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Systemic Importance gets (even more) expensive

12th August 2013. The CFTC issued a press release, announcing the approved final rules to implement enhanced risk management standards for systemically important DCO’s (“SIDCO”). The rules are intended to cohere with the BIS-IOSCO Principles for Financial Market Infrastructures recommendations, enabling the FSB-assessed SIDCO’s to continue as Qualifying Central Counterparties under international capital regulations. The final rules impose the following requirements:

  • SIDCO’s that have a more complex risk profile or that are internationally systemically important, will have to hold increased financial resources– sufficient to withstand the default of their two largest clearing members by exposure.
  • SIDCO’s are prohibited from including “assessment powers” (non-funded guarantee commitments by clearing members) in their default financial resources.
  • SIDCO’s are required to have a continuity/disaster recovery plan sufficiently robust as to enable resumption of full business operations no later than two hours after the disruption, however wide-scale it may be.

The G20 recommendations, as variously implemented by both Dodd-Frank and EMIR have been widely criticised for effectively shifting credit and liquidity risk from the TBTF banks to an even smaller number of systemically important clearing organisations. The minimally prophylactic rules above do little to answer such criticism. The CFTC seem to have focussed on physical disaster recovery, rather than market disaster prevention. The extremely stringent two hour BAU resumption window will require large investment in multiply-redundant systems across every aspect of a SIDCO’s business.

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