Clearing houses as system risk managers
Paul Tucker, deputy governor for financial stability at the Bank of England, feels that orderly resolution of a failed CCP have to involve clarity around the extent to which surviving clearing members pick up the pieces. June 17, 2011 | Timothy ShimSpeaking at the launch of the Depository Trust & Clearing Corporation (DTCC)-Centre for the Study of Financial Innovation (CSFI) Post Trade Fellowship, Paul Tucker, deputy governor for financial stability at the Bank of England recognised the importance of risk control and that the community has rediscovered the importance of the financial system’s plumbing. According to Tucker, that is of special interest to the Bank of England given the government’s plan to transfer to the bank responsibility for supervising critical financial infrastructure – settlement systems and clearing houses. Tucker said that right now, the biggest “plumbing” issues follow from the decision of the G20 that more of the over-the-counter derivatives market should be cleared via central counterparties. Yet he mentions that this is not just about derivatives markets. “Compared to their origins in clearing commodity futures and then exchange-traded financial derivatives, CCPs have increasingly been clearing cash instruments – notably equities and, in recent years, government bond repos” he said.He mentions that in London, LCH’s move to clear repos in Spanish government bonds helped that market stay open during some dark days last year. Tucker notes that CCPs are important due to a resumption of interest in the network characteristics of the financial system and that they simplify the complex web of counterparty exposures through multilateral netting – precisely what the US authorities contemplated trying to achieve ad hoc towards the end of a weekend when Lehman was slipping away. He also mentions that they do more than facilitate multilateral netting. They substitute themselves as the counterparty to the trades they clear – hence a central counterparty. According to Tucker, this makes them unusual financial institutions, because they run a completely matched book, and so ordinarily are not exposed to market risk in their core activity. “They are ... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Asset Management, Trustees and Custodians, Markets & ExchangesTrustees Custodians and Depositories,Markets Exchanges, Asset Management, Trustees and Custodians,Markets & Exchanges, Keywords:Bank Of England, Financial Stability, CCP Bank of England, Financial Stability, CCP
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