Monday, September 14, 2009

No CCPs can't save the world

With the financial markets in recovery mode, following last year's annus horribilus, the question everyone, particularly the regulators are asking, is can CCPs save the world?

That was the title of one of the morning sessions on the opening day of the Sibos conference in Hong Kong and by the time I managed to find my way to the conference hall where the debate was taking place, it appeared that most of the panellists were saying what most people at the coalface already knew, that CCPs can only reduce risk for those instruments that are standardised.
"The ability to determine price is important to the central clearing function," said Kim Taylor, president of Chicago-based CME Clearing. "We want to be able to determine price, have a good knowledge of the forward looking risk and be able to set standards in terms of who can participate. Given these three elements CCPs in standardised markets do provide enhanced efficiency."
Yet with so many CCPs popping up as multilateral trading facilities continue to multiply, some maintain that the multitude of emerging CCPs could create even more risk. "I don't think any of us take lightly our obligation to reduce systemic risk," Taylor riposted, adding that there was a danger of heightened risk if the markets tried to push every instrument into a clearing house. "We need to focus on the more standardised end of the curve."

Alberto Pravettoni, managing director, group corporate strategy for LCH.Clearnet, said that it had sufficient mechanisms in place to ensure it did not take excessive risk. But while CCPs may want to differentiate on what is standardised and what is not when it comes to central clearing, the regulators may have a different idea. Some see central clearing as a panacea for the market's current woes. And as academic Craig Pirrong, from the University of Houston pointed out during the panel debate, it may be difficult to distinguish between what you can and what you cannot clear.

Pravettoni believes there is an opportunity to put more products (namely, some equity and fixed income instruments) through clearing houses. But for the end users of clearing houses there is an increasingly confusing array of CCPs to choose from.

The question is how many clearing houses should there be? In the FX markets, Rob Close, president & CEO of CLS Bank, said there probably should only be two or three. However, markets like Korea and Singapore have mooted the idea of setting up local clearing houses for OTC derivatives. The latter did not appear to go down too well with Monday's panellists who all pretty much agreed that given the global nature of the markets, global clearing solutions, not local market-specific solutions, were needed. "Trying to force these products to go through local clearing routes would be counterproductive from a risk management standpoint," said Pravettoni.

No comments: