Is conflict brewing in the post-trade infrastructure community? Well, so it seems when it comes to the size of CCP reserve capital for loss recovery. The CCP industry is hitting back after critique from market actors including JP Morgan, State Street and Blackrock.
Not only newcomers to our industry have a challenge as they try to grasp the fundamental role of a central counterparty clearing provider. Professionals give opposing pictures too.
In a fresh statement, the World Federation of Exchanges (WFE) – which is the industry association also of CCPs – lines out how it is launching a 12-month “workplan to drive greater understanding around CCPs & their role in systemic safety”.
Specifically, it raises a finger against the idea that “any CCP act as the [banking and credit] system’s underwriter-of-last-resort”. This “would be irresponsible and reckless”, it writes.
“This, however, is a recurring theme in an increasing number of advocacy programmes,” WFE adds, without naming any in particular.
Dictates the size of reserves
In simple words: The world’s CCPs are rejecting the notion that it is necessarily their duty to save everybody from counterparty losses under any imaginable kind of crises the market.
This matters, since the business of a CCP is to guarantee market actors against counterparty risk. Essentially CCPs live off a risk-based fee which they charge from those who trade, in return for a duty to compensate for non-fulfillment by trading parties by drawing from reserves committed by the CCP’s members. The larger the reserve has to be, the less attractive the CCP participation. For example, the impact of reserve requirements on CCPs is currently highlighted at EuroCCP, which is a takeover target of US-based Cboe.
Clash with the titans
Notably, WFE’s rejection of the last-resort role is completely at odds with a recent proposal by nine heavyweights in the securities markets, both sell- and buy-side: Allianz, Blackrock, Citi, Goldman Sachs, Societe Generale, JP Morgan, State Street, T Rowe Price and Vanguard. In a detailed 10-page paper, labelled “A path forward for CCP resilience recovery and resolution”, these suggested explicitly and repeatedly that there should be “residual CCP capital” that is available as “a last resort” to absorb outstanding losses.