Craig Pirrong of the University of Houston has been concerned about CCPs concentrating risk for a very long time. But, as it turns out, he is also concerned about the role being played in system risk creation by real-time gross settlement systems.
Following up on FT Alphaville’s piece on RTGS last week — in which we broke down the connection between the shift towards a real-time gross settlement system, central banks’ fear of netting risks, liquidity sacrifices and general collateral abuse — Pirrong adds some extremely worthwhile points to the conversation. Read more
Regulators have long extolled the virtues of central clearing, championing it as a favourite solution for managing risk within the financial system.
Others, however, have been less enthusiastic about their potential. Concerns in that case have focused on the propensity of CCPs to concentrate wrong-way risk and to create a single-point of failure problem.
Regulators, however, seemed reluctant to listen.
Until last week that is when the ECB’s Benoît Cœuré, gave a speech in which he provided the first hint that regulators may be coming around to the dangers posed by too much central clearing. Read more
Something that missed our radar back in March was the Federal Reserve’s proposal to allow systemically important FMUs (financial market utilities) to establish accounts with the central bank and thereby get paid interest on their reserves, much like the primary dealers.
This sounds unsexy as it is, but the quick background here is that the Dodd-Frank bill empowered the Fed to supervise those FMUs that are designated systemically important by the Financial Stability Oversight Council. And along with the added supervision, those FMUs would be allowed to open the reserve accounts with the Fed. Read more
“What happens when one bank defaults across six CCPs? The remaining members will have to pick up the bill. Given that they are almost certainly members of the other CCPs, this will result in a default contribution bill so large it could potentially lead to their failure also.”
That’s Gary Dunn, senior manager for regulatory and risk analytics at HSBC, being quoted by Risk at Isda’s AGM last week. Given the increasing concentration of risk in central counterparties, he thinks that they would ultimately have to be bailed out by taxpayers, after the CCP’s buffers were exhausted. Read more
Ready for pop quiz? Don’t worry, it’s only one question and it involves pictures. Ready?
In the below picture, a pension fund governed under the Employee Retirement Income Security Act (Erisa) has a trading relationship with a bank… Read more
The FT’s Greg Meyer had a great piece out last week about the negative impact micro yields are having on the broker sector.
For a long time, the broker-dealer model has depended on the ability to reinvest customer funds to earn additional revenue. But in a zero-yield world that source of revenue is becoming constricted. Read more
Central counterparty clearing and settlement was always intended to make the financial system safer.
If you use a CCP, the idea goes, you’re far more robustly protected against counterparty default. The counterparty default risk has been absorbed by the much larger central entity. (The CCP can weather the default risk because its exposure is spread across numerous members.) Read more
News that Basel III is reconsidering the use of government bonds as eligible capital to be held in banks’ so-called liquidity buffers, couldn’t have come quicker.
The world, for want of another phrase, is running out of collateral. Especially in Europe. Read more