OPINION: The CCP Resolution Smokescreen


Planning for a resolution of a failed central counterparty clearinghouse is like rearranging the deckchairs on the Titanic as the ship is going down. It provides the appearance of activity but ultimately is useless.

Clearinghouses do fail. In roughly the past 40 years three of them shuttered. The Paris-based Caisse de Liquidation failed in 1974 when one large trading firm didn’t meet its margin requirements. The Kuala Lumpur Commodities Clearing House failed in 1983 when six brokers defaulted. Four years later, the Hong Kong Futures Exchange went bankrupt when one investor who traded via two Panama-registered firms refused to make good on his HK$1 billion trading loss.

All three examples were laid low by either an individual member defaulting on their margin requirements or by a handful of their members.

The industry has learned from earlier mistakes, and it’s doubtful that a default by one clearinghouse member could drive a clearinghouse to failure and into resolution.

A well-funded default fund and conservative risk-management strategies should allow any clearinghouse to absorb a single margin defaulter.

When regulators discuss CCP resolution, it is shorthand for an ‘end of the world’ scenario — tulip mania meets The South Sea Bubble meets the Great Depression meets the Dot.com Bubble.

If a clearinghouse defaults then, its largest members also have defaulted. And since a clearinghouse’s largest members are members of multiple clearinghouses, regulators most likely talking about the resolution of multiple clearinghouses or the end of modern finance as we know it.

Even if a clearinghouse managed to fail inside a vacuum, any established resolution plans written before the failure would be the first victim of the failure. Regulators likely would intervene before the CCP failed and would do their best to prevent it from happening.

The entire resolution discussion is more about taking the limelight off systemically important firms rather than protecting the financial markets as a whole.

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