July 7, 2013 9:30 pm
Banks warn of risk at clearing houses
Fast-expanding clearing houses on both sides of the Atlantic are posing a growing risk to the stability of the financial system, some of the world’s top bankers have warned.
Concerns have mounted as clearing houses have shot to the top of banks’ lists of counterparties, following the shift of over-the-counter trading to centralised clearing houses.
Clearers – such as LCH.Clearnet and Deutsche Börse’s Eurex in Europe, and CME Group in the US – sit between two parties in a trade and guarantee the deal if one of those parties defaults.
But, as trading volumes through the clearing houses ramp up, banks increasingly fear this new counterparty risk. Top bankers, who have been lobbying regulators over the issue for some time, have also sought meetings with clearing house bosses in recent weeks to discuss their concerns.
“We are losing track of the nominal risk,” warned Jean-Pierre Mustier, head of investment banking at UniCredit and a former board member at London-based LCH.Clearnet. “We’re moving from a set-up where banks were interconnected, because they had transactions between them, to a system where very lowly capitalised entities, the clearing houses, are supposed to protect the banks from a problem.”
Banks have voiced concerns to regulators in Europe and the US that central clearing houses are providing insufficient data on their own risks and demanding lower-quality collateral for swaps transactions. They argue the risks are too opaque, and getting riskier.
“It’s going in the wrong direction,” said the head of credit trading at a large US bank. “The race to the bottom is on.” He and other executives were critical of the CME’s decision to accept corporate bonds as collateral, a step down from the safer instruments usually required for margin.
Some institutional investors and clearing officials are suspicious of the motives of the banks, arguing that they are keen to check the move of bilateral, “over-the-counter”, derivatives trading, traditionally a large profit centre for the biggest dealer banks, to electronic platforms.
But bankers argue that they are in danger of failing in their own risk management if they are not given timely and full access to risks that clearing houses are facing.
A collection of banks, including Citigroup, Deutsche Bank, HSBC and JPMorgan Chase, which forms the “payments risk committee”, produced a report in February “to improve the transparency of risk management practices of central counterparties”.
Copyright The Financial Times Limited 2013
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