Clearinghouse risk and in particular the financial resources available in the event of a default is a top priority for the Commodity Futures Trading Commission, said the agency’s chairman Timothy Massad in his keynote address to FIA Boca delegates on March 11.
“We are currently considering the issues pertaining to the resources available to deal with a default in the context of reviewing clearinghouse recovery plans,,” Massad said. “We are trying to make sure that these plans are viable,” he added, in the sense that they are designed to “maximize the probability of a successful clearinghouse recovery while mitigating the risk that recovery actions could result in contagion to other parts of the financial system.”
The CFTC is also looking at clearinghouse governance issues in this context, Massad said. “Whose interests should be taken into account when a clearinghouse designs its recovery plan and when a clearinghouse faces a default?” he asked rhetorically. “If the waterfall of resources is not sufficient to cover a default, then how does the clearinghouse decide what happens next, and who should participate in or have input into that decision?”
Massad indicated that the impact of these issues on the industry as a whole is a key factor in his thinking. “Central clearing is fundamental to the health and vibrancy of our markets. We must make sure that clearing firms as well as clearinghouses can continue to operate successfully.”
In comments to reporters after the speech, Massad said the CFTC continues to discuss with banking regulators the impact of capital requirements on the clearing of derivatives, and explained that the CFTC believes segregated collateral should be treated differently than other types of bank assets under the leverage ratio requirements. “I think it’s very important to try to find a solution that addresses the multiple regulatory objectives that we have. Cash margin that is legally segregated I think should be considered for different treatment so that we don’t have a policy that undermines our regulatory objectives.”