As the regulators
push us towards centralised clearing for OTC derivatives they
may actually be making the world distinctly less safe.
At face value it
makes obvious sense; if one party defaults the CCP steps in. As
always, though, the problem lies in the detail but this time
not too far below the surface.
problem concerns the efficient use of margin. As CCPs start to
uncouple from their parent exchanges and compete more directly
with each other it’s only natural for them to
start trying to differentiate more.
An obvious step
is to offset margin requirements from equivalent (but not
fungible) products, especially given the opportunity cost of
capital these days.
This could now
include OTC products and exchange-traded ones, say a Euro-Swap
and a Bund. This is ok in principle, but
'equivalent’ is very different from
’same’ and a race to the bottom in
this type of competitive activity will increase systemic risk
rather than reduce it.
problem lies in post-trade and allocations. In derivatives this
is complicated enough, especially when the executing broker is
different from the clearing broker (or brokers) for the actual
Now multiply this
complexity by the number of Sefs (or OTFs) that emerge, then
multiply it again by every clearing house and, finally, throw
in the fact that there is no agreed sequence for the messages
and you start to get a distinctly queasy feeling.
I’ll keep my hard-earned cash under my