If OTC markets collapse, they must not be able to bring down the entire economy, “That’s the issue,” said Eddy Wymeersch, former chairman of the Committee of European Securities Regulators, speaking at yesterday’s panel on OTC derivatives markets post-crisis, entitled ‘Regulation, reform or extinction’. Regulatory reforms are in place that are intended to prevent the accumulation of outsized OTC positions, as was the case with insurance giant AIG in 2008, and the lack of market transparency which caused panic following Lehman’s collapse in the same year.
Marco Strimer, CEO of CCP SIX x-clear acknowledged the concern that CCPs were accumulating risk and said regulators had a responsibility to make sure the market was working from a stability point of view and from a risk point of view. “They need to make stronger recommendations on standards around CCPs. That’s a discussion we might need to have in the future.”
Issues of cost
The CCP model was also increasing costs for pension funds looking to hedge their risks using derivatives said Cian Burke, co-head of securities services at HsbC. As pension funds held one-way risk positions to hedge against the risk they held in their long-only portfolios they could not net off margins as banks could. Regulators were standing shoulder- to-shoulder far more than ever before, said Burke, but there were still gaps between transatlantic rules. “There is a lack of clarity round the definition of who needs to clear and who will be mandated to clear,” he said, adding that Asia sees the issue as a western problem. “Right now we know where we are but we’re not sure where we need to be,” said Alan Bozian, president & CEO, of CLS Bank International. Wymeersch acknowledged that as yet, the answer had not been found. “The real answer is that we have to look at reducing risks in these markets. You may pile up all the collateral you want but in the event of crisis collateral loses its value and solidarity disappears.”
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