The Bank’s proposal to reduce procyclicality within the safety measures employed by clearing houses has however caused concern. It would mean them divulging information about how they manage risk – and potentially exacerbate the problems at times of market stress. As a result of clearing houses’ growing importance in mitigating systemic risk, there have been calls for them to be subject to stress tests.
Clearing houses guarantee trades in the event that one of the parties is unable to deliver on its side of a deal. It is a goal of the G20 to ensure that many of the trades previously done between banks are to be done via clearing houses, where they are easier to monitor. Among the big clearers in Europe are LCH.Clearnet, owned by the London Stock Exchange, Ice Clear Europe, owned by IntercontinentalExchange, and Deutsche Börse’s Eurex clearing.
The clearing house takes assets from market participants – typically high-grade bonds or cash – and keeps those assets as collateral; if one of the trading parties goes bust, the clearing house takes over its open positions and trades its contracts with the rest of the market until its book is clear. There is a good chance the clearer will make a loss from the deal, but it will have the collateral to meet this shortfall.
As market conditions change, if market volatility rises for example, the clearing house may ask for more collateral from traders. But the exact risk-management system used by the clearing houses is proprietary to them and so the formulae for setting margin levels are not publicly available.
Full article (Financial News subscription required)
© Financial News
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article