According to the report, produced jointly by Isda and a group of dealer and buy-side representatives, in a worst-case scenario - the insolvency of one of the clearing members of a central counterparty (CCP), as happened with the collapse of Lehman Brothers -customers risked finding their margin payments inaccessible, as they would become entangled in the insolvency process. Different jurisdictions have different laws governing margin custody, with only one CCP allowing individual customer margin accounts - thought to make recovery easier - rather than one catch-all omnibus customer account.
While all the CCP proposals represent an improvement on the current counterparty risk in the uncleared over-the-counter CDS market, "no proposal is perfect in its current form. All of the proposals could benefit to a greater or lesser degree from legislative or regulatory changes to enhance the customer protection analysis".
In particular, some clearing members require clients to transfer title of assets posted as margin, making their recovery in the event of an insolvency much more difficult - customers would also benefit from using a third-party custodian rather than the clearing institution, as this would insulate them from much of the risk involved in an insolvency. Better segregation of customer margin would also make contracts more portable, or transferrable from one clearing institution to another, the report added.
Both US and European regulators are addressing these issues. In particular, the report said, the market needed clearer rules on the treatment of margin, more power for CCPs to transfer customer positions from one dealer to another, and guarantees of fast access to margin assets in the event of an insolvency. But it warned that the new rules could also make the CDS market slower and more costly.
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