US Treasury secretary Timothy Geithner has been among the voices calling for central clearing of all "standardised" over-the-counter derivatives trades, in a move aimed at reducing counterparty risk. But, speaking today at the International Derivatives Expo, Ice Clear Europe chief executive Paul Swann warned: "Some products will never be suitable for clearing. Any compulsory clearing would be a bad move and would end up stifling innovation."
Kim Taylor, president of the CME Group's clearing house division, agreed: "There is a danger in too broad a regulatory mandate for clearing," she said. "There are some products that [clearing houses] don't feel comfortable risk managing. The danger is that the markets will lose some diversity and opportunities, and some important product pipelines – products start out specialised and bespoke, and some become more vanilla as time goes on."
Taylor also highlighted another gap in Geithner's proposal: the absence of a clear definition of a "standardised" derivative.
"There is really no bright-line test for what is 'standardised'," she said. "Standard foreign exchange instruments are more complex than vanilla swaps – also, not all standardised instruments are clearable, though they lean in that direction. You need to look at the liquidity of the market, the transparency of pricing, and the number of market participants and the depth - but there's no easy single test for whether you can clear a product or not."
Michael Walinskas, head of risk management and membership at the Options Clearing Corporation in Chicago, added: "It has to be economically viable for a clearing house to clear it – in the end the clearing members will be paying the margin costs... it will depend on whether the participants are willing to put their own money on the line. It doesn't lend itself to a rules-based regime."
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