Isda AGM: clearing regionalisation comes with costs, warn Shirvani and O'Connor

Outgoing and incoming Isda chairs warn multiple CCPs with divergent standards will threaten market liquidity

The liquidity of over-the-counter derivatives markets could suffer if central counterparties (CCPs) continue to multiply and are allowed to operate under different regimes from one country or region to the next, attendees at the International Swaps and Derivatives Asssociation's annual meeting were told this morning.

Delivering one of the opening addresses, the outgoing chair, Eraj Shirvani – who heads the fixed-income business for Europe, the Middle East and Africa at Credit Suisse in London – congratulated the industry on its post-crisis progress, but warned it must not rest on its laurels.

"We need to ensure we achieve the goal of building a more robust regulatory framework and a stronger financial system. To that end, we should avoid fragmentation of central clearing," Shirvani said. "A disparity in standards, policies and processes for clearers would have negative side-effects – the regionalisation of clearing could reduce liquidity."

Those comments were echoed in a press briefing by the incoming Isda chair, Stephen O'Connor, the global head of over-the-counter client clearing at Morgan Stanley. "The academic literature says the best thing for the market is to have one global CCP per asset class because of the associated netting benefits. But that's the ivory tower point of view and we're in the real world, where there are different forces at work. There will be fragmentation, because local regulators have a view on this and we have to work with them."

The Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions are drawing up a set of global standards, but – as Morgan Stanley's O'Connor acknowledged – fragmentation already appears unavoidable. In addition to CCPs with global pretensions, a host of would-be CCPs are setting up with the goal of serving national or regional markets, often with the tacit backing of local regulators – and international dealers are worried this tacit support could translate into explicit requirements for local market participants to use the local CCP.

We need to ensure we achieve the goal of building a more robust regulatory framework and a stronger financial system. To that end, we should avoid fragmentation of central clearing

During the press briefing, Credit Suisse's Shirvani was blunt about the impact, admitting the industry faces increased costs as a result. "If you have several CCPs per asset class per region, it becomes difficult to manage – suddenly you have to connect to 15 CCPs, each with its own risk waterfall and default fund," he said.

The rest of Shirvani's address to the conference was valedictory. He praised the market for its role in managing risk and lauded the industry for the changes made so far, ticking off a series of industry achievements: the fact more than 40% of interest rate swaps are now centrally cleared, along with $16 trillion notional of credit default swaps; a market-wide reduction of $200 trillion notional through portfolio compression; and "vastly improved" transparency for regulators thanks to the creation of data repositories.