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COMMENTARY: Counterparty problems
EU regulatory deadlines for central clearing are closing in, but the industry is still grappling with the practicalities of moving entire markets on to central counterparties (CCPs). The latest holdup surrounds rules for the sharing of catastrophic losses – originally due for publication last year, they were pushed back to February, and will now be delayed still further.
This may appear to be a storm in a very, very distant teacup. The only situation in which a CCP's existing, funded reserves are thought likely to be overwhelmed is the simultaneous default of two or more large clearing members, but if it ever happens, participants will need to know exactly how to mop up the spillover losses. At the moment, they do not, and it feels safe to predict fierce arguments about the fairness of whatever system regulators eventually agree on.
Compulsory clearing is also worrying energy companies, which are hoping an impending European Commission review will reduce some of the burdens clearing could impose on their hedging and trading activities. European buy-side firms, meanwhile, are balking at the standardised documentation designed to speed up the process of putting clearing arrangements in place – lawyers claim some firms have been trying to renegotiate key elements of the contracts for two years.
These heated debates underline how vital CCPs will be to the reformed post-crisis financial markets, but their keystone role also makes them a point of vulnerability for the entire financial system, in particular in cyber attacks, with resilience and the rapid resumption of operations among the most critical concerns.
The strategic argument over central clearing is long over – the battles around implementation, though, will rage for some time to come.
QUOTE OF THE WEEK
"It's absolutely infuriating that as an industry we have bust a gut to get Solvency II in place, at huge expense to us and our policyholders, and then two weeks before the go-live date the ESRB says it's not good enough" – Hugh Savill, the Association of British Insurers
STAT OF THE WEEK
Sliding Chinese stocks are close to a key barrier in many autocallable products. Losses could get "out of control" if the HSCEI index – at 8,494 points on January 13 – drops below 8,000, dealers warn.
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