Recovery plans, CFTC equivalence and stress tests

The week on, September 21–27, 2019

7 days montage 270919

Ice, CME shore up clearing house recovery planning

Introduction of VMGH and tear-ups comes amid impasse over CCP recovery and resolution rules

CFTC’s equivalence plan divides clearing houses and clients

US end-users prefer alternative compliance, but foreign CCPs want exempt status

Floating start date for 2020 stress test alarms EU banks

Regulator proposal could lead to less reliable market risk data, critics warn


COMMENTARY: Hammer time

Clearing houses have responded to last year’s expensive default at Sweden’s Nasdaq by revamping procedures and policies in an attempt to bolster their defences against future shocks.

On September 10, 2018, Nasdaq Commodities racked up losses of €107 million ($122 million) after a defaulting member saw bets on the spread between Nordic and German electricity futures blow up in his face.

Suspicion quickly focused on the auction process used by the clearing house to sell off the loss-making positions and balance its book, as participants were suspected of bidding at significant discounts to the portfolio’s market value at the time.

As months passed, the market continued to complain about the auction through which Nasdaq resolved the default, and Nasdaq’s home regulator in Sweden also asked questions about process.

The head of legal at a US regulator subsequently weighed in on the discussion, cautioning clearing houses to give thought to who should be invited to bid at auctions. Nasdaq had run a closed auction among only four of its 166 member firms.

One year on from the catastrophe that befell Nasdaq, two of its peers have now overhauled their default management procedures. Both Ice and CME Group have implemented rules designed to ensure smooth recovery or their wind-up in the event of a humbling default.

CME has told US regulators its rules give it the right to impose haircuts on its variation margin obligations as a recovery tool in its rates business. It also aims to use partial tear-ups for contracts that may destabilise the clearing house. Both measures are argued to incentivise wider participation in a default auction.

Likewise, in Europe, Ice is introducing partial tear-ups and a compulsory auction process for credit default swaps – rather than the option of forced allocation.

Following the Nasdaq default, debate in the industry has also ensued over whether traders should be drafted into a clearing house to help close out a portfolio during an auction. Earlier this year, LCH announced precautions that spruce up rules governing use of market experts on two of its default preparedness groups.

And in June, global watchdogs released a consultation paper asking for feedback on how default auctions at clearing houses could be better organised. The culmination of this regulatory scrutiny over the role of auctions in risk-sharing mechanisms at clearing houses is therefore eagerly awaited. As a central pillar in the foundation of central clearing, the smooth management of close-out processes is essential to a central counterparty’s resilience.



More than one-fifth (22%) of overseas borrowing in sterling, as of Q1 2019, was from non-bank financial institutions, compared with just 5% at end-2013, data from the Bank for International Settlements shows, as non-banks’ role in cross-border funding grows.


“If you have no input then you have no output, so if there’s no prices then there’s no rate” – a former rates trader at a global bank on failures in the Ice swap rate.

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