CCP defaults, Pillar 2 charges and robo-raters

The week on, November 9–15, 2019

7 days montage 151119

Banks warn of trader crunch at CCP default auctions

Risk USA: dealers hope for more cross-CCP fire drills

EBA’s Campa: reduce Pillar 2 charges to offset output floor

Bankers plead for smaller capital hit and more predictability on implementation of Basel III

Robo-raters help banks vet vendors for cyber risk

Specialists tout service for monitoring third parties amid tougher rules on outsourcing risk


COMMENTARY: Into the breach

Using mandatory margin requirements as an indicator of client activity – albeit an imperfect one – an aggregate 18% increase in total required margin among 17 US futures commission merchants in the past quarter suggests FCMs are taking on more risk through client trades.

Meanwhile, analysis by Clarus Financial Technology, aggregating data for more than 50 clearing houses or services, shows $740 billion is being held by central counterparties (CCPs) as initial margin – versus default resources of $210 billion.

The systemic risks in the almost $1 trillion clearing industry are plain to see. It is no surprise that banks and asset managers have called for an overhaul of default waterfall processes – complaining that CCPs bear only a small portion of losses when a default occurs, because they can externalise them to clearing members and end-users.

For its part, exchange operator Ice has announced it is adding insurance to its default waterfall schedule at three of its CCPs. The company says it decided to add the extra layer of protection after feedback from clearing members.

A form of ‘skin in the game’, it would not prevent funds being taken out of a guarantee fund in a member default but would permit Ice to claw back a portion of clearing member funds – although some warn that in the past such insurance has proved expensive and ineffective.

Ice counters that clearing members will not pay any of the premium, which it claims has been added cheaply. Asked, however, why it doesn’t insure the full amount of the guarantee fund, Ice believes this could disincentivise clearing members from participating in a default process.

Default processes famously came under scrutiny last year, when the positions of rogue power trader Einar Aas blew up on Nasdaq’s Nordic futures market. The clearing house was accused of fouling up a resulting four-member auction, turning a 39% margin breach into huge costs for its default fund. In the recent past, proposals to open up auctions to outside bidders have divided CCPs, clearing members and their clients.

The farago at Nasdaq has been memorable enough that risk experts continue to debate its causes. Market participants, supervisors and infrastructures have been weighing up how the misfortune was mutualised at the CCP, crystallising into losses of €107 million ($115 million) for clearing members.

At Risk USA last week, Marco Ossanna, a chief risk officer at HSBC, didn’t mince his words, saying: “They screwed up. They had no concentration [margin] add-on or enough of a concentration add-on to protect against such an event.” That means there was an insufficient margin period of risk to allow the CCP to safely close out the positions. At the time, a Nasdaq spokesperson told that Aas’s loss-making positions were not large enough to attract a margin add-on for concentration risk.

Risk specialists at the conference also discussed the need to run more cross-CCP fire drills and whether it is best practice seconding traders to a CCP’s default management group so they can assist in closing out a defaulter’s portfolio – which can come at a risk for banks if they are asked to spread their resources too thinly.


After the Stock Exchange of Hong Kong announced the complete shutdown of the HSI futures market at 2pm on September 5, a majority of callable bull and bear contracts issuers stopped providing quotes to investors. Without the anchor of issuers’ quotes, bid/ask spreads on the products were left almost entirely to market forces. CBBC trading volumes dropped to HK$1.35 billion, over 80% down on the year-to-date daily average of HK$7.26 billion.


“The research is saying that we might not expect more individual storms – but we may expect, globally, more intense storms” – RMS’s Pete Dailey on forecasting climate change and estimating loss.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here