CCPs, margin ease and equity option freeze

The week on, November 23–29, 2019


Clearing house power-downs raise fears among members

Banks question CCP resilience to system outages, as debate swirls over non-default losses

JP Morgan turns to start-up to manage CME margin

Bank also weighing whether to bring its business at two other clearing houses on to Baton platform

EU to grant last-minute margin reprieve for equity options

European Commission to publish changes to Emir technical standards within days


COMMENTARY: Storm warning

Clearing houses have suffered big losses. Just ask Nasdaq. But so far they haven’t suffered a crippling cyber attack or an extended systems shutdown of the kind that would prevent them from functioning for days, weeks, months even.

Clearing users are worried that a damaging operational outage is just around the corner, and they want CCPs to beef up their capital reserves to cover such an eventuality. They say clearers such as LCH and Ice don’t hold enough capital to protect themselves if lightning strikes or the floodwater rises.

The bare numbers suggest users have little to worry about. Core systems at 10 of the largest clearing houses were down for less than 24 hours in aggregate over the past year, according to official disclosures, and those temporary interruptions did not lead to significant losses. LCH claims to have a 99.97% availability. But, the banks argue, who is to say these fleeting glitches don’t mask deeper problems?

The kernel of the problem is the billions of dollars in margin that banks and other clearing members lodge with CCPs. Members grumble that they have little say in how this margin is safeguarded – and if a devastating cyber attack wipes out a clearing house’s own reserves, the only remaining funds are theirs.

As Bill Stenning of Societe Generale says: “Although CCPs say ‘nowhere in our rule book do we say we will pass through non-default losses to members’, in the context of recovery and resolution, if and when you’ve used all the capital of the CCP, then the only thing left is member assets.”

Evidently, banks lack faith in existing CCP risk committees to provide the necessary level of independent oversight of operational risk. They are calling for greater member input in rule changes and decision-making. Whether they get it is a matter for continued debate.  



JP Morgan has deposed Deutsche Bank as the biggest derivatives dealer, according to the latest data from the Bank for International Settlements. The US giant had €39.5 trillion ($43.5 trillion) in over-the-counter derivatives notionals at end-2018, a rise of 5%. Deutsche is in the midst of a slash-and-burn exercise for many of its investment banking activities.


“If you were running a markets business pre-2008, you simply had an accelerator and a brake pedal. Now, it’s like flying a helicopter” – Bernard Mensah, co-head of global FICC trading at Bank of America, on the complex requirements for measuring capital and liquidity in post-crisis banking.

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