CCP risks, Sonia shift and CVA carve-out

The week on, January 4–10, 2020

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JSCC caps member cash calls, revamps futures margin model

Clearing house set to end unlimited default fund top-ups for futures clearing

Lloyds plans £4bn Sonia shift for covered bond extension clause

Consent solicitation aims to flip one-year Libor-linked grace period on fixed instruments to RFR

US sidetracks bid to end European CVA exemption

Fed’s change to SA-CCR capital renews EU industry calls to preserve carve-out

COMMENTARY: No margin for error

As quants at Bank of America pointed out this week in a technical paper, one clearing member’s disproportionately large position increases the credit risk for all members of a central counterparty (CCP). And, as the loss at Nasdaq in 2018 showed, the financial industry must remain vigilant and regularly reappraise the risks and costs arising from margin and loss-sharing mechanisms.

In September 2018, Nasdaq Clearing members nursed losses of €107 million ($122 million) when an independent commodity trader clearing his own account saw his bet that the spread between Nordic and German electricity futures would narrow go catastrophically wrong – drawing criticism that the CCP should have demanded more margin.

A number of clearing houses are already experiencing upticks in margin posted to balance counterparty risk. There has been an overall increase in initial margin posted to Eurex in recent quarters, and required initial margin held at CME at end-September 2019 was the highest quarter-end total on public record.  

It is no surprise also that clearing houses are showing themselves to be very much alert to the need to adjust their risk management tools to become better equipped to respond to adverse market conditions.

This week, for example, reported that the Japan Securities Clearing Corporation (JSCC) is going to increase initial margin requirements and limit what members must pay to replenish its guarantee fund in the event of a default by a clearing participant on its futures markets.

Conforming to the ‘defaulter pays’ principle, the move is said to ensure that clients with riskier positions cover more of their clearing member’s exposure through increased margin. JSCC is also planning to extend the margin period of risk on listed derivatives and its margin model’s lookback period from 500 to 1,250 business days.

LCH’s interest rate swaps-clearing service, meanwhile, has revealed that the required initial margin it holds is up 16% from end-June and 46% on a year ago. The shift follows changes to its value-at-risk model that increased the margin period of risk for the static part of the model for client clearing from five to seven days. The change was deemed necessary since margins for client positions had drifted lower after the ejection of the Lehman default from its historical market data series.

The alertness of CCPs to assess their risk-sharing mechanisms should be welcomed by regulators who, in the wake of the Nasdaq debacle, urged the industry to keep a close eye on margin policies, periods of risk and default processes – and adjust them as necessary.


A rule proposed on November 25 by the US Securities and Exchange Commission would limit a fund’s value-at-risk to 150% of a designated reference index and require asset managers to implement formal derivatives risk management frameworks.



“The trading venues and APAs are still not making data available for free after 15 minutes as is required by the rules and the Q&A. It is a slap in the face” – a regulatory expert at a large hedge fund on the difficulty faced by market participants getting easy access to European trade data. The revised Markets in Financial Instruments Directive requires details of the price and quantity of certain trades to be made freely available by trading venues and approved publishers 15 minutes after the release of real-time information to paying subscribers. But the problem persists despite a Q&A by the European Securities and Markets Authority trying to curb practices that make the data difficult to use.

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