Stablecoins, term Sonia and skin in the game

The week on, August 15-21, 2020

7 days montage 210820

Facebook’s libra could disrupt collateral markets – IMF paper

Collateral used to back ‘stablecoins’ such as libra will be unavailable for reuse

EU hands CCP members a narrow win on skin in the game

Clearing members could use the final rules to push for higher CCP capital globally

Race to cash in on term Sonia is filled with twists

Pending merger and FCA’s effort to create synthetic Libor rates could sway outcome

COMMENTARY: The argument continues

New EU rules mean a moderate victory on loss absorption – “skin in the game” – for clearing members, and a moderate defeat for the central counterparties (CCPs) that have been resisting greater exposure, but the argument won’t end here.

CCPs must now provide two tranches of skin in the game: one that is drawn on after the defaulting member’s margin and default fund contribution are exhausted; and another, newly added, which would provide a further buffer before entering the recovery process.

The argument between clearing members and CCPs over default procedures – known as the default waterfall – has been acrimonious for years. Higher requirements for skin in the game are seen as penalising CCPs, when in fact it’s the members, not the CCPs, taking the risk. Pushing more of the costs on to members, meanwhile, arguably risks driving them to other jurisdictions where trading is easier. Last-ditch contributions from members deserve compensation, members argue – though others say this undermines the waterfall process. In times of market stress, some say, it’s irresponsible to talk about default management reform at all.

Amidst all this, it’s important to keep an eye on two serious risks to CCPs that aren’t addressed in the skin-in-the-game debate. The first is what happens at the end of the waterfall – when all the money runs out. This is a low-probability, high-impact scenario, but this sort of tail risk represents the real downside of using CCPs rather than sticking with bilateral trading. Clarity about extreme scenarios may help to manage the danger that comes with CCPs’ status as a single point of failure in cleared markets. (It is, for example, probably a mistake to rely too heavily on insurance in this scenario; if CCPs are wobbling, insurers will not be far behind.)

The second set of risks are operational and execution risk. So far, there hasn’t been a member default of sufficient size to threaten the stability of a CCP, but some defaults have proved far more costly than necessary because of poor management. It would be a shame if CCPs were to neglect these real and addressable issues in favour of continuing to contemplate the shapes of waterfalls.


Systemic US banks raised probability of default (PD) estimates for corporate loans in the second quarter, as their credit models responded to the gloomy outlook for the coronavirus-ravaged economy. The median weighted-average PD for corporate exposures across the eight US global systemically important banks was 1.7% as of end-June, up from 1.39% three months prior and at its highest level since Q3 2014.



“Liquidity is a critical issue. The good news is we were better prepared for [the Covid crisis]. The less good news is that the Fed still had to take huge actions to keep the markets functioning from a liquidity standpoint” – Tim Clark, Better Markets

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