Risk.net poll: CFTC should re-think $50m rule for CCPs

More than three-quarters of respondents to a Risk.net poll think rule capping membership criteria at $50 million in capital should be changed following collapse of would-be clearer MF Global

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The collapse of MF Global means the Commodity Futures Trading Commission (CFTC) should revisit its rule restricting clearing house membership criteria to $50 million in capital, according to a new Risk.net poll – 77% of respondents call for change.

The rule has been controversial since it was first proposed in December 2010, with opponents claiming that lowering the bar would leave member firms facing more risk. A firm with $50 million in capital could theoretically use that sum to join multiple central counterparties (CCPs), dealers pointed out, arguing that such a firm would find it difficult to meet calls for extra default fund contributions from its clearing houses in a crisis scenario.

Supporters of the limit – including MF Global, which argued in a November 2010 comment letter to the CFTC that "grossly excessive capital requirements" were preventing it from joining two US CCPs – retorted that dealers were simply trying to protect their turf. The final rule, published on November 8, came down on the side of broader access and left the $50 million cap intact.

The CFTC has not said it will review the rule but one of its commissioners, Scott O'Malia, reiterated his misgivings at a Futures Industry Association event in Singapore on November 30: "My concerns have only deepened with the failure of MF Global, one of the main proponents of such a prohibition. I remain hopeful that the Commission will permit a CCP to have more flexibility to adjust its membership requirements to reflect risk management." O'Malia first criticised the rule at a CFTC meeting on October 18.

The limit on minimum capital requirements does not mean every firm that meets the criterion would be able to join as a clearing member. The CFTC would allow clearers to adjust membership criteria in other areas – for example, requiring firms to play an active role in default management procedures, which typically means clearing members would need a sizeable trading business.

MF Global never acted as a clearing member for over-the-counter derivatives but, like many other smaller broker-dealers, it had clearing ambitions. However, MF Global Inc – the futures clearing arm – held just $495 million in capital, well below the current OTC membership requirements of LCH.Clearnet's SwapClear and CME Group, which both require interest rate swap clearing members to have capital of at least $1 billion.

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