Apac CCPs: we’ve come a long, long way together

Members still gripe about arcane policies, but risk management fundamentals are strong

Members of Asian clearing houses used to fret about the big things in life: like trading blow-ups, and how many billions they could wipe from a central counterparty’s default resources. That they now worry more about other matters is a measure of just how far these regional CCPs have come in a short period of time. 

Years ago, many Asian CCPs were derided by the international community as the bad boys of clearing risk management. This was epitomised by a 2013 blow-up at Korean securities firm HanMag, which burnt a large hole in the default fund of the Korea Exchange and left its other members, including many global banks, on the hook for millions of US dollars. Understandably shaken, they scrambled to review the risk practices of other CCPs in the region that they were exposed to.

Any sense of schadenfreude that Western CCPs might have enjoyed at the time, though, evaporated when a Nordic power trader caused a $114 million loss at Nasdaq Commodities in 2018; it turned out that such blow-ups weren’t simply confined to the ‘Wild East’ after all.

These days most large dealers recognise that, by and large, Asian CCPs are not actually in all that bad a shape when ranked alongside their global peers. They’ve certainly showed a willingness to listen to the market and make improvements where necessary – take, for example, the Japan Securities Clearing Corporation’s recent move to cap the amount members are obliged to pay into its default fund in the event of a default. Moreover, many Asian CCPs boast proportionally far greater skin-in-the-game than their counterparts in Europe or the US do.

These days most large dealers recognise that, by and large, Asian CCPs are not actually in all that bad a shape when ranked alongside their global peers

The significant improvements that have been made at clearing houses in the region has given global banks the breathing space to turn their attention to less headline-grabbing problems, such as what CCPs do with the cash that members give them.

While poor investment decisions may not wreak quite the same devastation that uncontrolled trading blow-ups have in the past – unless CCPs do something really silly with the money – CCP members are becoming increasingly concerned with how much they could be on the hook for should investment losses arise.

Although global in nature, this concern is particularly relevant in Asia where thin repo markets can limit investment options and push CCPs towards taking on more risk.

Clearing members are increasingly anxious to have a better insight into what is being done with their money, and what will be done to mitigate losses should they arise. The problem is that, right now, they are not receiving this insight: out of all Asian CCPs only the ones in Singapore and Australia give any clues as to how they protect their members’ cash.

None of this is to belittle the risk management achievements that have been made at Asian CCPs. Far from it: the focus on investment management risk is a sign that global dealers are happy to move beyond dealing with the once-worrying unlimited losses they could face at CCPs should members default.

The hope being expressed by the likes of Goldman Sachs, JP Morgan, HSBC – and other large global banks that care about clearing house risk – is that Asian CCPs will continue on the journey with the same gusto that they have expressed up to now.

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