It’s time to call time on leisurely disclosures by CCPs

When clearing houses falter, markets should not be kept in the dark for months on end

A senior banker once said that if it were up to him, clearing houses would be forced to report figures on their activities much sooner than they currently do. “It would be a matter of weeks, not months,” the global head of central counterparty risk at a large investment bank told Risk.net.

By supplying core infrastructure for financial markets, central counterparties (CCPs) accept a big responsibility – and are, by the way, compensated handsomely for it. But they take too long to make the disclosures containing insights into mishaps that can potentially hurt all clearing members and, crucially, unsettle the entire financial system.      

Take two recent examples. In June, the Options Clearing Corporation revealed that it had incurred a record $2 billion initial margin breach in the first quarter, driven by a borrowing position in meme-stock GameStop between January 25–27. This means the market was unaware of a serious market event for six months.

Another significant problem also came to light with a sizeable delay. The National Securities Clearing Corporation was caught $600 million short of its Cover 1 obligation on one unspecified day between January and March, but reported the shortfall only in June.

Granted, the heads of CCP risk at the various clearing members have regular conversations with their counterparts at clearing houses where they discuss this type of incidents. But the many more market participants who are not privy to these conversations are kept in the dark for months on end.

Since clearing houses are now involved in a far larger portion of market activity, their reporting should be much timelier, in line with their greater importance

By publishing their latest statistics well after the end of the first quarter, the two CCPs were following the 2015 guidance from the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions. The regulators instructed clearing houses to disclose the vast majority of information on a quarterly basis. They also allowed a lag in reporting of between one and two months after the end of the relevant quarter.

However, the concentration of financial risk in CCPs has grown substantially since 2015. For example, in 2009 around 10% of credit default swaps and 37% of interest rate swaps globally were centrally cleared, whereas in 2019 those shares stood at more than 50% of credit default swaps and almost 80% of interest rate swaps.

Since clearing houses are now involved in a far larger portion of market activity, their reporting should be much timelier, in line with their greater importance.

Late may be better than never but, when it comes to disclosures by such central players in financial markets, late is a lot worse than promptly. It is time for global regulators to rewrite the rules.

Editing by Olesya Dmitracova