Regulatory Headwinds Could Bring Risks to Clearing Houses, Central Counterparties

The potential fallout from a hard Brexit, and growing exposure to clearing houses and central counterparties (CCPs) may soon bring added regulatory oversight and scrutiny to the sector, according to a new report from Fitch Ratings.

Overall, Fitch’s outlook for the sector remains positive thanks to CCPs liquidity levels, robust risk management and, so far, supportive regulatory environment. Generally, large global clearing houses have profited from a supportive regulatory environment that’s allowed for participants to centrally clear transactions, rather than do so in an over-the-counter fashion on a bilateral basis, Fitch analysts said. That in turn has led to a steady increase of market participants’ exposures to CCPs. The Commodity Futures Trading Commission (CFTC) recently showed through regulatory stress tests that the world’s largest CCPs have adequate liquidity resources to complete their settlements at the end of the day should a severe market stress occur.

"Regulatory stress tests are an important and standardized measure of CCPs' resilience, but the tests incorporate the use of committed credit lines that could be extended by commercial banks, which may be also CCPs' largest clearing members," said Evgeny Konovalov, director in Fitch's Financial Institutions group.

CCPs ‘skin in the game,’ or the amount of allocated capital resources are still relatively small in the world’s largest organizations—bringing more to the party would be a positive for CCP’s risk profiles, and serve to maintain margin and counterparty standards in a growingly competitive environment, Fitch said.

“An area to watch in 2018 will be the implementation of MIFID II/MIFIR requirements for open and non-discriminatory access to trading venues and CCPs,” analysts said. “These provisions may pose a challenge to national CCPs' currently well-entrenched franchises and lead to a re-distribution of clearing volumes to the larger international CCPs.”

A hard Brexit scenario could inspire EU regulators to demand direct oversight over the clearing of euro derivatives, which would bring complications to cross-border supervision of CCPs, Fitch said.

– Nicholas Stern, managing editor

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