Capital Markets Advisors

Turning Change Into Opportunity


Traders Magazine Online News,  August 4, 2014
John D’Antona Jr.


With more trading and risk in the swaps market, clearinghouses should be more open and disclose their operating procedures for the benefit of the marketplace.

That’s the viewpoint of market consultancy Tabb Group, which said in a recent report that the concentration of risk among central counterparties in the new global market structure must be accompanied by a proportional increase in transparency and reporting at the CCPs.

Radi Khasawneh, a TABB Group research analyst in London wrote in a research note that short-term fragmentation (with multiple entities split geographically) was likely to give way to consolidation and standardization over time. Given this trend, regional clearinghouses cannot simply do their own thing and march to the local regulator’s tune. And the same goes for the larger central clearing counterparties which have emerged with recent regulations requiring these complex instruments be cleared.

“We are at the implementation phase of a global regulatory shift that will force the majority of swaps into clearing,” Radi Khasawneh said. “The idea behind the push was to give regulators a cleaner view of risk in the derivatives world; but ever since the intention was announced by the G20 in 2009, market participants have long been concerned that this in itself may be creating additional systemic risk.”

If most trades have to go through a limited pool of central counterparties (CCPs), the potential for a significant market shock increases, he added.

Tabb added that the increase in the importance of CCPs in the new market structure must be accompanied by a proportional increase in transparency and reporting at the CCPs. Many of the safeguards are dependent on proprietary and often opaque modeling. They are owned or operated by a mixture of dealers and exchanges, meaning that everyone’s risks should be aligned – but a further level of assurance is necessary.

Khasawneh noted that two leading clearinghouses have already agreed to provide additional disclosure on their default fund and all-important margin requirement models is highly encouraging. “This paves the way to the establishment of a formal disclosure standard by the International Organization of Securities Commissions (IOSCO) later this year,” he added.

Still, Tabb reported that huge differences remain in margin treatment globally. It is far more preferable that this comes from the clearinghouses themselves and, in fact, the efforts of many global clearinghouses to attract increasing flow across different products in order to boost margin efficiencies increases the complexity of the modeling question, Khasawneh said, which would make it even more crucial.

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