Central clearing and exchange trading of OTC derivatives is a concept so dear to regulators’ hearts that it has become something of a mantra for them – particularly since the demise of Lehman Brothers and the counterparty risks that were brutally revealed by that event. So when Patrick Pearson, head of financial markets infrastructure at the European Commission’s DG Markt unit, stood up to address an ABS conference in London on June 15 his words took some in the audience by surprise. "Clearing houses don’t reduce counterparty risk," he stated. "They simply redistribute it. Central counterparties (CCPs) can act as a channel for risk. Their failure is far more dangerous than the failure of one single counterparty."
Hang on! The market has long worked on the assumption that CCP clearing will be mandated in Europe – it was just a question of when.
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"Central clearing of OTC derivatives is an essential part of the regulatory reform to make this market sufficiently transparent and to allow supervisors and overseers to monitor the build-up of systemic risk effectively" Gertrude Tumpel-Gugerell, European Central Bank |
Indeed, just days after Pearson’s speech, European Central Bank executive board member Gertrude Tumpel-Gugerell commented: "Central clearing of OTC derivatives is an essential part of the regulatory reform to make this market sufficiently transparent and to allow supervisors and overseers to monitor the build-up of systemic risk effectively."
