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 central counterparty clearing will be mandated in Europe - it is just a question of when. Indeed, just days after Pearson’s speech European Central Bank Executive Board member Gertrude Tumpel-Gugerell commented that “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.” She adding that 80% to 90% of OTC trades could be centrally cleared.
