Are Central Counterparties the Next Systemic Threat?
By John Heltman
Since the Group of 20 nations agreed in 2009 to route most over-the-counter derivatives through central counterparties, or CCPs, regulators have been increasingly concerned that those centers could pose a catastrophic risk to financial stability if they fail. But a years-long standoff between regulators in the U.S. and Europe over how to regulate the swaps market is also stalling initiatives to shore up CCPs and to keep the international swaps market afloat. The stalemate is making the situation worse, especially considering that an enormous proportion of the entire global swaps market flows through just a handful of CCPs… Karen Shaw Petrou, managing partner at Federal Financial Analytics, said where that line is drawn and how different it is on either side of the Atlantic is a major feature of the overall discussions. “Where does the risk stop at the CCP and start at the banks? There are some really strong differences of opinion there based on whether you’re a CCP or a bank,” Petrou said. It is doubtful any of these issues will be resolved soon, but the concern is that the swaps markets — the vast majority of which trade between London, New York and Chicago — will become increasingly fractured and disjointed. What is more, the push for central clearing has concentrated risk into a handful of institutions without a well-considered or uniform set of prudential standards to offset that concentrated risk, Petrou said. “You’ve pushed the financial system in one end, and something always comes out on the other, because markets are infinitely adaptable,” Petrou said. “Maybe with CCPs you’ve cured the opacity, arguably the self-interest … but you’ve created systemic utilities that are now too big to fail with an uncertain prudential regime. The framework is very, very patchy and incomplete.”