October 1, 2012 
Canada has declined to mandate a local CCP for local people, letting the global CCPs provide the necessary services to enable Canada to meet their G20 commitment. Personally I think this is sensible and pragmatic decision, the cost and complexity involved in setting up a CCP for OTC products isn’t trivial and can’t easily be justified by clearing trades solely for domestic business.
I wonder if Australia will follow suit? The story is reported by Jeffrey Hodgson, no relation.
Bank of Canada to allow global OTC derivatives clearing | Business | Reuters.
Amir Khwaja
Ben Larah
Michael Beaton
corinaki24
Jon Skinner
Mihir Vaidya
Maria Leontiou
samihodgson
Bill Hodgson
Tom Riesack
About to read this- I bet FiServ wanted no part in OTC derivatives…
Not mentioned in article, but sounds like reporting requirements (SDR) will be handled by global CCP? Interesting…
Bill, there less comfort in this for someone like Swapclear given the requirement for it to “have appropriate emergency liquidity arrangements in the currencies in which it clears.” It does not have access to central bank liquidity unlike some, but even they don’t have multi-currency support guaranteed. It will depend on how commercial bank support is viewed under this measure and also the ability of ccps’ to reuse non-cash collateral.
Which CCPs re-use securities as collateral? LCH don’t, does CME or ICE?
Further to John’s comment, see below from the BoE oversight report:
“Both LCH and ICE incur substantial unsecured intraday credit exposures to banks participating in their payment arrangements and to their commercial concentration banks. These exposures regularly exceed the CCPs’ capital — the only resource available to absorb credit losses from this source. LCH and ICE are exploring options to address these credit risks as a matter of priority. For example, LCH has identified a solution for eliminating its intraday exposures to payment banks, and ICE plans to concentrate sterling balances at the Bank of England. It is also important for both CCPs to ensure that they have sufficiently reliable access to the intraday liquidity required to facilitate smooth operation of their payment rrangements.”
They also say: “The Bank stands ready to provide settlement facilities (in sterling and euro) to CCPs and believes this can deliver a significant reduction in intraday
credit risk.”
Are the CCP’s direct members of CHAPS? The BoE is continuing to put pressure on major banks who are indirect members of CHAPS to become direct members, partly to ensure that they have access to central bank liquidity should a crisis arise. Should the CCP’s be direct members of CHAPS?
Bill,
The Canada decision is a step in the right direction of improving the risk consolidation benefit of OTC clearing but is small beer against countervaling forces in play.
The problem is that the bulk of the consolidation netting benefit (through taking trades facing 000′s of counterparties and instead clearing them with a small number of CCPs) is between G4 currencies (of which CAD is not one) and so far we have already created 3 critical mass CCPs for IRS clearing in Chicago, London and Japan where EUR, USD, JPY and GBP will be cleared to. Academic papers on the subject suggest that even with a small number of active clearing participants once we get above 2 CCPs we start to lose in aggregate on the netting benefit at the system level. In addition, Asian markets are each mandating their own national CCP which over time will only make things worse.
For a given buy side firm, they may choose to only clear at a single CCP per asset class so as to gain consolidation benefits. However, this may mean that they incur pricing disadvantages in executing trades (because of differential incremental margin funding costs given quoting banks net cleared portfolio risk on each CCP). It seems likely that significant buy side firms will therefore clear on more than one CCP and sacrifice risk consolidation benefits for the sake of keener trade pricing.
It’s likely therefore that tangible systemic risk reduction from OTC clearing will largely be limited to the enforcement of conservative and frequent margining regimes. This is still a significant reduction in systemic risk but comes at a significant funding cost to participants – especially to the non-market making participants. Were there to have been aggregate consolidation benefits these would have come as a major bonus. However, this would require a global regulatory agreement to limit the number of CCPs to two or fewer across US, Japan, EU.