April 17, 2014

Blackrock Viewpoint on Central Counterparties and Too Big to Fail

A Blackrock thought paper sets out their strong views on how CCPs should be positioned given their key role in the future market infrastructure.

A thought paper from Blackrock provides an insight into their view on how to 'manage' CCPs into their role as a vital component of the capital markets. Blackrock has undertaken this study as part of their fiduciary duty to their investors, so not just an idle talking point. Their intro reads:

One of the most significant reforms that emerged from the global financial crisis was the requirement that OTC derivatives be centrally cleared. Central clearing counterparties (CCPs) were created to reduce systemic risk by requiring central clearing of swaps and mandating collateralized transactions while increasing transparency and investor protection. The idea, promoted by the G-20 beginning at their September 2009 Pittsburgh Summit is good in concept, as it increases transparency for regulators and market participants, and eliminates many of the counterparty risks inherent in bilateral OTC transactions. 

Key findings cover:

  • Systemic risk
  • Stress testing
  • Transparency of risk management
  • Mandatory clearing
  • Default waterfall
  • Resolution planning for failed (or failing) CCPs

The paper is attached below or can be found over at the Blackrock site here:

One of the end quotes caught my eye:

All market participants, including CCPs, should be allowed to fail while ensuring protections are in place to avoid systemic risk and to protect end-investors.

A worthy goal which makes an interesting target for regulators to achieve, and the market players themselves.

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