The Clearing House Association recently released its recommendations regarding the operation, structure and regulation of central counterparties to promote financial stability.
TCH noted the key roles CCPs take in the derivatives market and to support financial stability but added that, if attention is not given to their activities and structure, CCPs could pose a threat to the stability of the U.S. financial system by imposing strict capital and liquidity demands on markets and clearing members.
“Central counterparties will now play a key role, directly and indirectly, in the promotion of financial stability, however, during periods of market stress CCPs could actually do the opposite and cause market destabilization,” Paul Saltzman, the president of TCH and executive vice president and general counsel to The Clearing House Payments Company, said, Yahoo reports. “Among many concerns, TCH wants to ensure that clearing member liability be limited and ascertainable, CCPs have appropriate governance structures and risk and liquidity management protocols and liquidity demands on clearing members be evaluated in light of new and conflicting demands.”
TCH recommended that “clearing member liability must be limited, ascertainable and manageable; CCPs must have appropriate ‘skin in the game’; initial margin should be limited to cash and high-quality, liquid instruments; CM collateral should be subject to investment and custodial risk protections; potentially unrealistic liquidity demands must be addressed; liquidity demands on CMs from intraday margin calls must be coordinated; CCP emergency authority must effectively balance competing interests; enhanced CCP transparency is critical to effective CM risk management; losses within a product type should be silo’d to mitigate the risk of contagion.”