About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

CCP for the CDS Market Will Have Very Little Impact on Risk Mitigation, Says Adsatis

Subscribe to our newsletter

Originally appeared in MiFID Monitor

The market may be overestimating the impact that the introduction of a central clearing counterparty (CCP) will have on systemic risk, according to London-based consultancy Adsatis. The firm’s recent white paper, entitled “A central counterparty for OTC credit derivatives – are we over estimating the importance?”, examines the benefits and possible disadvantages of clearing OTC credit derivatives via a CCP.

Bill Hodgson, Adsatis consultant and author of the paper, explains: “The benefits of a CCP for OTC credit products have been widely advertised as reducing ‘systemic’ risk in the capital markets. Our contention is that changing the processing of one high volume product makes no difference to the entire capital markets system, leaving the wider system unaffected. The inability of any CCP to take on the risk mitigation of complex structured credit products, means the CDOs and SIVs at the centre of the current crisis remain untouched by this initiative.”

The white paper examines the characteristics of a CCP and how these will affect industry participants in the CDS market. Hodgson identifies three main benefits to a member of a CCP: the release of credit line usage, the release of regulatory capital and more efficient back office processing.

But he also identifies what he sees as a negative impact: “One downside of having OTC contracts via a CCP is the exclusion of these trades from the existing ISDA based margin agreement between a pair of firms. With a large number of trades being novated to the CCP, this can potentially reduce the effect of exposure netting, and increase the amount of margin required in the bilateral relationship.”

The CCP will also provide benefits to regulators such as a single window into the risk exposures of its members, says Hodgson.

However, he is sceptical that the initiatives will benefit the industry significantly in terms of reducing systemic risk. “If your definition of systemic means the whole capital market, then given the narrow scope of the OTC credit CCP, this benefit doesn’t seem justified given the wide range of other business transacted by the major firms,” he says.

Hodgson puts the introduction of the CCP into this market down to two primary factors: public image that something is being done and the desire of regulators to more closely monitor the sector. He believes the existence of a credit CCP won’t prevent a future crisis and will be a footnote to any history of this period. “If anything this is a tactical step which will be forgotten once launched as we continue to see the after effects of the crisis. And a final note, given the scale of losses in the market so far, can a single CCP absorb such losses bringing concentration of risk into a single entity?”

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: In data we trust – How to ensure high quality data to power AI

Artificial intelligence is increasingly powering financial institutions’ processes and workflows, encompassing all parts of the enterprise from front-office to the back-office. As organisations seek to gain a competitive edge, they are trialling the technology in variety of ways to streamline and empower multiple use cases. Some are further than others along the path to achieving...

BLOG

Data’s Evolution Continues From Cost to Core Asset: DMS New York City 2025 Preview

Modern Chief Data Officers are not only the guardians of financial institutions’ data estates, they are also the caretakers of their single-biggest asset. With every part of an organisation’s business now dependent on data, the custody of its digital information is every bit as critical to operations as the management of trading teams or even...

EVENT

TradingTech Briefing New York

Our TradingTech Briefing in New York is aimed at senior-level decision makers in trading technology, electronic execution, trading architecture and offers a day packed with insight from practitioners and from innovative suppliers happy to share their experiences in dealing with the enterprise challenges facing our marketplace.

GUIDE

Dealing with Reality – How to Ensure Data Quality in the Changing Entity Identifier Landscape

“The Global LEI will be a marathon, not a sprint” is a phrase heard more than once during our series of Hot Topic webinars that’s charted the emergence of a standard identifier for entity data. Doubtless, it will be heard again. But if we’re not exactly sprinting, we are moving pretty swiftly. Every time I...