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

ICE and CME Group Speak Out About Implications of CCPs for Derivatives Markets

Subscribe to our newsletter

Following the concerns raised by Craig Donohue, chief executive of CME Group, last month about the dangers of forcing all derivatives to be cleared electronically, CME and rival IntercontinentalExchange (ICE) have this week released a 150 page report on the subject. The report details the legislative and regulatory action that may be needed in order to safeguard participants in a credit derivatives clearing central counterparty (CCP) against potential failures.

The two market players are themselves bidding for a slice of the derivatives clearing market: ICE launched its ICE Trust CCP earlier this year and the CME facility has already been approved for launch in the US market. However, Donohue in particular has been particularly vocal in recent months about the risks posed by the introduction of these facilities into the markets. “We have to be careful to manage the risk profile of what we clear and there will be a range of things that we would not be comfortable clearing,” he warned last month.

Donohue is therefore keen for the market to have some sway in deciding what is centrally cleared, rather than being forced to clear all standardised trades. “We want to be able to make the decision to clear what we feel comfortable with from a risk perspective,” he said.

This subject is dealt with in the report, as well as recommendations for regulatory protection to be introduced for market participants in the event of a bankruptcy. This could achieved through regulatory change, contends CME, by amending US bankruptcy rules to remove “uncertainties” that persist around buy side firms by extending existing rules for commodity contracts to the CDS sector.

ICE suggests that rules should be introduced for the segregation of collateral posted for CDS trades and for regulators to step in and assist in the timely return of customer collateral in the event of a clearing member’s bankruptcy.

The Federal Reserve Bank of New York has thus far indicated its support for the publication of this analysis and said it will look into the concerns raised. “Segregation and portability are key elements in building robust central counterparties. We requested the analysis because market participants were not making enough progress to analyse and address these buy side issues. This is a good first step and, as we move the OTC derivatives market to central clearing, we will work to strengthen the regulatory and legal environment for buy side clearing,” said William Dudley, president of the New York Fed earlier this week.

The Fed added that it expects market participants to continue to work with regulators and other authorities to strengthen the foundations for buy side clearing as they work to honour their commitment to start clearing customer trades by 15 December 2009.

The Asset Management Group (AMG) of the Securities Industry and Financial Markets Association (Sifma) has also pledged its support for the report, albeit in a general rather than detailed sense: “The Asset Management Group of Sifma encouraged this independent review of complex legal and operational issues that affect the segregation and portability of initial margin in CDS transactions. Protecting asset managers’ rights to recover the assets they have pledged in the event of counterparty default is an essential component of the enhanced processing changes that industry members have defined in recent discussions with regulators.”

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: Solving the operations talent crisis

With financial services in the grip of the Great Resignation, operations – a function which has always found recruitment and retention of talent difficult – is facing challenging times. Business growth is a must, but with scaling comes the cost and complexity of additional headcount. How can you ensure that these constraints don’t hold your...

BLOG

Predictions 2023: A Year of Evolution and Adaptation

By Ludovic Blanquet, Chief Strategy & Transformation Officer, Xceptor. As the curtains begin to draw on 2022, financial institutions are anxiously navigating the challenges imposed by war in Ukraine, rampant inflation, and looming recessions. If it was hoped the diminishing threat of Covid would offer some respite, that hope was short-lived. However, advancements were made...

EVENT

ESG Data & Tech Summit London

The ESG Data & Tech Summit will explore challenges around assembling and evaluating ESG data for reporting and the impact of regulatory measures and industry collaboration on transparency and standardisation efforts. Expert speakers will address how the evolving market infrastructure is developing and the role of new technologies and alternative data in improving insight and filling data gaps.

GUIDE

Regulatory Data Handbook 2022/2023 – Tenth Edition

Welcome to the tenth edition of A-Team Group’s Regulatory Data Handbook, a publication that has tracked new regulations, amendments, implementation and data management requirements as regulatory change has impacted global capital markets participants over the past 10 years. This edition of the handbook includes new regulations and highlights some of the major regulatory interventions challenging...