CCP model secrecy is ‘wrong and unjustifiable’, says BoE official
Central counterparties (CCPs) should make full details of their risk and margin models publicly available, and any attempt to withhold information on the basis it is proprietary is wrong and unjustifiable, according to a senior Bank of England official.
Speaking at the OTC Derivatives Clearing Summit Europe in London, Edwin Schooling Latter, head of the payments and infrastructure division at the Bank of England, said a variety of new, relatively small derivatives users will be required to clear contracts through CCPs as a result of new regulations – and these participants have a right to know how clearing houses are managing the risk.
“Not every client can be on the risk committee. Not every client can attend board discussions on segregation. So it is very important those that can’t are able to benefit from full and appropriate disclosure by the CCP on how it is managing its risks. We at the Bank of England, as a supervisor of CCPs, will consider that to be your right to know how that is done. In a world where you have to use a CCP, it is not right that the CCP doesn’t have to tell you how it is managing its risks. It is not right that it can claim it is proprietary intellectual capital on how it constructs its margin models. That is not going to be justifiable going forward.”
One delegate asked whether regulators should have been more explicit on CCP margin requirements within the European Market Infrastructure Regulation – but Schooling Latter said this would have been difficult.
“A 99% confidence level sounds like a very precise figure, but 99% of what? Exactly how the parameters of that calculation are set, in terms of what is in your look-back period, is incredibly important. And even if we define the look-back period, and the European Securities and Markets Authority technical standards have set some controls on what that look-back period needs to be, you still frankly have quite a lot of discretion in how you produce a distribution out of that look-back period,” he said.
“So it is difficult to be extremely precise. What’s the answer to that? Well, it goes back to the transparency point – I think CCPs should have to explain to all participants, and indeed the public to be frank, exactly how they do it, so the weaknesses and strengths of their particular model are available for everyone to see, and for everyone to criticise.”
The delegate responded that certain European CCPs are refusing to disclose details of their margin models – an approach Schooling Latter said was “wrong and unjustifiable”.
This article was first published on Risk