IMF: CCP structure increases systemic risk

The failure to establish either a single global central counterparty (CCP) or a viable approach to interoperability means the move to central clearing has simply increased the number of institutions in the global financial system that are too big to fail, according to Manmohan Singh, senior economist at the International Monetary Fund.

Speaking at a panel discussion at the Sibos conference in Osaka, Singh said that despite the efforts of the Group of 20 nations to reduce systemic risk by requiring over-the-counter derivatives to be cleared, key policy failures meant systemic risk had simply been transferred, and potentially extended.

“Both the banks and the CCPs are too big to fail – but it’s easier politically to bail out a CCP and that’s the twist. Today, there are 10 to 15 large banks with 90% of the derivatives market. But in the new world we are moving towards with central clearing – where a considerable portion of the derivatives market won’t move to a CCP – the result will be 30 or 40 new CCPs plus the existing banks. All that does is create more pockets of risk in the system. But if those pockets are too big to fail, then what are we doing?”

One possible solution is for clearing houses to be interoperable, meaning they effectively act as a single CCP. However, Singh said that “isn’t going to happen – for legal reasons, for cross-border reasons, and for reasons of certain clearing houses having niche markets that won’t happen. So now instead, we are going to have 50 pockets of risk including banks.”


This article was first published on Risk

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