Clearinghouse risk issues took center stage at FIA Expo in Chicago on Oct. 31, with more than 100 spectators in attendance for a civil but contentious discussion about governance and transparency issues.
The event was well-timed, coming soon after nine leading buyside and sellside firms issued a joint paper calling for regulatory action to make clearinghouses safer, and three of the signatories appeared on the Expo panel to discuss their motivations.
Marnie Rosenberg, managing director and head of clearinghouse risk and strategy at J.P. Morgan, was one of the CCP paper's authors. Looking out on the crowded room at Expo, she noted that "the paper has done a good job attracting attention" and stressed that part of its goal was to spur exactly this kind of discussion about what she sees as foundational issues to clearinghouse governance and transparency.
On CCP governance
Nicolas Friedman, managing director at Goldman Sachs and another of the paper's signatories, began the panel by discussing the timing.
"If you look back over the past five years or so, there's been progress … but there's still a set of complex issues that need to be more swiftly addressed," Friedman said. "So you have nine large institutions on the sellside and buyside coming together, coming in with different points of view on some of those complex issues and really trying to make a compromise to map a path forward and engage the broader regulatory sector and CCPs globally."
Friedman stressed that the intention was to spur discussions about what he called "peace-time" issues where "members want a more formal ability to opine on any change or new products that CCPs want to introduce because it has a significant impact on risk profile" as well as "war-time" issues related to catastrophic losses.
Lee Betsill, managing director and chief risk officer for CME Group, represented the clearinghouse perspective. He noted that while the paper was offered by "some big and important customers," they were "just a subset" of the market at large. Furthermore, he noted that "the topics in the paper we have been talking about in panels like this for years and years, and I don't think there's anything new in there."
But on the specific topic of enhanced governance, Betsill noted that CME already has "a very high bar" of oversight for any significant changes, such as the listing of a new product that would substantively change the firm's risk profile. These include internal and external risk committees with a diverse set of market participants, board approval and a regulatory filing process that demands any feedback from members be made public.
"But if there aren't significant changes to the risk profile, I think we have a lower bar," he added, stressing that feedback with "commercial views" is much different than those that call into question the resiliency of a CCP.
Eileen Kiely, managing director at BlackRock, conceded the balance is not always easy to strike across diverse participants. However, codifying a way to bring feedback through a formal "risk council" would help with transparency and clarity to the process.
"Without a risk council, there's really no formal way to raise objections other than white papers or panels such as this," Kiely said.
Fredrik Ekstrom, senior vice president and head of EU FICC at Nasdaq, mentioned that Nasdaq created such a risk council to address these kinds of concerns.
Margin Models
The panel also delved into issues around transparency of margin models.
"There are times if we reach out directly to a CCP, they are almost always willing to provide information on their margin methodology," said Kiely of BlackRock. "And we are privileged to have that access because we are so large. But others may not have that benefit."
Ekstrom at Nasdaq agreed that "the devil is in the details" when it comes to margin changes including concentration add-ons. He said that in addition to quantitative disclosure standards for central counterparties, Nasdaq tries to oblige those who ask for "tailored requests" on data. However, he suggested that "it could be useful in kind of a 2.0 version to harmonize across the industry what is that extra data that could provide that extra benefit."
Rosenberg of J.P. Morgan acknowledged the benefit of these disclosures but noted "there are clearinghouses where we are members that still don't publish them" and that there are "inconsistencies" among clearinghouse on the information they provide and how they provide it. "There's still somewhere to go on the public disclosures," she said.
Adding a public sector perspective was Travis Nesmith, assistant director and section chief of quantitative risk analysis at the Federal Reserve Board. Nesmith stressed that "a risk model ultimately doesn't substitute for your risk management." He added that better data can only take clearinghouses and their members so far and that it is crucial to not become over-reliant on spreadsheets alone.
"Just because something's difficult to measure doesn't mean that you don't try to do something," he said.
Blackrock's Kiely also noted that current disclosures can only take buyside firms so far.
"They are at best incomplete, and at worst misleading or sometimes incorrect. We routinely find errors in quantitative disclosures and we contact the CCP or our clearing member and there's usually just an 'oops we were wrong' and they republish a spreadsheet on their website," she said. "Anyone who downloaded the wrong version has no idea they have the wrong data."
Kiely advocated for formal audits to ensure the data in disclosures is accurate and there are no material omissions.
"We feel really strongly that audits need to be introduced," Kiely said.
