Customers may not be able to find a new home for their cleared derivatives if their clearing member goes into default, several industry participants warned the Commodity Futures Trading Commission at an April 25 meeting of the CFTC’s Market Risk Advisory Committee.
Executives from banks, trading firms and clearinghouses commented that even though “porting” of customer positions worked successfully in past instances of clearing member defaults, they are not certain that it will work going forward. One reason is the introduction of the Basel III leverage ratio, which has made it more expensive for clearing members to hold customer margin. This has raised a concern that clearing members will be unwilling to take on new business during a period of market stress.
Dale Michaels, executive vice president for financial risk management at OCC, the U.S. equity derivatives clearinghouse, urged regulators to address this concern to ensure portability in a stressed situation, and noted that some of OCC’s members have cut back on providing clearing services because of the capital requirements. This concern is “no longer theoretical,” said Michaels. “Even in peace time, clearing members are asking business to leave.”
Sebastiaan Koeling, managing director at Optiver U.S., the Chicago-based subsidiary of the Dutch trading firm, added that the leverage ratio is reducing the availability of clearing for market makers, which in turn is reducing their ability to provide liquidity. He added that porting will be particularly challenging for options market makers. There are only three clearing firms that have the ability to provide cross-margining for trading firms that make markets in both equities and options, he explained, and if one of these clearing firms were to default, the other two would be unlikely to take on its customers.
Ed Pla, head of clearing and execution at UBS, noted that in addition to the leverage ratio, several other factors have come into play since the introduction of mandatory clearing for swaps. These include an increase in the notional amounts being cleared, a decrease in the number of clearing members, and a concentration of market share among clearing firms, especially among the firms that clear swaps. Pla expressed concern about these trends and warned that porting is “very untested in the new regime.”
CFTC staffers echoed these concerns. Robert Wasserman, chief counsel in the agency’s clearing and risk division, commented that when Refco failed in 2005, several futures commission merchants competed for the firm’s customer accounts. When Lehman Brothers failed in 2008, only one firm stepped forward to take that firm’s customer accounts, and when MF Global failed in 2011, the customer accounts had to be split up among multiple firms. “The trend line has been going in the wrong direction,” he said. “The ability to find homes for customers [has become] much less likely.”
