New role for office of financial research
The Treasury Department's Office of Financial Research said in its annual report released on Jan. 27 that it will monitor the financial stability of clearinghouses.
The OFR, formed when Dodd-Frank was enacted primarily to weigh financial reporting and data, said the increased use of central clearing and CCPs in the derivatives markets has increased price transparency and improved risk management, but it also introduces concentration and contagion risks in replacing a network of two-way trading relationships with a centralized approach.
Further, OFR warned that central clearing could have the unintended consequence of creating incentives for market participants "to obscure the costs" of potential defaults and liquidation. "Data are lacking in scope and quality to assess and analyze those risks," OFR said.
As part of its effort to monitor CCPs, OFR said it will:
- Analyze central counterparty design, risks, risk management practices and potential systemic impacts.
- Identify and address data gaps, potentially through a pilot data collection and ultimately a permanent collection in collaboration with primary regulators, to improve the CCP data available to regulators and market participants.
- Develop tools for monitoring CCP activities and publicly publish data or monitors to help market participants assess risk exposures to CCPs.
