The value of European CCPs

In an industry full of risks the role of the central counterparty is perhaps the most important of the market infrastructures. The recent past shows distinctly how much firms have had to rely on CCPs when markets go into massive volatility swings. It’s not the slides so much as the swings. As massive share price rises can cause almost as much counterparty failure as when the market moves into a bear.

This is because of the propensity nowadays for investors to play the bear game, with naked shorts creating losses and unknown exposures to market counterparties. So CCPs have an important role to play in reducing risks for all in the market and to be an early warning system to central banks and regulators if counterparties begin to lose on the P&L and risks begin creeping up and the value of collateral starts to fall.

CCPs can often provide a developing picture of the financial position of a counterparty or the market as a whole if collateral has to be revalued and/or more collateral is being requested on a daily or worse intraday basis. The quality of collateral and the need for remargining also give indications that clouds are building on the horizon and a close watch is needed on firms or markets that look like they are heading into a storm.

During the last few years the market has had to cope with a number of perfect storms but it has managed to prevail because of the CCPs. It was for this reason the recent Post Trade Forum hosted by the London Stock Exchange, involving leading market experts on Europe, debating the future of European Clearing Houses was so topical. With European Clearing House structure fragmented there is difficulty in gaining a full picture of the strength of the market; a point which was highlighted during this spirited debate. Employees of regulated financial services firms can read about the interesting issues raised and points made about the existing and future clearing house model in Europe in the post-debate report by joining the post trade forum group on linkedin.