CCP Research and Potential Issues Arising from Central Clearing House Concentration Serge Wibaut And D. Sykes Wilford
Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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Introduction Existing literature on CCPs is relatively scarce and mostly deals with technical issues y Quote from a paper by Duffie and Zhu (2010) that caught our attention: “We show that it is always more efficient to have a single CCP that jointly clears various classes of derivative than to have separate CCPs that clear the respective classes. For example, regarding the debate over whether dealers should have separate CCPs for their U.S. and European credit default swaps, we show that it is more efficient to clear U.S. and European credit derivatives contracts on a single CCP “ y
Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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Introduction The Clearing and Financial System is complicated yClearing houses may be simple in theory but fit into the financial web in a complicated form yRegulation is already complicated and expanding it will affect many different entities yLiquidity is the lifeblood of the system and solving one problem with another set of regulations must consider this factor. yFor example, the existing CCP system in the US is already very complicated
Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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Introduction CCP’s In Yellow
Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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Overview of what we considered y
Insurance Industry Considerations
y
Focus on Credence Good Providers
◦ Concentration ◦ Forms of competition and optimal mix of equity, premiums and deductible ◦ Behavior of Purchasers ◦ Whole Life ◦ Auto and competition ◦ Short term decisions vs. longer term decision making
y
Private Sector CCPs as Credence Goods Providers Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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CCPs and Credence Goods Issues Tiers in the industry based upon degrees of safety -- Low Cost and Higher Risk, a Trade y Competition would engender the development of credence goods providers y Others would compete on price y What happens to Credence goods providers when a monopoly is created? y
â—Ś Are the rating agencies examples????? Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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Credence Good Issues Implications or problems if the Credence Good Provider were to disappear: yIs regulation and or legislation is sufficient ◦ Example of S&P and Moody’s
yOligopoly
pricing and cost of capital
◦ Who keeps the gains to trade
ySuppose
we nationalize the monopoly? yOr do we create GSE’s to service the banks interbank market? yUnintended Consequences of GSEs in a market: Fannie and Freddie yGood ideas have a way of going hay wire: AAA will never be the same… Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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Potential for Unintended Consequences from Global Regulation y
y y y y
Typical models of regulation of central clearing houses often assume a domestic economy model and focus on clearing house efficiencies gained from concentration. And when expanded little attention is paid to broader business implications for global markets. Getting Regulation right for clearing houses and their relationship to Global Banking may be impossible. Different regulators in different jurisdictions each add another complicating dimension to business activities. Failure by regulators to appreciate the unintended consequences from well-meaning regulatory changes may lead to more, not less, systemic problems. Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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One Economist’s Comment for a Better Conclusion
“If the lesson that world leaders took away from the ‘too big to fail’ financial crisis in 2008 was that we needed even bigger, more monopolistic financial institutions at the center of our markets, then financial market participants must find a way to prevent them from the inevitable catastrophe they are creating. The crisis that would inevitably follow the creation of a global CCP monopoly is a mistake that will lead to a global crisis that will make 2008 look like a play-date. It’s inconceivable that leading world politicians and financial regulators could make this mistake.” y Don’t Bet on it! --- My Addendum y
Cass-Capco Institute Paper Series on Risk, London, 19th April, 2012
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