June 23, 2017

The FED Governor Jerome H. Powell spoke at the Federal Reserve Bank of Chicago Symposium on Central Clearing in Chicago, Illinois. During his speech, he took stock of the progress made in strengthening the central counterparties (CCPs) post crisis and offered insights on the central clearing and liquidity risks.

Mr. Powell highlighted the importance of central clearing in addressing the weaknesses exposed by the recent global financial crisis and discussed the recent accomplishments in this area. He discussed the extensive work done to come out with and implement the Principles for Financial Market Infrastructures (PFMI), which were published by the CPMI and IOSCO in 2012. He added that CPMI and IOSCO will soon publish a more granular guidance on CCP resilience, focusing on governance, stress testing credit and liquidity risk, margin, and recovery planning. While this guidance will not establish new standards beyond those set out in the PFMI, it will encourage CCPs and their regulators to engage in thoughtful dialog on how they could further enhance their practices. The FED is also considering certain steps. First, it is developing an interpretation of its rules in connection with the movement of some centrally cleared derivatives to a "settled-to-market" approach. Under this approach, daily variation margin is treated as a settlement payment rather than as posting collateral. Under the FED’s capital rules, this approach reduces the need for a bank to hold capital against these exposures under risk-based and supplementary leverage ratios. Second, it is working to move from the "current exposure method" of assessing counterparty credit risk on derivative exposures to the standardized approach for counterparty credit risk (SA-CCR). The current exposure method generally treats potential future credit exposures on derivatives as a fixed percentage of the notional amount, which ignores whether a derivative is margined and undervalues netting benefits. SA-CCR is a more risk-sensitive measurement of exposure, which would appropriately recognize the counterparty risks on derivatives, including the lower risks on most centrally cleared derivatives.
 
He then focused on liquidity risks faced by CCPs. “I will look at these risks from two perspectives, first in terms of the payments that CCPs must make and then in terms of the payments they expect to receive,” said the FED Governor. He added, “As regulators, we should encourage innovations that increase clearing efficiency and reduce liquidity risks where they meet the PFMI and our supervisory expectations.” He addressed four policy issues that need careful consideration as the public sector and market participants continue to address liquidity risks in central clearing. The issues were stress testing CCPs, ensuring efficiency, central bank accounts for designated financial market utilities (DFMUs), and cross-border cooperation in this area. He highlighted that the lessons from Brexit point to the need for cross-border cooperation. Brexit triggered payments flows to CCPs across many jurisdictions. As far as liquidity risks are concerned, it is immaterial whether a CCP is based in the United States or abroad as long as it clears U.S. dollar denominated assets and must make and receive U.S. dollar payments. There are different possible approaches to such cross-border issues. Efforts to address these liquidity risks should carefully take into consideration the effect that they would have on the broader financial system. 
 
While discussing the issue of supervisory stress testing of CCPs, he welcomed the progress of authorities in both the United States and Europe. In the United States, the CFTC conducted a useful set of tests of five major CCPs last year. In Europe, ESMA is already expanding its supervisory stress testing exercise to incorporate liquidity risk. A similar exercise in the United States should be seriously considered, said the FED Governor. He also discussed the importance of allowing DFMUs to hold central bank accounts. The Dodd-Frank Act authorized the FED to establish accounts for DFMUs and these accounts permit DFMUs to hold funds at the FED, but not to borrow from it. Allowing DFMUs to deposit balances at the FED helps them avoid some of the risk involved in holding balances with their clearing members. It also provides CCPs with a flexible way to hold balances on days when margin payments unexpectedly spike and it is difficult to find banks that are willing to accept an unexpected influx in deposits. In such a case, it may also be too late in the day to rely on the repo market. The availability of FED accounts could help avoid potential market disruptions in those types of circumstances. The FED Goverrnor concluded by reinforcing that although the regulatory reforms have done much to strengthen both CCPs and their clearing members, we should continue to make progress in creating a more robust and efficient system.

 

Related Link: Speech

Keywords: Americas, USA, FED, CCP, Securities, OTC Derivatives, Credit Risk, Liquidity Risk, SA-CCR

Related Articles
News

IMF Releases Report on 2019 Article IV Consultation with United States

IMF published its staff report in the context of the 2019 Article IV consultation with the United States.

June 24, 2019 WebPage Regulatory News
News

BIS Report Discusses Regulatory Issues Related to Big Techs in Finance

BIS has pre-released a chapter of the BIS Annual Economic Report; this chapter focuses on the risks and opportunities presented by large technology firms in the financial services sector.

June 23, 2019 WebPage Regulatory News
News

IOSCO Report Examines Liquidity in Corporate Bond Markets

IOSCO published a report that examines the factors affecting liquidity, under stressed conditions, in the secondary corporate bond markets.

June 21, 2019 WebPage Regulatory News
News

FED Publishes Results of the 2019 Stress Tests for Banks

FED published a report presenting results of the Dodd-Frank Act Stress Test (DFAST) exercise for 2019.

June 21, 2019 WebPage Regulatory News
News

BCBS Report Examines Global Pillar 2 Supervisory Review Practices

BCBS published a report that examines the Pillar 2 supervisory review practices and approaches in Basel member jurisdictions.

June 21, 2019 WebPage Regulatory News
News

IASB Publishes Work Plan and Meeting Updates for June 2019

IASB published an updated work plan and a summary of its June meeting, which presents preliminary decisions of the Board.

June 21, 2019 WebPage Regulatory News
News

HKMA Publishes Banking Exposure Limits Code Under Banking Ordinance

HKMA issued a circular to all authorized institutions informing that the Banking (Exposure Limits) Code has been published in the Gazette on June 21, 2019.

June 21, 2019 WebPage Regulatory News
News

OSFI Proposes Guideline on Internal Model Oversight for Insurers

OSFI proposed the draft guideline E-25 on the internal model oversight framework for federally regulated property and casualty (P&C) insurance companies.

June 21, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for June 2019

Under the Single Rulebook question and answer (Q&A) updates for this week, EBA published one answer regarding the calculation of institution-specific countercyclical capital buffer rates.

June 21, 2019 WebPage Regulatory News
News

SEC Finalizes Capital and Margin Requirements for Security-Based Swaps

SEC adopted a package of rules and rule amendments to establish capital, margin, and segregation requirements for security-based swaps, under Title VII of the Dodd-Frank Act.

June 21, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3304