Margin calls, euro clearing and money-market funds

The week on Risk.net,October 14-20, 2016

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LCH MARGIN CALLS attract scrutiny after Brexit turmoil

EMIR could mean land grab for euro clearing

MONEY MARKET FUNDING dries up for banks

 

COMMENTARY: New fears of margin calls

The regulatory push towards margining of non-cleared derivatives trades continues, with the spotlight this week falling on Asian markets. International Swaps and Derivatives Association chief executive Scott O'Malia said an "aggressive" implementation timeline for requiring the exchange of initial and variation margin for non-cleared trades would require at least eight months, assuming all went smoothly.

All may not, of course, go smoothly. One area of active debate in many Asian jurisdictions, some of which have yet to release the final text of their rules on margin exchange, is how to handle the issues around non-netting trades – those taking place in jurisdictions where trades cannot be netted out, and collateralisation may not be enforceable. (Asia has many, chief among them being China.) Handling these trades is taxing regulators such as the Hong Kong Monetary Authority, and time may be running out to hit the March 2017 deadline for implementation – the alternative, O'Malia has warned, is a "repapering exercise on a scale that has not been seen before".

And on the other side of the fence, there are now worrying signs the push towards central clearing could have created new systemic risks in times of crisis. LCH is considering reforms after coming under fire for making several large margin calls as markets thrashed around in the wake of the UK's Brexit vote.

Fears are growing that such calls could be pro-cyclical, creating additional funding and liquidity burdens for banks already struggling to cope with a crisis of some kind. The irony that central clearing could be the source of the next contagious crisis has not escaped regulators, and the likely consequence is that LCH and other clearing houses will come under tighter control – official or indirect – by those responsible for financial stability. This won't be a complete surprise, given their newly central role in the world financial system, but it might not be a pleasant change.

 

STAT OF THE WEEK

Investors have pulled $1 trillion from prime funds since the US Securities and Exchange Commission finalised its money market reforms in July 2014, forcing banks to find alternative sources of short-term funding.

 

QUOTE OF THE WEEK

"The trend we have observed in Hong Kong and Singapore is slightly worrying. If a bank is not systemically important for the domestic market, then you shouldn't have to prepare a local recovery and resolution plan, but these resolution laws seem to be introducing the requirement for other banks to conform through the backdoor" – A regulation expert at one European bank active in Asia.

 

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