Banks rail against China CCPs’ loss-sharing policy

Global banks are pressuring China’s clearing houses to abandon a recovery tool that could compel members to absorb the loss-making positions of other firms during times of market stress.

“The challenge … is that market participants are facing a risk they can’t measure, manage or hedge in advance due to optionality,” says Nicolas Friedman, global co-head of counterparty credit risk at Goldman Sachs.

The loss allocation technique, known as forced position reduction, works by effectively setting