CPMI IOSCO consult on client clearing and portability
30 November 2021 Global
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The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) has opened consultation relating to access to central counterparty clearing and best practice in case of the default of a clearing member.
The two organisations have published a report, A Discussion Paper on Client Clearing: Access and Portability, which reviews new client clearing access models and ease of portability in case of clearing member default.
Respondents are asked to send their comments on the report by 24 January 2022.
In the event of a member default, client accounts will need to be transferred to another CCP clearing member or liquidated with minimum delay. Given that forced liquidation is typically undesirable, the report examines mechanisms for smooth and timely porting of client accounts.
The report notes that direct and sponsored access models bring new types of entity into the clearing membership of CCPs. These models allow entities that have historically participated indirectly as clients to access CCP services directly.
Based on survey results and client consultation, CPMI and IOSCO find that these new access models have gained most traction in repo markets.
These access models may diversify the risk profile of a CCP’s direct clearing participant base by introducing new types of direct participants, including regulated funds, pension and insurance companies.
However, it will be incumbent on CCPs to monitor and manage different types of risk presented by these new access models — including legal, liquidity and solvency constraints. These “new” types of participant may not contribute in the same way as traditional clearing members to the risk-mitigation mechanisms operating at CCP level.
Indeed, direct and sponsored access models share a common feature — they shift the responsibility of contributing to the CCP’s default or clearing fund, in most cases to a sponsor which guarantees that the risk exposure created by transactions of these new, direct participants are covered.
In some cases, however, the report notes that CCPs may waive the default fund contribution and this is not paid by anyone. Other CCPs may collect a “multiplied margin requirement”, offering either full collateralisation or a figure equivalent to margin and default fund contributions of full clearing members.
“It is therefore important,” says the report, “that CCPs address the implications of these models to mitigate the potential for unintended consequences that could, for example, hamper the CCP’s ability to manage a default.” (p 6)
In case of default by a sponsoring member, its sponsored participants will typically need promptly to establish a contractual relationship with a new sponsor (p 6).
The report reviews the different models that CCPs may apply in these circumstances. Some CCPs require sponsored participants to designate a “backup” sponsor (an “alternate client clearing service provider”) that may step up in case of a sponsor default. At least one CCP, the report notes, has imposed higher default fund requirements on sponsoring members that have clients without a backup clearing provider to reflect the higher burden associated with default management.
Other CCPs may maintain their own analysis to identify sponsoring clearing members most likely to accept sponsored clients in case of a clearing member default (“a game plan”).
The two organisations have published a report, A Discussion Paper on Client Clearing: Access and Portability, which reviews new client clearing access models and ease of portability in case of clearing member default.
Respondents are asked to send their comments on the report by 24 January 2022.
In the event of a member default, client accounts will need to be transferred to another CCP clearing member or liquidated with minimum delay. Given that forced liquidation is typically undesirable, the report examines mechanisms for smooth and timely porting of client accounts.
The report notes that direct and sponsored access models bring new types of entity into the clearing membership of CCPs. These models allow entities that have historically participated indirectly as clients to access CCP services directly.
Based on survey results and client consultation, CPMI and IOSCO find that these new access models have gained most traction in repo markets.
These access models may diversify the risk profile of a CCP’s direct clearing participant base by introducing new types of direct participants, including regulated funds, pension and insurance companies.
However, it will be incumbent on CCPs to monitor and manage different types of risk presented by these new access models — including legal, liquidity and solvency constraints. These “new” types of participant may not contribute in the same way as traditional clearing members to the risk-mitigation mechanisms operating at CCP level.
Indeed, direct and sponsored access models share a common feature — they shift the responsibility of contributing to the CCP’s default or clearing fund, in most cases to a sponsor which guarantees that the risk exposure created by transactions of these new, direct participants are covered.
In some cases, however, the report notes that CCPs may waive the default fund contribution and this is not paid by anyone. Other CCPs may collect a “multiplied margin requirement”, offering either full collateralisation or a figure equivalent to margin and default fund contributions of full clearing members.
“It is therefore important,” says the report, “that CCPs address the implications of these models to mitigate the potential for unintended consequences that could, for example, hamper the CCP’s ability to manage a default.” (p 6)
In case of default by a sponsoring member, its sponsored participants will typically need promptly to establish a contractual relationship with a new sponsor (p 6).
The report reviews the different models that CCPs may apply in these circumstances. Some CCPs require sponsored participants to designate a “backup” sponsor (an “alternate client clearing service provider”) that may step up in case of a sponsor default. At least one CCP, the report notes, has imposed higher default fund requirements on sponsoring members that have clients without a backup clearing provider to reflect the higher burden associated with default management.
Other CCPs may maintain their own analysis to identify sponsoring clearing members most likely to accept sponsored clients in case of a clearing member default (“a game plan”).
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