Question

Despite the apparently improved resiliency of the wider system, there has still been a fierce industry debate about whether CCPs need reform. The 19 firms that called for clearing houses to hold more capital as part of a raft of measures aimed at increasing their resilience included Allianz Global Investors, BlackRock, Citigroup, Goldman Sachs and JP Morgan. “There isn’t a market-wide consensus yet on the recovery and resolution framework for CCPs. How should the risks and burdens be balanced? In the current CCP rules, quite a lot of that burden falls on clearing members. Regulators will have to make the final judgement on that,” said Karl.

19 firms have called for clearing houses to hold more capital. How will this reduce the likelihood of a clearing house becoming insolvent?

Answer 1

The Central Counterparty (CCP), is an organization which is generally operated by a major banking unit. It basically works as a intermediary for carrying out the various functions such as clearing, settlements and other required transactions.

The CCP clearing intervenes between two parties, securing the trade contract of both , by becoming buyer for each seller and seller for each buyer present in the market.

It aims at protecting the buyers and sellers if they incur losses while failing the contracts in trade, thus, by charging a reasonable amount of money from each of them as a practice.

The advantage of CCP's is their risk control ability which is anyhow beneficial for the clearing members. As introducing risk management and operational management policies and programs for the settlement of various transactions cleared by the CCP's.

The disadvantages of CCP's include concentration of capital, liquidity, credit, and certain operational and legal risks too.

Thus, if both the advantages and disadvantages of CCP's are taken into account and reformed a bit, the risk and burdens will be balanced.

When the clearing houses are called for holding more capital by 19 major firms, the chances of its insovency will be reduced automatically, as it will earn more from the capital or money restored in the form of interest-rates.