Tag Archives: clearing house bubble

SEC delays Dodd-Frank Act derivatives measures

12 Jun

Bloomberg reported:

“The U.S. Securities and Exchange Commission will delay some Dodd-Frank Act derivatives measures scheduled to take effect in July, giving regulators more time to finish rules for the $601 trillion market.

Dodd-Frank, the financial-regulation overhaul enacted last year, set a mid-July deadline for measures designed to improve transparency and reduce risk in the over-the-counter swaps market. The SEC and the Commodity Futures Trading Commission are continuing to seek comment on rules, and have said they would miss the scheduled completion date for some measures.

Registration of derivatives such as credit-default swaps could “unnecessarily impede” use of clearinghouses meant to reduce risk, the SEC said in the proposal, which was released for public comment.”

Clearing houses are aggregating risks at a dangerous level. I would prefer to take the other side of the SEC. The clearing houses are going to increase risks. There is absolutely no way they can regulate an overwhelmingly speculative $601 trillion casino. 

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CLEARING HOUSE BUBBLE: Who is watching it?

4 Jun

LCH.Clearnet is one of the leading global clearing houses worldwide.

A brief description from their website explains the role of LCH.Clearnet and the function of a clearing house more specifically:

‘LCH.Clearnet is the leading independent clearing house group, serving major international exchanges and platforms, as well as a range of OTC markets. It clears a broad range of asset classes including: securities, exchange traded derivatives, commodities, energy, freight, interest rate swaps, credit default swaps and euro and sterling denominated bonds and repos; and works closely with market participants and exchanges to identify and develop clearing services for new asset classes.

A clearing house sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade. When the trade is registered with a clearing house, it becomes the legal counterparty to the trade, ensuring the financial performance; if one of the parties fails, the clearing house steps in. By assuming the counterparty risk, the clearing house underpins many important financial markets, facilitating trading and increasing confidence within the market.

Initial and variation margin (or collateral) is collected from clearing members; should they fail, this margin is used to fulfill their obligations. The amount of margin is decided by the clearing house’s highly experienced risk management teams, who assess a member’s positions and market risk on a daily basis. Both the soundness of the risk management approach and the resilience of its systems have been proven in recent times.’

LCH.Clearnet is 83% owned essentially by the investment banks and 17% by the exchanges. The company’s website states that their ‘market leading interest rate swap clearing service, SwapClear, has cleared over 1.5 million OTC IRS trades since launch in 1999. It currently has 49 clearing members and its portfolio contains 850,000 trades with a notional value in excess of $266 trillion.’ The $266 trillion is the net notional and it is important to highlight that this is not the exchanged principals.

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