Episode 120: CCP Non-Default Losses

This week, Anthony and James examine the issue of clearinghouse management and the risk of non-default losses at a center counterparty clearinghouse (CCP). Essentially, how do these entities manage operational risks around cyber-attacks, fraud or disaster recovery. Futures Commission Merchants (FCMs) argue that they shouldn’t be responsible for risk they don’t introduce into the clearinghouse; CCPs argue that the whole point of a clearinghouse is to mutualize risk. This topic is coming to a head because earlier this year the European Parliament proposed rules on how these should be managed, the first time anyone’s really codified it. Under this, the CCPs have to contribute 25 percent of what they put into the default fund—known as their “skin-in-the-game”—to cover these risks, before they dip into member money that is meant to be there to guarantee trades. James discusses the main issues involved, how serious a non-default loss could be versus something like a member default, why everyone should care about this issue, and what we can expect going forward. Anthony just basically listens and nods. The conversation starts at about the 3:45 mark and goes to about 17:00, where they transition—naturally—to a discussion of horror films.