The CFTC Market Risk Advisory Committee ("MRAC") examined (i) the Central Counterparty ("CCP") Risk Management Subcommittee's draft recommendations for the ways in which CCPs can coordinate their efforts when preparing for the default of a significant clearing member, and (ii) the roles the FDIC and the CFTC play in the resolution of banks and central counterparties.
At an open hearing, FDIC and CFTC staff presented a number of topics including: (i) the Title II Process under the Dodd-Frank Act, (ii) special accountability for the company management of global systemically important banks, (iii) access to the orderly liquidation fund, (iv) international engagement, and (v) derivatives clearing organization ("DCO") resolution.
CFTC Commissioner Sharon Bowen expressed support for CCP coordination in general terms, "since it is highly likely that the default of a significant clearing member would occur in an environment where multiple CCPs and clearing members are affected." She encouraged the FDIC, as the resolution authority for CCPs, and the CFTC, as the primary regulator for CCPs, to communicate and coordinate efforts.
CFTC Chair Timothy Massad emphasized the CFTC's leadership in promoting cooperation and coordination.
It has been a priority of mine since taking office, and it is also a priority of regulators around the world, as evidenced by the agreement between U.S. and international regulators last year, to implement a four-part workplan to examine clearinghouse resiliency standards, recovery and resolution planning, and interdependencies among clearinghouses and clearing members. I am pleased that the CFTC is leading much of this work.
Commentary
The need for so-called coordination between CCPs evidences one of the negative consequences of both Dodd-Frank and mandatory clearing: materially increased interconnected risk through clearing members. Dodd-Frank (and similar legislation throughout the world) has resulted in fewer clearing counterparties, and these remaining counterparties, which now are smaller in number and larger in size, are each more connected with the other counterparties through the increased mandatory use of clearing corporations. Even as regulators talk about reducing interconnectedness, the implementation of burdensome regulatory policies drives mid-sized firms away from certain activities. That, combined with government-mandated linkages through clearing corporations, likely increases interconnectedness, perhaps to a material extent.
Questions about interconnected risk are worth considering. Answers might demonstrate that the results of coordination are themselves questionable. Even assuming that the regulations are moving markets in the right direction (and that is an assumption), the specifics of coordination demonstrate that not all of the results are good. At best, they're mixed.
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