Senator Elizabeth Warren (D-MA), Senator Mark Warner (D-VA) and Representative Elijah E. Cummings (D-MD) requested that two systemically important derivative clearing organizations ("SIDCOs") – Chicago Mercantile Exchange, Inc. ("CME, Inc.") and Ice Clear Credit LLC – provide information regarding their respective recovery and resolution plans.
In letters to the CME and ICE, the legislators noted that, unlike large banks that provide the public with an executive summary of their plans together with certain material information, SIDCOs are not required to release public information about their recovery and resolution plans to either the CFTC or the Federal Reserve Board ("FRB"). On April 13, 2016, the FRB and the FDIC deemed that the resolution plans of five of the eight largest banks were not credible and required those five banks to remediate their deficiencies. The legislators stated that these deficiencies "raise . . . significant concerns about the resolution plans of other financial institutions, particularly those that have significant business interaction with the large banks." They argue:
Because it is concerning that the resolution plans of several of the largest banks were recently deemed not credible, we are seeking information to understand whether the resolution plans for DCOs are not credible as well.
Further, the legislators requested that the firms respond by July 26, 2016 to 11 questions concerning whether the plans have been reviewed by federal regulators, which events trigger the plans' execution, how clearing services are isolated from other activities, and to what extent the forms addressed the systemic risks they may face.
Commentary
The letters to the CME and ICE reflect a certain irony that is apparently lost on the authors. On the one hand, the authors claim that requiring most bilateral swaps to be cleared through a DCO "minimizes counterparty risk and represents a significant step towards ensuring a safe and stable financial system." On the other hand, they express concerns that such an arrangement "engenders the risk that a DCO might fail because of an increased concentration of risk at the clearinghouse, causing significant threats to the financial system." If mandatory clearing truly has all the virtues that the authors claim, then why is there so much anxiety associated with funneling all trades to DCOs? Or do the problems associated with concentrating risk in such a homogeneous way call into the question the wisdom of mandating clearing in the first place?
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