Let us decide our own collateral requirements, CCPs plead

Central counterparties (CCPs) clearing over-the-counter derivatives should have the power to decide on the appropriate collateral that can be posted as margin by clearing members rather than being dictated to by regulators, according to speakers at the International Derivatives Expo in London on June 8.

“My worry is that there will be a decision made by the regulators that says you have to take this and that. I believe CCPs need to have the right to decide what is really appropriate in terms of collateral. Otherwise, we are actually putting more risk into the CCPs,” said Alberto Pravettoni, managing director, corporate strategy at LCH.Clearnet.

Kim Taylor, president of CME Clearing at the Chicago Mercantile Exchange Group, echoed her rival’s fear that blanket rules for collateral requirements could ultimately do more harm than good.

“This is one of the areas I think the regulators will end up imposing some unintended consequences – by restricting what they will allow to count as ‘liquid’. But some of the regulators have said they prefer only cash and committed lines of credit even above US treasuries. I think how the regulators end up coming down on this issue could have a significant impact,” said Taylor.