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Can Derivatives Clearing Organizations Survive Severe Market Stress? 

June 15, 2015

Rob Daly, Traders Magazine

It's Wall Street's worst nightmare, a financial collapse that would make 2008 look like a day at the beach.

What if the five or six largest clearinghouse members suddenly defaulted simultaneously? Could clearinghouses manage their resources to meet their responsibilities, and what would happen if they could no longer make good on their members' losses?

The Commodities Futures Trading Commission (CFTC) has asked a number of industry participants those very questions.

CFTC Chairman Timothy Massad reassures that such an event is strictly hypothetical.

"To my knowledge, no U.S. central counterparty [CCP] has ever had to use resources beyond a defaulting member's resources to deal with a problem," he said, adding that this subject needs to be broached. "It doesn't mean we shouldn't plan for it and, in fact, our rules require us to plan for it because we know that no matter how good a regulatory regime is, in extraordinary circumstances something could happen."

A clearinghouse's entire raison d'etre is to mitigate the default risk by spreading the risk among its members. Each member contributes its initial margin for each trade to the clearinghouse's guarantee fund, which the clearinghouse taps for additional resources to cover any losses due to a member's default. A clearinghouse also may levy individual assessments on members whose defaults would bring greater risk to the clearing organization.

Read more: TradersMagazine

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