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CCP “contagion” fears spark derivatives debate 

November 14, 2014
Elliott Holley, Banking Technology

Controversy over the handling of derivatives dominated talk at the Mondo Visione Exchange Forum this week, where panellists contested the value of interoperability and whether CCP contagion might bring down the financial system.

“Regulators should absolutely not allow interoperability for derivatives,” said Philip Simons, head of OTC derivatives business at Eurex Clearing. “It creates systemic risk. If one clearing house goes down, it would result in contagion as it would bring down all the others. CCPs are phenomenally under-capitalised. They could easily fall over.”

Simons added that although models predict that the financial system is currently relatively ‘safe’, the events of 2007, 2008 and 2009 should serve as a serious warning not to become overly complacent. Despite having some of the best technology and staff available, companies such as Lehman Brothers failed to protect themselves against systemic risk. The models that suggest interoperable CCPs for derivatives could work may also be wrong, he said.

Read more: Banking Technology

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