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Spotlight on CCP risk 

June 8, 2015

Josh Galper, Automated Trader

Regulators around the world are increasingly looking to central counterparty (CCP) clearing houses as a way to mitigate counterparty risk in the market. But is this just the next too-big-to-fail in the making?

CCPs bring counterparties together and manage the risk of financial transactions between them. But by becoming an essential infrastructure, CCPs can possibly pose significant systemic risk to the market.

The "heart of the issue", said Josh Galper, managing principal of consultancy firm, Finadium, can be found within the tangled network of bilateral and CCP transactions.

"The CCPs are not a direct cause of concern; CCPs are unlikely to fail because of poor internal risk management. The cause of concern is how much risk is concentrated among large clearing members who could potentially fail," said Galper.

One bank failing could strain, but not incapacitate a single CCP. But banks like JP Morgan, Citi or HSBC could be members of a dozen or more CCPs. In a worst case scenario, a number of major banks could fail and any CCPs in which they are members would have to liquidate positions.

"A collapse of one or more major CCP without an orderly regulation would create very substantial disruption in the financial market and in domestic economies," he said.

Read more: Automated Trader

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