The interconnectedness of CCPs and banks

Ryan Ingram, Group Regulatory Analytics, Risk Policy & FMI Strategy, Hong Kong Exchanges & Clearing Ltd. (HKEX) summarises the themes from the panel he moderated at IOMA earlier in April.

At the WFE’s IOMA post-trade conference held in Chicago, HKEX had the pleasure of leading an exciting discussion among industry thought leaders on the relationships between, and the interconnected nature of, central counterparties (CCPs) and banks within the clearing ecosystem.

The focus of the discussion was to illustrate the depth of these relationships, and the interdependencies that exist among financial institutions and the financial market infrastructures (FMIs) that support them. The group also discusssed potential challenges to the system, and industry and policy considerations.

Industry discussions and initiatives related to FMIs are typically focused on services provided by CCPs, CSDs and SSS. However, these discussions are now expanding to assess critical services provided by financial institutions beyond their capacity as a clearing member. This includes: facilitating clearing for proprietary activity, as well as client clearing related activities from custody and settlement services; investment of collateral received; and providing credit and liquidity facilities.

This topic is particularly timely because while these interconnections and interdependencies are inherent in the clearing ecosystem (although variations occur by jurisdiction), and have existed for a long time, it has become increasingly important given the development of regulatory initiatives to promote central clearing. In fact, the Financial Stability Board (FSB) recently took on the task of analysing these relationships across the clearing ecosystem. The results of the analysis were quite insightful, and will help inform further regulatory and industry initiatives.

On the panel we were fortunate to have a representative from the buyside, and one from the regulatory community as well, both of whom could elaborate how they approach risk assessment and corresponding regulatory initiatives. Given the lively discussion, and thoughtful questions posed from the audience, we can expect this to be the first of many industry debates on this important topic. A special thanks to the WFE for hosting a forum that covers the most current and impactful themes across the post-trade industry.