The Federal Reserve Bank of Chicago ("Chicago Fed") published a staff policy paper highlighting the major business model and risk profile differences between central counterparties ("CCPs") and banks. In the paper, titled " A CCP is a CCP is a CCP," Chicago Fed staffers Robert Cox and Robert Steigerwald explain how collateral and capital play different roles in CCP risk management when compared with banks, calling capital "subordinate, yet complementary" in CCP risk management.
The authors emphasized that CCPs (unlike banks) are not in the "business of risk-taking." "CCPs are managers of risk, not takers of risk," they said. The authors assert that central clearing transforms risk instead of eliminating it, and that the role of the CCP is to (i) manage the related credit, liquidity and operational risks, (ii) provide a mechanism for "market entry and exit that supports liquidity" and (iii) ensure clearing members meet all CCP-mandated obligations.
The authors offered the following policy recommendations concerning CCP supervision and risk management:
- Capital cannot be a significant resource for loss absorption.
- Capital analysis is not a meaningful measurement of CCP resilience.
- Stress testing should focus on member default.
Commentary / Nihal Patel
As the title of the report suggests, a CCP does not act like a bank, and therefore, the regulatory structure created to protect against its failure should not be the same as that used for a bank. The authors take no view on whether it is good policy to push markets to use central clearing. Rather, their focus is on steering policymakers in crafting solutions to address the risk of CCP failure (something exponentially less common than bank failures) towards policies that are specific to the risks most likely to arise for CCPs. (A point made often by certain Cabinet commentators.)
While the author's point seems obvious, it is well worth making given recent trends in regulatory activity. Part of the problem is the regulatory oversight itself. Given that the personnel charged with overseeing CCPs from a systemic risk perspective are largely bank regulators, it is not surprising that such persons might be "perplexed by what is seen as an idiosyncratic balance sheet of CCPs" and have sought to impose "bank style capital, in order to run the equivalent of bank stress tests." Cf. "If I Had a Hammer."
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