On Nov. 17, the Commodity Futures Trading Commission's Market Risk Advisory Committee approved a set of recommendations for improving the methods that clearinghouses use to manage the default of a clearing member.
The recommendations covered several aspects of default management, including communication with clearing members and non-clearing firms, participation in default management committees, "fire drill" testing exercises and auctions. The recommendations also covered several issues related to the porting of customers from a defaulting firm to another clearing member.
The recommendations were drafted by a group of experts from major clearinghouses, clearing firms and end-users under the leadership of Susan O'Flynn, managing director and global head of CCP strategy at Morgan Stanley. Although the recommendations are not binding on the CFTC, the recommendations were endorsed by nearly every member of the advisory committee as well as all three of the CFTC's commissioners.
The group identified auctioning a defaulting clearing member's positions as one of the most critical pieces of a clearinghouse's default management process. To ensure successful auctions, the group highlighted the importance of transparency into the auction process, the need for CCPs to harmonize their approaches to auctions, and the value of allowing non-clearing members and customers into the bidding process.
The group also urged regulators to reduce certain obstacles that can hinder the porting process. These recommendations included providing FCMs with temporary relief from anti-money laundering and know your customer requirements, and making changes to bankruptcy laws so that positions and collateral move at the same time. Some members of the group also said they supported temporary relief from capital requirements as well.
