Goldman Sachs, Other Financial Firms, Call for Regulatory Action to Enhance Safety and Soundness of Clearing Houses

Major buy-side and sell-side firms call for regulatory action to make clearing houses safer and propose a step-change in how the market deals with clearing house failure


New York, October 24, 2019 – BlackRock, Goldman Sachs, J.P. Morgan, Allianz, Citi, Societe Generale, State Street, T. Rowe Price, and Vanguard, today, in a joint paper [click to view], presented detailed recommendations from both buy-side and sell-side perspectives to further enhance the safety and soundness of central counterparties (CCPs), also known as clearing houses. Since the financial crisis, CCPs have been increasingly relied upon to protect market participants from counterparty losses when faced with major market shocks but, despite enhancements in the past few years, the firms believe that there remain outstanding issues relating to CCP resilience, recovery and resolution that require further action.

In the spirit of ensuring on-going financial stability in times of market disruption or crisis, the paper seeks to better align incentives between CCPs and market participants, and ensure that clearing member and end-user liabilities are limited and manageable.  Our recommendations address key elements of resilience, recovery, and resolution of a CCP and include:

On Resilience

  • ensuring that CCPs are subject to appropriate risk management standards and have sufficient financial resources in place to reduce the likelihood of ever needing to enter a recovery or a resolution process
  •  requiring CCPs to make material contributions of their own capital to the default waterfall in two separate tranches

On Recovery

  • introduction of a clearing member ballot to support CCP recovery
  • compensation to be provided to clearing members and end-users for losses incurred through recovery or resolution tools
  • pre-defined assessment rights capped at one times each clearing member’s default fund contribution

On Resolution

  • require CCPs to set aside ex ante resources (e.g., issuance of long term debt that could be bailed in) for recapitalization
  • regular reviews of CCP rulebooks to be conducted by resolution authorities in conjunction with CCP  primary regulators and systemic risk regulators to ensure a common understanding of CCP risk

“Together, these recommendations form a path forward to aligning incentives and enhancing financial stability through even stronger CCPs,” said Nicolas Friedman, Global Co-Head of Counterparty Risk at Goldman Sachs.

“Together, our recommendations will help ensure that CCPs are optimally structured to make sure the market remains resilient in the unlikely event of a meaningful disruption,” said Eileen Kiely, Deputy Head of Counterparty and Concentration Risk at BlackRock.

“Our recommendations would help ensure that clearing members’ and end-users’ exposures to the CCP are limited, ascertainable and manageable,” said Marnie Rosenberg, Global Head of Clearing House Risk & Strategy at JP Morgan Chase & Co.

“While central clearing has mitigated many risks, market resiliency can be enhanced by additional protections to strengthen margin calculations and default fund components, and to preserve the assets of non-defaulting market participants,” said William Thum, Global Head of Capital Markets Legal and Regulatory at Vanguard.

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