NEW YORK, January 14, 2015 – John Williams, partner in Milbank, Tweed, Hadley & McCloy’s Alternative Investments Practice Group, provided commentary in a recent Structured Credit Investor (SCI) article titled, “Seeking knowledge: FIA survey to unlock CCP transparency?”
SCI mentions that, “John Williams is an advocate of increasing CCP oversight and supports ISDA's CCP adequacy principles (SCI 25 November 2014), which primarily call for clearinghouses to open up about both the risks they take and what they are doing to safeguard the market.” Williams elaborates, “In general, a number of things going on in the last two to three years have moved regulatory practice in the right direction. ISDA's principles are a good indicator, but it is clear that more must be done.”
SCI furthers, “one solution put forward by the ISDA principles is mandatory and transparent stress testing of CCPs, but Williams believes this is an initiative that is less likely to be pushed forward in the short term.” Williams explains, “There would be a lot of knowledge to transfer. That does not mean there are not currently people with the relevant knowledge, but it is still a long way away from being possible.”
Regarding issues that arise from the variety of CCPs, Williams comments, “for example, commodity CCPs and interest rate CCPs would require different approaches, so there would be a lot of administrative work required. The sentiment shows that the market is heading in the right direction though.”
Despite the multitude of discussion around CCP transparency, SCI notes, “Williams believes a wider understanding of their conduct is still unrefined in the market.” Williams says, “When you compare it with aspects of the bilateral derivatives world, the precision of understanding is nowhere near the same. Admittedly, participants are spending a lot of money to find solutions in this space, but we need a more concrete form of answer.”
SCI further explains that, according to Williams, “Regulators have done a good job in changing perspectives and subsequently setting a solid framework for comparison among CCPs. He cites the, Principles for Financial Markets Infrastructure meeting as an example, where prudential regulators met in 2012 and set 24 principles for CCPs to abide by. On the back of this, US, Canadian and Japanese regulators began a fresh revision of their current regulations.”
However, regarding the need for additional solutions and increased knowledge within the industry, Williams urges, “We require more than just policy papers and conferences. Participants need to invest in their own systems. If we push for greater precision in knowledge, we can create more accountability.”
“Many CCP users think [the global survey is] worth doing,” says Williams. “The only barrier is that it is expensive. To be useful to clearing members, an external survey must be at least as user friendly and reliable as anything the clearing members would put together internally, and the relevant body of material can be pretty extensive.”
However, he adds: “The US$5m worth of survey orders that FIA has already received suggest this project meets a real need in the market. There is still a lot to do, but this signifies the potential for a large-scale project.”
William concludes, “If the whole financial world is trading on CCP platforms, then they should certainly be transparent. However, we shouldn't just rely on these market infrastructures to simply set rational and fair guidelines for themselves without necessary scrutiny. External pressure must continue to arrive from all angles.”
