While lawmakers and supervisors across the world have set forth various derivatives regulations in order to manage the risks associated with the trade of these financial instruments, there is a lot of work that must be done to properly regulate the entities that clear these transactions, a prominent finance official said recently.
Central counterparties (CCPs) and clearing houses both clear these trades, and in doing so help manage the counterparty risk that is inherent to derivatives transactions. As more trades are processed by these financial institutions, this risk could become concentrated. The failure of a CCP could threaten the entire financial system.
William Coen, deputy secretary for the Basel Committee on Banking Supervision at the Bank for International Settlements, stated that "we're still grappling with how to deal with the failure of a financial institution and there's a lot more work to do on CCPs," according to International Financing Review.
The concerns with the risks that CCPs pose to the financial system have grown as derivatives regulations worldwide – including European Market Infrastructure Regulation and the Dodd-Frank Act – have created a framework of rules that require more of these trades to be cleared centrally, the media outlet reports.
◦ Asset Liability Management
◦ Portfolio Risk
◦ Sensitivities & Hedging
◦ Stress Testing & Scenario Analysis