Clearing firms worry that PTFs and market-makers joining CCPs en masse will increase systemic risk.

Ive just read an excellent article from Luke Clancy at Risk.net . Read it here (paywall) https://lnkd.in/eydbd-Ec.

The increasing trend of principal trading firms (PTFs) and market-makers becoming direct members of central counterparties (CCPs) is reshaping clearing. While this shift offers benefits like greater liquidity and cost efficiency, it also introduces significant risks that must not be ignored.

The US Treasury clearing mandate—requiring broker-dealers to clear US Treasury securities by December 2025 and repo trades for most participants by June 2026—has been a key driver. To preserve profitability in strategies like basis trading, where margin treatment is critical, many firms see self-clearing as a way to optimise margin offsets between cleared repos and futures.

However, concerns from futures commission merchants (FCMs) and other market participants highlight critical risks:

1️⃣ Capital Requirements and Resilience:
Banks and FCMs face strict capital rules. Banks must hold 3–5% capital against exposures, and FCMs must set aside 8% of required client margins. By contrast, non-bank CCP members can join with as little as $5 million. This disparity raises concerns about whether these firms can absorb losses during market stress, potentially endangering the system.

2️⃣ Default Fund Contributions and Intraday Risk:
CCP default fund contributions are based on end-of-day positions, but PTFs and market-makers often hold substantial intraday exposures. Their trading strategies involve high daily volumes, creating risks that may not be fully captured by CCP risk models. This leaves the system vulnerable if a failure occurs.

3️⃣ Regulatory Oversight:
Unlike FCMs, which face intense scrutiny from bodies like the CFTC, self-clearing PTFs operate with lighter oversight. This creates an imbalance, with CCPs incentivised to admit members based on commercial interests rather than systemic safety. If FCMs are heavily audited and fined for minor infractions, should self-clearing members face the same treatment?

While some argue that more clearing members enhance resilience—citing examples like DRW’s role in managing Lehman’s positions during the 2008 financial crisis—the systemic risks cannot be ignored. Uniform capital requirements for all CCP members and revised margining practices to account for intraday exposures could help address these risks.

As the US Treasury clearing mandate approaches, the industry must balance innovation with stability. How do we ensure progress doesn’t compromise resilience?

Your thoughts on these developments are welcome.

SecFin Solutions

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