Treasury Warns of Concentration of Risk in Clearinghouses

Last Wednesday, January 27th, the U.S. Treasury Department’s Office of Financial Research (“OFR”) released its annual report to Congress.

One of the OFR’s key findings related to clearinghouse use for derivatives trades: “…clearing derivatives trades through central counterparties (“CCPs”) has significant benefits in reducing the risks to counterparties of default — as long as the CCP has the resources to meet payment obligations in the event of member default. But a CCP can also be a single point of vulnerability for failure and creates the potential for propagation of risks.”

According to a recent Bloomberg article, regulators and other industry firms have also suggested that there could be too much risk concentrated at clearinghouses.

The OFR also found that rapid, sharp declines in market liquidity “have amplified market shocks” and pose a threat to financial stability. Bloomberg states that regulators are studying the ways in which they can prevent this to help the U.S. Treasury market operate more smoothly.

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