CFTC to Host Public Roundtable Discussion on Recovery and Orderly Wind-Down of DCOs (with Lofchie Comment)

The CFTC staff announced it will hold a public roundtable discussion on March 5, 2015 on recovery and orderly wind-down of derivatives clearing organizations ("DCOs").

According to the CFTC, the goal of the roundtable discussion is to gather views from a variety of stakeholders, including DCOs, their clearing members (futures commission merchants), and the customers of their clearing members (including money managers, end-users, and others).

The roundtable discussion will be broken into four sessions, which will discuss: (i) variation margin gains haircutting, (ii) re-establishing a matched book, (iii) wind-down, and (iv) liquidity risk management.

Lofchie Comment: With the change in administration at the CFTC, the regulators are now able to address the fact that clearinghouses do not magically eliminate risk in the system; in fact, they concentrate it, not necessarily for the better. While it is certainly worthwhile for the CFTC to address the risk to the system that may be caused by a defaulting DCO, the greater risk that the CFTC should consider is that during a time of extreme market volatility, DCOs would demand significantly increased amounts of collateral which might very well: (i) cause a liquidity drain at a time when the system can least afford it and (ii) cause a massive sell-off of positions as firms liquidate rather than meet collateral demands.

See: CFTC Press Release.