The risk controllers : central counterparty clearing in globalised financial markets

418 Pages·2011·5.66 MB·English

by  Norman

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The Risk Controllers
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FurtherpraiseforTheRiskControllers
“The fallout from the 2008 financial crisis is forcing the world of clearing and settlement out of its
traditionalback-officeobscurityintothelimelight.PeterNorman’sbookpresentsaninvaluableviewof
thehistory,operationsandstrategicissuesrelevanttothisworld.Atatimewhenmarketinfrastructure
is undergoing the most fundamental change in living memory, his book is an essential companion to
anybodyinvolvedinhelpingtoshapethenewlandscape.”
—RichardBerliand,formerHeadofPrimeServicesandMarketStructureat
J.P.Morgan
“TheRiskControllersisaninvaluablehistoricalandinvestigativeworkaboutoneofthemorearcane,yet
criticalpartsofthefinancialindustry.Asaresultofthefinancialcrisis,CentralCounterpartyClearing
isnowfullsquareatthecentreoftheglobalfinancialrepairagenda,especiallyforderivativesmarkets,
whichmakesthisbookparticularlytimelyandwelcome.Thisbookwillbethereferenceworkonthis
subjectforyearstocome.”
—DavidWright,DeputyDirectorGeneral,InternalMarket,EuropeanCommission
(2007–2010)
“Amust-readforallinvolvedinthedevelopment,implementationandoversightofnewclearingregu-
lationsfollowingtherecentfinancialcrisis.Peterhaspresentedarichhistoryofclearinginaconcise
andsignificantmannerforthosewhomustseizethesuccessesofthepastinputtingtoday’snewclearing
regimeninplace.AllshouldthankPeterforcreatingthisimportantworkwhichissorelevantintoday’s
world.”
—DennisDutterer,RetiredCEO,PresidentandDirectorofTheClearingCorporation;
formerGeneralCounseloftheCFTC
“TheRiskControllersprovidesawelcomeinsightintotheworldofcentralclearing.Atimelyexercise
aslegislatorsaroundtheworldpintheirhopesonCCPstoplugthedeficienciesinriskmanagement
identified in the global derivative markets. By explaining the history, exposing the limitations and
describingthemyriadofvestedinterestsinvolvedincentralclearing,PeterNormanhasclearlyoutlined
thepossiblepitfallswemustallnowtrytoavoid.Averyconciseandengagingbookonacomplextopic.”
—DrKaySwinburne,MemberoftheEuropeanParliament,ECRCoordinatorfor
EconomicandMonetaryAffairs
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The Risk Controllers
Central Counterparty Clearing in
Globalised Financial Markets
Peter Norman
A John Wiley and Sons, Ltd., Publication
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Thiseditionfirstpublishedin2011
©2011PeterNorman
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ToJanice
andinmemoryofFrankNorman
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Contents
Preface xiii
Acknowledgements xv
PARTI CLEARINGUPTHECRISIS
1 UnlikelyHeroes 3
2 TheModernCentralCounterpartyClearingHouse 7
2.1 TheCCP’sUniqueSellingPoint 7
2.2 TradingVenuesandClearingMarkets 8
2.3 ManagingRisk 9
2.4 ClearingDerivativesandSecurities 12
2.5 CCPsasaBusiness 14
2.6 NettingTradesandOpenInterest 15
2.7 VerticalandHorizontalClearingSystemsintheUS 18
2.8 VerticalVersusHorizontalinEurope 20
2.9 RiskandResponsibility 21
2.10 ClearingupaCrisis 22
3 TheBiggestBankruptcy 25
3.1 AnInauspiciousStart 25
3.2 LCH.ClearnetintheFrontLine 26
3.3 LBIE–ADifficultDefault 28
3.4 SwapClearinFocus 32
3.5 ThePictureinParis:LCH.ClearnetSA 35
3.6 ResponsesElsewhere 37
3.7 ImmediateLessonsfromtheDefault 42
3.8 LCH.ClearnetStandstheTest 45
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viii Contents
PARTII THEROADTOCENTRALCOUNTERPARTYCLEARING
4 EarlyClearing 51
4.1 TheFirstTradersandPost-TradePractices 51
4.2 ClearingintheDutchGoldenAge 52
4.3 TheSpreadofClearingHouses 54
4.4 TheDojimaRiceMarket 56
4.5 ForwardsandFutures 57
4.6 TradingandClearingCottoninLiverpool 59
4.7 FuturesandClearinginChicago 61
4.8 Anti-GamblingSentimentintheUS 65
5 InnovationinEurope 67
5.1 BreakthroughinLeHavre 67
5.2 TheFunctioningoftheCaisse 70
5.3 EuropeFollowsLeHavre’sLead 71
5.4 Anti-GamblingSentimentinEurope 74
6 TheLondonProduceClearingHouse 79
6.1 ClearingforProfit 79
6.2 EstablishmentofLPCH 80
6.3 LPCH:SugarandtheGermanConnection 83
6.4 ADividedMarketandaClearingCompetitor 85
6.5 LPCHandtheFirstWorldWar 89
6.6 LPCH:AnAwkwardRecovery 90
6.7 ForcedInactivityandtheSaleofLPCH 93
7 CompleteClearinginNorthAmerica 95
7.1 TheMinneapolisClearingAssociation 95
7.2 Minneapolis:ANeglectedInnovator 98
7.3 TheGradualSpreadofCompleteClearing 99
7.4 ACCPfortheCBOT 103
7.5 TheBoardofTradeClearingCorporation 106
7.6 ProsperityandDepression 108
7.7 GlobalPostscript:SeparatingtheWeakfromtheStrong 109
PARTIII FORMATIVEYEARS
8 TheCollapseofBrettonWoodsandtheInventionofFinancialFutures 113
8.1 TheReturnofPeacetimeandEconomicGrowth 113
8.2 LPCHResumesClearing 114
8.3 NewActivitiesandtheComingofComputers 116
8.4 FloatingCurrenciesandFinancialFutures 118
8.5 Options,InterestRateFuturesandCashSettlement 120
8.6 TheInfluenceofRegulators 123
8.7 HorizontalIntegrationforUSEquitiesClearing 125
8.8 FinancialFuturesintheUK 126
8.9 CCPFailures 131