The Risk Controllers Central Counterparty Clearing in Globalised Financial Markets
, by Norman, Peter
- ISBN: 9780470686324 | 0470686324
- Cover: Hardcover
- Copyright: 5/23/2011
Crises create unlikely heroes. The bankruptcy of Lehman Brothers on 15 September 2008 was no exception. When Lehman sought protection from its creditors in the US that day a small number of specialist financial institutions sprang into action to keep the world's securities and derivatives exchanges at work. First in Europe, and later around the globe, central counterparty clearing houses, or CCPs, stepped in to rescue trillions of dollars worth of trades caught up in the Lehman collapse. Without their action, the global financial meltdown threatened by the failure of the 158 year old investment bank would have been an instant reality.These little known organizations fulfilled their emergency role of successfully completing trades that they had guaranteed. They also ensured that the world's securities and derivatives exchanges could continue to function and handle trading volumes that leapt into the stratosphere as prices for shares, bonds and other exchange traded instruments gyrated wildly in the crisis.Lehman's bankruptcy placed in jeopardy trillions of dollars worth of transactions conducted by and through the investment bank and its many subsidiaries. Assets were caught in limbo, spreading financial hardship, and in some cases collapse, to companies at the other end of these trades. As became clear when bankruptcy administrators on both sides of the Atlantic tried to make sense of the wreckage, some of these assets would be out of reach for creditors for months if not years. But the story was very different for those trades transacted on derivatives and securities exchanges where central counterparty clearing houses guaranteed their completion and also for those transactions which, while negotiated bilaterally 'over-the-counter' (OTC) between buyer and seller, were centrally cleared by CCPs.Within a week, most outstanding open positions had been successfully hedged so that they could pose no threat of further losses to creditors or added chaos to the world financial system. Within two weeks, most of Lehman's customer accounts were successfully transferred to other investment companies. By late October, it was apparent that CCPs in most leading financial markets had successfully managed the biggest default in financial history without cost to their member companies. For those at the centre of the crisis, the performance of the CCPs permitted a rare outburst of satisfaction. In a business where sober understatement is the norm, Chris Tupker, Chairman of LCH.Clearnet, claimed that the actions of the transnational European clearing group 'saved the City' in the weeks following the Lehman bankruptcy. On the other side of the Atlantic, Don Donahue, the Chairman and Chief Executive of the Depository Trust and Clearing Corporation of the US, reported that DTCC was 'able to ensure reliability and mitigate risk across the industry' despite 'unprecedented volatility and shaken confidence' in the financial services sector.Thanks to CCPs, the world's securities exchanges have continued to raise risk capital for enterprises while futures and options exchanges continue to provide investors, traders and entrepreneurs with the means to protect themselves against risk.One consequence of the crisis has been to change fundamentally the status of CCPs in financial markets and the priority they are accorded on the agenda of policy makers. Central counterparty clearing houses emerged from days of chaos among the very few organisations in the global financial system with a good story to tell.This book takes up the story of central counterparty clearing by examining in detail how CCPs functioned in the emergen
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