CCP patch raises asset manager worries

In the wake of a review of European Market Infrastructure Regulation (EMIR) and a proposal made by the European Commission (EC) regarding central counterparties (CCPs) recovery and resolution, some of the biggest global asset managers have appealed to European Commissioner Jonathan Hill in a joint letter. 

The letter puts forward an argument underlining their point that clearing houses, also known as CCP's, will erode financial stability if they continue to trim collateral put in place by investors. 

According to the asset managers involved, the "end-investors do not own that infrastructure and have deposited money in good faith - undermining that good faith by haircutting initial margin (IM) and/ or variation margin (VM) will lead to perverse systematic consequences."

"We recommend IM haircutting is taken off the table altogether and VM considered only as a recovery tool of the last resort", the letter states.

The united stance also points the finger at CCPs for holding back a cut of a non-defaulting participant's initial margin, and criticises this measure as having the potential to "fundamentally alter" the market's view of cleared products.

Among those to have supported the letter with their signature are European leaders and heads of investments at Allianz Global Investors Europe, Schroeder Investment Management, PGGM, BlackRock and UBS Global Asset Management. 

 The industry has seen a sharp rise in the number of financial trading products being pushed through central clearing since the implementation of post-financial crisis regulation. These products came with the intention to offset risk and offer protection against counterparty defaults, but this has caused fears that the new rules are shepherding the risks in a small number of clearing houses. In the event of a member or CCP default, the whole financial system may be negatively affected. 

Furthermore, the letter advises that the European Commission bring in compulsory stress tests for CCPs and more funds from the CCP themselves at time of member default. It was also proposed that the EC ensure a minimum of two other CCPs are capable of offering clearing for any mandated product.