Client clearing poses acute liquidity risks

Many end-users are unlikely to have spare cash on hand to meet potentially huge central counterparty margin requirements. Clearing members suggest they could intermediate by providing collateral transformation services, but many participants argue the sheer size of buy-side obligations could cause severe liquidity stresses on the system. By Matt Cameron

Energy can neither be created nor destroyed: it can only be transformed from one state to another. A similar principle can be applied to risk. Regulators are putting the finishing touches on rules requiring a large portion of the over-the-counter derivatives market to clear through central counterparties (CCPs), a move they believe will reduce bilateral counterparty credit risk and make the financial system safer. For this structure to work, however, clearing houses must receive vast amounts of