Isda pushes back on CCP ownership caps

Industry groups oppose limits on dealer stakes in clearing houses

US derivatives industry lobbyists are pushing back at proposals by the US government to resurrect and expand the Lynch amendment, which would have imposed limits on dealer ownership of derivatives clearing houses.

The Commodity Futures Trading Commission published proposed rules in October 2010 that would have limited the shares major financial companies could hold - individually and collectively - in derivatives clearing organisations, swap execution facilities (Sefs) and designated contract markets.

Clearing houses could choose one of two ownership regimes. Under one, an individual member of a clearing house would not be allowed to own more than 20% of it, and each clearing house could be no more than 40% owned by major financial companies. Under the other, clearing members would be limited to a 5% stake, but no aggregate limit would be imposed.

The CFTC also proposed that individual 20% limits should apply to Sefs and markets.

The US Department of Justice backed the move in a comment letter sent on December 28, arguing that designated markets and Sefs should also come under the aggregate ownership limit - as they were just as much at risk as derivatives clearers of coming under the control of a cabal of major dealers, who might then be able to "exclude rivals, limit pre- and post-trade transparency, decline to trade certain contracts to disadvantage rivals, or try to evade exchange-trading requirements".

But several US industry organisations - including the International Swaps and Derivatives Association - complained yesterday that the limits would prevent consortia of dealers from setting up new clearing houses, in effect weakening competition in the clearing space. Allowing dealers to own most of a trading venue would also encourage more dealers to take shares, which would in turn improve liquidity, they argued in a letter also signed by the ABA Securities Association, the Clearing House Association, the Financial Services Roundtable, the Futures Industry Association, and the Securities Industry and Financial Markets Association.

Regulators on both sides of the Atlantic have proposed ownership limits for clearing houses - a European Parliament committee suggested in February that dealers should be banned outright from owning shares in central counterparties - and have generally met with stiff resistance from the industry, which argues that only ownership stakes can bring in enough liquidity and expertise to make clearing houses run properly.

The Lynch amendment, proposed by Massachusetts congressman Stephen Lynch in 2009, stated that the Dodd-Frank Wall Street Reform and Consumer Protection Act should impose 20% aggregate ownership limits for clearing houses, but it was not included in the final act passed in July 2010. However, the CFTC argues that the act in its final form nevertheless gives it power to impose ownership limits on clearing organisations.

The comment period on the regulator's proposals ends on March 7.