Banks rail against China CCPs’ loss-sharing policy

Controversial loss allocation technique remains unused during the Covid meltdown, but banks want it banned

The Shanghai Futures Exchange is one of at least six venues to have ‘forced reduction’ rules

Global banks are pressuring China’s clearing houses to abandon a recovery tool that could compel members to absorb the loss-making positions of other firms during times of market stress.

“The challenge … is that market participants are facing a risk they can’t measure, manage or hedge in advance due to optionality,” says Nicolas Friedman, global co-head of counterparty credit risk at Goldman Sachs.

The loss allocation technique, known as forced position reduction, works by effectively setting