![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Lynch amendment spooks DTCC
![stephen-lynch stephen-lynch](/sites/default/files/styles/landscape_750_463/public/import/IMG/100/93100/stephen-lynch-580x358.jpg.webp?itok=wJg7OBbn)
As dealers and legislators debate reform of the over-the-counter derivatives market, at least one innocent bystander - the New York-based Depository Trust & Clearing Corporation (DTCC) - has been caught in the crossfire. At the end of February, DTCC staff travelled to Washington, DC to voice their concerns.
At issue is an amendment offered by Massachusetts congressman Stephen Lynch on December 9, which was included in the House version of reform, the Wall Street Reform and Consumer Protection Act, when it passed two days later. The rule would prevent dealers from collectively owning more than 20% of any derivatives clearing house - an attempt to stop the industry from hampering progress towards greater use of clearing and a swipe at dealer-backed ventures such as IntercontinentalExchange's Ice Trust and Ice Clear Europe. But it could also catch the DTCC, which regularly shakes up its ownership based on how much members use its services. If one of these periodic reviews resulted in more than a fifth of the DTCC's shares being in the hands of dealers, the consequences could be dire.
"It's impossible to know what would happen," says a US-based source. "DTCC shares are not publicly traded so it might theoretically mean it has to go public and then completely rebalance the ownership. But the DTCC is also a monopoly, which is only tolerated because it is a user-owned utility, so going public would leave it subject to the usual antitrust laws. To say it's a catch-22 would be an understatement. In theory, it could prevent it fulfilling its charter and put it out of business."
One London-based banker is sympathetic. "It's a technical thing, but it's a real pain for them. It's one thing having a go at banks, but the consequence of this amendment is it's now sweeping up a utility as well," he says. A spokesman for the DTCC confirms that concerns have been raised in Washington, but refuses to comment further.
The Lynch amendment specifies that dealer ownership would be restricted only for a "derivatives clearing organisation that clears swaps", which would seem to rule the DTCC out - although it clears a vast swath of the cash markets, it doesn't at this point handle swaps business. That apparent exemption hasn't been enough to calm the DTCC's fears, though.
It's a real pain for them. It's one thing having a go at banks but the consequence of this amendment is that it's now sweeping up a utility as well
The point could eventually be rendered moot. The impression gathered on the DTCC's Washington trip is that the Lynch amendment has few backers in the Senate, where three different committees are currently drawing up their own reform bills - which will need to be compressed into a single document before finally being reconciled with the House version. If none of the Senate proposals contain a Lynch-type rule, it would be more difficult for the amendment's backers to force it into the final reconciled bill.
"It's tough to say anything definitive, but people are saying there doesn't appear to be a champion. There isn't anyone out there saying ‘I want this to take place, I want this Lynch language'," says the US-based source.
Until the final bill appears, however, the uncertainty remains - and the notion of restricting dealer ownership of clearing houses has its supporters. Across the Atlantic, an advisory note published on February 11 contains even stronger language than the Lynch amendment, calling for dealers to be barred from sponsoring clearers. The note is for politicians who will vote on the European Union's own OTC reforms. On March 1, Moody's Investors Service released a report that argued the ban on dealer ownership would help tackle systemic risk by making it less likely clearers would compete for business by reducing margin requirements.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Vendors lack silver bullet for FRTB’s fund-linked issue
EU and UK legislators tried to ease capital charge by leaning on vendors, but problems persist
Does Basel’s internal loss multiplier add up?
As US agencies mull capital reforms, one regulator questions past losses as an indicator of future op risk
US Treasury official calls for SLR relief during market stress
Under Secretary Liang also urges scrutiny of “artificial incentives” for Treasury futures in 40-Act rules
US banks seek to open vendors’ black box on green data
Inaugural Fed climate scenario analysis flags lack of transparency around third-party models
Why FRTB models are on the edge of extinction
With only four banks known to be applying to use internal models for market risk, the fate of advanced modelling looks precarious
Reframing the Fed’s discount window
Funding window incentives and collateralised credit lines could transform bank liquidity in a crisis, argues Bill Nelson
Attention shifts to US, UK after European Union postpones FRTB
Risk Live: Global timeline still unclear, with banks hoping lawmakers will use delay to soften rules
Go your own way: departures pose new challenges for CFTC
Loss of Democratic majority would impede chairman’s ambitions for regulatory agenda
Most read
- Harvesting the FX skew premium
- How steepener trades burned hedge funds, and what happened next
- House of cards? The $3 trillion (non-systemic) real estate risk