Financial Times – July 10, 2013
A capital buffer can strengthen the clearing system
From Prof Eric De Keuleneer.
Sir, The capitalisation level of clearing houses (“Clearing houses spark concern”, July 8) is indeed a problem, but not sufficient to justify sticking with bilateral over the counter transactions, and moreover it is a problem that can be dealt with in a logical way.
Bilateral derivative transactions create risk for banks, which are concentrated with dominant banks in a market, and make these “too big to fail”, which brings along a public subsidy for those banks, in the form of a tacit public bailout guarantee and the cheap funding that goes with it. Moreover Peter Clarke (Letters, July 10) very aptly reminds us of the dangers of the present credit default swaps market and the advantages it creates for the banks that dominate it. It is thus not surprising these dominant banks want to keep this system going, but this is not in the interest of other market participants nor of taxpayers who underwrite it unwillingly. A clearing house or central counter party (CCP) allows the offsetting of some of the risk, and greatly reduces the systemic risk of possible bank failure, but it is true that the CCP itself should be capitalised at a high level.
An easy solution to this would be to use the proceeds of a (modest) financial transaction contribution on the instruments that are cleared through the relevant CCP, to create a capital buffer within the CCP. After a while, the capitalisation of the CCP would be large enough to make it a real strengthening of the system. Above a certain level of capital buffer within the CCP, the transaction contribution could be reduced or deleted.
Some may say this would be a kind of financial transaction tax, but it would be a perfectly logical one, the proceeds of which being used to make sure a financial activity is paying itself for risks it generates.
Eric De Keuleneer, Solvay Brussels School of Economics, Université Libre de Bruxelles, Brussels, Belgium
Copyright The Financial Times Limited 2013.