Monday 19 March 2018

Clearing houses run Lehman Brothers-style crash exercise

Lehman Brothers’ former headquarters in New York. Photo: Gino Domenico/Bloomberg
Lehman Brothers’ former headquarters in New York. Photo: Gino Domenico/Bloomberg

Will Hadfield and Ben Bain

The first co-ordinated global test has showed that clearing houses - the firewalls protecting the financial system from calamity - are strong enough to survive a major bank going bust.

Regulators wanted to know what would have happened if there had been a Lehman Brothers-style collapse during a market shock like the Brexit vote last year.

They asked three major clearing houses - LCH, CME Clearing and Eurex Clearing - to run a simulation.

Each of the clearing houses pretended that it had to auction a portfolio of debt and equity derivatives, backed by billions of dollars of collateral, or initial margin, in cash and bonds.

The auctions were simulated as if they were taking place at the end of June 2016, during the fallout from Britain's surprise Leave vote.

Several hundred traders took part in the April drill, with more than 50 banks or trading firms involved in three auctions held by Eurex.

The US Commodity Futures Trading Commission said each clearing house successfully completed its hedging and auctions.

"It is important that default drills be as realistic as possible, and large member firms usually clear at multiple central counterparties in more than one jurisdiction," said CFTC spokeswoman Erica Elliott Richardson.

She added: "This is why the drills are held in the US and Europe at the same time. The analysis by the authorities is not yet complete, but the results are positive."

The ability of clearing houses and their trading members to handle a default has risen up the agenda of regulators in the US and Europe in the years after the financial crisis. (Bloomberg)

Irish Independent

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