Comment Text:
Please find attached comments from J.P.Morgan
In our view the various components of the risk management framework of a clearing house are interconnected and as such, must be considered in their entirety. For this reason, a low minimum capital requirement may be applied to clearing house members only in conjunction with, at a minimum, the implementation of the following prudent risk management requirements: (1) a direct relationship between the amount of risk that can be cleared by a clearing member and that clearing member’s capital; (2) the implementation by the clearing house of real time risk management systems and processes, as well as active supervision by regulators; (3) a sufficient amount of funded default guarantee fund held by the clearing house; and (4) sufficient liquid resources held by the clearing.
In addition, the implementation of prudent risk management methodologies by clearing houses is a key step towards greater systemic stability. This can be achieved by establishing a direct link between the earnings that a clearing house derives from cleared activity and the contribution of that clearing house to its own financial safeguards package. We would support regulations that require a CCP to retain in a segregated deposit account, on a rolling basis, 50% of the earnings from the previous 4 years. We observe that this amount would represent approximately 10% of the clearing house enterprise value, therefore achieving a reasonable balance between risk and reward for clearing house shareholders. In addition, it would be appropriate for at least 50% of the retained earnings to have a first loss position in the financial waterfall. This solution would accomplish the goal of greater systemic stability, and would scale over time the contribution by the clearing house to its own financial safeguards package without large decreases or increases at any one resizing date. We recommend that the clearing house contribution be subject to a minimum floor of $50MM, to provide adequate protection and provide increased confidence in the markets while market participants ramp up access to clearing services.
