Comment Text:
The proposed vertical integration of clearinghouses with customer-facing intermediaries will not enhance market stability, investor protection, or reduce market risk. This new regulatory framework should not be implemented at all. It only serves to transfer the ability to take on significantly more risk and leverage to a vertically integrated (i.e., monopoly) clearinghouse, with a considerable reduction in visibility of both the level of risk and the presence of a naturally occurring disciplinary feedback mechanism.
In other words, this new market structure and regulatory proposal should not be implemented in any way.
A quote from Romero’s comment is particularly relevant: “Our clearinghouse rules were not set up to protect customers, because they were written with the idea of a separate intermediary that interacted with customers and had regulatory obligations for customer protections.”
Now that the intermediary is being removed, the regulatory rules for clearinghouses reduce protection for customers and allow for the abuse of investors through a lack of investor protection. Without regulatory oversight and consumer protection, investors cannot have confidence in their market, which is essential for functioning markets. In addition to the lack of confidence, it is clear that clearinghouses are not prioritizing the interests of customers and investors.
Trade execution can no longer be guaranteed to favor or protect the investor. There is now less competition, less regulatory oversight, and no need for clearinghouses to adhere to fair trade execution practices.
According to Romero’s subsequent comment, a vertically integrated market eliminates competition. Not only are investors no longer protected by regulatory constraints imposed on clearinghouses for this purpose, but vertical integration also places power in the hands of a single entity. Competition can no longer be used to self-regulate the market to the extent that it is capable. This is also outlined in her comment here:
“The traditional market structure contains inherent bumper guards—market discipline resulting from differing interests of different entities—that promote financial stability. Expanding to a novel vertically integrated market structure for example, for clearinghouses raises particular concern because the resilience of our clearing system depends in significant part on the disciplining effect that clearing members can have on clearinghouses. Because clearing members may be asked to mutualize losses and accept risks in a default waterfall, they have much at stake in the decisions made by clearinghouses. They often have a different perspective, and do not always have fully aligned interests with the clearinghouses. What happens to that disciplining effect where the clearing member (the futures commission merchant (FCM)) is owned by the same parent company as the clearinghouse?”
The answer is that there will be no disciplining effect, and accepted risks and potential losses will be determined by the new clearinghouse monopoly. There will be no regulatory oversight, competition, or disciplining effect. The new vertically integrated system can take on as much risk as it desires, with no ability for outside entities to intervene or set risk limits. Similarly, we saw what happened with then-novel credit default swaps and mortgage-backed securities - where the risk of these assets was poorly understood and virtually unregulated. If we fail to remember history, it will repeat itself. I hope we remember 2008 and what happened when we blinded ourselves to increased risks through a lack of regulation. This new vertically integrated clearinghouse environment is not an ill-packaged security but rather a lack of insight into the risks it poses and the ability of the clearinghouse to leverage risk substantially more (and without any risk insight,
