General Clearing Members (GCM) are exposed to the risk of default of their non-clearing (NCM) clients. This is the same kind of exposure that the CCP has on its clearing members. While the CCP will monitor risk on the CMs, it does not assess the risk the GCM runs on his NCMs – this is expected to be the responsibility of the GCM itself. In fact, many GCMs have in place sophisticated risk management systems that help them to monitor and mitigate this risk.
Risk management involves, first of all, accurate estimation of the client’s exposure. Once identified, the exposure can be mitigated by margin calls on the client. Until quite recently, the standard practice was to compute the exposure in an end-of-day batch and to call margin the next morning. However, the GCM is at risk from the moment the client trade enters the CCP system. Clients can accumulate quite large positions during the trading day, and be unable to unwind them. Clearly, the GCM must monitor client’s exposure close to real time. Intraday margin calls on the clients have become market practice, for those GCMs who deployed appropriate tools.
A related issue has generated interest recently. If the client fails to meet a margin call in due time, the GCM should be able to avoid further exposure and to suspend his clearing obligation on this client – temporarily or permanently (declaring the client in default). In the markets that we consider in this note, this means blocking further access to trading for the client. However, current market infrastructure does not, in general, allow for such a blocking/suspension to be activated at any time. There is at least one exception: a well-known European CCP, in a vertically integrated market, that offers its GCMs a “stop button” function.
The client suspension feature can be implemented in several ways. It can be an integral part of the CCP system. It might take the form of a “controlled” market access gateway, similar to those used in sponsored access. When discussing alternative implementations, it is helpful to separate clearly two aspects:
- identification of an undesirable exposure that may require stopping an NCM from trading,
- actually closing access to the market.
Both aspects might be covered in a single system. However, there are reasons to keep them separate.