The Payments Risk Committee, a group of banks overseen by The Federal Reserve Bank of New York, made a series of recommendations meant to create better risk management practices at central counterparties (CCPs). According to a press release from the Payments Risk Committee, the group believes that accurate reporting of risk management practices at CCPs is fundamental to enable clearing members to conduct their own due diligence on risks they face as clearing members.
The report, released by the Payment Risk Committee, highlights eight risk management topics, including governance, collateral structures, evaluation and monitoring of clearing members. Each of these recommendations are meant to improve the ability of consistent information. Their report also advises CCPs to create a common framework for reporting – ideally encouraging greater consistency in reporting across CCPs.
The recommendations are not legally binding, but would improve the ability of banks and other clearing members to better monitor and analyze their activities with clearinghouses, supporting a “more stable overall financial system,” according to the report, obtained by Reuters.
The U.S. central bank does not formally back these recommendations, according to Reuters. Though supportive of the committee’s work generally, the clearinghouses are urged to voluntarily take them up. The Payment Risk Committee’s recommendations have the potential to help banks better understand how clearinghouses run and manage any related risks. The committee is encouraging more transparency regarding the steps they would take to deal with the default of a clearing member, while providing an overview of their investment policy for the initial margins and default-fund contributions submitted by members.
While meeting these recommendations would require more resources and new approaches for CCP’s, clearinghouses would also need to provide more information on collateral structures, and the process in which they evaluate and monitor the credit-worthiness of members.
The banks involved were JPMorgan Chase & Co, Morgan Stanley, Goldman Sachs Group Inc., and Bank of America.