Wednesday, October 21, 2020
Yesterday, the CFTC and the Bank of England signed a Memorandum of Understanding on the Cooperation and the Exchange of Information Related to the Supervision of Cross-Border Clearing Organizations. Heath Tarbert, the Chairman of the CFTC, and Jon Cunliffe, deputy governor for financial stability at the Bank of England, also authored an opinion piece published in Risk. It notes that the UK is “the single largest investor in the US,” and that the US “is the largest investor in the UK.” The two jurisdictions account for about 80% of the global market activity for interest rate derivatives.
The global clearing mandates that followed the financial crisis of 2007-09 have increased the importance of cross-border financial market infrastructures such as clearinghouses and also the potential for these infrastructures to propagate risks throughout global financial markets. The opinion notes that “The long-lasting significance of these reforms was seen when the Covid-19 pandemic sent shockwaves through the world’s financial markets earlier this year. The largest dollar moves in history were recorded for the S&P 500, Dow Industrial Average and Nasdaq-100. The FTSE All-Share index fell more than 10% on March 12. Despite this market turmoil and a transition to a work-from-home model, the central counterparties at the heart of this activity remained resilient.”
That’s great news. Ideally, this will be indicative of the future performance of these global, cross-border infrastructures. However, should a clearinghouse become distressed or insolvent in either jurisdiction and taxpayer funds required, I think it would be helpful to have a better understanding of how any taxpayer losses would be shared not only between the U.S. and the U.K., but also with any other relevant jurisdictions. Recall that “[t]he largest recipients of AIG bailout funds were European banks, Wall Street firms and, to a lesser degree, municipal governments,” and it was AIG’s near collapse that largely motivated the clearinghouse mandates.