Financial Clearinghouses Watchful On US Downgrade Fallout
August 06 2011 - 2:37PM
Dow Jones News
CHICAGO (Dow Jones) -- The biggest U.S. trade-clearing firms on
Saturday generally refrained from any immediate response to
Standard & Poor's late-Friday downgrade of the United States'
credit rating, as they monitored the impact on debt markets.
Clearing facilities run by the OCC and IntercontinentalExchange
Inc. (ICE) had staff watching for any signals of ramped-up
volatility in U.S. debt markets, but as of midday Saturday had
taken no steps to require traders to post greater amounts of
Treasurys to back up trades.
"We monitor risk all the time," said a spokesman for ICE.
"Certainly this is something that's been contemplated long before
we had a debt ceiling resolution this week."
Representatives for the Depository Trust & Clearing Corp.,
which handles all U.S. stock trades, and CME Group Inc. (CME), the
world's largest futures exchange operator, had no immediate
comment. CME late Friday did notify traders that increased levels
of collateral would be required to trade futures linked to
long-term U.S. Treasury bonds.
The U.S. rating downgrade affects financial clearinghouses in
two ways. Member firms can post U.S. government securities as
collateral to be held against outstanding trades, so that if major
participants default, their transactions can be made good. If
Treasurys become more volatile or dramatically fall in price in
response to a downgrade of U.S. credit, clearinghouses could ask
members to post more Treasurys to ensure trades remain covered.
CME in late July took such a step, as the debate over raising
the U.S. borrowing limit peaked.
"OCC continues to monitor the situation as we have done over the
past few weeks and will determine appropriate action, if necessary,
should there be any disruption in the Treasury market," said a
spokesman for OCC, previously known as the Options Clearing Corp.,
in an email.
The other way clearinghouses can be impacted is through their
own credit ratings. Because clearing facilities typically hold vast
levels of U.S. debt, ratings agencies have in past months warned
that any view on the U.S.'s credit would be reflected also in the
marks given to big clearinghouses.
Standard & Poor's in mid-July put a credit watch on
Depository Trust Co., Fixed Income Clearing Corp., and National
Securities Clearing Corp., all operated by the Depository Trust
& Clearing Corp., as well as the OCC. The move came a day after
S&P announced a 50% chance that the U.S. AAA bond rating could
be lowered within three months.
"Falling securities prices will increase margin calls, decrease
the value of clearinghouse and [central securities
depository]-invested capital, decrease the value of guaranty or
clearing funds, and possibly in the long run impair members'
ability and willingness to respond to margin or deposit calls,"
S&P said in a statement at the time.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com
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