Clear and present danger?

Clear and present danger?

Steve Grob

Director of Group Strategy at Fidessa

In addition to providing a regular commentary on the issues surrounding fragmentation Steve is responsible for Fidessa’s strategic development. This includes the development of new geographic markets and strategic partnerships and driving new industry initiatives.

Views 652

Clear and present danger?

07.04.2016 11:15 am

There has been a lot of talk about how the LSE/DB1 merger might create a “too big to fail” clearing house. This seems to be missing the point somewhat as both LCH and Eurex Clearing are already too big to fail. Imagine the fallout if either of these were to go through some sort of disorderly meltdown – would the UK or German governments really just sit back and watch? The real point is that as a “buyer or seller of last resort” clearing houses are, by definition, too big or important to be allowed to fail. In fact, the sole reason for their existence is to provide confidence to the financial system just like the UK’s ATOL does by underwriting travel firms in the time between us paying for our holidays and actually going on them.

Aha! I hear you say – but surely spreading the risk across more clearing venues is safer? Well not necessarily, as each clearing house operates its own risk management systems and most are on a one-way course to offer greater capital efficiency through margin offsets. This might make things complicated if positions across multiple clearing houses needed to be unwound in a hurry. And, however you look at it, less margin underpinning the same level of global risk will not make us any safer. This point, incidentally, being one of the great ironies of Basel III and other constraints on banks’ capital.

If things really did go pear-shaped, then the clearing houses would have to be kept upright however many or few of them existed. This only serves to highlight the reality that the only way to avoid transactional risk altogether is to make those transactions instantaneous. It’s no wonder, then, that there’s so much chatter around distributed ledger technology (AKA blockchain). But, imagining a solution and practically implementing it everywhere, for every asset class, are two completely different things.

So, in the meantime, I guess we either just keep our hard-earned cash stuffed in a sock under the bed or accept that risk is intrinsic in any financial transaction.

Latest blogs

Shuvo G. Roy Mphasis

Reboot 1.0: How financial services technology can enable the supply chain to support a post-lockdown boom

Ground control and Captain Tom When veteran Captain Tom Moore decided to walk one hundred laps of his garden before his 100th birthday to raise funds to support NHS heroes battling Covid-19 from the frontline, he never imagined that he would Read more »

Lisa Gutu Salt Edge

Building a PSD2 compliant channel: challenges and opportunities for financial institutions

PSD2 obliges ASPSPs including banks, e-wallets, prepaid cards and other companies that offer payment accounts to provide at least one channel for secure communication with third party providers (TPP). Even neobanks or e-money institutions, including Read more »

Thomas Pintelon Capilever

Credit origination - A lot of innovation on the horizon

While consumer credits are becoming more automated and user-friendly to request, all other credits are often still very manual and labor intensive to originate. In this (relatively long) blog I will try to give a description of the (potentially Read more »

Kelly Kearsley

Time Card Theft is a Big Problem. Here's How to Stop It.

Trust is at the core of every employer-employee relationship. You trust your people to do their jobs, and they trust you to compensate them for their work. Most of the time, it works. However, there's always the person looking to bend the rules or Read more »

Daria Afanasyeva UTP Merchant Services Ltd

Cybersecurity – Online payments are getting more secure

Ever since we've been able to buy anything we need with just a click of a button on our laptops or phones, online sales have been consistently increasing each year. Just last year, the total value of UK retail sales was £394 billion, with an average Read more »

Free Newsletter Sign-up
+44 (0) 208 819 32 53 +44 (0) 173 261 71 47
Download Our Mobile App
Financial It Youtube channel