Just a stupid question, if the clearinghouses keep encouraging transaction volume and low reserves doesn’t that mean that they are setting the scene to become the counterparties at some point in the future if margin can’t be posted? In other words.... aren’t you on to “Big Short” territory?
What I THOUGHT I heard, using different terminology, is that the tri-party repo market has essentially transferred risk management to the agent (clearing house) and away from the repo trading partners.
The problem with this is that the clearing house (agent) is incentivized to increase transactions (and fees) and has no incentive to manage risk. So margin limits are set lower to increase transactions, but lower margins allows more leverage--increasing risk. So, basically, tri-party repo risk management is an illusion.
Just a stupid question, if the clearinghouses keep encouraging transaction volume and low reserves doesn’t that mean that they are setting the scene to become the counterparties at some point in the future if margin can’t be posted? In other words.... aren’t you on to “Big Short” territory?
What I THOUGHT I heard, using different terminology, is that the tri-party repo market has essentially transferred risk management to the agent (clearing house) and away from the repo trading partners.
The problem with this is that the clearing house (agent) is incentivized to increase transactions (and fees) and has no incentive to manage risk. So margin limits are set lower to increase transactions, but lower margins allows more leverage--increasing risk. So, basically, tri-party repo risk management is an illusion.
Is this restatement basically correct?
Great reminder piece of the cracks that we have seen but have been papered over.