Will Central Counterparties become the New Rating Agencies?

by Chris Kenyon of Lloyds Banking Group, and
Andrew Green of Lloyds Banking Group

November 28, 2012

Abstract: Central Counterparties (CCPs) are widely promoted as a requirement for safe banking with little dissent except on technical grounds (such as proliferation of CCPs). Whilst CCPs can have major operational positives, we argue that CCPs have many of the business characteristics of Rating Agencies, and face similar business pressures. Thus we see a risk that prices from CCPs may develop the characteristics attributed to ratings from Rating Agency pre-crisis. Business over-reliance on ratings of questionable accuracy is seen as a cause of the financial crisis. We see the potential for same situation to be repeated with prices from CCPs. Thus the regulatory emphasis on CCPs, rather than on collateralization, may create the preconditions for an avoidable repeat of the financial crisis.

AMS Classification: 91B25, 62P05, 91G20.

Keywords: Central Counterparty, Basel III, regulation, CCP, rating agencies, ratings, prices, collateralization, financial crisis.

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