https://derivsource.com/2018/09/18/ten-years-on-are-derivatives-markets-safer/

Here are some of the best parts:

have expressed concern over the scenario of a few clearing members suffering large losses due to margining failures.

It noted that a small number of entities tend to dominate the provision of critical services between them and other entities, which “suggests that a failure at one of these central elements of a CCP network would likely have significant consequences for the rest of the network.”

The monopoly effect is particularly felt in the interest rate swap (IRS) and foreign exchange (FX) markets, where LCH’s SwapClear rules the roost, as well as in the credit derivatives domain, which is dominated by the Intercontinental Exchange (ICE).

As for the US credit default swaps (CDS) market, ICE Clear Credit maintained its lead in Q2 with a towering 98% share of the $2 trillion volumes generated.

Who own the risk?

“One of the problems is the clearing system is opaque and the clearinghouse doesn’t know who actually owns the risk in the majority of positions. The other issue is that there are only relatively few clearing members and most of the participants use futures commission merchants (FCMs), who are careful not to reveal who their customers are. There has been a lot of discussion about waterfall processes, compression and reducing exposures, but there are still a lot of linkages which can potentially create significant problems,”

Bollenbacher also points to the pitfall of the shrinking pool of FCMs, which have been under pressure from low interest rates and as a result have had to turn their attention to their larger, wealthier customers. “The view is that the smaller clients are not worth their while, and the result is a drought of clearing services for smaller firms,” he adds. “The result is that some CCPs are offering services that will enable them to clear directly.”

There are just 63 FCMs registered with the CFTC, according to Tabb Group’s 2017 US Futures Market review released in February 2018—almost half the number fifteen years ago. The top ten accounted for 73.2% of total assets at the end of December 2017, with Goldman Sachs in pole position with a roughly 14% share as measured by customer account balances. JP Morgan was the runner up with 11.4%, while Bank of America Merrill Lynch and Morgan Stanley both remained ahead of Société Générale, followed by Citi Group and UBS who tied for sixth place.

Are custodial banks becoming too systemically important?

“The participants that I worry most about are the custodial banks, whose assets under custody have continued to grow as investors have moved into passive investments such as ETFs (exchange traded funds),” he adds. “They have become increasingly important and play an immensely significant role in managing, for example, cash flow from repo and structured products.”

At the end of the second quarter, the four largest banks continued to dwarf the other players, according to a study cited in Trefis, published by Forbes. Together, they amassed $114 trillion assets under custody and administration, with BNY Mellon retaining its crown with $33.6 trillion, followed by State Street at $32.9 trillion, JP Morgan at $26.3 trillion and Citi at $19.4 trillion.