FIA and ISDA support efforts to grant DCOs Central Bank deposit accounts at the U.S. Federal Reserve

The Futures Industry Association (FIA) and the International Swaps and Derivatives Association (ISDA) announced on the 17th July that a signed letter was delivered to U.S. Rep. Emmanuel Cleaver in support of the legislative efforts to grant Derivatives Clearing Organisations[1](DCOs) and Clearing Agencies direct access to U.S. Central Bank deposit accounts offered by the Federal Reserve.

The letter highlights the support from the two associations for the efforts made by Representative Cleaver to grant all DCOs registered with the U.S. Commodities Futures Trading Commission (CFTC) and Clearing Agencies registered with the U.S. Securities Exchange Commission (SEC), access to Federal Reserve deposit accounts. Both the FIA and ISDA recognise that a central bank is the safest and most liquid location to store U.S. dollar denominated client margin – which is paid and collected daily.

The recent market stress during the COVID-19 Crisis (CC) was a significant shock to the cleared derivatives market, where record volatility was seen across the board. While DCOs and their non-U.S. equivalents – Central Counterparties (CCPs) – remained significantly resilient[2]during the highly turbulent CC period, higher liquidity and security for margin deposits would improve the overall safety and provide additional resilience for the markets during future events.

FIA and ISDA also refer to the October 2017 U.S. Department of Treasury report on Capital Markets, which summarised that U.S. Federal Reserve deposit accounts for DCOs was an important systemic risk mitigation tool to increase reliability and ultimately ensure the safety of U.S. dollar margin during times of stress:

Page 165 of the report states: “The ability to deposit client margin at a Federal Reserve Bank is an important systemic risk mitigation tool. FMUs [financial market utilities] without such account access rely on a number of other alternatives for cash management, such as money market funds, repurchase agreements, and deposits at commercial banks. These private sources may be less reliable in times of market stress. Moreover, lack of access to a Federal Reserve Bank account means large amounts of U.S.-dollar margin may not be maximally safeguarded during times of market stress.”

For more information:

[1]In the U.S., the equivalent of a Central Counterparty (CCP) is a Derivatives Clearing Organisation (DCO) or a Derivatives Clearing House; and is subsequently regulated by the U.S. Commodity Futures Trading Commission (CFTC).

[2]ECB Financial Stability Review May 2020; ESMA’s third EU-wide CCP stress test finds system resilient to shock