Volatility prompts firms with crucial settlement role to increase collateral demands
The crucial role played by clearing houses in financial markets has been thrust into the spotlight after contentious moves by US brokers such as Robinhood and Charles Schwab to restrict retail investors’ bets on stocks at the heart of the Reddit-fuelled trading boom.
Customers reacted angrily on Thursday as brokers moved to stop them opening new positions in certain red-hot stocks, accusing them of unfair treatment or even a Wall Street establishment plot. But the brokers gave a more mundane explanation: the extra volatility in share prices meant they had to hold more capital at the institutions that clear their trades.
What do clearing houses do?
These unobtrusive venues normally sit in the background of daily market activity but they can become the centre of attention during periods of volatility when they require more cash — or “margin” — from their members to ensure that deals are honoured as customers expect.