Clearing member insolvency risk consists in the exposition of the the clearing client to the clearing member insolvency or other failure.
If clearing member enters into insolvency proceedings, the clearing client may not receive all of its assets back or retain the benefits of its positions.
Issues not to be underestimated, are likely time delays and costs (e.g., funding costs and legal fees) connected with assets' recovery.
It is noteworthy that, save for specific exceptions, the clearing client will not have any rights directly against the CCP; and will only have contractual claims against clearing broker (it means that he won't rather be able to recover particular assets as owner).
In turn, when it comes to instigating action against the clearing broker, in insolvency proceedings all powers in respect of insolvent estate of the clearing broker are with the insolvency administrator of our insolvent estate and all actions have to be taken against or with the consent of the insolvency administrator (which can be a time consuming process with an uncertain outcome).
The main problem of dealing with insolvency administrators is that insolvency law may override the terms of contractual agreements. The effect of this is any stage of a cleared transaction (e.g., client transactions, CCP transactions and porting) may be challenged by the insolvency administrator over insolvent estate if, broadly speaking, it was not on arm's length terms.
If successful, the court has broad powers to unwind or vary all of those stages.
The interaction of key default issues – e.g. porting, recovery of assets, close-out netting and other insolvency matters – are complex and likely to be determined by a combination of the law of the CCP or the clearing member's establishment, the law of the location of the relevant branch, as well as the law of the location of any collateral.
Clearing client may also not receive back assets and positions if other parties in the clearing structure – e.g. the CCP itself, a custodian or a settlement agent – default.