CCPs offer a high degree of transparency for parties involved in the clearing process
Intercontinental Exchange (ICE) owns and operates six central counterparties (CCPs) in North America, Europe, and Asia, with more than 390 unique clearing members. ICE recognises the importance of operating highly transparent CCPs and believes transparency is critical to supporting healthy derivatives markets – providing ICE’s stakeholders with adequate information to fully understand the clearing process.
All these efforts build a level of market confidence that CCPs maintain adequate resources and have robust risk-management frameworks. CCPs have had a long-standing practice of providing publicly available rule books.
In more recent years, ICE CCPs have undertaken significant efforts to further enhance the transparency of their risk-management practices via public disclosure of quantitative and qualitative information consistent with various global regulatory objectives. In addition to fulfilling all regulatory disclosure requirements, ICE CCPs voluntarily provide additional public information, where possible. Throughout this article, ICE has provided some examples of helpful links for the benefit of readers.
As the leading operator of CCPs clearing a diverse set of exchange-traded and OTC derivatives, we know first-hand the impact central clearing plays in the role of risk-management for the financial system and, as a result, its critical function in maintaining global financial stability. The risk-reducing benefits of central clearing have long been recognised by users of exchange-traded derivatives and were the foundation of the financial reforms put forward over the past decade for OTC derivatives.
Public Quantitative Disclosures
As required by CPMI-IOSCO, each quarter ICE CCPs make our Public Quantitative Disclosures (PQDs) publicly available. These provide transparency around the CCP’s financial resources during the reported quarter. This comprehensive set of disclosures spans various risk topics, including but not limited to credit risk, collateral, margin, custody and investment risk, liquidity risk and operational risk.
So far, ICE CCPs have published Public Quantitative Disclosures for 23 consecutive quarters since Q3 2015.
Qualitative Disclosure Frameworks
The Disclosure Frameworks provide relevant information to market participants with respect to the clearing house’s operations and risk methodology, including around legal and regulatory frameworks, governance, frameworks for managing legal, credit, liquidity, operational and other risks, default rules and procedures, collateral and haircut requirements, margin methodology, processes for measuring, monitoring, segregation and portability, and access and participation requirements.
Each ICE CCP continues to post its respective Disclosure Framework publicly on the ICE website. ICE CCP Disclosure Frameworks are reviewed and updated at least every two years, and more frequently in case of material changes.
The Disclosure Frameworks and the PQDs have together provided a standardised means for ICE CCPs to disclose information, and for stakeholders to process it. In 2015, CCPs globally agreed to consistently respond to the disclosures, utilising pre-determined and standardised definitions. The standardised definitions and methodology were reviewed and agreed upon with the PSG[i] group of CPMI-IOSCO to ensure consistency with the 2015 PQD Standards. To further support the standardisation of quantitative disclosures across the CCPs globally, the CCP industry developed and adopted a standardised PQD Template that has enabled consolidation of disclosures and captures revision history.
CCPs globally have continued to demonstrate their commitment to enhance existing disclosures by participating in industry discussions around transparency. ICE recognises that these discussions between market participants (clearing members and clients) and CCPs have been useful in enhancing the clarity and understanding of the PQDs.
More recently, based on industry demand, ICE began to host a series of webcasts after publishing its quarterly PQDs, starting with the Q2 2020 disclosures. These webcasts are a helpful resource to provide market participants with qualitative commentary on key data disclosures and significant quarter-over-quarter changes, and are typically held within a week of the release of the most recent quarterly PQD. Data relating to the previous five quarters is displayed to indicate trends.
ICE makes the presentation available ahead of the webcast to help facilitate an engaging Q&A session, which is available as a part of the webcast for the benefit of all participants. ICE also posts a recording of the webcast for anyone who misses the live event. Links to webcast presentations and recordings, with summaries of each webinar below:
Q2 2020:
This was the first PQD webinar we hosted, introducing the PQD disclosures. ICE described the healthy level of financial resources maintained by its CCPs, observing Zero Cover 2 or Liquidity Stress Test breaches, and explained its margin back-testing results, which evidence a high margin coverage above regulatory requirements despite the extreme volatility experienced in 2020 due to the COVID-19 pandemic.
ICE also highlighted the increase in margin requirement and variation margin calls and attributed the increases directly to a combination of an increase in volumes, open interest, and margin rates due to heightened market volatility and increased risk-management activity driven by shifting supply/demand dynamics related to various geopolitical events and the emergence of COVID-19. ICE also explained the default insurance available to three of its CCPs, which provides an additional, distinct, and separate default resource that should serve to further protect the non-defaulting clearing members’ guaranty fund contributions from being mutualized in the event of a default.
Q3 2020:
Recorded in January 2021, this webinar discussed the Q3 2020 PQD disclosures, including how margin requirements and peak margin calls during the quarter were relatively lower compared with those in Q1 and Q2 2020, as we saw COVID-19 related volatility ease.
Q4 2020:
Broadcast in April 2021, this webinar discussed Q4 2020 disclosures, including an additional five-quarter comparison to include the volatility observed in early 2020. ICE highlighted that ICE CCPs had observed another strong quarter with zero margin breaches at four of its six clearing houses, with only a few total margin breaches in single digits at the remaining two clearing houses. The webinar also discussed that its CCPs had updated their stress tests in 2020 to include the market moves that we observed earlier in the year due to Covid-19 volatility.
Q1 2021:
Our most recent PQD webinar discussed Q1 2021 disclosures compared with five quarters to early 2020. It included discussion of adjustment to skin-in-the-game related to the launch of ICE Futures Abu Dhabi, which increased ICE Clear Europe’s skin-in-the-game by $10 million. ICE explained its rationale for increasing the guaranty fund size at ICE Clear U.S. by $150 million and the reduction in the amount of the Digital Currency contract skin-in-the-game at ICE Clear US. ICE also discussed the 2021 Texas winter event.
The Three Lines of Defence
To ensure accuracy and quality of its data disclosures, ICE CCPs utilise their three lines of defence model. While the First Line (i.e., Risk Managers) provides data, the Second Line or in some cases, staff independent of the Risk Managers (i.e., Independent Staff) provide the oversight and challenge of the PQD data and on a periodic basis, the CCP’s Third Line (i.e., Internal Audit) may audit all such disclosures.
To the extent a CCP has any automated disclosure components, these go through the rigour of the software development lifecycle (SDLC) process (requirement capture and review by the first and second line, quality assurance testing, regression testing and user acceptance reviews).
Rulebooks
For years, each of our CCPs have been operating under comprehensive and detailed rulebooks. Each of these rulebooks and related resources are posted on our website. Each of these Rulebooks provides certainty on an ex-ante basis, has been developed in consultation with the relevant CCP’s clearing members, reviewed, and approved by the relevant CCP’s Board governance process and the relevant CCP’s Regulators.
Each CCP’s rulebook establishes the obligations and terms under which the CCP operates, such as membership criteria, margin and default fund obligations, default management mechanisms, recovery processes, and fee schedules (if applicable for various membership types). Effectively, the rulebook is the contract between the CCP and its members.
You can find our larger CCP Rule Books here:
Circulars and Notices
Each of our CCPs provides notices and circulars for the following market impacting activities, including but not limited to:
- rule changes
- procedure updates
- business continuity planning exercises
- new product launches
- additions or terminations of membership
- default events
- changes to concentration banks
- holiday schedules
- domain name changes
- margin rate updates
- updates to haircuts or list of permitted cover and limits on collateral
- fee schedule changes
You can find links to our larger ICE CCP Circulars and Notices here:
Membership
Strict membership criteria help ensure ICE’s clearing members are highly capitalised and financially responsible for all trades cleared through their operations at the ICE CCPs. ICE has published a Membership and Credit FAQ and publishes a list of its active clearing members and the membership criteria on its website to help clearing members comply with diverging regulatory regimes and membership requirements.
For example, ICEU’s Membership Criteria require that all clearing members hold sufficient capital, hold all necessary regulatory authorisations, licences, permissions and approvals, are domiciled in a jurisdiction approved by ICEU, and can meet margin requirements.
You can find a list of members and membership criteria for ICE’s three largest clearing houses here:
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ICE Clear Europe |
ICE Clear Credit |
ICE Clear U.S. |
Financial Resources
ICE clearing houses update their financial resources every quarter on their respective websites.
Each ICE CCP lists its own contribution to its default waterfall as well as clearing members’ initial margin on deposit and guaranty fund requirement. This is important because it provides a transparent, easily accessible summary of each ICE CCP’s financial resources available in the event of a default.
Margin Models
Each of the ICE CCPs works to optimise capital efficiency for clearing members, while maintaining optimal levels of initial and intraday margin to safeguard the global marketplace. Each ICE CCP collects initial margin for all open positions based on a risk model that takes into account a broad range of stress and/or historically observed scenarios.
The margin requirement for each contract is regularly adjusted in line with changes in market volatility. The levels of initial margin are calibrated such that a portfolio the clearing house may be required to liquidate post-clearing member default can be closed or auctioned without recourse to resources other than those deposited by the defaulting clearing member, assuming an appropriate risk confidence level and liquidation period.
In addition to the base margin model, each ICE CCP (depending on its products) employs a number of margin add-ons related to position concentration, clearing member capital, volatility, spread responses, recovery rate sensitivity, jump-to-default, and wrong way risk.
Each ICE clearing house also includes an anti-procyclicality (APC) component as part of its margin requirements. All of these margin add-ons result in margin confidence levels that exceed the regulatory minimums. The combination of each ICE CCP’s base margins, margin add-ons, APC margins, and shortfall margins, result in a margin process that supports a defaulter pays model.
Extensive member review, board approval, independent model validation, and regulatory approval are critical components of determining our clearing houses’ margin methodology. Further protection is provided through the revaluation of cleared portfolios, on at least a daily basis, through settlement of variation margin or mark-to-market margin.
This practice of requiring clearing members to pay their losses on at least a daily basis serves to avoid the accumulation of large losses over time. Clearing members with a position loss are held accountable as the market moves. ICE’s CCPs each monitor positions on a nearly real-time basis and may make additional intra-day margin calls in the event that certain risk thresholds are exceeded. Clearing members are required to provide additional collateral in a timely and prescribed manner in the event of an intra-day call.
The specific margin methodologies used vary based on the risk characteristics of the CCP’s cleared products - an overview can be seen via the links below.
ICE Clearing Whitepaper
This paper sets out the role of clearing, the benefits provided, the implemented risk control measures and the layers of protection in place at ICE clearing houses.
We wrote the paper to raise better awareness about the role of clearing, the benefits it provides, and the risk control measures and the layers of protection that are in place at ICE CCPs.
Additional Disclosures
ICE publishes market information, such as lists of cleared products, fee schedules, trading hours, volume, open interest, settlement prices etc.
We do this to make this information easily accessible for our customers so they can clearly identify the product code for each contract, the ICE exchange it trades on, and the expiry details.
In addition to making information publicly available:
- Each ICE CCPs also provide transparency to stakeholders through risk committees, working groups, coordination through industry associations, and one-on-one discussions. ICE has been an active member of a number of international clearing trade associations, including the WFE[ii], and works extensively to advocate for financial reform that enhances market efficiencies and the ability to manage risk while minimising unintended consequences such as the fragmentation of markets, erosion of liquidity or dramatically increased costs for participants and end users.
- ICE CCPs each proactively interact with their regulators and provide regular reports and notifications to their respective supervisors. Any rule changes go through the regulatory approval process.
- ICE CCPs each directly provide various types of reports to their members on a day-to-day basis, enabling the participants to view exposures and manage their risks. ICE CCPs provide technical guides and training materials at on-boarding and on an ongoing basis to facilitate participants' understanding of the CCP's rules and procedures and the risks they face from participating in the CCP. Additionally, ICE CCPs regularly respond to due-diligence questionnaires and inquiries on a bilateral basis.
- ICE CCPs each have independent members on their Boards and/or Risk Committees including industry experts that advise the CCPs on risk-related matters affecting risk management.
ICE believes the level of transparency demonstrated by the ICE CCPs has been exceptional and market participants should avail themselves to all the readily available information described above. ICE cautions market participants to consider the risks of over-disclosure, for instance, the risk to market participant confidentiality. By way of example, certain disclosures even where clearing members are anonymised, present a real risk of allowing market participants to reverse engineer the exposures of clearing members and attempt to derive benefits from such actions or destabilise the macro market.
Clearing Member Disclosures
Given the level of public disclosures already provided by CCPs, ICE believes the level of standardised public disclosure provided by CCPs is not replicated by market participants, and the market will be better served by expanded disclosures from clearing members, comparable to what is disclosed by CCPs in their disclosure frameworks and PQDs. Clearing members play a critical role in the clearing ecosystem by guaranteeing the financial performance of the contracts they clear for themselves and for their clients. Hence clearing member disclosures are justified and should be designed to support a CCP’s holistic view of the risk exposures of its clearing members – including those that could arise outside of the cleared markets.
No formal process has been undertaken by international standard setters to impose standardised qualitative and quantitative disclosures for clearing members, which is particularly relevant considering the risks that often accrue outside of the transparent, centrally cleared derivatives markets. Current clearing member disclosures are insufficient since they are not tailored to centrally cleared markets and do not provide sufficient insight into the risk clearing members face from their uncleared exposures, prime brokerage, and other capital markets activities. Also, current clearing member disclosures are not always made at the clearing member level.
Given their role, CCPs monitor counterparty risk on an ongoing basis, which includes a counterparty review process. While CCPs have the necessary information to undertake this process in a meaningful way, increased public disclosures from clearing members would enhance this process. The importance of further visibility into the risk taking of clearing members in the opaque uncleared OTC markets has been reinforced by recent market events, where such activity had a material impact on the group capital and liquidity levels of bank-affiliated clearing members. Considering the size of these exposures, they also create spillover risk into the cleared markets, so at a minimum the CCPs should have increased visibility into this risk-taking.
ICE certainly encourages the industry to continue the constructive dialogue on overall market transparency. ICE believes all market participants should support a judicious and transparent disclosure framework. Without such comprehensive coordination, unknown systemic risk will continue to surprise market participants during violent and unpredicted market moves.