At the WFE IOMA Clearing & Derivatives Conference, Paul Wong, Member of Secretariat, Committee on Payments & Market Infrastructures, BIS took part in a panel on how CCPs and banks connect. Here he looks at the importance of CCP transparency.
During the last five years, much progress has been made to enhance the safety and soundness of systemically important financial market infrastructures (FMIs), including central counterparties (CCPs).
The 2012 Principles for financial market infrastructures (PFMI), the international risk management standards established by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO), notably raised the bar in terms of how FMIs should manage risk – both individually and collectively.
Transparency is another core component of the PFMI, albeit one that has received less attention than the risk management standards. Transparency on the exposures, risk management practices and business models of FMIs is critical to achieving financial stability. A CCP, by design, depends crucially on the financial strength of its clearing members (eg because of loss allocation mechanisms) including the preparedness of members to meet cash calls or withstand variation margin haircutting. As such, it is important for clearing members, their clients and relevant authorities to understand these contingencies in advance, and thereby help strengthen market resilience.
The CPMI and IOSCO have striven to improve CCP transparency. As a start, the PFMI set out a number of key items that FMIs should disclose publicly. The Principles were followed by the 2012 Disclosure framework and assessment methodology and the 2015 Public quantitative disclosure standards for central counterparties. More recently, the CPMI and IOSCO have issued technical guidance on harmonised definitions, formats, and usage for over-the-counter derivative transaction reporting. The aim here is to clarify market exposures from derivative transactions. With the quality of available data now improving, it is increasingly desirable that such data be put to good use by authorities and market participants.
Understanding exposures has been a core objective of official data collection and harmonisation work. A recent report by the CPMI, IOSCO, the Financial Stability Board and the Basel Committee on Banking Supervision on the Analysis of central clearing interdependencies shows how authorities can use data to highlight and quantify some of the risks associated with current market structures. The report, for the first time, provides insights into the high degree of interconnectedness among a core set of CCPs and their clearing members. As the report notes, however, this picture is only a partial one given limitations of the data provided to authorities.
Enhanced data quality and transparency have also become more important for supervisory stress testing. Last month, the CPMI and IOSCO published a Framework for supervisory stress testing of central counterparties that provides authorities with high-level guidance on how to design and conduct analyses to examine the potential macro-level impact of a common stress event affecting multiple CCPs. These types of stress test are important tools in helping authorities, CCPs and market participants understand adverse market dynamics during financial or operational shocks and to strengthen market resilience against them. CCPs and market participants should welcome this type of exercise with open arms.