Alicia Greenwood, Director, Post Trade Services, Johannesburg Stock Exchange (JSE), and newly elected Vice-Chair of the WFE's CCP Working Group, gives her regional perspective on the importance of CCPs.
African markets are generally seen as frontier – opportunities exist but come with investment concerns such as low levels of liquidity, regulatory opacity and lack of market depth.
For emerging capital markets to deepen, their exchanges and CCPs must be able to maintain, develop and grow their links with financial institutions around the world. Institutions need guarantees that when they invest in a market, their money is recoverable in crises, and that the infrastructures are aligned with international standards and best practices. A number of African countries are introducing positive market reforms to advance the needs of institutional investors and meet their regulatory obligations and reporting requirements.
JSE Clear is a CCP for the South African derivatives market, and is compliant with CPSS-IOSCO’s principles for financial market infrastructures and recognised by ESMA as a third country CCP. The equivalence discussion following Brexit is top of mind for JSE Clear, as we await clarity about the regulatory status of third country CCPs in Europe and our ability to maintain access to these markets. Where possible, we try to influence policymakers and regulators to drive outcomes that minimise disruption, avoid fragmentation and maintain access to global markets. Collaborating with other CCPs in this effort, by leveraging organisations such as the WFE, is essential.
Liquidity and counterparty credit risks are faced by all CCPs, and these are amplified in emerging markets which are generally highly concentrated and have significant contagion effects. Also, in emerging markets there is typically a higher probability of counterparty failures. This makes it critical for CCPs to demonstrate their ability to neutralise the market risk that would manifest in the event of default and to ensure that there are sufficient resources to fund that neutralisation. Continuous efforts are required to improve modelling and stress testing tools to quantify liquidity risk at an individual CCP and market wide level. Reliable and timely access to adequate liquidity is essential; as is engagement between CCPs and central banks to ensure that cleared markets remain robust in the face of potential liquidity crises.
CCPs that wish to expand their breadth and role in the ecosystem must be defined by scalable, purpose-built automated systems with robust data management infrastructures. The breadth of data to be managed - including trading, counterparty, risk, collateral, valuations and derived data – and data-related regulatory requirements have increased significantly. Manual processes and system workarounds will no longer be good enough. CCPs must be operationally excellent and resilient – achieving this will be a differentiating factor in what is becoming an increasingly competitive environment.
In summary, maturing emerging markets tend to focus on many of the same capabilities employed by the most developed markets, such as alignment of standards and regulatory principles with international best practices, enhancing market access, building networks of intermediaries, and technological enablement. The pace, and cost, at which this can be achieved will be a challenge for years to come.