We are now reaching the tenth anniversary of the reforms implemented in the wake of the Global Financial Crisis and a shift in focus has taken hold.
The core goals of the G20 in their September 2009 meeting to drive more activity into central clearing has seen tremendous progress. The assessment of that progress is, and has been, underway and is now moving from the immediate post-crisis needs to ensuring central clearing provides for the growth and development of safer and more secure markets.
This underlying reality permeated the IOMA conference earlier this month, and was the impetus for the WFE-Oliver Wyman paper ‘The Future of Clearing.’ I was honoured to take part in the panel discussion of the paper, which I found to be very well done and insightful.
Along with enhancing the financial stability of CCPs, another key result of the post-crisis reforms was an increase in transparency – both market wide and for CCPs. The movement of traditional OTC products to a CCP has increased transparency through reporting of prices, quantities and other transaction details. The CCPs themselves have increased their own transparency in response to standards promulgated by the Committee on Payment and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) by implementing quantitative disclosures of key risk and operational metrics. Finally, the increased transparency has led to greater collaboration among CCPs.
While differences in asset classes and market practices caution against approaching CCPs with one-size-fits-all solutions – from regulation to risk management procedures – the interconnectedness of the clearing system is undeniable. The WFE CCP Working Group provides an opportunity to share information and address the interconnectedness issues in today’s markets. At IOMA this year I particularly found the Working Group’s discussion of default management useful. There were clear overlaps and similarities in default processes, but it was most helpful to understand the differences. These disparities in processes led to healthy discussion on the differences in jurisdictions and asset classes.
Since IOMA was in Mumbai this year, one aspect of CCP collaboration that was very prominent was interoperability. The Securities and Exchange Board of India (SEBI) is moving toward a June 1 implementation of interoperability among its three derivatives clearing organisations.
The difficulties of putting interoperability into practice cannot be understated, not least of which is the potential for increased risk exposure between clearing houses, as well as the added complexity of default management. I found the discussion on India's move to interoperability to be among the most interesting of the conference and I will certainly be watching the progress of the implementation with interest.
A somewhat related topic in ‘The Future of Clearing’ paper we discussed on our panel that has stuck with me is the idea of regional CCPs. Like interoperability, regional CCPs face a number of challenges. Key among those challenges is the ability to design rule books that work across multiple jurisdictions.
However, if the legal hurdles facing regional CCPs can be overcome, then there is great potential to reduce costs and risks. The open interest within asset classes could be netted and combined, which would significantly reduce risk. The synergies available for staff and infrastructure, as well as the scale provided by a larger pool of participants would reduce the costs of mutualisation of loss. While this kind of consolidation would reduce some competition, the resulting savings with larger CCPs would more than offset any competition benefits. Moreover, the regional CCPs themselves would still be competitive with each other.
Risk management could be enhanced from a higher number of members a regional CCP might attract compared to a single jurisdiction. This is particularly true for smaller markets.
I especially enjoyed the opportunity to speak with some of the newer CCPs and CSDs at IOMA this year. It was great to hear how they are implementing the model. The regional CCP idea, however, could be beneficial to those smaller markets that do not have a domestic CCP, and where creating one could be cost prohibitive. I think it will be very interesting to watch how this develops.