The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has today issued a statement on coronavirus (Covid-19) and current market volatility.
The economic impact of the Covid-19 pandemic has introduced extraordinary volatility in global financial markets, as participants are obliged to reassess their valuations of all investments and associated derivatives as the situation develops. In an environment where uncertainty makes it unusually hard to price assets and for market-makers to operate, exchanges are providing the only way to establish consensus on these valuations in real time. As such, WFE members expect to continue to operate for as long as normal during trading days. CCPs, meanwhile, continue to take prompt action with respect to the credit risk associated with participants’ open positions. The WFE is in turn facilitating the exchange of best practice among its members, who operate over 150 such pieces of infrastructure in over 90 countries around the world.
Volatility has reached levels comparable with the Global Financial Crisis of 2008, with one-day losses not seen since 1987. The situation is made more challenging by high levels of indebtedness and already low interest rates. As the global representative body of exchanges and CCPs, the WFE is working with our member community to share best practice, mitigate risk, and coordinate responses (where permitted by antitrust laws) during this crisis.
A variety of well-established measures are used to address the pressures on the financial system. Examples include:
- Circuit breakers (sometimes referred to as ‘volatility control mechanisms’) are triggered in order to allow for ‘cooling off’, and to discourage disorderly markets;
- Pricing bands - the ranges at which market makers are permitted to quote bids/asks - are appropriately adjusted, to allow for continuous trading in the context of high volatility; and
- Exchanges and CCPs remaining in constant contact with their members, peers and authorities to coordinate updates to help maintain stability across markets.
In addition, exchanges and CCPs have triggered continuity plans (involving, for example, remote working and working from secondary sites) to ensure their operational resilience and ability to serve their markets, against the backdrop of social distancing policies that governments around the world are adopting. Through the WFE, they are sharing best practice on these and other measures taken to keep markets open and resilient. The WFE has also launched a depository of COVID-19-related public communications from exchanges and CCPs on its website as a resource for the financial community and our stakeholders.
The role of financial markets in a crisis
Financial markets provide businesses with crucial funding, and risk management products and services. Investors rely on markets for adequately priced assets and managing portfolio risk. The transparent price formation process that happens on exchanges provides essential market information to investors, asset managers and economic decision-makers. CCPs allow for risk transfer between institutions in a transparent and operationally resilient ecosystem. Central banks use markets and market intermediaries to transmit their monetary policy and promote financial stability.
Even as our present crisis causes large swings in markets and operational pressure on market infrastructures, these functions remain critically important. It is important that markets remain open and that the hours of trading remain as normal, to preserve the benefits of price formation and access to liquidity for society. As for key personnel of other critical national infrastructures, there is a need to ensure exemptions for critical financial market infrastructure personnel in the event of any ‘shelter in place’ or ‘lockdown’ policy.
Action by the WFE and global market infrastructures
WFE members are coming together to share evidence on the impact of recent measures, and over the coming weeks and months will work together to determine how the experience of recent days can inform best practices and public policy going forward. We will all continue to work with global and national authorities as they seek to address the pandemic and its impact on our lives. The WFE will provide opportunities for global exchanges and CCPs to remain in communication about the imposition of market integrity measures relevant to financial stability, ensuring the international co-ordination of these where that is necessary for them to be effective.
It is important that financial markets remain able to perform their role - providing investors with liquidity, facilitating price discovery, and allowing for risk transfer and the transmission of monetary policy. It is likewise important that CCPs continue to play their role supporting the risk transfer of products and specifically in derivatives markets by mitigating, within the parameters they operate, associated systemic risks.
Market infrastructures around the world recognise their responsibility not only to issuers and market participants, but to the economies they serve and society at large. We believe that with appropriate action, information-sharing and vigilance, along with a fundamental focus on market integrity and investor protection, we will be able to come through the current crisis.
Nandini Sukumar, Chief Executive Officer, WFE said: “In a crisis, you need finance more than ever, and how else are people going to be able to operate that without central markets? Indeed, it is hard to envisage any benefit from closing markets during a period of already heightened uncertainty - particularly not to investors. Policymakers and central bankers, as well as market participants, need as much accurate and reliable information to help manage the situation. Every market infrastructure, exchange, and CCP, is working towards maintaining open, safe and resilient markets through this time. Exchanges and CCPs enable businesses to fund, investors to price assets and manage risk appropriately, and central banks and policy makers to promote financial stability; they should be allowed to do so with normal trading hours and appropriate support from policymakers.”