Welcome to the October issue of Focus.
We have the pleasure of having three events to mark: First, the forthcoming publication of the special issue of the Journal of Financial Market Infrastructures (JFMI) dedicated to the 37th edition of WFE’s Derivatives and Clearing Conference 2020. Then, looking forward, the publication of the Call for Papers for the 38th edition of the conference, to be held next year in a virtual format. And finally, the launch of the WFE Research webinar series.
I see these events as important steps in filling a gap in the CCP community. Let me explain.
After the Great Financial Crisis of 2008, market infrastructures have grown in complexity and in importance as fundamental pillars for financial stability. The problems derived from new regulations – from changes in the market structures, and from the need to manage risks sitting far away in the tail – can be extremely challenging and often require sophisticated tools of analysis.
These tools may come from different research disciplines, including network analysis, auction theory, game theory, risk modelling, finance law, or behavioural economics. However, research on CCPs is particularly challenging because CCPs remain a niche area, full of specificities that often seem accessible only to the initiated. The CCPs’ default fund, for example, is a unique construct, the result of decades of market practice, industry evolution and regulatory pressure. You will not find it in university textbooks. Academics approaching CCP-related questions bring with them powerful, specialised tools, but often find it difficult, or perhaps not necessary, to incorporate all the details of how the CCPs function and how they interact with their ecosystem. On the other hand, industry lives the granularity of the details, but it does not always have the time or the resources for lengthy research projects. And regulators often need, or choose, to prioritise policy and supervision.
And so, instead of a coffee shop where these three constituencies can fluently share their knowledge, not only through written publications, notably the JFMI, but also engage in live dialogue, there tends to be an empty space. Yet communication is more urgent than ever because the complexity of the problems demands theoretically and empirically robust responses.
As a contribution to fill this gap, the WFE’s Clearing and Derivatives Conference aims to bring together academics, policy-makers and practitioners to share original research and engage in an exchange of ideas on the future of central and bilateral clearing. This is also one of the objectives of our recently launched WFE Research webinar series.
And it is also the goal of this edition of Focus.
John McPartland, who has been a central banker, settlement banker, senior executive of two FCMs and deputy manager of a major CCP during a 45-year career in the industry, walks us through the work of Dr. James T. Moser on the development of central clearing, from the earliest precursors of CCPs to the CCPs as we know them today.
Ron Berndsen, professor of Financial Market Infrastructures at Tilburg University, and chair of the Risk Committees of LCH Ltd and LCH SA, who is also editor-in-chief of the Journal of Financial Market Infrastructures, reflects on the trade-offs between higher skin-in-the-game (the layer of CCP’s capital that is placed as part of the default waterfall) and clearing costs.
David Murphy, Senior Advisor at the Bank of England, reminds us that a key question when considering mandatory client clearing of OTC derivatives is whether porting is likely to be achieved, while discussing some of the hurdles involved and potential solutions.
Alessandro Cocco, Vice President and Head of Financial Markets Group, Federal Reserve Bank of Chicago, describes a new framework that is being developed by the Federal Reserve Bank of Chicago for assessing the impact of climate change on the global financial markets, with particular emphasis on financial instruments that are exchange traded and cleared.
Michael McClain, General Manager of Equity Clearing and DTC Settlement Services at DTCC, discusses the criticality of increasing automation and digitalisation, eliminating manual processes in favour of alternatives, like DLT, that can increase the speed of processing and lower costs.
Vikram Kothari, Managing Director at India’s National Securities Clearing Corporation, reminds us that customer protection is also a key policy objective for the CCPs and explains how it can be achieved.
John Davidson, OCC Chief Executive Officer, reflects on the past and future of clearinghouse resilience.
Andreea Minca, from Cornell University, examines, in a joint work with Hamed Amini, the impact of central clearing and portfolio compression on the seniority structure of the clearing network.
Adena Friedman, Nasdaq President and CEO, discusses Nasdaq’s perspectives on the impact of new technologies.
Fernando Cerezetti, Chair of the EACH Risk Committee, talks about model risk management in central counterparties. He discusses how the complex model governance procedures designed by regulators could produce unintended contradictory outcomes.
Simon Zammit, Malta Stock Exchange Chief Executive Officer, describes how the Malta Stock Exchange will soon be widening its product base with the introduction of two new initiatives, real estate investment trusts (REITs) and green bonds.
I hope you enjoy this edition of Focus.
Dr Pedro Gurrola-Perez
Head of Research
The World Federation of Exchanges