This paper produces the most detailed analysis I've seen of the state of CCPs and their ability to resist market stress conditions. It also provides an insight into the relative size and strength of global CCPs using a variety of data. The overall conclusion is that CCPs are 'safe' but looking at the anonymised concentration risk charts it is evident that some banks are significant in their inter-connnectedness to the network of CCPs and therefore their impact in a default scenario.
As of January CME had $66bn of notional in cleared OTC credit products compared with ICE with a combined total of $1.5trn. The only other firms to offer clearing for OTC credit are LCH and JSCC with $42bn and $8bn respectively. Bill.
CME Clearing US adds Korean Won and Indian Rupee, currencies not yet cleared at SwapClear. KRX already provides clearing of KRW IRS products, but no other currencies, so this move by CME gives their customers the opportuntiy to offset exposures in KRW with other currencies. There is no existing CCP for Indian Rupee trades so this is a first, more background at ClarusFT from prior to this announcement.
CCPs were recently introduced for standard derivatives to remove counter-party risk from trades. Should the buyer or seller default, then the CCP will take over his trade commitment. CCPs thus effectively insure counter-party risk. Traders are therefore expected to continue to trade at times of elevated counter-party risk. A liquidity dry-up is thus avoided and, with it, the potential for an all-out crisis.
Bill: The ClarusFT article covers the fine detail of intra-day topups to SwapClear and why timing changes were necessary. If you have never looked at the detail of intraday margin calls then this is the article to read.
We keep on hearing how difficult it is to be a clearing broker these days. Case in point – this Risk.net article discusses how FCMs had to find billions of dollars in the middle of the day after the Brexit vote. This is because, when the market moves, Clearing Houses can choose to make margin calls […]
When I give my class on the systemic risks of clearing, I usually joke that I should give the lecture by a campfire, with a flashlight held under my chin. It is therefore appropriate that on this Halloween Risk published Peter Madigan’s take on the effects of Brexiton derivatives clearing: it is a horror story.
If you’ve been paying the slightest attention to financial markets lately, you’ll know that blockchain is The New Big Thing. Entrepreneurs and incumbent financial behemoths alike are claiming it will transform every aspect of financial markets.
The techno-utopianism makes me extremely skeptical. I will lay out the broader case for my skepticism in a forthcoming post. For now, I will discuss a specific example that illustrates odd combination of cluelessness and hype that characterizes many blockchain initiatives.
This has to be one of my favourite articles I've seen for a long time - read the story at ClarusFT (link below), removing EUR from SwapClear has a surprising result, but moving EUR on-shore is a shocker. Bill.
We estimate the Initial Margin impact from moving EUR Clearing out of the UK This could happen as a result of Brexit We can make an estimate as to the maximum margin impact possible using publicly available data In terms of Initial Margin, we only see a small impact on the LCH SwapClear portfolio in London But […]
Central Counterparties recently published their new CPMI-IOSCO Quantitative Disclosures, meaning we now have three sets of disclosures, so I thought it would be interesting to look at trends in the data. Background Under the voluntary CPMI-IOSCO Public Quantitative Disclosures by CCPs, over two hundred quantitative data fields covering margin, default resources, credit risk, collateral, liquidity risk and more […]
On 9th June, it became clear that the European Union would delay the implementation of the mandatory bilateral margin. See for example the Risk article or the Bloomberg article. But for the rest of the world, the 1 September 2016 date is still a major deadline.