WFEClear: The WFE’s Clearing and Derivatives Conference 2023
Conference Programme
Day 1 - Mon 27 Mar
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08:00 - 16:15:
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08:15 - 08:30:
Opening Remarks
Speakers
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08:30 - 08:45:
Speech: Phuthuma Nhleko, Chairman, Johannesburg Stock Exchange
Speaker
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08:45 - 10:15:
Session 1: The Concept of Central Clearing and the Role, Function & Workings of the CCP
The session will provide delegates with an understanding on the fundamental tenets of clearing direct from industry practitioners. It will give an insider’s view on CCPs and how they operate & interact with the market, introducing the fundamental concepts that will be explored in greater depth in subsequent sessions. Topics covered will include the CCP rulebook, risk management approaches, the default waterfall, the significance of governance practices, the benefits of multilateral letting, the role of incentives, and how margin practices discourage risky behaviour in times of market stress.
Moderator
Speakers
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10:15 - 10:30:
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10:30 - 12:00:
Session 2: The Legal and Capital Market Framework
The session will provide an overview of the legislative constructs upon which a CCP is based, and the important legal considerations that provide required legal certainty and inform broader policy and capital frameworks. Participants will be left with a sound awareness of the intersection of legal, policy, and capital frameworks, and their integration with foundational guidance such as the CPMI-IOSCO PFMIs. The session will also provide a thorough grounding in where the CCP sits in capital market structure sequencing, an understanding of the various and varied legal environments around the world, and important considerations thereto.
Moderator
Speakers
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12:00 - 13:00:
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13:00 - 14:30:
Session 3: An Introduction to Risk Modelling and Methodologies
The session will outline how risk managers at CCPs approach clearing risk management, focusing specifically on risk modelling as part of the overall risk methodology. We will describe how margin requirements for cleared portfolios are calculated, and how risk methodologies interact with market volatility to promote the safety and soundness of a CCP. We’ll cover the debate on procyclicality, stress-testing, and the factors that impact margin requirements during times of market stress. Participants will examine various different design choices, with consideration of past market events, such as whether to consider margin variation across the cycle, or focus on short-term margin increases, while looking at how historical and simulated data portray various margin models in regards to their risk sensitivity.
Moderator
Speakers
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14:30 - 16:00:
Session 4: Regulatory Themes in Clearing
The session dives into current regulatory themes and industry initiatives, and anticipates what changes could be on the horizon for CCPs. We take stock of current areas of regulatory focus from international standard setting bodies, considering the broader role for clearing as enshrined in the 2009 G20 reforms, as well as at jurisdictional level. This session will ensure that delegates have an understanding of how policy initiatives are formed, advanced, and implemented among standard-setting bodies and market participants, including CCP operators. The WFE Regulatory Affairs team will share best practice and insight into what’s active and new on the international policy agenda, including skin-in-the-game, non-default loss arrangements, recovery and resolution, margin practices (such as anti-procyclicality measures), and minimum account requirements.
Moderator
Speakers
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16:00 - 16:15:
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16:30 - 18:30:
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18:30 - 21:00:
Day 2 - Tue 28 Mar
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08:30 - 17:30:
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09:00 - 09:15:
Opening Remarks
Speakers
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09:15 - 12:30:
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09:15 - 09:30:
Opening keynote: Summer Mersinger, Commissioner, Commodity Futures Trading Commission (CFTC)
Speaker
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09:30 - 10:30:
Session 1: Clearing – The Real Impact and the Real Economy
Clearing and the role of CCPs were thrust into the limelight after the latter ensured systemic stability during the Great Financial Crisis of 2008. But what are the visible, tangible impacts that CCPs have, and what is the role that they play in the broader financial system and real economy? Furthermore, what is the role that CCPs can play to directly mitigate broader market volatility in financial markets? How can we improve clearing to work best for end users, such as institutional investors and non-financial companies? Are barriers to clearing too high for some of these users, such as pension schemes? What are the challenges and opportunities for entities outside the centre of finance? What are the unique use-cases in which centralised clearing can further promote market stability in global markets and economies?
Moderator
Speakers
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10:30 - 11:15:
Session 2: Paper Presentation: How confident are we of margin model procyclicality measurements?
The WFE Research Paper brings the attention to the fact that the standard measures of initial margin model procyclicality are random variables and, as such, are subject to uncertainty. While this fact has attracted little attention, it has important consequences because, for any discussion around the procyclical behaviour of a model or any implementation of a procyclicality mitigation tool, it is fundamental to be able to adequately measure the responsiveness of the model. In particular, to mitigate the risk of prescribing hard rules which may have an unknown but significant chance of resulting ineffective or even detrimental, any decision or policy making that is based on these measures requires to take into consideration the impact that uncertainty will have on expected outcomes. To aim of the paper is to estimate such impact, examining the case of some typical margin models, both empirically and within a Monte Carlo simulation setting.
Moderator
Discussant
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11:15 - 11:30:
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11:30 - 11:45:
ESMA Keynote: Froukelien Wendt, Independent Member of the CCP Supervisory Committee and Director for CCPs, European Securities and Markets Authority (ESMA)
Speaker
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11:45 - 12:45:
Session 3: Conquering New Commodity Risk
Exchanges and CCPs have always managed commodity risk, but the last few years have brought new challenges. What are they? Are there new opportunities too? Are energy companies in a position to meet higher margin requirements that arise in times of geopolitical instability? What is the role of centralised clearing in mitigating risk arising from the multitude of economic and geopolitical issues that affect the price and volume risk of hard or soft commodities? What are the different regulatory responses proposed in different jurisdictions? What is the right regulatory structure?
Moderator
Speakers
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12:45 - 14:00:
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14:00 - 17:45:
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14:00 - 15:00:
Session 4: Whither Innovation
"If future generations are to remember us more with gratitude than sorrow, we must achieve more than just the miracles of technology. We must also leave them a glimpse of the world as it was created, not just as it looked when we got through with it.” Lyndon B. Johnson, President of the United States of America.
As the implosion of FTX continues to bring wreak havoc on both the crypto market and investor trust, the topic of innovation and how it’s best regulated has become an existential debate. Could the debacle of FTX have been prevented? What lessons can we learn? What are the drivers of progress in clearing? Is it technology, new products, and/or established clearing and policy frameworks? What changes can or should be made to global regulatory environments and frameworks in the wake of FTX? What are the costs and benefits of accommodating new approaches and models in clearing? Can innovation emerge within the established constructs and frameworks?
Moderator
Speakers
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15:00 - 15:45:
Session 5: Academic Paper Presentation: The Prudence of Central Clearing with Market-based Default Management
A model of central clearing where the central counterparty (CCP) offers direct access to all account holders has grown in prominence recently. Direct clearing houses often manage risk algorithmically: accounts are settled to market, and the first line of defence for the CCP against falling account value is submitting market orders to reduce account risk. This market-based default management strategy is fundamentally different from the margin call-based approach of traditional CCPs. The paper presents the strategy employed, illustrating its dynamics using a detailed example. A stylised clearing service is used to compare the financial resources a traditional CCP would require with those needed by a direct CCP clearing the same service and targeting broadly the same safety standard. Some key issues affecting the risk of market-based default management are discussed using these insights. As a contribution to the current debate on the regulation of direct CCPs, their policy consequences are also considered.
Moderator
Discussant
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15:45 - 16:45:
Session 6: New Clearing Models: New Paths to Manage Risk
Looking to the future, new technologies and products have potential to reshape the industry and take risk management to the next level. In Schumpeter’s creative destruction process, innovation is a driving force for progress and growth. But which innovations will outlive the hype? What technologies provide a true response to genuine problems? What new risks will emerge and how do we manage them? Looking to new classes of products, from crypto to carbon-related products, what are the risks associated? Do we need new risk management tools for an industry that has stood the test of time and held steadfast through many stress tests?
Moderator
Speakers
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16:45 - 17:45:
Session 7: We Have Nothing Without Liquidity (and Settlement)
Why is there a debate on shortening the status quo in settlement cycles? What are the benefits, costs, and challenges? Is liquidity under strain, and if so why? How will CCPs and market participants manage, and in particular, how does this impact risk modelling methodologies? What changes in market structure are needed to optimize the use of capital and enhance funding liquidity? What are the liquidity challenges observed in prefunded markets? How are CCPs deploying technology to benefit market participants, the cleared market, and the financial system? What is the role of new and existing technology? Will tokenisation alter post-trade clearing and settlement? Will the fundamental trade-offs involving credit risk and liquidity remain in a tokenised world?
Moderator
Speakers
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18:00 - 21:00:
Day 3 - Wed 29 Mar
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08:30 - 16:15:
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09:00 - 12:15:
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09:00 - 09:15:
Speech: John McPartland, Senior Advisor, Hidden Road Partners LP
Speaker
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09:15 - 10:15:
Session 8: It’s All About the Incentives
How can we create and maintain the balance of incentives that exist within the CCP construct to best serve the market and its users? Are the governance structures of CCPs calibrated correctly? Does regulatory arbitrage exist, and do governance failures take place? What is the role and function of financial resources contributed by clearing members and by the CCP as part of the overall mutualised resources available within the default waterfall? Do the waterfalls du jour encourage responsible position-taking? Do altering levels of skin in the game for private FMI stakeholders incentivise the prioritisation of clearing volume, and does this really impede demutualised CCPs from performing in the public interest? How do CCP governance structures mitigate risks while motivating collective engagement and contribution for both CCPs themselves as well as its market participants? What are the best practices, risks, and rewards from multi-stakeholder governance structures, and what is the potential for increased capital structure diversity?
Moderator
Speakers
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10:15 - 11:00:
Session 9: Academic Paper Presentation: Empirical evidence on adverse feedback loop between asset price movements and position liquidation, and the efficacy of anti-procyclicality measures
The last decade has seen substantial research and debate on procyclicality of CCP margins. The procyclicality argument essentially involves two effects in an adverse feedback loop: first, volatile markets leading to higher margin demands, and second, higher margin demands leading to further market volatility. Regulatory authorities across the world advise CCPs to put in place anti-procyclicality (APC) measures to reduce this adverse feedback. However, the empirical research in this area is limited to the first effect of sensitivity of margin models to volatility. The second effect, i.e., sensitive margin models influencing subsequent trading behavior, as well as the efficacy of APC measures to attenuate this influence has not been investigated empirically. We utilize a quasi-natural experiment made possible by unique design of Indian derivatives market and recent strengthening of anti-procyclicality measures.
We investigate impact of sensitivity of margin models on customer level trading behavior to assess the evidence for effectiveness of anti-procyclicality measures. We find that under similar asset price movements, the tendency of market participants to exit outstanding positions is lowered under stronger APC measures. While initial margin procyclicality is just one factor influencing price stability, the results suggest that implementation of APC measures can achieve the desired effect of weakening the adverse feedback loop between asset price movements and position liquidation.
Author: Aniket Bhanu, NSE Clearing (NSCCL), National Stock Exchange of India
Moderator
Discussant
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11:00 - 11:30:
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11:30 - 12:15:
Session 10: Academic Paper Presentation: The repo market under Basel III
It’s well-known that regulation can have profound effects on asset prices and market fragmentation. Yet existing evidence is very thin. We contribute by assessing the effects of Basel III on financial market fragmentation using the UK repo market as an important case study. Evidence is affirmative of a fragmentation. The leverage ratio incentivises banks to net transactions in order to mitigate the associated capital charge, which leads to a fragmentation across prices between nettable and non-nettable trades. This effect is concentrated on the bilateral segment of the market, which showcases that central counterparties insulate their members from this fragmentation. In addition, the liquidity coverage ratio incentivises banks to reduce long-term (>30 days) lending backed by lower-quality collateral, which leads to a fragmentation across maturities. Finally, the documented effects are amplified during stress as banks that are jointly constrained by both ratios reduce their activity to a greater extent than those that are constrained by a single ratio or not constrained at all, with important implications for market liquidity.
Authors: Eddie Gerba and Petros Katsoulis, Bank of England
Moderator
Discussant
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12:15 - 13:45:
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13:45 - 15:45:
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13:45 - 14:00:
Speech: Takeshi Shirakami, Deputy Head of Secretariat of Committee on Payments and Market Infrastructures, Bank for International Settlements
Speaker
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14:00 - 14:45:
Session 11: Academic Paper Presentation: Optimal bidder selection in clearing house default auctions
Default auctions at central counterparties (or ‘CCPs’) are simultaneously critically important to financial stability and largely unstudied. We develop a model for CCP default auctions that incorporates: a.) the CCP’s non-standard objective of maximizing success above a threshold rather than revenue; b.) addresses the important question of who participates in the auction, and; 3.) explicitly models information leakage affecting private portfolio valuations. These features make the auction analysis non-standard. We show that an entry fee, by appropriately inducing members to participate or not, can maximize the probability the auction succeeds. The result is novel, both in auction theory and as a mechanism for CCP auction design.
Authors: Rod Garratt, University of California Santa Barbara; David Murphy, London School of Economics and Political Science; Travis Nesmith, Federal Reserve System; and Xiaopeng Wu, University of Toronto.
Moderator
Discussant
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14:45 - 15:45:
Session 12: Risk, Recovery & Resolution
What measures are required to promote resilience while maintaining the continuity of critical CCP functions, public confidence, and financial stability? Why have these longstanding tenets of a CCP, having performed admirably throughout recent market events, resurfaced as we look to understand CCP risk management strategies? How should a CCP model for extreme situations, where outcomes and conditions are unpredictable? Are CCPs being coerced into becoming insurers for the financial industry at a cost to clearing members? What is the current state of participant preparedness? Are market participants sufficiently anticipating and preparing for material, and at times unprecedented, market events that lead to reasoned increases in margin requirements to support corresponding increases in position exposures? How can CCPs maintain the integrity of the default management process and the financial resources that support it when considering recovery and resolution?
Moderator
Speakers
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15:45 - 16:00:
Concluding Remarks and Announcing the Call for Papers WFE’s Clearing Conference 2024
Moderators
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18:00 - 21:00:
