WFE’s Clearing and Derivatives Conference
Conference Programme
Opening Dinner - Sun 29 May
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18:30 - 21:30:
Day 1 - Mon 30 May
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08:30 - 09:15:
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09:15 - 09:30:
Opening Remarks
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09:30 - 10:00:
Opening Keynote: Eva Hüpkes, Head of Regulatory and Supervisory Policies, Financial Stability Board (FSB)
Speaker
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Session 1: Horizon scanning
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10:00 - 10:45:
Paper Presentation: The netting efficiencies of market wide central clearing
Market disruptions in response to the COVID pandemic spurred calls for the consideration of market wide central clearing of Treasury securities, which might better enable dealers to intermediate large customer trading flows. The authors assess the netting efficiencies of increased central clearing using non‐public Treasury TRACE transactions data and find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations and would have substantially lowered settlement fails.
Authors: Michael J. Fleming, Frank M. Keane, and Or Shachar (Federal Reserve Bank of New York)
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10:45 - 11:45:
Panel: Extending central clearing to new asset classes
Multilateral netting, together with counterparty risk management and increased transparency, is one of the key benefits offered by central clearing. After the Great Financial Crisis, policymakers decided to extend these benefits to a wider set of instruments as a way of increasing financial stability, and mandated central clearing of standardized contracts. More than a decade later, a new and different crisis has brought the question of extending the clearing mandate even further. Is this a desirable outcome? What are the trade-offs involved when extending central clearing to other asset classes, including government bonds? What could be the implications for default management? What are the challenges of clearing crypto-assets?
Chair
Speakers
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11:45 - 12:15:
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12:15 - 13:00:
Paper Presentation: An unintended consequence of holding dollar assets
The authors study investor trading behaviour and yield patterns in the UK government bond market during the recent COVID crisis. They show that the yield spike in mid-March 2020 was accompanied by heavy selling of gilts by UK-based insurance companies and pension funds, which - they argue - was an indirect result of the US dollar's global prominence. In crisis periods, dollars appreciate against other currencies. To meet margin calls on short-dollar FX positions, foreign institutions sell their domestic safe assets, thereby contributing to the yield spikes in domestic markets.
Authors: Robert Czech (Bank of England), Shiyang Huang (University of Hong Kong), Dong Lou (London School of Economics and CEPR), Tianyu Wang (Tsinghua University School of Economics and Management)
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13:00 - 14:00:
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Session 2: Cross border clearing
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14:00 - 14:20:
Reflections on Cross border clearing
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14:20 - 15:15:
Panel: Smoothing out frictions in cross border clearing
Because of the global nature of financial markets, clearing houses are naturally at the centre of cross border financial networks. They are subject to global, regional, and local regulations. From a supervisory standpoint this requires different types of coordination. What are the main cross-border frictions arising from regulation and how can we address them? What could be the evolution and implications of EU location policy. How does EU and US regulation impact third countries? Is there space for reducing the cross-border regulatory burden?
Chair
Speakers
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Session 3: Where are we in the regulatory cycle?
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15:15 - 16:00:
Paper Presentation: The impact of margin requirements on voluntary clearing decisions
This paper examines the incentive to voluntarily centrally-clear swaps. Specifically, it takes advantage of changes brought about by a 2016 regulation to analyze the determinants of traders' clearing decisions. It finds that the decision to clear their swaps by certain entities was substantially affected by this regulation. The change in clearing rates was driven by a small number of entities; those who were already clearing members of the clearinghouse. This highlights an important aspect of clearing decisions; becoming a clearing member entails significant upfront costs but allows members much lower marginal costs of clearing.
Author: Esen Onur, David Reiffen and Rajiv Sharma (CFTC)
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16:00 - 17:30:
Panel: The upcoming regulatory agenda
We take stock of the current areas of regulatory focus, especially at the level of international standards, considering the broader role for clearing enshrined in the 2009 G20 reforms. This naturally includes matters of resolution and related questions (notably around NDLs). Also high on the list would be the current discussion around margining practices.
Chair
Speakers
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19:00 - 22:00:
Day 2 - Tue 31 May
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Session 4: The future of clearing
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08:00 - 08:15:
ESMA Keynote: The future of clearing
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08:15 - 09:15:
Panel: CCP risk management in a fat-tailed world
In the last years, as different crises unfolded, an intense focus has been placed on CCPs risk management models and strategies. We have been discussing margin model procyclical behaviour, the allocation of non-default losses (NDLs), or the conditions for a successful recovery and, eventually, resolution processes. In all these cases, one of the main difficulties is the fact that these questions refer to extreme situations, where the standard modelling approaches do not necessarily apply and where the conditions under which events will unfold are largely unknown. Are we assuming CCPs should underwrite risk without limit? And if not, where is the limit? Would alternative financial resources for CCP resolution be an option? When instead of risk we face uncertainty, are prescriptive approaches effective?
Chair
Speakers
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09:15 - 10:30:
Paper Presentation: What can we expect from a good margin model? Some insights from whole distribution tests of initial margin models
This paper presents an approach to testing initial margin models based on their predictions of the whole future distribution of returns of the portfolio. This ‘whole distribution’ approach to testing is substantially more powerful than the usual ‘back-testing’ approach which is based on returns in excess of margin estimates, and it provides a methodology for calibrating margin models. The results suggest that margin models can meet regulatory requirements, but that they do not, for the examples studied, accurately model the far tails of the return distribution. Different models which are acceptably accurate are shown to provide substantially different margin estimates in periods of high stress. The policy implications of these findings are discussed.
Author: David Murphy (London School of Economics and Political Science)
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10:30 - 10:45:
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10:45 - 11:30:
Paper Presentation: Mitigating margin procyclicality – effectiveness of APC measures during the COVID-19 stress
This is an analysis of the effectiveness of APC measures implemented by CCPs on clearing member and client margins using daily portfolio-level data collected under EMIR. Using simulations, the authors show a strong sensitivity of APC measure effectiveness to the details of calibration and to the type of portfolios on which it is applied. They show that models that implement margin floors displayed diminished margin growth during the COVID-19 stress and conclude with a policy discussion on the benefits of margin model transparency and advocate for the provision of additional regulatory guidance for the implementation of APC measures.
Author: Argyris Kahros and Marco Weissler (European Central Bank)
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11:30 - 12:00:
Academic Keynote Speech: Facing Forward: Open Issues and Old Questions in CCP Governance
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12:00 - 13:00:
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Session 5: The system-wide view
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13:00 - 14:00:
Panel: CCPs, derivatives, and climate risk
While climate risk can naturally be incorporated into the enterprise-wide risk management of financial entities, including CCPs, its impact on the CCPs’ management of counterparty credit risk – their main task - is perhaps less straightforward. CCPs should remain alert to any new potential scenarios that could have an impact on the risk of the portfolios they manage, including those scenarios that can constitute an extreme but plausible stress event, being climate-related or not. But while climate risk crystallizes in the long term at a macro level, CCPs focus on managing short-term exposures (spanning just a few days), informed by the nature of the products they clear. To what extent climate risks relate to the CCP’s risk management models and strategies? What specific aspects, if any, are particularly relevant or different for CCPs? Which derivative products could be more affected?
Chair
Speakers
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14:00 - 14:45:
Paper Presentation: Unlocking ESG premium from options
The paper finds that option expensiveness, as measured by implied volatility, is higher for low-ESG stocks, showing that investors pay a premium in the option market to hedge ESG-related uncertainty. Using delta-hedged option returns, the authors estimate this ESG premium and show that all three components of ESG contribute to option pricing. The effect of ESG performance heightened after the announcement of Paris Agreement, and has done so after speeches of Greta Thunberg, and in the aftermath of Me-Too movement. The influence of ESG on option premia is stronger for firms that are closer to end-consumers, facing severe product competition, with higher investor ESG awareness, and without corporate hedging activity.
Authors: Jie (Jay) Cao (The Chinese University of Hong Kong), Amit Goyal (University of Lausanne and Swiss Finance Institute), Xintong (Eunice) Zhan (The Chinese University of Hong Kong), and Weiming (Elaine) Zhang (The Chinese University of Hong Kong)
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14:45 - 15:15:
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15:15 - 16:00:
Paper Presentation: Construction of hypothetical scenarios for CCP stress tests using vine copula
Parametric models for construction of hypothetical stress scenarios involves use of expert judgement in parameter setting and substantial model assumptions. The authors propose a non-parametric method for generation and/or validation of hypothetical stress scenarios using vine copula. This method is superior because it allows for modelling individual marginal distributions of multiple risk factors independent of joint distribution structures. The method also allows for capturing non-linear tail dependence in addition to capturing fat tail and it is also scalable to large number of risk factors.
Author: Aniket Bhanu (NSE Clearing) and Vineet Virmani (Indian Institute of Management Ahmedabad)
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16:00 - 17:00:
Panel: CCPs contribution to mitigating systemic risk
CCPs contribute to financial stability firstly by ensuring the continuity of the contracts through a voluntary rules-based mechanism that provides transparency and confidence to the markets. In addition, CCPs facilitate multilateral netting thereby reducing overall exposures and improving market liquidity. In their role of managing counterparty credit risk, CCPs ensure that market participant risk exposure is commensurate with their credit quality and capital strength. However, CCPs were not intended to manage or bear the totality of risks in the financial markets’ ecosystem (not least among cleared and non-cleared markets). How to strike the right balance to align the incentives of market participants with the social objective of financial stability, without impairing the objective and benefits of central clearing? Do new clearing models change the calculus? How can we get a better picture of risk across the system as a whole, rather than purely within the centrally cleared sector?
Moderator
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17:00 - 17:30:
Derivatives Regulation: Rules and Reasoning from Lehman to Covid
Nandini Sukumar in conversation with Dr David Murphy about his new book
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17:30 - 17:40:
Concluding Remarks and Announcing the Call for Papers WFE’s Clearing Conference 2023
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17:45 - 20:00:
CCP Working Group Meeting - Wed 01 Jun
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09:00 - 15:00:
WFE CCP Working Group Meeting
For CCPWG Members onlyChair
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