By Peter Fredriksson – Chairman and Co-Founder of Baymarkets
This is a particularly crucial time in the development of the CCP industry, with a full decade having now passed since we began implementing a wide variety of post-crisis reforms. It therefore seems pertinent to take stock of how much progress has actually been made and to evaluate what more needs to be done. With this notable anniversary in mind, I was delighted to attend the 36th IOMA: The World Federation of Exchanges (WFE) Clearing & Derivatives Conference which brought together global leaders from across the exchange and post-trade community to discuss where progress still needs to be made and what the next ten years are likely to hold in store.
Held in Mumbai and hosted by the National Stock Exchange of India (NSE), the two-day conference began with a discussion of an extensive report which has been jointly published by the WFE and Oliver Wyman. Entitled ‘The Future of Clearing’, the paper examines in extensive detail the post-crisis developments that have brought us to where we are today. It looks at the wider variety of reforms introduced as a result of the 2008 financial crisis in a bid to strengthen the resilience of the capital markets and the role that clearing can play in preventing a repeat of those events. For CCPs, perhaps the most important of these changes was the introduction of IOSCO’s Principles for Financial Market Infrastructures (PFMI), particularly in relation to their impact on OTC trading. The paper also highlights key areas of concern, including the design of some of the bank capital requirements, which has negatively impacted central clearing and clearing volumes. This in turn is threatening to undermine the reform’s original objectives.
The report concludes with an assessment of the opportunities for the clearing industry, which was also the theme of the conference’s first panel discussion. As we prepare for the next wave of regulation, the panellists agreed that risk management needed to remain a priority for CCPs. Expanding the scope and reach of CCP offerings was also seen to be vital, such as enhanced collateral efficiencies, and the need to focus on delivering services for the crypto market as well. It was argued that now is also the time to urgently review the impact of current membership models. In particular, the concentration of clearing services within members, especially in the OTC and commodities markets, is having a negative impact and may also be preventing the industry from fully realising the G20 agenda.
The issues raised by current membership models were also revisited in later discussions as they remain the main barrier to entry for many. In addition, the authorities are broadening the debate on resilience to include additional considerations such as cyber issues, operational and liquidity risk and the need for better recovery and resolution planning within CCPs. A further notable recommendation was for clearing houses to begin operating a consolidated margin pool for multiple products.
In terms of expanding the scope of CCPs, panellists examined the need to foster the development of derivatives and clearing in emerging markets and to merge the infrastructure of various markets to achieve economies of scale. Many improvements in the OTC derivatives market, for example, are in great part due to the increased use of central clearing and the enhanced collateralisation of transactions. Cross jurisdiction challenges were also high on everyone’s agenda, with continued uncertainty as to how Brexit will impact CCP models. The threat to clearing houses from a member default of course remains another key concern and has highlighted the role of initial margin in ensuring CCPs have adequate resources to recover from such an event.
Yet despite the ongoing challenges facing the industry, my main takeaway from the conference was the sheer number of opportunities and new initiatives that are already underway. CCPs can now offer a greater range of services than ever before, such as collateral management and expanding into data sales. Regulatory changes are also likely to continue to increase clearing memberships and the number of asset classes and products which are handled by CCPs continues to broaden. For example, Malta exchange has launched security tokens and we expect to see tokenised corporate bonds and repos is the future. India is also introducing interoperability for CCPs in June, which should help to further reduce clearing costs for members. In all, I was encouraged to see that the role of CCPs is considered to be of vital importance to financial stability, which in turn is the basis for economic growth, and look forward to attending the next informative IOMA event in 2020.