THE WORLD FEDERATION OF EXCHANGES & OLIVER WYMAN LAUNCH ‘THE FUTURE OF CLEARING’ REPORT
by Shrutee K/DNS
Mumbai, Tuesday 2 April 2019 – The World Federation of Exchanges (“WFE”), the global industry group for exchanges and central counterparties (CCPs), today published a joint report with Oliver Wyman examining the post-crisis developments that have shaped the current clearing landscape, along with forward-looking recommendations on how to build the CCP of the future.
The report – entitled The Future of Clearing – looks at three areas:
How we got to where we are, including a concise overview of CCP core functions and systemic role;
Taking stock: reviewing what has been achieved so far; and
Looking ahead: where will the focus be over the next five to 10 years?
CCPs far pre-date the financial crisis, and were providing effective risk management services across multiple asset classes since well before the crisis.
The performance of CCPs and centrally-cleared markets through the crisis, and the role of CCPs in managing counterparty credit risk and enhancing transparency, led G20 leaders, to push for more central clearing of OTC derivatives.
Other post-crisis reforms aimed at strengthening the international financial regulatory system include enhanced bank capital requirements and introducing measures to improve the resilience of systemically important financial institutions.
There is broad consensus that a significant amount of progress has been made both in implementing the G20 reforms, and achieving the reform objectives:
There have been sizeable increases in OTC clearing activity, with commensurate increases in the number of CCPs offering OTC clearing services.
CCPs have continued to invest in their risk management and core processes while bolstering financial resources.
There is recognition, however, that the reforms are not yet fully and consistently implemented, with a high degree of variation in the use of central clearing across G20 jurisdictions and asset classes. In addition, in some instances the interaction of reform can potentially undermine the objectives, shown most clearly in the treatment of client margin in the leverage ratio (see the WFE’s position on this issue). Supervisors need to focus on ensuring implementation of agreed principles, avoiding unnecessary market fragmentation.
The report concludes with an assessment of the opportunities for the clearing industry, along with an examination of three future areas of focus:
Rolling out the next wave of risk management innovation: management of operational risk (including cyber resilience), credit, liquidity and market risks as well as recovery & resolution planning are likely to remain high on the agenda for CCPs across the globe;
Addressing barriers to incentives to clear: CCPs will continue to expand the range of products made available for clearing, as well as identifying ways to facilitate stakeholder access to clearing services, such as the possibility of expanding services to clients directly; and
Expanding the scope and reach of CCP roles/offerings: initiatives could include the establishment of regional CCP offerings; delivering enhanced collateral efficiencies; and other adjacent services such as trade data services, bilateral OTC solutions, and technology solutions/apps.
Nandini Sukumar, Chief Executive Officer, WFE said: “As the global regulatory approach gradually shifts from the implementation of the post-crisis reforms towards promoting market development and growth, we find ourselves at a critical moment in time. This is the moment when clearing industry stakeholders, including supervisors, CCPs, and clearing members, must work together to ensure any outstanding areas of reform are properly implemented. This will avoid undermining the finely calibrated and complex incentive structures at play in the central clearing universe, structures that are instrumental in supporting a stable global capital markets system.”
Daniela Peterhoff, Global Head of Market Infrastructure, Oliver Wyman added: “Significant progress has been made across the industry in implementing various post-crisis reforms. However, in certain areas these reforms have not been fully or consistently implemented. As we look ahead, supervisors need to focus on ensuring continued implementation of agreed principles for the clearing ecosystem and avoiding unnecessary market fragmentation. In addition, the industry must plan for other challenges including the next regulatory wave, an evolving risk environment, technology advancements and market structure evolution.”
Today’s report draws on existing studies and quantitative assessments performed by industry bodies, as well as a proprietary survey completed by 20 respondents from across the WFE CCP member base. The WFE’s CCP Working Group (CCPWG) is comprised of 26 CCPs, represented by business leaders and regulatory/risk management experts, spanning the Americas, EMEA and Asia-Pacific. The role of the CCPWG is to share information on key developments related to central counter party clearing, prioritising and engaging on relevant policy issues while educating stakeholders about the role of clearing. The group has an in-person meeting each year at IOMA: WFE’s Clearing & Derivatives conference, and holds additional calls throughout the year to steer the WFE’s policy development.
The report is being launched today, one day before the start of the 36th IOMA: WFE's Clearing & Derivatives Conference in Mumbai, with host National Stock Exchange of India (NSE). The two-day conference focuses on post-trade issues and brings together the leaders of the world's futures & options markets with clearing houses.
About the World Federation of Exchanges (WFE): Established in 1961, the WFE is the global industry association for exchanges and clearing houses. Headquartered in London, it represents over 200 market infrastructure providers, including standalone CCPs that are not part of exchange groups. Of our members, 37% are in Asia-Pacific, 43% in EMEA and 20% in the Americas. WFE exchanges are home to nearly 48,000 listed companies, and the market capitalisation of these entities is over $70.2 trillion; around $95 trillion (EOB) in trading annually passes through the infrastructures WFE members safeguard (at end 2018).
The WFE is the definitive source for exchange-traded statistics, and publishes over 350 market data indicators. Its free statistics database stretches back more than 40 years, and provides information and insight into developments on global exchanges. The WFE works with standard-setters, policy makers, regulators and government organisations around the world to support and promote the development of fair, transparent, stable and efficient markets. The WFE shares regulatory authorities’ goals of ensuring the safety and soundness of the global financial system.
With extensive experience of developing and enforcing high standards of conduct, the WFE and its members support an orderly, secure, fair and transparent environment for investors; for companies that raise capital; and for all who deal with financial risk. We seek outcomes that maximise the common good, consumer confidence and economic growth. And we engage with policy makers and regulators in an open, collaborative way, reflecting the central, public role that exchanges and CCPs play in a globally integrated financial system.