On 19 May 2022, Christina Segal-Knowles gave a speech at the European Association of CCP Clearing Houses (EACH) in Brussels. The speech addressed central clearing, and the lessons that can be learnt from recent episodes of market stress in order to make central clearing stronger. The speech highlights how, going forward, cross border cooperation is paramount for ensuring that central counterparties (CCPs) can provide a seamless network of functions.
The following three lessons stem from the market stresses resulting from the COVID-19 pandemic and the Russian invasion of Ukraine:
- Tackle the side effects without sacrificing the cure: CCPs should ensure that initial margin is sufficiently conservative in good times, reducing the need for wild swings once a crisis hits. CCPs should also ensure that participants have sufficient information, data and tools to anticipate what margin calls might look like under stress and how pro-cyclical they may be. The ability of non-banks to insure against severe liquidity stress also needs addressing.
- The past is not always a good guide to the future: Given that markets can behave in unexpected ways, CCPs need to design stress scenarios based on implausible events as well as plausible ones.
- Ignore structural factors at your peril: Understanding underlying market structures matters. CCPs who are in the risk management business can help by understanding and managing the markets in which they operate. The Principles for Financial Market Infrastructures (FMI) say that “An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.” That means understanding what is going on with clients. Communication between exchanges and CCPs; and better sight of over-the-counter markets by exchanges and CCPs will be important here.