Report: The Future of Clearing, from the World Federation of Exchanges and Oliver Wyman

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:

1. How we got to where we are, including a concise overview of CCP core functions and systemic role;
2. Taking stock: reviewing what has been achieved so far; and
3. Looking ahead: where will the focus be over the next five to 10 years?

KEY HIGHLIGHTS

• 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:

1. 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;
2. 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
3. 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 counterparty 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.

You can read the full report here.