The World Federation of Exchanges (WFE) is the global trade association that represents more than 200 Financial Market Infrastructures (FMIs), of which more than 100 are Central Counterparties (CCPs) and Central Securities Depositories (CSDs). Our members include exchange groups as well as standalone CCPs.
As the BCBS is aware, FMIs performed well through a range of significant market stress events including the 2008 global financial crisis and – more recently – in the global market volatility seen in August 2015 and at the beginning of 2016. Despite their impressive track record through stressed market conditions, FMIs continue to refine and improve their resilience and ability to manage future market crises as the core function of their offering.
The WFE welcomes well-designed international efforts to enhance and strengthen the resilience of the financial system post-crisis and supports further initiatives that encourage that objective. The WFE has previously publicly expressed support for initiatives such as the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs) and the FSB Key Attributes, and has sought to contribute to the international debate on these issues and others – including CCP risk management, recovery and resolution4. In doing so, its members have contributed significantly to the strengthening of the system via the implementation of many post-crisis initiatives, including efforts to encourage central clearing of derivatives as per the G-20 direction.
The WFE acknowledges and applauds the BCBS’ careful consideration of capital issues generally, and the Leverage Ratio specifically, and in particular recognises that it has listened to stakeholder representations around the design and effect of the rules (which were designed primarily to strengthen banking capital).
However, notwithstanding positive aspects within the most recent consultative document – particularly around the move to a revised SA-CCR method and movement on the liquidation period expected for centrally cleared derivatives – the WFE remains concerned around the effect of some elements of the proposal.
Particularly, we are concerned about the impact of not recognising the exposure-reducing effect of client initial margin on fair, orderly and stable markets – which appears contrary to wider efforts to encourage central clearing of derivatives. We believe that an inappropriate application of requirements on clearing members will have contagion effects in many other parts of the market for whom they clear, with no clear risk benefit. This in turn will have knock-on effects on the markets and services WFE members offer. Specifically it:
- Will force a market exit of some Clearing Members – which has already begun to happen – increasing concentration risk with the remaining entities;
- Will make more difficult for end users (funds, commodities) to use markets to hedge, with up to 60% having already been asked to pay higher fees;
- Will have a knock-on effect on non-Clearing Members in terms of capital – with fewer access points. This will ultimately affect the real economy through medium such as higher food & energy costs and pose greater difficulty in managing retirement funds in addition to other similar negative effects; and
- Will force more trading OTC and lower liquidity on transparent exchanges as it will become uneconomical for market makers and liquidity providers – who make up to 40% of traded volume – to continue contributing liquidity.