Investment Operations

CCPs Demonstrate Resilience in Times of Crisis

Today, the CCP12 – The Global Association of Central Counterparties – has published a paper that emphasizes what the group says is “the exceptional handling of crises by CCPs despite unprecedented volatility, record clearing volumes and long-term implementation of Business Continuity Plans.”

Financial markets react to all kinds of events, which may include those that are politically, economically or environmentally driven. In times of crises, the impact is amplified and often felt across large parts of the global financial markets and the global economy, and this was observed during the 2020 COVID-19 Crisis (“CC”). Due to the uncertainty in the markets, volatility spiked to extraordinary levels – stocks, interest rates and oil prices fell and credit spreads widened. During this unprecedented time of market volatility, financial market participants needed the ability to effectively manage their risks, and, according to this paper, the centrally cleared markets have proven, once again, to be a safe haven for market participants during this period of extreme stress.

“The CCP12 paper “CCPs again demonstrate resilience in times of crisis” conveys how effectively CCPs have performed during the recent period of historical volatility across multiple asset classes; and while operating in a BCP mode.” said Kevin McClear, President of ICE Clear U.S. and Chairman of CCP12.

In particular, Central Counterparties (“CCPs”) provided market participants with an efficient and effective forum to manage their risks, whilst providing transparency and operational reliability. This was despite the significant challenges driven by the operational responses to coronavirus, as well as the extraordinary levels of volatility. CCPs observed significant increases in payments due to the observed market moves, but were able to process these payments in a timely manner.

Due to the extreme levels of volatility observed over the course of the CC most CCPs were required to issue additional margin calls. CCPs always aim for a balance between achieving appropriate margin coverage and mitigating procyclical risk. In striking this balance, CCPs must consider having appropriate risk-based margin coverage,  while also avoiding unnecessary procyclical changes to margin requirements relative to the observed levels of market volatility. Ultimately, states the paper, CCPs proved once again, as they have in past crises, that they provide safety and stability to the markets that they serve, particularly during periods of stress.

“CCPs proved again, that they are a critical and well-functioning component of financial markets, providing financial markets with resilience, safety and stability by offering market participants an effective and efficient place to manage their risks.” said Marcus Zickwolff, CEO of CCP12.

To read the full report, please click here.