Investment Operations

WFE Conference Highlights Clearing Infrastructure Challenges

This week the World Federation of Exchanges has convened a record number of stakeholders at its annual clearing conference, WFEClear. Industry leaders from central clearing houses, exchanges, regulators and policymakers met at the SIX-BME headquarters, the Palacio de la Bolsa de Madrid, to share original research and exchange ideas on the opportunities and challenges for the future of central and bilateral clearing. 

Day one consisted of a capacity building day, with a number of workshops on fundamental aspects of clearing. The technical assistance programme provides a foundational education for anyone interested in CCPs and the concepts of clearing and is taught by leading practitioners in the industry. 

The following two days of the conference featured academic paper presentations, panels, fireside chats and keynote speeches on issues such as the benefits, risks, and implications of the integration of CCPs, their role in the smooth functioning of financial markets and the legislative environments in which they operate. A selection of academic papers chosen by a Scientific Committee, comprising academics, regulators and industry experts, was presented and discussed. The papers covered relevant industry issues such as procyclicality measurement, the role that DLT technology can play in the future of the industry or the increase in liquidity that can be generated by shortening the settlement cycle. 

Key highlights from Day 1 include:

–    BME CEO, Javier Hernani, analysed current sector trends and focused his opening remarks on the crucial role of clearing in financial markets. “As an industry, we face profound challenges, but Central Counterparties have made the world a safer place, as demonstrated in the 2008 crisis or, more recently, in the pandemic,” he said. He also highlighted SIX’s commitment to being a leader in digital assets as, “regulated markets offer a higher level of security and trust”. Hernani noted that the revision of the European Market Infrastructure Regulation (EMIR) will require financial institutions to open active accounts in Central Counterparty Clearing Houses in the EU, which is an opportunity for SIX as it is licensed in the European Union for IRS, through its Spanish clearing house.

–    Froukelien Wendt, Director for CCPs, Independent Member of the CCP Supervisory Committee, European Securities and Markets Authority (ESMA) delivered a keynote address outlining the preconditions of setting up a CCP. The panel which followed discussed how a CCP should be set up to align the incentives of market participants and provide knock on benefits to the wider financial system such as multi-lateral netting. 

–    CFTC Commissioner Summer Mersinger gave a keynote address in which she expressed hope that the Basel III Endgame proposal changes expected this year avoid “imposing a government-mandated solution that is contrary to the interests of those in the derivatives markets that will bear its consequences.” Commissioner Mersinger highlighted that whilst bank capital requirements are critical to our collective efforts to prevent another financial crisis, addressing capital requirements should not undercut the important role central clearing plays in reducing systemic risk. 

Key highlights from Day 2 include:

–    Dr Dermot Turing, Visiting Fellow, Kellogg College, Oxford said in his keynote speech, “A futile battle is still going on between the EU and the UK about where euro-denominated financial products should be cleared. The fight is not about the interests of the industry or consumers, and none of the reasons given by the authorities makes a great deal of sense. There are far more important things to worry about in the post-trade space, including the availability of collateral, who picks up the tab when things go wrong, and the shrinking pool of clearing members.”

–    The pioneering paper on procyclicality co-authored by the WFE’s Head of Research, Pedro Gurrola Perez was presented. The paper puts forward an impulse response function (IRF) approach to measuring initial margin responsiveness. This method allows the comparison of CCP models at different levels of volatility, with independence of particular scenarios, and with a forward-looking perspective, avoiding the limitations that affect other measures, including the one proposed by BCBS-CPMI-IOSCO joint working group on margin (JWGM).

–    There were two panels related to the BCBS-CPMI-IOSCO JWGM consultation on initial margin responsiveness and transparency. One of these looked at the transparency aspect of the JWGM consultation and how CCPs communicate margin calls to their customers. Speakers gave examples of the efforts they’ve engaged in to improve the predictability and transparency of margins including standardised public quantitative and qualitative disclosures.

–    Aniket Bhanu, Vice President, NSE Clearing, National Stock Exchange of India talked through his academic paper on India’s implementation of the T+1 settlement cycle and the lessons learnt which may be useful for other markets. Mr Bhanu noted that shortened settlement cycles also lower the funding liquidity demand with lower margin requirements, which could unlock liquidity in less liquid stocks.

–    Carol Alexander, Professor of Finance at the University of Sussex, delivered a keynote on the importance of independent CCPs for unregulated crypto platforms that use their own system of automatic liquidations of clients’ losing positions, passing them onto their insurance fund which may trade in a strongly pro-cyclical manner. Professor Alexander said that clients are faced with real-time management of rapidly changing collateral requirements, based on poorly constructed MtM prices, which can make their entire portfolio bankrupt, without notice from the platform. Professor Alexander also highlighted that the deliberate under-reporting of liquidations, and the removal of insurance fund trades from historical data, combine to give a false picture of the actual risks of trading. A deep dive into the client liquidations and insurance fund trades around the API outage on Binance on 19 May 2021 was used as an example.

Key takeaways from Day 3 include:

–    One panel discussed the impacts of Basel III proposals, which would increase the capital requirements for large US banks, consolidate the market for intermediaries and therefore reduce access to clearing for end users. The panellists suggested the proposals could counteract the G20 clearing mandate and decrease the use of central clearing because of higher costs that may be passed on to end-users (who may be forced to limit their activity or leave the market) or because of reduced capacity offered by the remaining clearing members in the market.

–    Another panel looked at the learnings from the ION Group hacking in 2023. The panellists discussed best practices for CCPs as they migrate to more cloud-based services and technology, including putting in place third party risk management procedures and having greater dialogue with customers. The panel also discussed why concerns about cloud service providers are overdone.

–    The WFE announced the host and dates for WFEClear 2025: Korea Exchange (KRX) in Seoul, 1st-3rd April 2025.