Case Studies
EUREX & CME
COMPARISON OF PORTING MECHANISMS IN EU AND US REGIMES
In the event of a Clearing Member default at a CCP, CCPs endeavor to transfer client positions and collateral from the defaulting Clearing Member to a non-defaulting Clearing Member, often referred to as “porting”. Porting enables the clients of the defaulting Clearing Member to maintain their exposures, ultimately providing them continuity of clearing services. However, we have observed that due to the differing regulatory frameworks (e.g., account segregation), which leads to different risk management practices at CCPs across jurisdictions, CCPs employ different approaches to porting. The two case studies that follow outline the differences in how porting may occur at Eurex Clearing, a European-based CCP, and CME Clearing, a U.S.-based CCP regulated by the CFTC.
COMDER
THE ORIGINS OF OTC TRADE REPOSITORIES AND THE BENEFITS OF THE NEW DERIVATIVES TRADE REPOSITORY IN CHILE; PERSONAL VIEW BY PABLO RODRIGUEZ, CRO, COMDER CCP
The opacity of the derivatives market was at the center of the stage of the GFC and fueled the panic seen during the worse days of the crisis. The American International Group (“AIG”) problems revealed during the weekend of the Lehman default demonstrated that not enough information was available about the risk exposures of large financial institutions to the derivatives instruments and other asset classes and, for that reason, regulators were ready to make the necessary changes to improve transparency of key financial firms and restore confidence in the market. The inclusion of OTC derivatives Trade Repositories (“TR”) was one of the big changes.
By centralizing the collection, storage, and dissemination of data, a TR can enhance the transparency of transaction information to relevant authorities and the public and, most importantly, they can promote financial stability.
Chilean regulators and the local financial community already benefited from the information provided by the local TR, especially to manage financial stability. Now, Chilean regulators can do stress tests of derivatives positions at the industry level, size collateral calls (especially in non-central bank money) and analyze the impact of extreme market volatility on non-bank institutions. In other words, Chilean regulators now have enough information about the risk exposures of large financial institutions in Chile.
ICE
THE IMPLEMENTATION OF IRM 2.0 AT ICUS
ICUS is a CFTC-registered DCO and provides clearing services for equity index, interest rates, and agricultural futures and options traded on ICE Futures U.S. which includes ICE’s benchmark MSCI® equity index futures.
ICUS traditionally used ICE Risk Model 1 (“IRM1”), a parametric model, to calculate IM requirements for all of its cleared products. However, ICUS transitioned its equity index and interest rate contracts from IRM1 to IRM2 in Q1 2022 following a 12-18 month implementation phase with regulators, CMs, vendors, and customers.
IRM2 is the result of a multi-year effort within ICE to design, develop, and implement a new portfolio-based model. Migrating to such a new risk model is a large undertaking for a CCP due to the review and approval process across relevant committees, external validators, CMs, and regulators. In addition, implementing a new risk model requires a long lead-time for CMs and vendors, to understand impact to cleared portfolios and schedule required development and testing to integrate to the new model.
This case study provides an overview of why ICUS chose to implement a new risk model and the process undertaken to migrate from IRM1 to IRM2 for the equity index and interest rate contracts.
NSE
SUCCESSFUL MIGRATION TO T+1 SETTLEMENT CYCLE IN INDIA
Between February 2022 and January 2023, CCPs in India successfully migrated the settlement cycle for cash equities from T+2 to T+1, being one of the very few markets to achieve T+1 settlement in equities. The implementation in India is particularly remarkable considering a multilaterally netted delivery-versus-payment (“DvP”) settlement in a fully interoperable framework. Trades can be executed on any exchange, margined, and settled through any CCP, and securities transferred in any CSDs, at the choice of the market participants.
Indian FMIs implemented the necessary procedural and system changes; and were able to settle the first trade under T+1 settlement within 6 months from regulatory enablement. The securities with least market cap were put under T+1 settlement to begin with, and subsequently, all securities were incrementally migrated under T+1 over the next 1 year in the order of their market capitalization. This approach helped successfully achieve a significant change within a short span of time and without any issues.
SHANGHAI CLEARING HOUSE
A STRESS TEST ON LEGAL RISK IN CCP DEFAULT MANAGEMENT – CHINA’S FIRST FINANCIAL MARKET TEST CASE
China has been committed to developing a modern legal framework for financial markets. China’s first financial court, established in Shanghai, initiated the Financial Markets Test Case Scheme. In October 2022, SHCH together with 4 CMs, jointly filed the application for a case test on major legal issues in CCP default management. The test case is the first financial market test case in China and the world’s first central clearing financial test case.
The case tests the legitimacy of SHCH’s default management rules and the rationality of the DMP. Upon completion of procedures including materials and evidence submission, information disclosure, third-parties consultation, and public trial, the Court published the judicial opinion of this test case. The judicial opinion held that SHCH default management rules met the requirements of validity and were legally binding from a judicial perspective. The Court also recognized the rationality of SHCH’s DMP.
The test case enhances the legal certainty of China’s FMIs’ rules and promotes compatibility with international financial market practices. Furthermore, it could serve as a useful reference for developing the legal framework for the cleared markets in global emerging economies.