The Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee held a public meeting on the July 21st to discuss topics including the impact of the pandemic on derivatives markets, the current status of the transition away from the Libor benchmark, and an upcoming report on climate-related financial risks with representatives of clearinghouses, exchanges and buy-side firms.
The CCP perspective on COVID’s impact to margin, processing and operational health in cleared derivatives was represented by Lee Betsill, Managing Director and Chief Risk Officer at CME. Betsill defended how clearinghouses successfully implemented Business Continuity Plans enabling full or partial remote work and demonstrated their operational resilience during the pandemic amid extraordinary volatility volumes without experiencing significant disruptions. Regarding margin methodologies, Betsill exposed that “the size of the overall IM increases relative to extraordinary volatility observed, including as demonstrated by the VM flows, were relatively muted, […] suggesting that the anti-procyclical characteristics of CCP margin models worked accordingly while maintaining appropriate coverage.”
Thomas Wipf, Vice Chairman of institutional securities at Morgan Stanley, led the discussion about the Interest Rate benchmark reform and examined the progress made towards an orderly global transition away from LIBOR by the end of 2021. Wipf recapitulated the developments in LIBOR transition since December and some of the current concerns, including:
- Gaps in understanding among market participants about the precise timing of discounting transition milestones, as well as dynamics of CME and LCH auction processes;
- Potential disruptions that may be caused by an auction where discounting risk swaps cannot be liquidated despite the end user’s election to offload these swaps;
- A lack of consistency between CCP-mandated dates by which market participants must finalize elections to offload discounting risk swap compensation; and
- Major differences between CCP plans that could create significant operational and market risk for participants over the discounting transition period.
Key considerations offered to help mitigate these concerns included risk mitigation strategies such as trade compression and re-couponing by market participants, better industry education and proactive engagement by all stakeholders.
For more information: