CCP Global Annual Markets Review

ASX

Forecasting Peak Trade Volume Using a Hybrid Long-Term Trend and Jump Model

Securities transacted on Australian cash equity markets are settled via the Clearing House Electronic Sub-register System (“CHESS”), which is operated by the Australian Securities Exchange (“ASX”). CHESS provides several critical functions, including clearing and delivery versus payment (“DvP”) settlement, an electronic sub-register for shares in listed companies and other securities, as well as other post trade services critical to the orderly functioning of the market.

In November 2023, ASX announced its decision to partner with global technology provider TATA Consultancy Services to design and deliver a new CHESS. The indicative time-frame for the delivery of the full system is 2028-2029, subject to a number of factors including stakeholder consultation and detailed planning. Until then, ASX will continue to invest in the capacity and resilience of the existing CHESS, to ensure that it can reliably process current and future trade volumes, including during periods of elevated trade activity such as was seen during the onset of the COVID-19 pandemic.

To assist with future capacity planning, the Securities and Payments team at ASX required a reliable forecast of future peak daily trade volume, extending out to 10 years. This paper describes a hybrid forecasting model which was developed by ASX’s Risk Quantification Team for this purpose. The model is based on a combination of time-series modelling for long-term trade volume growth, and a jump process to model infrequent but significant volume spikes. The model has been calibrated using 16 years of historical daily trade volume data, and evaluated using in-sample (model-fit) and out-of-sample (backtesting) metrics, and is updated on a monthly basis.

COMDER/CRCC

How the G20 Derivatives Markets Reform Boosted the International Demand for Chilean and Colombian Derivatives

For more than 100 years, counterparty credit risk (“CCR”) management, which, among some other critical factors such as due diligence, monitoring, etc., also involves posting collateral in the form of margin, has been the key to the success of the development of the futures and options markets, or what is called listed derivatives products. However, collateral posting to mitigate CCR is relatively new in OTC derivatives products.

One of the most important consequences of the implementation of the G20 derivatives reform, in the aftermath of the GFC, was the way that large banks manage CCR for OTC derivatives, mainly because of the introduction of mandatory clearing for a large portion of derivatives products and uncleared margin rules (“UMR”). Hence, banks moved from managing CCR by means of credit lines to their clients and counterparties, to managing CCR by posting collateral either to their direct counterparties or to a CCP.

Derivatives markets are relatively new in Chile and Colombia and their development was led by local banks since the early nineties in the form of OTC derivatives. However, listed derivatives have not had the same traction and their development still lags that of OTC derivatives. This is the reason why local banks managed CCR exposure by granting credit lines to their counterparties.

Local banks in Chile and Colombia have a long history of trading with global foreign banks, particularly after the implementation of the G20 derivatives reform. Local banks faced the obligation to send derivatives to CCPs or sign Credit Support Annexes (“CSAs”) for IM and VM. Since neither Colombia nor Chile belong to the G20, no mandatory clearing or UMR was imposed on them while the G20 countries were implementing such reforms. In practical terms, local banks faced an extraterritorial regulatory situation that forced them to change the way they were used to managing CCR.

This case study will show the positive impact of the G20 derivatives market reform in Chile and Colombia. We will see how the reforms boosted volumes of derivatives transactions between local banks and foreign counterparties, which in the case of interest rate derivatives reached levels never seen before, even amid central banks actively fighting the consequences of the COVID-19 crisis, and the related spike in inflation.

EUREX CLEARING

Initial Margin Cyclicality: Measurement and Transparency

In the complex landscape of financial markets, the concept of Initial Margin (“IM”) holds a pivotal role, especially in the context of derivatives trading and risk management. IM refers to the collateral required to be posted by a party in a financial transaction to cover potential future exposure to its counterparty arising from market movements. The cyclicality of IM, characterized by its fluctuation in response to changes in market volatility and other factors, poses significant challenges and opportunities for market participants. This article provides Eurex’s views on the nuances of IM cyclicality, its measurement, and the imperative of transparency in its management. A few potential approaches to enhancing CCP transparency of the reactiveness of their margin models are presented alongside the challenges that might arise. The article concludes with Eurex’s suggestions for tangible steps CCPs and regulators could take in an effort to boost market participant liquidity preparedness.

HKEX/SHCH 

Pioneering OTC Derivatives CCP Interoperability — HKEX and SHCH Clearing Link Under Swap Connect

Swap Connect, launched on 15 May 2023, is the world’s first derivatives mutual market access program. Connecting Mainland China and Hong Kong, it allows international investors for the first time to trade and clear onshore Renminbi (“RMB”) IRS while remaining offshore. This is achieved through a ground-breaking collaboration between HKEX’s clearing subsidiary OTC Clear and SHCH, bridging the derivatives clearing infrastructure across the border.

Swap Connect has implemented an innovative CCP interoperable model to reduce the complexity for onshore and offshore investors in multiple processes without having to modify their current trading and settlement practices. For clearing and settlement, a new Clearing Link has been established which enables OTC Clear and SHCH to jointly provide clearing and settlement services, with OTC Clear providing central clearing services for Hong Kong and international investors, while SHCH provides central clearing services for investors in Mainland China. For risk management, the introduction of inter-CCP margin pioneered by SHCH and OTC Clear provides sufficient coverage in a CCP default scenario. Clear default waterfall procedures in case of a CM default are well-defined; they do not envisage the use of the inter-CCP margin, and the default fund of the other interoperable CCP.

Swap Connect marks a significant milestone in the opening up of China’s financial markets. It will help further strengthen the interconnection of financial markets between Hong Kong and Mainland China and create new investment opportunities for international investors.

JSCC

First JSCC DLT-Based Production System – Launched for Physical Settlement of Commodity Futures

While the Japanese financial markets have always been of significant global importance, the listed derivatives market has particularly attracted a growing share of foreign investors recently. However, the global settlements infrastructure has not effectively reduced the underlying operational inefficiencies and its associated risks.

With the many recent technological innovations, JSCC sees an opportunity for major participants in our global financial markets to assess these operational inefficiencies and collaboratively transform our outdated ecosystems. This should be built upon a foundation of standard business processes and can be effectively delivered using robust and secure open-source software tools.

Particularly, the tokenization of assets can offer immediate benefits in many areas of today’s post-trade operational and settlement processes. In a small first step, JSCC launched its first DLT-based production system in January 2023 with the view to improve operational efficiencies using tokens in the physical settlement of rubber (“RSS”) futures. JSCC intends to influence and align with global standards to further benefit upon expanded token-based services. This case study summarizes our journey.

KDPW_CCP

Orderly Handling of the Unexpected – Recovery Planning

Entry into force of CCP recovery and resolution regulation in the EU enforced the EU CCPs to prepare their recovery plans till 12^th February 2022. As the requirements regarding content of CCP’s recovery plan are based on provisions regulating banking recovery, preparing such a plan poses a significant challenge for CCPs that do not have a banking license and for the local ones, as the provisions of regulation were designed mostly for the biggest players being systemically important across the EU.

KDPW_CCP is a local CCP operating on the Polish market. KDPW_CCP is the only CCP serving the Warsaw Stock Exchange (“WSE”) by clearing in equity segment and the only CCP clearing OTC derivatives on the Polish market. We are then the primary choice of Polish clearing participants. 

This case study provides an overview regarding challenges that KDPW_CCP has faced in preparing the recovery plan and the adopted solutions.