Central Clearing Design

If you had to design a central clearinghouse for transactions in financial markets, what size of guarantees should be offered? And what percentage fees should be charged? “The central clearing modifies the market,” said Andreea Minca, “because the old network structure [of one-to-one] is changing to a new ‘star’ structure.” Minca is Assistant Professor at the School of Operations Research and Information Engineering at Cornell University and was the sole presenter at the December 6, 2016, webinar on systemic risk and central clearing design to members of the Global Association of Risk Professionals (GARP). Under new US legislation, all over-the-counter […]

Swaps, Before & After

“Historically, there were few, if any, regulatory requirements on swaps … it was effectively an unsecured loan,” said James Schwartz, Of Counsel at Morrison & Foerster. He was the fourth and final presenter at the Derivatives Regulatory Update webinar held on March 31, 2015, sponsored by the Global Association of Risk Professionals. Prior to the Dodd-Frank Act, swaps dealers were self-regulated through the trade association International Swaps and Derivatives Association (ISDA). “It was typical for the two parties to accept a certain amount of uncollateralized exposure to each other in the form of a threshold that varied according to their […]

Update on Central Clearing

One of the goals of the Dodd-Frank Act is to mitigate systemic financial risk by establishing a central clearinghouse for derivatives. But how close is the financial community toward achieving that goal? “Many swaps were not collateralized prior to Dodd-Frank,” said Julian E. Hammar, Of Counsel at Morrison & Foerster. Hammar was the third of four presenters at the Derivatives Regulatory Update webinar held on March 31, 2015, sponsored by the Global Association of Risk Professionals. Clearing swaps mitigates risk not just through requiring margin collateral (and thereby reducing) credit risk. It also imposes an “operational discipline” Hammar said, with […]

“Skin in the Game”

What safeguards should be in place, to minimize the risks posed by financial derivatives? CME Group requires that its Clearing Members support the risk of their portfolios by “putting some skin in the game,” said Jason Silverstein, Executive Director and Associate General Counsel of CME Group, a body that includes the Chicago Mercantile Exchange and the New York Mercantile Exchange among its subsidiaries. “It’s a story of balancing incentives, in order to stabilize losses. Our belief is that it should be significant and risk-based.” Silverstein was the second of four presenters at a webinar titled Derivatives Regulatory Update held on […]

Towards Reducing Systemic Risk

Have the risks posed by financial derivatives in the context of the current, still evolving, regulatory landscape been properly addressed? Michael Piracci, Director of PCB Compliance at Barclays, said that nowadays he has “a lot of interactions day-to-day with the clearinghouse” and overall, “it makes me feel a little more comfortable there’s a good system in place.” Piracci was the first of four presenters at a webinar titled Derivatives Regulatory Update held on March 31, 2015, sponsored by the Global Association of Risk Professionals. Piracci began by explaining the role of the Central Counterparty (CCP) and the Futures Commission Merchants […]

OTC Market 2. A New Paradigm

“How will errors be handled? That’s the biggest area of discussion with SEFs,” said Bis Chatterjee, Global Head of E-Trading and New Business Development, Credit Markets, at Citigroup Global. SEF refers to a Swap Execution Facility. He was the second of two speakers at a GARP-sponsored webinar, about changes to the over-the-counter (OTC) credit default swaps (CDS) market, held on April 15, 2014. “The market had less time than it would have liked to review various rules of the new guideline,” Chatterjee said, referring to the flurry of market response to the new regulations brought in by the US Commodities Futures […]

Basel III and Beyond: Part 2. Real-Time Counterparty Risk

“Implementing the CVA is a journey with great expectations,” said James Zante, Product Manager for Integrated Market and Credit Risk at IBM Risk Analytics. He was the second of two speakers on the topic of counterparty risk assessment. He presented a real-life case to a GARP webinar audience on June 27, 2013. CVA refers to a new capital charge, the credit valuation adjustment brought in as part of the Basel III regulations. The CVA plays an important role in the optimization of credit capital, said Zante. At one extreme, the trades cleared through the clearinghouse may be considered “risk free,” […]

Evolution of the OTC Swaps Markets. Part 2: Lessons Learned

The scramble to meet the Phase 1 deadline of new regulations on swaps “was a significant learning experience,” said Bis Chatterjee, Global Head of E-Trading, Credit Markets at Citi. He was the second speaker in a webinar panel organized by the Global Association of Risk Professionals (GARP) on May 14, 2013. The deadline that came into effect March 11, 2013 pertained to the Dodd-Frank Act governing over-the-counter (OTC) swaps. (Two more phases will follow; see Part 1 for details.) There were challenges first of all, Chatterjee said, in the self-identification of market participants in Phase 1. Second, even if you […]

Libor Fallout: Part 1. The Stomach Ache During the Heart Attack

The emerging scandal around the setting of LIBOR (the London Interbank Offered Rate) prompted GARP (the Global Association of Risk Professionals) to convene a panel of three experts to inform its members about the background and implications of the LIBOR fraud. On December 20, 2012, the first presenter at the GARP webinar was Amy Poster, Strategic Adviser at Iron Harbor Capital Management. She described the background and key facts. Calling it the “$800 trillion scandal,” Poster said that these events touched many derivatives markets, various consumer debt instruments such as credit card loans, and 100 percent of the sub-prime market. […]