CCP – National or Regional Risk Management Presented by Terry Gibson, Vice President, MillenniumIT at the 23 rd Meeting of the Africa & Middle East Depositories Association Tangiers - Thursday 5 th May 2016at the Innovation is Power
MillenniumIT Overview MillenniumIT - The Capital Markets Technology Partner Pre- to post-trade, multi-asset, ultra-low latency, agile capital market solutions Powers trading venues, banks, broker dealers, CSD’s, CCP’s, and industry regulators 800+ professionals specialising in state-of-the-art capital market technology Long-term partner for more than 40 financial institutions and financial services clients across the Americas, Europe, APAC and Africa Founded (1996) and head-quartered in Sri Lanka, acquired by London Stock Exchange Group in 2009 Pag Innovation is Power e 2
The London Stock Exchange Group Vision The most trusted expert in global financial markets MillenniumIT is part of the London Stock Exchange Group Innovation is Power
Clearing Houses The management (risk management, transaction monitoring, netting) of a transaction after the matching of a buy and sale trade and prior to the legal fulfillment of the respective obligation. It exists in two forms, either as a Central Counterparty (CCP), in which case the CCP becomes the counterparty of the original buyer and seller, or as a facilitator, in which case the original buyer and seller remain legal counterparties to each other. Innovation is Power
Moving to a CCP Bank A Bank A Bank B Bank E Bank B Bank E CCP Bank C Bank D Bank C Bank D Innovation is Power
Netting Efficiencies Bank A Gross Exposure $8m $6m Bank A CCP $10m $6m $8m $10m Bank B Bank C $8m $6m Bank A Bank B Bank C Net Exposure $2m $10m Bilateral Exposure CCP $2m $4m Bank B Bank C Innovation is Power
Benefits of Clearing / CCP Clearing House CCP • • Standardises and automates Novation - mitigates trade capture counterparty risk • • Maintains full post trade Reduces risk by netting anonymity exposures • • Provides a golden record of Increases certainty / builds each trade confidence • • Netting payments and Reduces impact of default settlements • Reduces balance sheet usage • Reduces operational risk • Increases capacity • Standardises and automates post trade processing Innovation is Power
World Federation of Exchanges “We believe that the expansion of clearing should be driven by the goal of financial stability and the necessity for improved risk management of an asset class .” “Our view is that the CCPs are the experts in managing the risks of their markets and CCPs should retain the flexibility to design and augment risk management tools to manage the risks brought by their participants“ CCP risk management tools have been repeatedly tested in a range of significant market stress events and despite their impressive track record, CCPs continue to refine and improve their resilience and ability to manage future market crises as the core function of their offering. Innovation is Power
Market Structures Stock Exchanges Clearing Houses Central Securities Depositories Innovation is Power
Multiple Market Structures (Examples) United States Europe – NSCC Asia – LCH Clearnet – HKEx – Six x-clear – SGX – CCP-A / CEE Innovation is Power
Consolidation Exchange A Exchange B Exchange C CCP Central Securities Depository Innovation is Power
UK CCPs (supervised by the Bank of England) Clearing house Main products cleared Number of members European Central European equities 24 Counterparty. (EuroCCP) Ltd CME Clearing Europe Ltd OTC commodity derivatives and 18 interest rate swaps ICE Clear Europe Ltd Energy and commodity contracts 69 and European credit default swap transactions LCH.Clearnet Ltd Clears a range of asset classes 170 including interest rate swaps, repos, equities and commodities LIFFE Administration and Exchange-traded interest rate 46 Management products, equities, index and (Outsourced) commodities derivatives Source: Bank of England (2013) Innovation is Power
Interoperability Exchange A CCP CCP Central Securities Depository Innovation is Power
Outsourcing Exchange A CCP (Operational) CCP (Legal) Risk Management Central Securities Depository Innovation is Power
Single Market Exchange A CCP Central Securities Depository Innovation is Power
What are your options? What are the key drivers? – Market – Regulatory – Participant Requirement - CCP Infrastructure to support Exchange and OTC Markets – Single platform – Potential for multiple legal entities – Risk management to match legal framework – Single regulatory framework Implementation Model – Consolidation – Interoperability – Outsourcing – Single Market Innovation is Power
CCP – National or Regional Risk Management Presented by Terry Gibson, Vice President, MillenniumIT at the 23 rd Meeting of the Africa & Middle East Depositories Association Tangiers - Thursday 5 th May 2016at the Innovation is Power
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