While readers in the EMEA and Americas regions slept, the World Federation of Exchanges kicked off its annual IOMA conference in Kuala Lumpur, Malaysia. For those unfamiliar with IOMA, it began in 1983 as the International Options Market Association, and in 2002 became affiliated with the WFE. The focus of the conference has drifted over the years and its sessions are now squarely centered on the post-trade derivatives space – clearing, settlement, blockchain, systemic risk, and the panel I am moderating, trade reporting.
Is a name-change imminent? At the opening reception, I could count on one (maybe two) hands the number of options practitioners in the room. The trouble is that the name still has tremendous brand equity, and walking away from a storied name with a storied past is a daunting proposition. Perhaps we should arrange a conversation between the WFE and Dan Day-Robinson, who last year changed the name of the iconic SFOA to the International Commodities and Derivatives Association.
CCP clearing is a chief topic of conversation at this year’s conference. If the issues could be boiled down into one overarching bullet point, it would be this: Tremendous progress has been made in the migration of OTC markets into central clearing, but the recent equivalency decision between the US and the EU is the tip of a global harmonization iceberg. Plus, though the clearing model has served the futures markets well through the last several crises, when all is said and done, we will not know for sure how much safer we are until the first time an entity needs an orderly wind-down.
Though squabbles between jurisdictions are neither new nor unexpected, differing views among regulators within the same jurisdiction pose a different problem. And nowhere is this case more pronounced than in the Basel III rules, specifically the supplemental leverage ratio.
For those unfamiliar with the issue, Basel III rules coming into force next year include a provision that will require customer collateral held at banks to be counted as levered assets subject to a supplemental charge on the balance sheet. This is driving institutions to turn away clearing customers and, in some cases, get out of the clearing business entirely. This seemingly-senseless double whammy – customer collateral is already a charge against a portfolio – runs counter to the G-20 goal of central counterparty clearing. The problem is that another G-20 goal is to ensure that there is adequate capital backstopping banks in the event of a systemic issue.
The dispute, then, is between derivatives regulators, who see the importance of the risk-mitigating effects of clearing, and banking regulators who, rightly or wrongly, say that, if banks are expecting a bailout as a last resort, there will be rules, and those rules will feel onerous.
In the words of Commander Perry (or was it Walt Kelly?), “we have seen the enemy, and they are ours.”
Let’s clear up the clearing issue.