Friday, November 28, 2008

Liquidity Fragmentation, CCP ownership

G’day All,

Well, pressed for time.
First thing, is time for a rant – it’s been a while.
During TradeTech liquidity this week there were some comments made about CCPs.
I though the comments well off the mark if not irresponsible in the current market situation.
See below (I have already posted the response in my blog).

Other news:
Great that the US gets out of Iraq – they have enough things at home to spend their cash on.
NYSE & Liquidnet link up. Lit and dark will continue to mix.
AIG: This is ridiculous. Nobody works for a dollar per annum. This is just ‘disclosed’ compensation, there are obviously other drivers here. Why would any of us work for a dollar? The pendulum has swung too far the other way. What are the motivators (believe me, self interest is in there somewhere).
Chi-X: news from Asia
Nasdaq: Energy
CDS Clearing: Again, forget when I said it, but we see the call for competition. See:
Fidessa: I do like the concept of the fragmentation index. I can’t comment on the formula, but it is a view. Up until now I have relied on the BBG MDM page (Market Depth Monitor). Worth a look for those interested in liquidity shifts: (Fidessa is now traded on Chi-X and cleared by EMCF)
BHP: If ever there was a time to pull a deal this was a good one.

Hey: Aussie is getting digital radio next year! Cutting edge down here I tell you!

Fortunately we had some rain last weekend so I could watch some sport.
For variety I watch Aust NZ in the rugby league world cup final. We were useless and in my view deserved to lose for being too complacent. Awful and depressing performance.
As for the Aust / France game. We got through by the skin of our teeth. I think both teams were held back by a dreadful ref.

Have a great week end all.


The Rant bit:

I read the below remarks from yesterdays TradeTech Liquidity conference with some concern.
Skinner comments ….” I raised heckles a little by asking the dumb question, “as EMCF only has two risk managers and is now run by the Dutch Government, isn’t that bad for business?”

(Well, – I’m taking the bait here).
I’d like to suggest the following points are also worthy of consideration when responding to such, at least in my view, mis-informed questions:

Risk management is a sub second world is not about people watching trades. It is about systems, procedures, rules etc. To date the regulators have proven very effective at supervising all the new CCPs. I recommend any of the national regulatory reports (FSA, DNB etc.) where you can see first hand how CCPs are measured against the CPSS / IOSCO standards. Let the regulators continue with their jobs.

A CCP operates as a closed eco-system. There are layers of protection from participation criteria, margining (remember the focus here) and elements of mutualisation such as a default fund. In between there may be other layers of protection of various degrees. What is important, and what the regulators accesses, is the ability of a CCP to handle default events without recourse to external capital. Neither the capitalisation of the CCP nor its ownership could be relevant in the event of adequate margins being called. When a CCP is stress tested, it is done on this basis. If the overall protection is not sufficient you will see either an increase in margin rates, default fund requirements or other. Again, leave the regulators to carry on doing their supervisory role.

Personally, I don’t think there was any joy in allowing Lehmans to fail. Nor for that matter in any of this market turmoil. That said, EMCF has experienced a default event and within 36 hours all EMCF participants were assured that there would be no recourse to their default fund contributions. This was possible in part due to the focus of the assets serviced and risks monitored. Again, the ownership of EMCF had no bearing on this event (the Lehman event was prior to the Fortis change of control announcements). This was simply a CCP doing what it is created for.

To date we have seen no failure by the regulators in their supervision of CCPs. That is not to say they should not be challenged but let’s do it constructively.

Fragmentation is the cost that allows the benefits of competition to accrue to the market. Embrace the evolving market place and do your bit for all Europeans!

People also want cheaper post trade costs. Remember clearing (risk management and charged per transaction) is different from settlement (change of ownership and charged net per transaction). EMCF has hammered down clearing costs to 5 eurocents and the primary market CCPs have begun to respond. EMCF has identified there is a place for new entrant CCPs and indeed they have come (e.g. EuroCCP).

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