Quick Takes: What’s new in CCP disclosures – 1Q24?
===

Ali Curi: Hi everyone and welcome to ION Markets Quick Takes. I'm Ali Curi and every week along with my guests Amir Khoja and Chris Barnes, we take a quick dive into the headlines on the Claris blog. 

Let's get started. Hi Amir. Hi Chris. 

Amir Khwaja: Hi Ali.

Chris Barnes: Hey Ali. How are you doing?

Ali Curi: I'm doing great. Welcome back to Quick Takes.

Amir, let's start with you. What's your Quick Take for this week? Which headline from the Clarus FT blog would you like to discuss? 

Amir Khwaja: Sure, Ali. So it's called "What's New in CCP Disclosures First Quarter 2024?" So this is a blog I do each quarter, and in our CCPView product, we collect disclosures every quarter from 44 clearinghouses, and we have data going back to September 2015 for every quarter.

I'm going to talk today more about the mechanics rather than the actual content of that blog, which our blog readers can read. Every quarter, every CCP publishes about 200 numbers for every clearing service. Let's say we have 44 clearing houses, average three to four clearing services; about 150 numbers being published by every clearing house, 200 numbers, 200 times 150, so that's 30,000 data elements that are being published. So really our goal is to have a look at that new set of data and compare to prior quarters. So it's lots of numbers and we're looking at what's changed. I think normally I start the blog by looking at initial margin. It's a really, really large number, but the part that I find most interesting is trying to spot things that have changed a lot and that might be of concern to members of the CCP or the regulators, et cetera, or other CCPs, right?

And I call that section, "Other Disclosures of Interest." We have a filter in the CCPView application where you can select for a date range and a service. Only those elements that have changed more than a certain tolerance, they get highlighted more than 10%, more than 20 percent out of range. So that's a part I find interesting.

I think it's useful because with all this data, you want to spot things that may be worth looking to much further. Most clearinghouses have a quarterly call where they explain to members and people interested, highlights of their disclosures and members can join those calls. We've joined many in the past.

Or also, clearing members that have risk groups can meet on a regular basis once a year with the clearing houses to ask about these quantitative disclosures. And I think they get quite nuanced. So I just wanted to, for our listeners, highlight a few of the disclosure names, not the contents.

Some of them are quite a mouthful. So "5. 3. 4, Number of days during the look back period on which the fall in value during the assumed liquidation period exceeded the haircut on an asset." Interesting. But yeah, that has meaning to people. Because really a clearing service is, keeps adequate resources against exposure.

So when it falls below a liquidation period assumption of a haircut, that can be a concern. Here's one of my favorites. "4. 4. 3, Estimated largest aggregate stress loss in excess of IM that would be caused by the default of any single participant in extreme but plausible market conditions."

So again, that's a very important one. Sorry, I missed the last bit. "Mean average over the previous 12 months." There's also peak average. So again, that's important because a clearinghouse mutualizes losses between members. So if one of them were to default, the largest one, you want to know the impact.

So that's an interesting one. The other ones I like are, " 6, 8. 1. Maximum aggregate IM call on any given business day over the period." So it's good to know how much flows are. And there's one for VM as well. So really that's an example. " 6. 6. 1" is one of my favorites, "Average total VM paid to the CCP by a participant was."

So that gives you an idea of large flows that move between. And I guess there are many disclosures. These are just some of the ones that I look at "4. 1. 4 Pre-funded aggregate participant contributions required." So again, that's "4. 1. 8 Committed aggregate participant." So these are all default resources.

And for CME, for instance, CME's last quarter had more than 20 billion dollars of committed aggregate participant to address initial participant default. Those are the committed funds they have from existing members that are there in case someone went to default. One of the members. Again, huge, huge sums.

So again, there's a flavor, I produce it regularly. It highlights what could be of interest in lots of numbers. So I don't know, 150 times 200, was it? The 30,000 new numbers, each quarter and long trends. So I think that's what I wanted to just highlight briefly. Chris, any questions? 

Chris Barnes: Yeah. First of all, I'm amazed Amir that you have so many favorite disclosures.

So it's fascinating to hear. On the numbers though. I was looking at the blog and initial margin for IRS, Eurex OTC has 40 billion euros in initial margin for IRS. To put that in perspective, SwapClear has 225 billion dollars. When we talk about market share in euros, and moving European rates onshore and active accounts, et cetera, we generally talk about Eurex having a market share in Euro swaps of, let's say 1 percent in €STR and maybe 5, 6, 7 percent for your EURIBOR. Maybe it has a larger market share when you look at open interest. Are there any relevant metrics that we should be talking about in terms of market share, for initial margin here?

Amir Khwaja: Good point. So it does, initial margin is a risk measure, a net sort of risk, more of a net risk measure, at least compared to gross volume, and open interest. I think certainly initial margin and default resources are, give you a sense of the systemic importance of that clearinghouse.

Eurex clearly is even on swaps is much more significant than the volume numbers would lead you to believe. I think partly because of LCH has many currencies and they can net. So some of the margin can net down and different margin methodologies. Can also flag that. 

Chris Barnes: But if you compare the Eurex number 40 billion to the CME number, right?

The CME numbers about 40 billion as well, but the CME only has like a, what a 2 percent market share of dollar swaps now with euros and dollars being about the same market, size-wise. And then you look at JSCC with only 10 billion dollars and JSCC has like a 70 percent market share of yen, right? 

Amir Khwaja: For smaller currencies, yeah, so clearly the volume in yen is lower than the volume in sterling, right?

Which again is much lower than the volume in euros and in dollars. And also I guess the volatility in yen is probably less as well, historically in rates, so this is going to be a less volatile number, lower margin requirements. Euro, I've not looked at it carefully, but you would have thought euro volatility is probably similar to dollars or maybe lower in rates, similar.

Chris Barnes: Lower, but of a similar order of magnitude, whereas yen is probably much, much lower, right?

Amir Khwaja: So I get these different metrics, volume, open interest, initial margin, default resources, they all give you different insight into different aspects of that clearing houses risk management process. In terms of how they're supporting their clearing business. And I think some of these more esoteric long-named disclosures, 4. 4. 3. And I guess, we're all creastures of habit, so I tend to look at the same ones because I find them interesting. I understand them. But there might be others that people find interesting; liquidation, there's lots of liquidity concentration measures that are also interesting. How concentrated is the exposure, the positions at the clearing house? Between members. Do the top five or top 10 hold X percent? So I think that there are many metrics and I guess they're of interest to different audiences. I tend to pick on certain ones, but I think what surprises me is that every quarter there are many that have record highs, which is quite interesting, right?

So you expect, I can very easily find without a lot of effort, new disclosures that are record highest in the prior for a number of clearing services, a number of measures. And those are where lead to interesting questions, which the CCPs will may answer on their calls with members or members can go and ask and get more color.

I mean, there are notes as well, right? So not only do we have values of disclosures in CCPView, we have the notes and many times in the disclosures there'll be a note against that measure, if it's interesting. 

Chris Barnes: I think just from a policy perspective, this use of initial margin as like a reflection on risk.

And then precisely, as you say, looking at concentration of that initial margin, feels like there's a lot more to talk about that potentially. 

Amir Khwaja: Great. Thanks, Chris. So, Ali, so that's what I had. "What's new in CCP disclosures first quarter 2024?" 

Ali Curi: Great. Thank you, Amir. And thanks again for sharing the title of your blog post.

Amir Khwaja, Chris Barnes, thank you both for sharing your Quick Takes. Let's do it again next week. 

Amir Khwaja: Thanks, Ali. 

Chris Barnes: Thanks, Ali. Looking forward to it. 

Ali Curi: And that's our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn. Thank you for joining us.