By any measure, 2020 created unprecedented challenges for cleared derivatives markets across many elements of the trading cycle. However, an IDX-V panel of experts in operations, market structure and clearing expressed a shared view that the global derivatives industry performed remarkably well despite the extraordinary pressures it faced over the last several months.
Christopher Smith, head of clearing and post trade operations at LME Group, pointed to industry preparedness via business continuity planning as key factors in the resilience of cleared derivatives markets.
"If this had happened 10 or even five years ago, it would have been a different story," he said. "I think raising the bar across the industry really, really helped."
Smith also applauded staff across the industry who rose to the occasion. "When everyone's worrying about stuff at home and at the same time still focused on these big challenges at work, the collaboration element and the people element was really just fantastic," he said.
Jens Janka, director and head of clearing delivery and control at Eurex Clearing, also pointed to the importance of well-tailored regulation over the last decade to reduce systemic risk and create a resilient derivatives marketplace.
"The regulators asked us to prepare for crisis," Janka said. "Things went well in the end because we were prepared based on a strong regulatory environment. We were one step ahead."
Though generally positive about how markets performed, panelists were honest about the challenges created by high order volumes and trade backlogs during the peak of market volatility in February and March and discussed how the system could improve.
Meher Sutaria, executive director and global head of regulatory control and European head of operations at J.P. Morgan, noted that clearing platforms had to cope with system latency and backlog amid significant market volume surges.
This was an issue, she said, because "quite a lot of CCPs have very little time between trading close and clearing close." And while some CCPs did offer extensions, she noted those extensions can only help so much during the week as delays inevitably push back processing and staffing for the next trading day rather than fully resolving the issue.
Sutaria also noted challenges with "very large and multiple intraday margin calls," and concerns over transparency with margin methodology.
Those challenges caused by volume and volatility would be troublesome enough in a vacuum, said Nicholas Briggs, F&O operations global strategy at Bank of America. But when you consider the challenges caused by current regulatory issues and the practical challenge of a remote workforce, it complicates things even further.
"Especially for FCMs in Europe at the moment, we're all dealing with fairly complex account structures at CCPs post-EMIR and post-MiFID II and we're juggling multiple memberships after Brexit preparations," Briggs said. "This is a normal day. But when you introduce market volatility and a global pandemic into the mix, it makes operating in this environment very complicated."
Planning for the next crisis
Panelists agreed that looking beyond the unique short-term issues caused by the pandemic should be the industry’s top priority. They agreed that strategic concerns facing the operational side of derivatives markets should be addressed when things are calm, to allow for the difficult tactical decisions to be made with less disruption in the thick of a crisis.
Diederik Dorst, global head of regulation and market structure at Flow Traders, pointed out that many pain points seen across the trading cycle in 2020 were not really anything new to market observers -- just "amplified" because of the crisis. This presents an opportunity to seriously engage with these issues now that recent events have shown in real time how they can impact the marketplace.
"These issues are in a pressure cooker so you can see the full effect and where the weakest link is," Dorst said. "The good thing is that the people are the strongest link, because people pick up the phone… people make this work. But we should also use this opportunity to do a deep dive and see where we can improve operations and try to resolve some of the local folklore that's still in the system and may hamper interoperability."
Dorst also suggested moving some off-exchange and bilateral transactions onto a CCP both to reduce systemic risk as well as operational complexity.
The system held up well under pressure in 2020 despite these challenges. However, Jens Janka of Eurex Clearing stressed that it is important to embrace the idea that "there should not be competition around being resilient" and for the cleared derivatives community to build on what worked to ensure an even better response to the next crisis.
"We should now think together about what we can improve and how can we work together to show that we as a financial industry learned something," Janka said. "We should listen to each other, listen to the regulators and really put our heads together around business continuity planning."