ISDA highlights a selection of research papers on derivatives and risk management
Central Clearing and Risk Transformation
Rama Cont, Imperial College London
The report demonstrates that central clearing transforms counterparty risk into liquidity risk. While recent discussions have centered on the solvency of CCPs and capital requirements, the author argues that the main focus of risk management and financial stability analysis should be on the liquidity of clearing members and the liquidity resources of CCPs. Stress tests of CCPs and their clearing member should focus on liquidity stress testing: the focus should be on comparing the size of the potential liquidity shocks to clearing members with their liquidity buffers, rather than their equity. CCP recovery mechanisms should be centered not on maintaining a CCP’s operations at any cost but on avoiding financial instability and safeguarding the financial system.
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Analysis of Central Clearing Interdependencies
Financial Stability Board
The report provides an analysis of the interdependencies in central clearing, covering 26 central counterparties (CCPs) from 15 jurisdictions in North America, South America, Europe and Asia-Pacific. The analysis includes CCPs, their members and other financial institutions that are linked to CCPs such as custodians, settlement banks, credit and liquidity providers and investment counterparties. The data collection and analysis was as part of the work to strengthen the resilience, recovery and resolution of CCPs undertaken by the Financial Stability Board jointly with the Basel Committee on Banking Supervision, Committee on Payments and Markets Infrastructures, and International Organization of Securities Commissions.
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Access to Capital and Market Liquidity
Division of Economic and Risk Analysis of the US Securities and Exchange Commission
The report describes trends in primary securities issuance and secondary market liquidity and assesses how those trends relate to post-crisis regulatory reforms. It includes a survey and analysis of recent academic literature, as well as analyses based on publicly available databases and non-public regulatory filings. The report examines the issuance of debt, equity, and asset-backed securities, as well as activity and liquidity in U.S. Treasuries, corporate bonds, single-name credit default swaps (CDS), and bond funds. Specifically for CDS, the report points out that some measures of CDS market liquidity have remained stable or point to improvements, while other measures show a reduction in activity. Interdealer trade activity in CDS has declined after 2010, but dealer-customer activity has remained stable.
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The US Treasury market is the world’s biggest and most systemically important market. It’s the oil that keeps the wheels of the global financial system turning and is the primary means by which the US government raises funding. It’s therefore...
ISDA Response to ESMA on CCP Model Validation
On April 7, ISDA responded to the European Securities and Markets Authority’s (ESMA) consultation on draft regulatory technical standards (RTS) under article 49(5) of the European Market Infrastructure Regulation (EMIR), on the conditions for an application for validation of model...
Scott O'Malia Testimony on US Treasury Clearing
On April 8, ISDA CEO Scott O'Malia testified on the implementation of mandatory US Treasury clearing before the US House of Representatives Committee on Financial Services Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity. “The US Treasury...
Joint Letter on Changes to French General Tax Code
On March 31, ISDA, the Association for Financial Markets in Europe (AFME) and the International Securities Lending Association (ISLA) sent a letter to the French tax authority about changes being made to Articles 119 bis A and 119 bis 2...