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Journal Article
Blockchain and Financial Market Innovation
Blockchain technology is likely to be a key source of future financial market innovation. It allows for the creation of immutable records of transactions accessible by all participants in a network. A blockchain database is made up of a number of blocks ?chained? together through a reference in each block to the previous block. Each block records one or more transactions, which are essentially changes in the listed owner of assets. New blocks are added to the existing chain through a consensus mechanism in which members of the blockchain network confirm transactions as valid. The technology ...
Newsletter
A New Approach to Stock Market Execution
The Federal Reserve Bank of Chicago has published extensively on the risks and effects of high-frequency trading (HFT) in U.S. financial markets and has in the past expressed an interest in the concept of batch auctions as a potential way to diminish the speed advantage of HFT traders. The Chicago Stock Exchange (CHX) recently filed an application with the U.S. Securities and Exchange Commission (SEC) to inaugurate CHX SNAP, an on-demand batch auction service. If and when approved, SNAP auctions would deemphasize speed and allow institutional traders to place large orders, with a reduced risk ...
Newsletter
Central Counterparty Risk Management: Beyond Default Risk
On October 17, 2017, the Federal Reserve Bank of Chicago held its fourth annual Central Counterparty (CCP) Risk Management Conference: Beyond Default Risk. Attendees included representatives from regulators, CCPs, clearing members, and end-user market participants from across North America, Europe, and Asia. Panelists and keynote speakers discussed the challenges for CCPs and market participants that arise from stresses other than a clearing member default
Discussion Paper
Blockchain and Financial Market Innovation
Blockchain technology is likely to be a key source of future financial market innovation. It allows the creation of immutable records of transactions accessible by all participants in a network. A blockchaindatabase is made up of a number of blocks “chained” together through a reference in each block to the previous block. Each block records one or more transactions, which are essentially changes in the listed owner of assets. New blocks are added to the existing chain through a consensus mechanism in which members of the blockchain network confirm transactions as valid.While all are in ...
Discussion Paper
Non-Default Loss Allocation at CCPs
In this paper, we answer three questions about the appropriate allocation of non-default losses at central counterparties (CCPs): 1) “Who should assume financial responsibility for a non-default loss?”, 2) “What portion of a non-default loss should each party pay?”, and 3) “How should CCPs and clearing members address catastrophic non-default losses?”. To answer the first question, we argue that financial responsibility should be shared among the parties whose decisions contributed to the loss. Determining whose decisions contributed to a loss requires an understanding of the type ...
Journal Article
The Goldilocks Problem: How to get Incentives and Default Waterfalls “Just Right”
Regulatory reforms in the wake of the 2007?08 financial crisis have increased the focus on the systemic importance of central counterparties (CCPs), which guarantee the performance of their clearing members? financial contracts.1 This, in turn, has increased policymakers? and practitioners? focus on risk management at CCPs. A key component of any CCP?s risk-management strategy is the CCP?s default waterfall. The default waterfall stipulates the sequence of financial resources that a CCP can draw upon to cover the unsatisfied financial obligations of a defaulted clearing member. At the top of ...
Newsletter
Symposium on OTC Derivatives—A Conference Summary
The People?s Bank of China (PBOC) and the Federal Reserve Bank of Chicago sponsored the Symposium on OTC Derivatives in Shanghai on May 23, 2017, in conjunction with CCP12, a global association of major central counterparties (CCPs). The conference focused on current risk management and regulatory issues facing CCPs.
Newsletter
A “Principled” Approach to International Guidance for Central Counterparties
Following the 2007?08 financial crisis, the G20 agreed to implement a clearing mandate, requiring all standardized over-the-counter derivatives to be cleared through a central counterparty (CCP). The central role of CCPs in post-crisis financial markets has increased the interest of both national authorities and international standard setters in CCP regulation.
Newsletter
Taking a Deep Dive into Margins for Cleared Derivatives
Central counterparties (CCPs) are institutions that become the buyer to every seller and seller to every buyer in cleared markets. By design, CCPs have a matched book of positions. As a result, their liabilities to clearing members with winning positions are exactly matched by incoming payments from those on the losing side of positions.