Quick Takes: What’s new in CCP disclosures — 2Q 2024?

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

Let’s get started.

Hi, Amir. Hi, Chris.

Amir Khwaja: Hi, Ali.

Chris Barnes: Hi, Ali. How are you doing?

Amir Khwaja: I’m doing great. Welcome back to Quick Takes.

Ali Curi: 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 is called, “What’s New in CCP Disclosures — 2Q 2024.” This is a regular quarterly blog that I do, and I think I’ve done a podcast before a few times on a similar topic.

Once a quarter, all clearinghouses release these disclosure numbers by 200 key metrics. Disclosures about their governance, default resources, margin requirements, liquidity. And we collect all this data, which we’ve been doing since September 2015, in our CCPView product. So that means we have nine years, four numbers every year, four quarters. So we have 36 different instances for every disclosure metric. And what’s nice to see then is how these have evolved over time. And particularly as clearing has become more important larger mandatory also increases voluntarily market. So CCPs or clearinghouses and counter parties are an important market structure.

As they become more widely adopted and larger, they become even more systematically important. So it’s important to keep an eye on these disclosures and I write a quarterly blog just to highlight things that are of interest so our readers and our subscribers and to CCPView can get a heads up on what’s interesting, right?

Normally the charts focus on initial margin, few charts. But again, my favorite section and Chris will laugh at favorite metrics tend to be the section called “Other Disclosures of Interest.” And we have this nice feature where we can highlight things in the current quarter that are all time record highs.

And given we’ve got, 36 instance for every metric, so I guess there’s a less than a 1 over 36, 3% chance of a given, of a current number, being higher than ever. But you know, it always surprises me that we always find some quite easily. So I guess I’ll pointed out a few ones. For instance, just to as a highlight, so for example, CME based, so CME is one of the largest groups of exchanges, clearinghouses.

So 4.1.8, the committed aggregate participant commitments to address initial default were $21.6 billion in the latest quarter, so that’s a huge number. So that’s how much members are on the hook for to commit on a default, above and beyond their pre-funded sources.

Again, pretty large numbers. Not only CME, so CDS, which is the Canadian Depository for Securities, their 4.1.8, the same number was up to $7.3 billion from $3.7 billion. So again, participants who are participants at many of these clearinghouses, on the hook for large amounts of cash to contribute to a default, which highlights the importance and the interconnectivity of clearinghouses.

The other ones, that I commonly look at are these 4. 4 type metrics and these are these kind of stress losses, so the estimated largest aggregate stress loss and excessive IM that will be caused by the default of any participant, one or more participants. And again, some of those are a record highs at many CCPs.

Let’s pick a few, again CME base 4.4.3 was $5.3 billion or else was it a high CCNG bonds. Again, a higher range, so that’s all the metric. And I just end with briefly, OCC, we’ve all followed, the rise of day trading, zero day options in the US, so OCC is where those stock options clear in the US.

And I think for the first time it was interesting, 6.1.1, the house net initial margin at $52. 5 billion was higher than client net initial margin. And given, we’ve always seen, the press talks about client trading, day trading about on these options. So it’s interesting why for the first quarter, either ever or for a while, we’ve seen the house margin as being bigger.

And predominantly, OCC, is single stock options and index options on equities that clear in the U.S., so again, interesting. So it’s really, my aim of this blog is to highlight things that are newsworthy, interesting for our readers, subscribers to take a deeper dive and really assess what’s changing over time between clearinghouses, within clearinghouses, within their CCPs and yeah, and there’s lots of data. We have a nice UI to look at it. We have an API and, I think it’s important to provide transparency so numbers can be published, but they can get lost in the firestorm of numbers that are published, the firehose of numbers that are out there on the internet.

So by writing about it, I get a sense, I really get a sense. And yeah, and it’s a good habit to do that one on a quarterly basis. I was going to hand over to Chris and ask Chris if he had any questions.

Chris Barnes: Thanks Amir. Again, a great blog. I love our API, love the graphs, but I think the very best way to access this data is just to wait for your blog.

There is no way I’m going to find time to go through all of those other disclosures of interest. I just thought I would throw some questions at you based on that.

4.1.8, does it make sense for us to sum these committed aggregate contributions across all of the CCPs and see what the industry as a whole is actually on the hook for?

Amir Khwaja: Yeah, I think we could do that. Yeah, we could do, both 418 and I think 414, which is pre funded, right? So there’s pre funded contributions that have already been provided for the clearinghouse. And these are the commitments that are above and beyond that, which more than double what’s pre funded. So I think those would be sizable numbers. I’m not sure I’ve looked at it for a while.

Chris Barnes: And they would be bigger than the default fund contributions? They’d be…?

Amir Khwaja: They’re committed.

Chris Barnes: Smaller than I am, obviously.

Amir Khwaja: I feel like the committed default fund contributions above and beyond what’s pre funded, I think are similar to the pre funded or larger in some cases.

It varies by CCP, so my guess is that it would more than double the pre funded.

Chris Barnes: Wow. It’s a big number.

Amir Khwaja: Yeah.

Chris Barnes: There’s a lot of interesting data there.

When you go through the other disclosures, is there anything that jumps out that isn’t , to you, that you’d like to see?

Amir Khwaja: Definitely, yeah. So I think there are definitely things and you put me on the spot.

I can’t remember what they are, right. But you know, there’s, it’s always a case of there are things that we would like to see. I think one is, at the moment the numbers are released with a two month lag, on a quarterly basis. It would be nice to get that lag down to one month, thinking that would be better.

There are disclosures and I can’t remember but clearly if I had a wish list, and I think this is one of the things, when regulation comes in and there’s best practice and regulation and things get published. It’s very slow to change and improve what’s published.

Chris Barnes: Agreed.

Amir Khwaja: And you always feel like there should be a process, right?

When lawyers or regulators write these things, there should be built in something which says that after an X period of implementation, we will revise, be prepared in your plans to do that, right? That rarely happens, which I think is unfortunate.

Chris Barnes: It’s because the process tends to be, they only ever add stuff, right?

Whereas, amongst all of those disclosures, there must be some stuff that we’re like, yes, it kind of made sense in like a consultation concept when we were first thinking about what should be disclosed. But actually, when we look at the data, it’s not very helpful.

Amir Khwaja: Yeah, good point. So for example, the one to pick out is there’s ones on volume, right?

And they’re not really that useful, because they’re too high level across all the CCPs. And the CCPs already disclose their volumes on their websites, right? What they disclose in disclosures, I look at it, and it’s all this gobbledygook, but it’s not comparable very nicely.

Chris Barnes: Yeah.

Amir Khwaja: It’s not granular enough, even for a given CCP and comparisons across them are meaningless, with those set of volume metrics. So I don’t find those useful and there’s quite a lot of those. So that’s a recipe for one that could be removed and there, there’s that could be added. But generally I think the regulation captures the important ones, default fund, initial margin, liquidity risk, concentration risk, so I think there’s some quite important ones in there. I guess the other thing I’d point out, the reporting dimensions gets to be a concern sometimes.

Some clearinghouses have many CCPs, right?

Chris Barnes: Okay.

Amir Khwaja: And they tend to disclose things at detailed levels, which makes comparison difficult, not a big name, but there’s some where if I click on the clearinghouse, suddenly I get 10, 15 things below it. And there’s disclosures at different levels at the clearinghouse level, the clearing service level.

And so you got to know for a given metric, which level to look at over time. It gets a bit onerous. So I think some consistency there or some guidance there would also improve it. I am rambling, Chris, right?

Back to you, Ali.

Ali Curi: Thank you, Amir. And please, share with us again the title of your blog post.

Amir Khwaja: Sure, Ali. Yeah, it’s called “What’s New in CCP Disclosures — 2Q 2024?”

Ali Curi: Great, that works. 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. See you next week.

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.