Quick Takes: What’s new in CCP disclosures – 4Q23?

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?

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 ClarusFT blog would you like to discuss?

Amir Khwaja: Thanks, Ali. It’s called, “What’s New in CCP Disclosures 4Q 2023?” This is a blog I do once a quarter in our CCPView product. We collect the CPMI-IOSCO quantitative disclosures that are published quarterly with a two month lag by clearinghouses.

And these metrics, over 200 numbers allow us to see what’s happening at a particular clearinghouse and compare different clearinghouses. Just a few highlights, so I think in 4Q 2023, 31st December. The initial margin held at the four major interest rate swap clearinghouses was $330 billion, which is close to the all time high in the March 2023 quarter, $338 billion.

So again, large numbers, because as we know, clearinghouses are very important financial market infrastructure, they hold a lot of sources, these disclosures really give you insight into what’s changing with those metrics and disclosures. I think conversely credit default swaps were actually lower.

So the IM held there was $60 billion, as opposed to $70 billion earlier in the year, and that’s primarily because there’s now really only two major clearinghouses instead of three, because ICE Clear Europe closed down their clearing for CDS in Europe. And I think two clearinghouses means you have more netting benefit.

So the IM that members have can net in two pots rather than three pots, leading to lower gross IM. So I think that’s the kind of reason we think that. And then finally, I collect nine ETD exchange traded derivative clearinghouses metrics and they were also up at $465 billion. So again, pretty large numbers.

So really my aim here is to highlight these metrics to our readers so they can look at the data and dig deeper into what’s happening with these metrics. I also have a section lower down where we have this nice tool where it highlights disclosures that have changed more than a certain percentage from a range you pick, you specify.

So we now have been more than eight years of quarterly disclosures. So there’s lots of numbers to look at. And I think the two I’d pick out, that have really jumped a lot is B3 in Brazil, have hit some all time highs in some of their disclosures. Both the clearinghouse’s own capital and member contributions, and largest stress losses are at all time highs.

So clearly that market is, I guess it’s larger than historically. And then the other one I’d pick out is DTCC in GSD, which is government securities clearing. We talk a lot about U. S. treasuries, SEC mandates. So again, some of the disclosures are at all time highs. So pre funded aggregate default fund contributions at $56 billion up from $49, all time high. So I think we’re highlighting things that have changed, lots of different numbers, and using CCP, your customers can use a UI or our API to understand trends in those numbers. They can compare clearing houses, or they can compare trends at one clearinghouse. And, these are substantially large numbers, very important institutions in terms of financial market structure.

So that’s briefly what I was going to describe. And Chris, do you have any questions?

Chris Barnes: I actually have three questions. I will try and rattle them off relatively quickly. First one, I think, looking at it, is it a surprise that initial margin has gone up over the year end? Is there any element of balance sheet window dressing that normally happens with these numbers or are they not seasonal at all?

Amir Khwaja: I think, yes, great question. Yes, so I think there clearly are year end effects. Both in terms of member positioning, but also higher rates. Volatility at year end can lead to higher IM. That’s certainly true in interest rate swaps. Also in ETDs, right, because it’s up from early in the year.

Chris Barnes: So second question is somewhat related. Is it right to think of initial margin as being risk sensitive? If you put on more risk at the CCP, you’ll be posting more initial margin. Is the reason that we blog so much on IM related to the fact that it’s a reflection on the amount of risk that’s in the system?
Or are there different interpretations of why IM can go up quarter on quarter?

Amir Khwaja: Yeah, it really affects the amount of risk at that point in time. And risk defined as ” How much,” is thoroughly based on the current market volatility.

Chris Barnes: And so initial margin also is driven by the risk of the underlying portfolios.
So my final question is more on what’s not in the blog. I’m right in saying that the disclosures have information on default funds as well, is that right?

Amir Khwaja: Correct.

Chris Barnes: And yet we don’t necessarily present charts on how the default funds change from quarter to quarter is the blogs are normally focused on initial margin, right?
Initial margin is a reflection of risk. Therefore is likely to change quarter on quarter. Default fund, when you think of it from a market participants perspective, that’s more like your mutualized risk at a CCP. Do we actually find that default funds are a lot more stable then? Therefore there isn’t much point in showing charts or is it just a completely independent measure?

Amir Khwaja: I think correct, yes. So it does change, but it changes less frequently. And I think it changes when the CCPs decide to change it rather than automatically. I think, so quite often we’ll see it’s flat quarter and there’ll be a change, but it does vary actually. Some practices vary.

So at some CCPs, it does change every quarter, but at many it doesn’t. I could include those on this chart. They’ll be, I guess more boring than these ones. But there are particular CCPs, like for example, we talked about DTCC GSD, Government Securities Clearing. That does change every quarter, so they obviously have a process that does change it as far as I recall whereas others don’t. So practices vary.

Members probably are not too keen for that to change, as frequently as IM, which changes daily. It may be catching a snapshot at the end of the quarter, but initial margin is changing every single day because your risk is changing every single day.

And default fund contributions are changing at a less frequent, either on demand or some less frequent cycle than daily.

Chris Barnes: And not necessarily for now, but in general, do you find it’s well understood in the market, the differences between initial margin and the purpose that serves in the event of a default versus default funds versus other means that CCPs have?

Amir Khwaja: I would hope so. Yeah, I would hope so that people understand that, an initial margin is single members resources. So we’re summing up all members individual resources that will be used against that member’s positions and default fund contributions are mutualizing loss for all members of their clearinghouse.

So I would hope certainly, we talk about it a lot, I would hope that people understand the differences between those. And so if a member were to default, a CCP would first use that member’s resources, its initial margin. And ideally that initial margin should cover all losses for that member.

And we’ve seen that happen in a number of struggle cases. If not, they would use the defaulting member’s default fund contributions. It should be sufficient. If not, they will draw on the mutualized default fund contribution of all members, right? So I think that’s a fairly common waterfall that happens in a default.
And I would hope that certainly all members of CCP should understand that, and even clients should understand that. Great. Thanks, Chris.

Chris Barnes: Thanks, Amir. Very helpful.
Back to you, Ali.

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

Amir Khwaja: “What’s new in CCP disclosures 4Q 2023.”

Ali Curi: Great. That works. Amir Khawaja, 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. And thank you for inviting me back after the variation margin podcast. It’s much appreciated.

Ali Curi: You’re very welcome.
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.