Mike Bodson, executive managing director, DTCC and chairman, EuroCCP

In the crisis of 2008, market infrastructure worked while almost all other facets of the securities markets struggled. That was the message from Mike Bodson, Executive Managing Director of DTCC in his keynote address to the Securities Market Infrastructure Forum. He spoke for many in the industry in asserting that, “the clearing and settlement systems succeeded in providing stability, safety, resilience and risk reduction during the crisis.” This success has apparently not gone unnoticed by regulators, legislators or industry participants judging by the ‘standing room only’ attendance at the Forum and the subsequent session, “Can central counterparties save the world?” chaired by Natasha de Teran, freelance columnist. Not only was the audience large, it was, based on a card vote, virtually unanimous in believing that central counterparties (CCPs) were the answer, almost irrespective of the question.

The panels in both sessions were generally happy to take credit for a job well done. Bodson noted that DTCC had, rather presciently ‘war gamed’ a possible bankruptcy of Lehman only a few months before it actually happened, while Alberto Pravettoni, Managing Director, Group Corporate Strategy, LCH. Clearnet confirmed the success of unwinding trillions of dollars of Lehman positions across multiple asset classes in a matter of a few weeks. De Teran contrasted this with the fact that “in the ‘over-the-counter’ markets thousands of individual transactions needed confirmation and some clients could be waiting another two years before money can be released to them.”

But as the crisis recedes and markets return to a semblance of ’normality’, the very success of CCPs and clearing and settlement systems is creating its own tensions. Politicians and regulators as well as managers, users, shareholders and even some academics have a perspective on how past success could and should be built on in the future. In response to an audience question, Craig Pirrong, Professor of Finance, Bauer College of Business, University of Houston agreed that taxpayers, as newly recognised ‘guarantors of last resort’ have “a legitimate right to know how these structures are governed and managed,” and added that “central banks should regulate central counterparties in their own market.” Robert Close, President and CEO, CLS Bank International and CEO, CLS Group, concluded, based on his own experience in foreign exchange markets, that “it is unrealistic to expect central banks to give up control of anything that involves the payments infrastructure for their own currency to another regulator or jurisdiction.”

“The clearing and settlement systems succeeded in providing stability, safety, resilience and risk reduction during the crisis.” Mike Bodson, Executive Managing Director, DTCC and Chairman, EuroCCP

However, Bodson had earlier suggested that the crisis had shown why the world would be better off if everyone used a single infrastructure for credit default swaps, namely the established DTCC solution, rather than each region creating their own version. A central repository of information shared by regulators was far more useful than multiple systems. Kim Taylor, president, CME Clearing felt it was perfectly appropriate to expect central banks to cooperate while infrastructure providers extended their offering to new markets. She felt that management and members of CCPs should determine “what instruments they would accept” rather than having “regulators decide what they think should be cleared.”

Both Philippe Metoudi, Member of the Executive Board, Clearstream and Monica Singer, CEO, Strate agreed that competition for services was a good thing and that product development should be lead by clients/members, only constrained by what they were willing to pay for. Singer’s agenda was clear “Strate is not a monopoly. We welcome competition and regulations allow for more than one CSD in South Africa. However, Strate has shown it is good at what it does and if its members want it to expand into other African markets for example, that is what we will do.”

Alan Cameron, head of clearing, settlement and custody, BNP Paribas

Interestingly, among the 10 panellists across the two sessions, only two represented users of infrastructure as opposed to providers. Alan Cameron, Head of Clearing, Settlement and Custody, BNP Paribas responded to Singer’s comment by explaining, “It is always troubling when people running monopolies do not accept that they are a monopoly.” He added that while users welcomed competition between CCPs, regulators considered CCPs as “critical in helping reduce systemic risk and for that reason do not want them to compete on risk, i.e. margin requirements, netting, cross collateralisation and conditions for clearing membership; precisely the areas where competition is natural.” Simon Hag was less confrontational in approach but agreed that large global investment banks would be unhappy with a proliferation of local CCPs in different countries, each with its own costs and rules. Generally, users and providers agreed that a single global solution would not be acceptable politically, but would not want numbers to expand significantly from what exist today.

Whether such organisations compete, cooperate or both, was left unclear by both panels. Multiple providers will certainly need to offer interoperability if the full benefits for members or regulators are to be realised. There was little discussion on this in either panel, but according to Cameron progress, especially in Europe, has been painfully slow.

New CCP models

““It is always troubling when people running monopolies do not accept that they are a monopoly.”” Alan Cameron, Head of Clearing, Settlement and Custody, BNP Paribas

However, looking at the future what seems inevitable is further innovation. As Cameron pointed out it is “very difficult for infrastructure institutions to ‘stick to their knitting’. There is always something more interesting that they can work on.” Even CLS may move towards providing a CCP service for FX options and forwards. As Close commented: “For 10 years up until 2008 whenever we asked our members about a CCP, they said it was not necessary. Now some are in favour of us moving in that direction.” Taylor also feels that foreign exchange is an opportunity to be pursued and Pravettoni has ambitions to clear every instrument that can be cleared i.e. all those for which, according to Taylor, a price is available, risk of future price movements can be effectively modelled and membership can be controlled to effectively manage risk. But not all new infrastructure entrants will necessarily be welcome. Ted Rothschild, executive director, global market infrastructures, J.P. Morgan declared himself “unsure of exactly how TARGET2-Securities (T2S) will operate and what it will actually do to benefit the markets.”

As well as geographic and asset class expansion, many infrastructure providers want to expand their offering. Everyone had their own view as to what kind of ‘added value’ services would become part of future offerings, but trade matching, securities financing and collateral management generally seem likely to be important. As Rothschild remarked he hoped everyone in the room was doing something they believed ‘added value’.

Success in the crisis has certainly brought attention, initially welcome, now an irritant to some market infrastructure. Success has already bred geographic, product and mission expansion among many infrastructure providers with more to come. Whether success breeds success may depend on how governance enables users, members and shareholders to hold management to account while at the same time allowing regulators to benefit but not interfere too much.



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