Journal of Financial Market Infrastructures

Welcome to the December 2018 issue of The Journal of Financial Market Infrastructures.

The first paper in this issue is “The centrally cleared interest rate derivatives market: how are clients changing the risk perspective?” by Paweł Fiedor, Sarah Lapschies and Lucia Orszaghova. It studies client clearing for interest rate derivatives, which has been an area of significant growth in recent years. With client clearing, it is possible for pension funds or hedge funds, for example, to participate indirectly in a central counterparty (CCP). The authors have access to a large data set comprising all EU transactions reported to the six trade repositories. The network analysis that they perform shows that the network structure, the geography and the sector of risk changes significantly if clients are taken into account.

Our second paper, “The distribution of clearing members’ risk exposure and how it matters” by Olga Lewandowska and Edgar Mai, explores the quantitative information on CCPs that has been publicly available as a requirement of the Committee on Payments and Market Infrastructures–International Organization of Securities Commissions (CPMI–IOSCO) since 2015. The authors focus on the distribution of a CCP’s clearing members and the cover 2 adequacy of the CCP. The latter is the requirement that a CCP that clears complex products or is systemically important in multiple jurisdictions should be able to withstand the simultaneous default of its largest two clearing members in extreme but plausible market conditions. Based on the available data, the authors investigate the relationship between the risk distribution of the clearing members and the adequacy of the CCP initial margin and default fund for three large CCPs.

The issue’s third paper is also related to CCPs. In “Reducing margin procyclicality at central counterparties”, Radoslav S. Raykov looks at the role of collateral in times of financial stress in the context of reducing the procyclicality of margins. He shows that in some cases, mitigating procyclical margin jumps may have an ambiguous effect and can destabilize trading in volatile periods. The paper proposes a welfare- improving stabilization policy based on measures that increase the opportunity cost of default of a clearing member.

Our fourth and final paper in this issue appears in the Forum section, and it provides a new perspective on our industry. In “A linguistics approach to solving financial services standardization”, Richard Charles Robinson discusses standardization: a topic whose importance to financial market infrastructures would be hard to exaggerate. In particular, Robinson reacts to the earlier literature on establishing a common financial language and argues that the aim of a single, universal financial language (ie, standardization) may be too much of a good thing. His underlying explanation, which is based on work from the linguistics literature, is that the level of complexity is too high. Instead, it is much more productive to focus on defining financial language geographies (bounded communities that speak the same language) and points of interoperability (translation). The author concludes with some policy recommendations.

I hope you enjoy reading this issue of The Journal of Financial Market Infrastructures.

Ron Berndsen
LCH and Tilburg University