Journal of Financial Market Infrastructures

Ron Berndsen
LCH and Tilburg University

Welcome to the fourth issue of Volume 9 of The Journal of Financial Market Infrastructures. This issue contains four papers covering a wide range of topics: the long-run sustainability of Bitcoin, climate risk and central counterparties (CCPs), gains of data standardization in the post-trade industry, and a cost–benefit analysis of various anti-procyclicality measures in a CCP’s initial margin setting.

In the first paper in the issue, “What drives Bitcoin fees? Using SegWit to assess Bitcoin’s long-run sustainability”, Collin Brown, Jonathan Chiu and Thorsten V. Koeppl investigate whether Bitcoin will still be economically viable when the Bitcoin reward has been lowered to zero (an event in the distant future). Bitcoin miners will then only be compensated for their effort through transaction fees. Brown et al construct a model making use of the introduction of a new protocol, “Segregated Witness” (SegWit for short), that leaves more room for transactions in a Bitcoin block as a natural experiment. Based on that model they find that the price of Bitcoin has to increase substantially, which could render future Bitcoin fees prohibitively expensive.

In the issue’s second paper, “A cost–benefit analysis of anti-procyclicality: analyzing approaches to procyclicality reduction in central counterparty initial margin models”, David Murphy and Nicholas Vause show the costs and benefits of various approaches to attain anti-procyclical initial margin setting. The importance of this is directly related to financial stability: CCPs should avoid having to sharply increase their initial margin requirements in volatile, stressed market conditions, as this would amplify the financial cycle. This also presupposes that margin should not drop too low in tranquil times. The emphasis is on initial margins rather than variation margins, as the latter are usually considered to be liquidity neutral. Murphy and Vause find that it is sometimes better to adjust the margin model itself rather than putting an anti-procyclicality measure on top.

In our third paper, “Industry adoption scenarios for authoritative data stores using the International Swaps and Derivatives Association Common Domain Model”, Aishwarya Nair and Lee Braine state that the post-trade industry is still complex and duplicative from a data standpoint, with errors and high costs as a result. They argue in favor of a strategy for the industry to move toward a much higher degree of standardization and harmonization. A vehicle to achieve that goal could be a socalled authoritative data store (ADS), operated by a financial market infrastructure. The data in such an ADS can be seen as the “golden” copy of a trade or a legal agreement, to be accessed by broker-dealers. Nair and Braine describe both a centralized version, which can be seen as a conventional solution, and a decentralized version, which makes use of distributed ledger technology.

The issue’s fourth and final paper, “Climate risk and central counterparty risk management”, sees Max Chan of the Climate Risk Working Group of the European Association of CCP Clearing Houses considering climate risk in the context of CCP risk management along various dimensions. In this Forum paper, climate risk is taken to be both a physical risk and a transitional effect risk. Chan stresses the importance of developing and using climate risk metrics from the perspective of an individual CCP as well as at the macroeconomic level. The Climate Risk Working Group also favors disclosure of such risk metrics in line with existing supervisory guidance.

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