JW explains why there is plenty of room for innovation between Listed and OTC markets in the new regulatory environment.
via John Wilson on Vimeo.
[vimeo http://www.vimeo.com/67194222 w=400&h=225]
Reblogged this on Carl A R Weir's Blog.
Not sure an FCM is indifferent to client choice between swapfutures and swaps given lower margin for the same economic risk and limited liquidity in the executed market for swapfutures compared with swaps. These points may drive higher risk and/or higher Basel III capital against potentially lower clearing revenue and I would expect infrastructure cost to be a wash between the two.
Sorry. Smartphone scrambled my text. Here's a cleaner version.Good points and understood. John..On 1 the big question is will this occur in Rates?On 2 last time I was close to this capital is worst case between local entity and hq so even if FCM saves HQ still has to hold B3 capital to cover all entities. Since CFTC capital is sometimes inversely correlated with tail risk and 1day close out cannot be rationalized sensibly even for futures, I hope the B3 effect you mention trims the systemic risk CFTC has effectively partly neglected. I also wonder whether CCP vertical integration tempers diligent risk management in the name of commercial exchange revenue. If so this combined with FCM indifference means only the collective regs can save us. Ugh.At least if regs spend time on periodic reviews of actual execution liquidity across futures and swaps and performance of clearing members and CCPs in default management dress rehearsals they may find supporting rationals for appropriate harmonization / distinction between products and between regulators (i.e. 10 day margin period of risk in B3 vs. 1 day / 5 day close out period in minimum margins).
Jon, a couple of points on the comments you make1) FCM is permitted to charge higher margin commensurate with the risk they perceive, notwithstanding competitive pressures between FCMs to retain/win clients. Hence, just because the CCP charges less for futures doesn't oblige the FCM to collect less. A prime example of this is CDS where CCP margin is widely recognised to collect only a portion of the risk with the result being covered by default fund - this would be insufficient in a client default situation and hence higher margin is sought. 2) Lower margin on swap futures equals a lower capital requirement for the FCM under CFTC rules3) Basel 3 rules are more likely to push margin requirements on futures higher to compensate for the longer close-out periods it foresees on futures than the CFTC regulations et al presently suggestSo why do I argue indifference - because the largest FCMs have to cater for all products to service individual clients and the spectrum of clients. Hence we have the pipes regardless. Secondly, there are pro/cons to each product and these broadly balance out.Lastly, I deplore margin discrimination based on a product label eg listed v otc. Like you I think margin should be set based on the economic risk and its various components. Sensible CCPs should set margin based on risk, not on the lowest level required by regulation, which is equally applicable to FCMs. [These views are my own and do not necessarily reflect those of Newedge...or such similar disclaimer as required in such cases].
Good points and understood. John..On 1 the big question is will this occur in Rates?On 2 last time I was close to this capital is worst case between local entity and hq so even if FCM saves HQ still has to hold B3 basis capital. Also this is a perfect example of why CFTC IM based capital is inversely correlated with risk at tim day IM ot be rationalized sensibly ergo I hope the B3 effect you mention trims the systemic risk CFTC has effectively neglected. I wonder whether CCP vertically integrated distracts somewhat from their primary goal of risk management.FCM indifference and CCP distraction might mean that only the regs can save us. Ugh.At least if they do a periodic review of actual execution liquisity and mandatory dress rehearsals of default management they may eventual harmonize close out periods appropriately?