Every June, the Bank for International Settlements (‘BIS’) publishes one of the most influential texts for finance, its annual report. It covers the bank’s own activities, to be sure; but critically for all other actors, it sets forth the content and direction of high-level, central bank thinking on their plans.

This year, two elements were pre-published, which is unusual. This may indicate a particular need felt to inform the market on both progress and planning for macroprudential regulation, mainly of banks, but not only; and to comment also on the crypto-currencies vogue, and the problems arising from them – not least environmental given the need for enormous computing power required of distributed ledgers.

In April, the global banking and capital markets authorities together announced a mid-course correction to their work transforming central counterparty clearing of OTC derivatives contracts. In their search in 2009 for the answer to the ‘OTC counterparty risk problem’ that had so brutally hit the world’s financial system and economy, the authorities grasped at a notion then circulating in central banking circles: if clearing houses had proven themselves able to manage the risk of on-exchange transactions during the market turmoil of 2008 and the failure of Lehman Brothers, then they ought to be called upon to do the same for the off-exchange business that had gone off the rails.

Thomas Murray has always understood and supported the value of bespoke OTC derivatives contracts, which meet highly specific economic needs not found in the regulated marketplaces. What cannot be overlooked, however, is that OTC derivatives contributed significantly to the Global Financial Crisis of 2007-2009. One factor behind this contribution was the poor information on bilateral positions. Contracts had not been confirmed with counterparties, different terms were noted on contract notes, and on and on the information gaps went: there was no overall picture in the autumn of 2008 as to who owed what to whom, and what a given counterparty’s positions and ability to meet its commitments were, not to mention the sudden realisation that nobody knew the true value of the contacts. And so the OTC markets largely froze.

A key objective for G20 countries announced at their Pittsburgh Summit in 2009 was to reduce systemic risk in the global financial system by moving over-the-counter (‘OTC’), bespoke derivatives into central clearing houses. The bilateral risk is assessed and taken onto the books of the CCP for the entire life of those instruments. To achieve that level of risk management over the entire term of each contract, the OTC contracts had somehow to be standardised, which by definition is a contradiction with their specific, tailored nature and purpose. It was always going to be hard to square that circle; the CCP segment was not made for this purpose.

Of all the elements required to make a marketplace function, financial information is the most valuable. Since the dawn of time, an information advantage – and the time to make use of it ahead of others - has been the source of greatest gain to anyone who had it. Examples range from the return of special couriers who raced back to London after the Battle of Waterloo in 1815 to today’s high-speed algorithm trading shops paying additional fees to ‘co-locate’ their computer servers immediately next to those of the exchanges themselves. Having that edge is clearly critical, whatever the technology, or these presumably intelligent individuals would not strive so hard to get and keep it.


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