Margin Requirements with Intraday Dynamics

Both in practice and in the academic literature, models for setting margin requirements in futures markets use daily closing price changes. However, financial markets have recently shown high intraday volatility, which could bring more risk than expected. Such a phenomenon is well documented in the literature on high-frequency data and has prompted some exchanges to set intraday margin requirements and ask intraday margin calls. This article proposes to set margin requirements by taking into account the intraday dynamics of market prices. Daily margin levels are obtained in two ways: first, by using daily price changes defined with different time-intervals (say from 3 pm to 3 pm on the following trading day instead of traditional closing times); second, by using 5-minute and 1-hour price changes and scaling the results to one day. An application to the FTSE 100 futures contract traded on LIFFE demonstrates the usefulness of this new approach.ARCH process, clearinghouse, exchange, extreme value theory, futures markets, highfrequency data, intraday dynamics, margin requirements, model risk, risk management, stress testing, value at risk.

Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements

Spectral risk measures are attractive risk measures as they allow the user to obtain risk measures that reflect their risk-aversion functions. To date there has been very little guidance on the choice of risk-aversion functions underlying spectral risk measures. This paper addresses this issue by examining two popular risk aversion functions, based on exponential and power utility functions respectively. We find that the former yields spectral risk measures with nice intuitive properties, but the latter yields spectral risk measures that can have perverse properties. More work therefore needs to be done before we can be sure that arbitrary but respectable utility functions will always yield ‘well-behaved’ spectral risk measures.coherent risk measures, spectral risk measures, risk aversion functions

Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements

This paper applies an AR(1)-GARCH (1, 1) process to detail the conditional distributions of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses the conditional distribution for these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user’s risk-aversion function. It compares these to more familiar VaR and Expected Shortfall (ES) measures of risk, and also compares the precision and discusses the relative usefulness of each of these risk measures in setting variation margins that incorporate time-varying market conditions. The goodness of fit of the model is confirmed by a variety of backtests.Spectral risk measures, Expected Shortfall, Value at Risk, GARCH, clearinghouse.

Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements

This paper applies an AR(1)-GARCH (1, 1) process to detail the conditional distributions of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses the conditional distribution for these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user’s risk-aversion function. It compares these to more familiar VaR and Expected Shortfall (ES) measures of risk, and also compares the precision and discusses the relative usefulness of each of these risk measures in setting variation margins that incorporate time-varying market conditions. The goodness of fit of the model is confirmed by a variety of backtests.

Opportunity cost and prudentiality : a representative-agent model of futures clearinghouse behavior

Includes bibliographic references (p. 31-38)

Conflicts of Interest in Derivatives Clearing

[Excerpt] The financial crisis implicated the over-the-counter (OTC) derivatives market as a source of systemic risk. In the wake of the crisis, lawmakers sought to reduce systemic risk to the financial system by regulating this market. One of the reforms that Congress introduced in the Dodd-Frank Act (P.L. 111-203) was mandatory clearing of OTC derivatives through clearinghouses, in an effort to remake the OTC market more in the image of the regulated futures exchanges. Clearinghouses require traders to put down cash or liquid assets, called margin, to cover potential losses and prevent any firm from building up a large uncapitalized exposure, as happened in the case of the American International Group (AIG). Clearinghouses thus limit the size of a cleared position based on a firm’s ability to post margin to cover its potential losses. As lawmakers focused on clearing requirements to reduce systemic risk, concerns also arose as to whether the small number of large swaps dealers in existence—mostly the largest banks—might influence clearinghouses or trading platforms in ways that could undermine the efficacy of the approach. Concerns about conflicts of interest in clearing center around whether, if large swap dealers dominate a clearinghouse, they might directly or indirectly restrict access to the clearinghouse; whether they might limit the scope of derivatives products eligible for clearing; or whether they might influence a clearinghouse to lower margin requirements. Trading in OTC derivatives is in fact concentrated around a dozen or so major dealers. The Office of the Comptroller of the Currency (OCC) estimated that, as of the third quarter of 2010, five large commercial banks in the United States represented 96% of the banking industry’s total notional amounts of all derivatives; and those five banks represented 81% of the industry’s net credit exposure to derivatives. The first group of Troubled Asset Relief Program (TARP) recipients included nearly all the large derivatives dealers. As a result of the high degree of market concentration, the failure of a large swaps dealer still has the potential to result in the nullification of tens of billions of dollars worth of contracts, which could pose a systemic threat. A 2009-proposed amendment proposed to H.R. 4173, which passed the House, would have limited ownership interest and governance of the new derivatives clearinghouses by certain large financial institutions and major swap participants. Sections 726 and 765 in the final version of the Dodd-Frank Act mandate that the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), respectively, must adopt rules to mitigate conflicts of interest. However, it allowed the agencies to decide whether those rules include strict numerical limits on ownership or control. In the CFTC’s proposed rules to mitigate conflicts of interest, published on October 18, 2010, and on January 6, 2011, the CFTC did choose to adopt strict ownership limits, along the lines of the Lynch amendment. The SEC’s proposed rule, published on October 13, 2010, does the same. This report examines how conflicts of interest may arise and analyzes the measures that the CFTC and SEC proposed to address them. It discusses what effect, if any, ownership and control limits may have on derivatives clearing; and whether such limits effectively address the types of conflicts of interest that are of concern to some in the 112th Congress. These rulemakings may interest the 112th Congress as part of its oversight authority for the CFTC and SEC. Trends in clearing and trading derivatives, and the ownership of swap clearinghouses, are discussed in the Appendix

The Regulation of Commodity Options

To outline further genetic mechanisms of transformation from follicular lymphoma (FL) to diffuse large B-cell lymphoma (DLBCL), we have performed whole genome array-CGH in 81 tumors from 60 patients [29 de novo DLBCL (dnDLBCL), 31 transformed DLBCL (tDLBCL), and 21 antecedent FL]. In 15 patients, paired tumor samples (primary FL and a subsequent tDLBCL) were available, among which three possessed more than two subsequent tumors, allowing us to follow specific genetic alterations acquired before, during, and after the transformation. Gain of 2p15-16.1 encompassing, among others, the REL, BCL11A, USP34, COMMD1, and OTX1 genes was found to be more common in the tDLBCL compared with dnDLBCL (P < 0.001). Furthermore, a high-level amplification of 2p15-16.1 was also detected in the FL stage prior to transformation, indicating its importance during the transformation event. Quantitative real-time PCR showed a higher level of amplification of REL, USP34, and COMMD1 (all involved in the NF kappa B-pathway) compared with BCL11A, which indicates that the altered genes disrupting the NF kappa B pathway may be the driver genes of transformation rather than the previously suggested BCL11A. Moreover, a 17q21.33 amplification was exclusively found in tDLBCL, never in FL (P < 0.04) or dnDLBCL, indicating an upregulation of genes of importance during the later phase of transformation. Taken together, our study demonstrates potential genomic markers for disease progression to clinically more aggressive forms. We also confirm the importance of the TP53-, CDKN2A-, and NF kappa B-pathways for the transformation from FL to DLBCL

Opportunity cost and prudentiality : an analysis of futures clearinghouse behavior

Margin deposits, which serve as collateral to protect the clearinghouse, are typically the most important tool for risk management. The authors develop a model that explains how creating a futures clearinghouse may allow traders simultaneously to reduce both the risk of default and the total amount of margin that members post. Optimal margin levels are determined by the need to balance the deadweight costs of default against the opportunity cost of holding additional margin. Both costs are a consequence of market participants'imperfect access to capital markets. The simultaneous reduction in default risk and in the opportunity cost of margin deposits is possible because the creation of the clearinghouse facilitates multilateral netting. The authors characterize the conditions under which multilateral netting will dominate bilateral netting. They also show that it is credible for the clearinghouse to expel members who default, further reducing the risk of default. Finally, they show that it may (but need not) be optimal for the clearinghouse to monitor the financial condition of its members. If monitoring occurs, it will reduce the amount of margin required, but need not affect the probability of default. The empirical tests run by the authors indicate that the opportunity cost of margin plays an important role in determining margin. The relationship between volatility and margins indicates that participants face an upward-sloping opportunity cost for margin, which appears to more than offset the effects that monitoring and expulsion would be expected to have on margin setting.Environmental Economics&Policies,Banks&Banking Reform,International Terrorism&Counterterrorism,Economic Theory&Research,Insurance&Risk Mitigation

Diversifying Clearinghouse Ownership In Order To Safeguard Free And Open Access To The Derivatives Clearing Market

Implementing the rigorous governance and ownership standards established in the Dodd-Frank Wall Street Reform and Consumer Protection Act3 for derivatives clearing organizations (DCOs) will promote free and open access to clearing and reduce systemic risk within what is now the $700 trillion notional value derivatives market. Such standards are central to and advance the key regulatory tenants of Dodd-Frank: i.e., to restore transparency, capital adequacy, and accountability to what was the unregulated over-the-counter (OTC) derivatives market by ensuring that swaps are cleared through financially sound DCOs. Also, these rules will promote competition by curtailing large swap dealers‘ (SDs) control over these markets to the disadvantage of swaps users. This article focuses on the importance of swaps clearing to Dodd-Frank-mandated market reforms and the need for fair and open access to that clearing. Specifically, it shows that implementing objective governance standards for DCOs that include maximum capital requirements for DCO membership will enhance market stability and efficiency. To this end, the article focuses exclusively on clearing as it lies at the heart of Dodd Frank market reforms. Also, although the article discusses the SEC‘s proposed rules on DCO governance and ownership, it primarily focuses on the CFTC‘s rulemaking for DCOs since the CFTC has jurisdiction over 85The article is divided into four parts. First, it shows that Congress intended the CFTC to adopt rigorous rules regarding DCO governance and ownership that eliminate the conflicts of interest that have allowed SDs to stifle competition for clearing services and to charge unnecessarily high transaction fees. Second, it explains how pre-Dodd-Frank market forces have limited access to clearing. Third, it shows that the CFTC‘s final rule on participant eligibility—particularly the rule establishing a$50 million threshold for DCO membership—promises to both improve swap users‘ access to clearing and ensure greater stability within the derivatives clearing market. Finally, the article argues that the CFTC should strengthen its proposed governance standards for DCOs in order to safeguard swap users‘ access to clearing against the possibility that the CFTC‘s participant eligibility requirements fail to increase DCO membership