Financial markets: Systemic risks in plumbing?

Following the 2008 Global Financial Crisis (GFC), financial markets have undergone substantial and wide-reaching reforms. In particular, derivatives trading has been reshaped by mandated electronic trading and central clearing. These two core elements of the financial market infrastructure, ie the “plumbing” have been strengthened to mitigate the contagion risks seen in the Lehman episode and are seeing steadily increasing trading activity. At the same time, the last few years have also witnessed a considerable number of stress events, ranging from supposedly safe fixed income segments such as US Treasuries (March 2020) and UK gilts (September 2022) to the US repo market (September 2019), commodities (first half of 2022), equity (GameStopp episode in January 2021) and CDS (March 2023). Two common factors of these stress episodes are a sharp and sudden decline in market liquidity and a jump in the margins called by major CCPs (leading to increased liquidity risks for many market participants). These developments raise a number of major questions about the resilience of market infrastructure and the impact of regulation and the remaining risks in the plumbing of the global financial system.

Some issues for discussion in this webinar are:

• How has the plumbing of key market segments changed since the GFC?
• Is central clearing eliminating contagion risk?
• What is the role of non-bank traders in the new ecosystem?
• How does Brexit affect derivatives trading in the EU?
• How does the private sector manage risks in trading and clearing?
• What are the lessons of the recent stress events?
• What are the main risks at the moment?
• Which further reforms are necessary to reduce systemic risk in financial market infrastructure?

Scientific coordination: Martin Scheicher, Adviser, DG Horizontal Line Supervision of the Single Supervisory Mechanism, ESB and SUERF Fellow

Background documents

“Resilience Redux in the U.S. Treasury Market” by Darrell Duffie, Jackson Hole Symposium Paper, Federal Reserve Bank of Kansas, August, 2023.
“Dealer Capacity and US Treasury Market Functionality”  by Darrell Duffie, Michael Fleming, Frank Keane, Claire Nelson, Or Shachar, and Peter Van Tassel, Staff Report 1070, Federal Reserve Bank of New York, August, 2023.

Bank of England, Staff Working Paper No. 1026
The potential impact of broader central clearing on dealer balance sheet capacity: a case study of UK gilt and gilt repo markets by Yuliya Baranova, Eleanor Holbrook, David MacDonald, William Rawstorne, Nicholas Vause and Georgia Waddington