Coronavirus, smart contracts and public bailouts for CCPs

The week on, March 7–13, 2020

7 days montage 130320

Oil price shock triggers big margin calls

Banks and exchanges worked through weekend in anticipation of oil collapse

Outsmarting counterparty risk with smart contracts

A digital transaction system developed by quants at DZ Bank could slash margin costs for derivatives

Of rats and men: would member compensation imperil CCPs?

CCPs and members split over whether compensation after default losses is moral hazard or fair

COMMENTARY: Panic goes viral

Continuing bad news about the spread of the coronavirus, together with a sudden oil price shock, hit hard on Monday this week. covered the immediate effects on the markets, and also looked at the likely effects of the pandemic in the weeks ahead.

The oil price moves weren’t unprecedented – but with the WTI and Brent benchmarks falling 25% and 24% in a day, they were the most severe since the 1991 Gulf War. At best, they seem to have been right at the edge of what central counterparties and banks had planned for – but they made it through nonetheless amid sizeable margin calls and record volumes on the options and futures markets. Foreign exchange markets saw surging volumes as well, as traders sought to profit from near-unprecedented volatility or hedge existing exposures.

Other trades have performed less well – dispersion trades suffered as equity correlations soared, even before last weekend’s events. And troubled markets took another blow later in the week with US president Donald Trump’s unexpected announcement of a 30-day ban on travel and trade between Europe and the US (the US government announced shortly after that the trade ban would not go into force and the travel ban would not apply to US citizens). The most unpredictable administration in recent US history no doubt has more surprises to spring on the markets as the crisis goes on.

But the real imponderables lie, as they so often do, in the area of operational risk. Already, traders say, bond and swap markets are seeing low liquidity and wider spreads, amplified by the effects of remote working. It isn’t a case of a sudden cataclysmic failure of the market – or even at a single bank – but the many small inefficiencies and problems involved in switching to backup sites or remote working are starting to add up. Everything becomes a little more difficult; everything takes a little longer. So volumes drop and spreads widen. Soon trades may take longer to confirm; decisions will be made more slowly; and operational errors of every kind will become more frequent.

This is friction. It’s unavoidable even at the best of times, but as the strain on business continuity plans, connectivity and staff continues to grow, it will manifest itself more and more – and not just as a gradual increase in costs and processing times, but in occasional but spectacular losses that slip through a weakened safety net. The minutiae of individual business continuity plans will become very important in the weeks and months ahead.


February’s largest operational risk loss saw a Paris court order BNP Paribas to pay up to €152.2 million ($165.3 million) for concealing the financial risks of real estate loans offered between March 2008 and December 2009. The loans were denominated in Swiss francs but repayable in euros, and the contracts were criticised by magistrates as “particularly unintelligible”



“Discussions with market participants suggest that in some cases up to half of pledged collateral activity may not be on-balance sheet. Standard measures of leverage derived from on-balance sheet or aggregate data fail to capture this” – Manmohan Singh and Zohair Alam

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