Welcome to the final issue of Volume 7 of The Journal of Financial Market Infrastructures, which contains three papers.
In our first paper, “Central counterparty anti-procyclicality tools: a closer assessment”, Atsushi Maruyama and Fernando Cerezetti focus on the topic of procyclicality in the context of central counterparties (CCPs). From a financial stability perspective, it is important that in extreme but plausible market conditions CCPs are adequately protected against member defaults as well as being equipped to avoid undue additional stress when making margin calls. The authors investigate this balance using lessons learned from securities financing and bilateral over-the-counter markets. Among other recommendations, they argue in favor of enhanced transparency in margining practices, specifically with regard to intraday mark-to-market procedures.
“Funding and credit risk with locally elliptical portfolio processes: an application to central counterparties” by Leif Andersen and Andrew Dickinson, the second paper in this issue, considers the problem of credit and funding risk quantification in the context of value-at-risk and expected shortfall, risk measures often used by CCPs. More specifically, these risk measures allow for more general distribution models, possessing fatter-tailed market movements during the margin period of risk, than the simplistic random walk assumption. The authors apply their mathematical results to both client clearing and the mutualization of losses from member defaults.
Ruth Wandhöfer and Ron Berndsen coauthor our third paper, “Proof-of-work blockchains and settlement finality: a functional interpretation”, which proposes a generalization of the legal notion of settlement finality to a functional notion of the degree of settlement finality. The degree of settlement finality of a certain block in the blockchain increases with the length of the blocks that come after that block. Through this generalization it becomes possible to compare final settlements in financial market infrastructures with the kinds of settlement found in proof-of-work algorithms, such as that used by Bitcoin.
Finally, I would like to announce that we intend to publish a special issue on CCPs to discuss some of the main outstanding problems in the area. A call for papers will be in an upcoming issue and on Risk.net. I look forward to seeing your contributions on those topics, but there is also ample room for submissions in other subjects within the scope of The Journal of Financial Market Infrastructures.
This paper investigates whether the substantial focus placed on the procyclicality of initial margin reflects both the original concerns at the time of the 2007-8 financial crisis and the intrinsic 'modus operandi' of CCPs.
Funding and credit risk with locally elliptical portfolio processes: an application to central counterparties
In this paper, the authors extend the scaling approach of Andersen et al (2017a) from a model driven by Brownian motion to one driven by an arbitrary isotropic Lévy process.
In this paper, the authors aim to provide an interpretation of the legal issue of settlement finality in the context of proof-of-work distributed ledger technology, such as the Bitcoin network.