More collaboration between central counterparties (CCPs), vendors and buy-side firms is needed to prevent dangerous operational bottlenecks from developing in futures and options markets, say clearing members, after a massive spike in trading volumes in March due to coronavirus-induced volatility saw missed margin payments and trades being left on the books of the wrong clearing brokers.
Back-office systems buckled in the wake of a massive spike in volumes during March’s coronavirus rout. Processing backlogs and manual errors meant some clearing brokers were left with uncollateralised overnight exposure to buy-side clients, while others had to meet surprise margin calls at a time of funding stress. ClearVision, a widely used system supplied by vendor FIS, reportedly experienced outages on March 20, a key expiry date for US stock futures and options.
Speaking at an industry event on June 24, Nick Briggs, vice-president in global strategy, futures and options and over-the-counter clearing operations at Bank of America, said the operational backlogs that occurred across several heavy trading days in March resulted in an unexpectedly large number of trade breaks, necessitating a huge manual effort by futures commission merchants (FCMs) to match them up again.
“Normally, a trade will be booked into a CCP, the FCM on the other side will receive a confirmation from their client, and they will pick the trade up. Unfortunately, due to the huge amounts of volumes that were going through, that was not quite as easy. We might have had some disparities between confirmations being received from a client or trades received from another FCM – that meant that there were huge amounts of investigative work that needed to be carried out,” said Briggs, who was speaking during a virtual panel debate during the Futures Industry Association’s International Derivatives Expo.
March volumes were a record for many benchmark equity, credit, interest rate and commodity benchmarks across multiple exchanges. At the Options Clearing Corporation, for example, home of the Vix contract, total volumes were up more than 60% in March 2020, compared with the same month in 2019. At Eurex, cleared futures and options volumes increased 40% compared with March 2019.
As the coronavirus crisis developed, operational bottlenecks became dangerously squeezed, said Briggs, who praised his staff for working long hours under stressful conditions to clear the backlogs.
“Between three and five days in, I don’t want to say [there were] CCP systemic issues, but we were unable to adjust trade data,” he added. Although rules vary between clearing venues, trade data is typically only adjustable in CCP systems between three and five days after the trade date.
Between three and five days in, I don’t want to say [there were] CCP systemic issues, but we were unable to adjust trade data
Nick Briggs, Bank of America
To clear the backlog of trades older than five days, the bank was forced to engage in manual position transfers, he added, wherein a clearing member transfers an unsettled position to another clearing member, with the approval of the CCP, in order to consolidate a client’s positions as well as reduce margin requirements and settlement-related expenses.
But that only got them so far, he added: “We are not able to physically allocate transactions between members after a period of time. On a normal day-to-day basis, FCMs would prefer not to have to perform position transfers between each other, as it has knock-on effects [with] reconciliations. There are cash elements where you’re really valuing back to between closing price and trade price, and also it has knock-on effects downstream [with] partners in regulatory reporting teams.”
On expiry dates, Bank of America prioritised tackling trade breaks on physically delivered contracts over cash-settled, said Briggs – with the downside that this left some trades behind on the books of the wrong FCMs. Brokers were forced to come together to work out a plan to remediate the cash differences between FCMs, to ensure clients had the correct P&L sitting with the right clearing firm, he added.
On the busiest contract expiry dates, FCMs were left with very little time at the close of trading to process allocations provided by clients – a particular problem for give-up trades, which have to be accepted and reconciled by another clearing broker on the other side, according to Meher Sutaria, global head of regulatory reporting and European head of global clearing operations at JP Morgan.
While CCPs did provide extensions, she said, these are only useful “up to a certain time – otherwise it will impact your processing and start-up the next day. And because we were all having end-of-day extensions, it then delayed the start of the end-of-day batch [processing] across the industry”, speaking during the same debate.
She also complained some CCPs issued “very large and multiple intraday margin calls” with limited information to attribute a cause to clients: “FCMs then end up carrying that additional margin risk. For give-ups that were not accepted, the executing broker is again carrying the margin risk.”
In some cases, CCPs did not return the margin until the next day, she added, even where markets had moved in the FCM’s favour – giving risk to concerns over double-funding of positions.
“There are certain CCPs where you actually have to tick a box to say: ‘Use this additional liquidity for my next day’s call,’” said Sutaria. “Otherwise, you will be called for the margin again the next day – essentially double-funding for a few hours.”
Speaking up for CCPs, Jens Janka, head of clearing delivery and control at Eurex Clearing, said it was impossible to please all clearing members in such situations, with some opposed to settlement window extensions. One side needed the additional time to process give-ups and take-ups, he said, while the other side needed evening processing time to ensure their system was up and running the next business day.
“We ended up in a situation where nearly everyone called us and had different kinds of requests. One side of the street was asking for a maximum extension of clearing accounts, and the other side was asking us to please not extend a single minute,” he said.
On the buy side, Diederik Dorst, global head of regulation and market structure at prop shop Flow Traders, said areas where post-trade bottlenecks could occur were well known, but that during volatile markets, poor communication between all parties meant they were “amplified, like in a pressure cooker”.
He said Flow Traders especially experienced particular problems in March moving trades in exchange-traded funds “that have multiple listings, across multiple CCPs with the same Isin [International Securities Identification Number]”.
In terms of lessons learned, clearing members said more transparency would be helpful – around intraday margin add-ons from CCPs, and on processing give-ups in order to allow better resolution of failed trades.
Editing by Tom Osborn
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