BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

Continue Reading


Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

Continue Reading


Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

Continue Reading

Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

Continue Reading


Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

Continue Reading

Categorized | Capital Markets

Derivatives traders forced to provide $27bn collateral post-Brexit

Posted on November 17, 2016

Derivatives traders were forced to stump up tens of billions of dollars the day after Britain’s vote for Brexit to cover volatile price movements, testing the foundations of the market’s post-financial crisis architecture.

Five of the largest clearing houses in the world demanded $27bn in additional collateral across derivatives products on June 24, according to data from the Commodity Futures Trading Commission, the main US derivatives regulator. That was $22bn, or five times, greater than the previous 12-month average, the CFTC found. 

The disclosure came as the clearing houses passed their first stress test from the regulator.

Clearing houses, or CCPs, are seen as critical backstops in derivatives markets, standing in as buyer to each seller and seller to each buyer on contracts ranging from interest rate swaps to oil futures. They collect collateral, or “margin”, to cover potential losses should a party to a trade default.

The CFTC noted that liquidity issues, as well as operational risk and cyber risk, were not covered by the stress test. The test only assessed a CCP’s ability to withstand losses given its current resources, so even if the $27bn called for after the UK voted to leave the EU had not been paid, the CCPs would still have passed. 

But some investors aired concerns over demanding large sums of money during stressed periods, sapping liquidity from the market. 

“There is more to the issue than just passing this test,” said Michael O’Brien, head of global trading at Eaton Vance. “Liquidity issues and margin calls are also very important to the system as whole.”

The CFTC carried out the test on five of the largest derivatives clearing houses: CME Group’s US business, London-based LCH and three businesses in the US and UK run by Intercontinental Exchange.

Crucially, every CCP was able to cover losses arising from the default of its two largest members, an international standard for clearing houses, in each of the 11 unique stress scenarios. The scenarios were developed after reviewing price movements on days with extreme volatility, including June 24.

“These first tests show that clearing houses had ample resources to withstand extremely stressful market scenarios on the test date,” said Timothy Massad, chairman of the CFTC. reported that LCH was addressing concerns over its margin processes that were criticised due to instances where the CCP calls for additional margin on contracts that move against investors but does not immediately return cash on contracts that have favourable price moves, leaving CCP members to fund the difference in between. Some initial changes took effect shortly before the US presidential election.

“I think [Brexit] was the first time the corporate treasurer knew my name … Had it been an unknown event, had it been an event we did not see, then the rally for cash would have been certainly more stressful,” said Tom Gillis, a futures executive at Wells Fargo Securities, at the FIA Expo conference in Chicago last month.

Stock, bond and currency derivatives underwent another big swing last week, as Donald Trump secured a surprise presidential victory. Daily volume on CME Group exchanges topped 44.5m contracts, smashing the previous record by almost 5m. US dollar interest rate swap volumes also surged, according to data from ClarusFT. But clearing house members and investors said margin calls were more moderate than in the days after Brexit.