WFE says CCPs should be at forefront of market risk management

The World Federation of Exchanges (WFE) has suggested that central counterparties (CCPs) are best placed to manage risks within specific markets according to a new report published.

In the report it also laid out the WFE’s own viewpoint on how to handle the controversial topic of CCP risk management, recovery and resolution.   

On the subject of transparency and disclosure, the Federation advocates transparency in procedures, rules and risk methodologies as well as disclosing information to customers requiring assessing risks.  This, they believe, would bolster the safety of the financial system and the smooth functioning of fair and orderly markets.

Furthermore, it believes CCPs must establish and retain emergency powers in order to address unforeseen events, as the 2008 financial crisis demonstrated the systemic risk management benefits that CCPs provide.

On the subject of skin-in-the-game the WFE has also proposed a standardised ‘skin-in-the-game’, personal contribution to the financial waterfall, and Europe- based multi-asset CCPs have responded with their own stance on ‘skin in the game.’  

“Skin in the game is there to align the incentives of CCPs and clearing members, which is important. Flexibility is also crucial – and will need to extend to how CCPs work with each other because effective recovery is going to require greater collaboration,” said Frederik Ekstrom, president of Nasdaq Clearing.

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