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The effect of the last two phases of the uncleared margin rule on participant swap decisions
Journal of Securities Operations & Custody,
15
(3),
228-237
(2023)
Abstract
The last two phases of the uncleared margin rule went into effect in September 2021 and September 2022. In this paper, regulatory data is used to analyse the impact these regulatory changes had on non-deliverable forward (NDF) foreign exchange markets. The data suggest that the changes had little impact on total trading activity. However, a substantial increase is observed in the extent to which traders who came into scope during these phases centrally clear their trades. This is consistent with the premise that the rule change lowered the cost of clearing a trade relative to the trade remaining a bilateral contract between the traders. This finding is in contrast to the impact of previous phases in the sense that central clearing was chosen almost exclusively by clearing members in those earlier phases.
Keywords: uncleared margin rule; central clearing; non-deliverable forwards; swap market regulation
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Author's Biography
Esen Onur joined the Commodity Futures Trading Commission (CFTC) in 2011 as a research economist in the Office of the Chief Economist (OCE). Currently he serves as a supervisory economist in the OCE, guiding the academic research output of the office. Previously, he served as Head of Academic Outreach, where he established numerous research collaborations with top academic researchers. His own research interests are centred on the derivatives markets and market microstructure. His work contributes to the understanding of how market participants use derivatives markets, with a specific focus on the interaction of futures and swaps trading, and traders' decisions around central clearing. He has also studied how the speed of trading and the changes in technology affect traders' decisions and market outcomes. In addition to research, Esen has provided cost-benefit analyses for a variety of rulemakings, was instrumental in creating the Commission's Weekly Swaps Report, and contributed to the CFTC's involvement in global swaps data harmonisation efforts. Prior to joining the CFTC, he was a professor of economics at California State University, Sacramento. His research has been published in leading journals such as Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Commodity Markets, Journal of Alternative Investments, Journal of Futures Markets and International Journal of Finance and Economics. Esen also serves on the editorial board of the Journal of Futures Markets. He received a PhD in economics from the University of Virginia.
David Reiffen is a senior economist at the US Commodity Futures Trading Commission. He has conducted economic analyses on many Commission rulemakings. He also conducts research on a variety of topics in industrial organisation and finance, several of which draw on regulatory data provided to the Commission. Prior to joining the Commission, he was an economist at the US Treasury Department and the US Federal Trade Commission. His work has been published in leading journals such as the American Economic Review, the Rand Journal of Economics, the Review of Economics and Statistics, the Journal of Law and Economics and the Journal of Financial Economics. He received a PhD in economics from UCLA.
Rajiv Sharma joined the Commodity Futures Trading Commission in 2015 as a derivatives research analyst in the Office of the Chief Economist (OCE). He conducts statistical and economic analyses of derivatives regulatory data. His research focuses on the trends observed in the foreign exchange and equity derivatives markets. His work contributes to understanding how various market participants use derivatives markets, specifically focusing on the interaction of futures and swaps trading and traders' decisions around the central clearing. In addition to creating the Commission's Weekly Swaps Report for the foreign exchange derivatives, Rajiv was instrumental in designing the Commission's Entity Netted Notional reports for the interest rates and the foreign exchange asset classes. Before joining the Commission, he worked for over a decade in Enterprise Risk Management at Capital One, Countrywide and Bank of America. In these roles, Rajiv developed and implemented models for measuring risk-based capital and performed quantitative analysis of portfolios of commercial loans, derivatives, mortgages and retail exposures. He was a Chartered Financial Analyst (CFA) and Financial Risk Manager (FRM) charter holder and received an MS in Banking and Finance from Case Western Reserve University.
