WFE Webinar
Residual Risk and Default Waterfalls in Central Counterparties
Date:July 26, 2023 Time:13:00-14:00 UTC
Moderator: Dr. Pedro Gurrola-Perez, Head of Research, The World Federation of Exchanges
Presenter: Dr. Jorge Cruz-Lopez, Assistant Professor, Department of Economics, University of Western Ontario
Abstract:
Dr Cruz-Lopez will present a stress-testing methodology to measure residual credit risk exposures and their sources in derivatives central counterparties (CCPs). Residual risks are measured relative to the coverage suggested in the Principles for Financial Market Infrastructures (BIS and CPSS-IOSCO, 2012), they can be used to evaluate the risk management practices of CCPs, their systemic risk contributions, and the effectiveness of regulations mandating the central clearing of over-the-counter (OTC) derivatives. Using portfolio-level data from every member in Canada’s largest derivatives CCP from 2003 to 2013, he shows that aggregate risk exposures reached record levels during the financial crisis, even though the CCP continued to operate normally. More importantly, the risk decomposition shows that trade crowdedness peaked six months prior to the financial crisis, whereas asset co-movement peaked during and after the crisis. These results suggest that trade crowdedness could serve as a leading indicator of the financial cycle and that it should be considered when designing risk management policies for derivatives portfolios.
Pedro joined the World Federation of Exchanges in October 2019 from the Bank of England, where he led the Financial Market Infrastructures Directorate’s Research Team. He had joined the Bank of England in 2013, after two years at the UK Financial Services Authority. Previously, Pedro spent more than 15 years lecturing and doing research at a range of well-regarded academic institutions, including the University of Barcelona and the Instituto Tecnológico Autónomo de México (ITAM).
Pedro holds two PhDs: one from the University of Barcelona, Spain, and one from the University of Montpellier, France, and has published across key academic journals, including the Journal of Financial Market Infrastructures, the Journal of Risk, International Finance and the Journal of Futures Markets. His recent work includes research on the economics of distributed ledger technologies (DLT) for securities settlement, on the network structure of settlement fails and on market liquidity risk in CCPs. He has also published research on payment systems, back-testing methodologies and on the structure of interest rate futures markets. In 2007 he received the National Award on Derivatives Research, awarded by the Mexican Derivatives Exchange (MexDer).
Jorge is an Assistant Professor in the Department of Economics at the University of Western Ontario. He joined the university in 2019 after spending eight years at the Bank of Canada, where he worked as a Senior Economist and as a Principal Researcher. Jorge’s research interests include financial asset pricing, financial risk management and financial market infrastructures (FMIs). He has published in academic and practitioner journals, served in editorial boards, and spoken at several conferences, universities, and policy institutions, including the Bank for International Settlements (BIS), the Federal Reserve Board of Governors and various other central banks. He has been an Academic Consultant at the Bank of Canada since 2019 and has previously spent time as a Visiting Scholar at De Nederlandsche Bank, HEC Paris and Queensland University of Technology. Jorge has also held teaching positions in the business schools of Carleton University, the University of Ottawa and Simon Fraser University, where he obtained a PhD in Finance in 2014. In addition to his academic responsibilities, Jorge serves as the Director of Financial Engineering and Research at Financial Network Analytics Ltd. (FNA), a leader in Regulatory Technology (RegTech) and Supervisory Technology (SupTech). He is also a member of the Advisory Board of the New York Institute of Finance, a training center for professionals in the financial services industry.
