INTERVIEW | “We consider that at this stage, in the European Union, there is no need yet for a clearing obligation in the government bond market,” says Stéphane Janin, Head of Global Regulatory Developments and Public Affairs with Paris-headquartered investment giant AXA Investment Managers (AXA IM). PostTrade 360° met up with him at April’s clearing specialist conference WFEClear in Seoul. His wish list also entails more transparent margin-call models at the CCPs, and the possibility to file government bonds – not just cash – as variation margin.
While the United States recently postponed the compliance dates for its upcoming mandate to clear treasury bond transactions at a CCP – by a year, to 30 June 2027 for repo transactions – the wind is blowing in a clear direction. Now, discussion is heating up over whether such a rule should apply also for the EU. The answer from AXA Investment Managers’ Stéphane Janin would be a no at this stage.
“The interbank part of the repo market is already fully centrally cleared, and the rest of the market at 50 percent. So, with a reasonable level of central clearing taking place, driven only by market forces, this is a better solution than imposing a mandatory obligation.”
Clearing services come with values for market participants – in the risk protection that they bring, and the reduction of settlement volumes that comes with the CCPs’ service of first netting out trades that have gone in opposite directions through the trading day. But then, there is also a cost for the service (feeding into a total of €6 billion or so of annual revenue for Europe’s clearinghouses). The balance of the benefits against the costs will be different for different market participants. In summary, Europe’s asset managers fear that they could lose out if the decision came to be prescribed from above their heads.
“The costs would ultimately be borne by the end clients,” says Stéphane Janin.
Regulation list already long
He also points to the context of other risk-mitigating regulations that have come into play for asset managers after the financial crisis around 2008, and after the 2009 “Pittsburgh summit” that laid out the ambitious global clearing policies in its wake. In the EU, the European Market Infrastructure Regulation (EMIR) obliges reporting of standardised OTC instruments, and disclosures around them. And the EU Securities Financing Transactions Regulation (SFTR), which, regarding repo transactions, already sets a regulatory framework on them, including reporting. Thirdly, EU asset managers are required to regularly report the whereabouts (OTC or not, and centrally cleared or not) related to their investment funds to their national supervisory authorities. Furthermore, in the euro zone, an additional reporting requirement to national central banks comes on top. With all this oversight, the question is whether the existing setup is leaving enough risk unmanaged to motivate yet another obligation.
To decrease the systemic risks, a closer look at the less regulated subsegments of actors within the diverse category known as non-bank financial institutions (NBFI) by policy makers would make sense, in Stéphane Janin’s view. The 2021 implosion of Archegos, in the US, sent shockwaves through markets, and helped push bank Credit Suisse into virtual bancruptcy. By today’s framework, such a fund would go outside many of the rules that limit what the mainstream asset managers could do.
“The non-bank financial institutions was a concept developed by the Financial Stability Board, potentially capturing everyone but banks – so, both regulated and unregulated players. Within that group, the different types of entities are not equal. Asset management companies as such are fully regulated, as well as the funds they manage. Compare that with structures like Archegos, that are not regulated but which operate as counterparties of many banks, particularly in the OTC markets. So at the end of the day, we may wonder if there wouldn’t be a need for a minimum regulatory framework on those non-regulated players or structures – to ensure that regulators better know them at least.”
Indeed, the owner of Archegos had previously pleaded guilty to insider trading.
Transparency could be better
Another wish from Stéphane Janin goes out to the CCPs themselves.
“We would like their risk models and simulation tools to become more transparent. Some CCPs are better than others, and we would like to see the higher level across all of them, not only some. We need to be able to anticipate our derivative risk in cleared markets, so as far as possible, we wish to take into account the CCP risk model parametres into our own tools. And we would like these risk models to be made more interoperable, by being more easily available through APIs in particular.”
By the same logic, Stéphane Janin would prefer if the clearing members – positioned between the asset manager and the CCP – could find ways to apply more reasonable notice periods when introducing margin add-ons and related collateral calls to their clients, to cover for counterparty obligations when market positions have gone south. While this could be hard to regulate in detail, Stéphane Janin sees room for international policy bodies such as CPMI-IOSCO to express principles.
“It is usually a discussion mainly between regulators, policy bodies, clearinghouses and clearing members, without end users speaking on these topics. We want to make the end users’ voice better heard.”
Hopes bonds could count for “VM”
Yet another win for capital markets would be if the so-called variation margin – that market participant must chip in as additional collateral in response to value swings towards a counterparty – could be posted in high-quality securities such as government bonds, and not only cash. For the initial margin, this is already possible.
“We understand that the cash is easier for the clearinghouses to manage but from an end-user perspective, when you have huge portfolios of the safest bonds, it would be better, and less pro-cyclical, to bring in these than to have to sell them for cash in stressed market conditions,” says Stéphane Janin.
“At least in the EU framework, we have hopes that such a proposal could fly.”
