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High Frequency Trading: Mitigating Its Impact on Trading and Investing

Short Course – Markose

Short Course 2 – Dr. Prof. Sheri Markose

On Interconnectedness and Systemic Risk in Derivatives: Updates on G20 OTC Reforms and skin-in-the game for CCPs.

Summary of Course
The global derivatives markets that aim to provide risk management services had become part of the problem because of their size at over $700 trillion in 2007. Also their clearing process involving a few large banks was too opaque and had made these banks vulnerable to failure.  Hence, the G10 reforms aimed to introduce central clearing parties (CCPs) as a means of increasing transparency of the clearing process.  But then the question is how vulnerable are CCPs and do they have sufficient capital, called “skin-in-the-game.” Otherwise, CCPs have to rely on others, including  tax payer bailouts during a crisis. Sheri Markose will guide you through the modelling of systemic risk in global derivatives markets using network analysis and will use her most recent publication in the 2017 Banque de France Financial Stability Review (FSR) which assesses the status of G10 financial market reforms post GFC.  Sheri’s paper “Systemic Risk Assessment of OTC Derivatives Reforms and Skin-in-the-game for CCPs” in the 2017 BdeF FSR, provides proof of concept for quantifying the skin-on-the-game for CCPs.

After 20 April 2017, the FSR can be accessed from Banque de France’s website at: https://publications.banque-france.fr/en/liste-chronologique/financial-stability-review

We will cover three main subjects:
1.  Systemic Risk and Network Analysis for Global Derivatives Markets
2. G20 Reforms Collateralization and CCPs: Solvency and Liquidity Systemic Risk
3. CCP’s as “super systemic’: Designing skin-in-game for CCP’s

The lectures will make use of 3 other publications in the execution of this course:

– Markose, S.M, Giansante, S., Eterovic, N., Gatkowksi, M. Early Warning and Systemic Risk in Core Global Banking: Balance Sheet Financial Network and Market Price-Based Methods, Available at https://ssrn.com/abstract=2899930

– Alexandra Heath, Gerard Kelly, Mark Manning, Sheri Markose and Ali Rais Shaghaghi, “CCPs and Network Stability in OTC Derivatives Markets,” Journal of Financial Stability, Vol. 27, December 2016, Pages 217–233. http://dx.doi.org/10.1016/j.jfs.2015.12.004

– Markose, S.M, 2012 November, “Systemic Risk from Global Financial Derivatives: A Network Analysis of Contagion and Its Mitigation with Super-Spreader Tax,” International Monetary Fund Working Paper No. 12/282, November 2012.  https://www.imf.org/external/pubs/ft/wp/2012/wp12282.pdf