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CONTENTS

01Cover Story

3816 31

www.dce.com.cn

GLOBAL DERIVATIVES MARKET

Cover Story

01

Exchange News 06

Regulatory Update 09

Industry News 11

Market Opinions

13

14

Voices from Events

15

16

17

Comments and Features

18

19

21

New Contracts

23

Macro-Economic Focus

24

27

Commodity Focus

29

31

32

Statistics 34

DCE News

38

01

COVER STORY

02

COVER STORY

December 2020 GLOBAL DERIVATIVES MARKET

03

COVER STORY

To consider how a financial institution’s balance sheet and other measures of financial position or business condition will continue to be stressed in a post-COVID-19 world will naturally lead us to consider the need for stress testing processes and technologies that can be leveraged to prepare for black swan events — like an unprecedented global pandemic — and other systemic or idiosyncratic disruptive forces to liquidity management. In effect, we should be prepared to handle swans of all shapes and sizes and in multiple shades of black, white, and grey. Thus, we propose a series of ideas that should be considered by financial institutions as they seek to build industrial-grade stress testing processes.

While many institutions are adept at calculating liquidity coverage ratios (LCR) and net stable funding ratios (NSFR) — given the frequency with

which regulators require them — for dynamic l iquidity monitoring in t imes of st ress, a comprehensive perspective is required. Assessing daily changes in the trifecta of inflows, outflows and HQLA within an organisation is critical. For example, COVID-19 has led to massive drawdowns on retail savings. This has taught us that not having automated connectivity between daily deposit activity and cashflow, impacts an organisation’s ability to accurately create liquidity stress scenarios. Fortunately for some organisations, FDIC 370 regulations in the US as well as European Banking Authority (EBA) and national central bank (NCB)-mandated regulations like AnaCredit and Deposit Guarantee Schemes (DGS), have forced many to improve their loans and deposits management and monitoring solutions. As a result, many firms now have their customers-accounts-deposits data integrated into a single repository covering risk management, compliance, and management information. Thus,

04December 2020 GLOBAL DERIVATIVES MARKET

they can produce an accurate daily perspective on deposit flows. Liquidity managers should carefully consider how this adjusts their view of expected outflows in these turbulent times. This number is surely higher than any drawdown rates prescribed in typical LCR reports and pre-COVID-19 stress scenarios.

On the flip side, inflows are faring no better. People and businesses across entire economies are cut off from their sources of income, and governments have put moratoriums in place that provide relief for borrowers but leave lenders waiting. This is in addition to the problem of an increasing risk of defaults, as discussed below. Furthermore, a firm needs to keep a close eye on its book of HQLAs, which faces liquidity risk as the issuance market dries up and the risk of downgrades increases. Through recent injections of large amounts of cash and liquidity support into the economy — including direct purchases of corporate debt securities — raising funds through wholesale money market instruments has been helped by the actions of the US Treasury and Federal Reserve, the UK Bank of England and similar national bodies. But, like a babbling brook flowing slowly towards a lake, benefits take time to trickle down to all participants in the economy. To summarise, step 1 for coping with a black swan involves having a deep understanding of what physical or virtual network of factors drive liquidity. And how those factors impact both short-term liquidity and medium-term funding buffers in times of extreme economic stress.

Capital adequacy measures and related reporting requirements such as standardised approach to counterparty credit risk (SA-CCR) and the fundamental review of the trading book (FRTB)

provide a system-driven mechanism to report wholesale credit and market risk on a financial institution’s books. In these uncharted new times, the very definition of default is changing. This is mandated by newly installed legal default forbearance, an economic stimulus program, or a regulator. Such a scenario is almost impossible to model. Having said that, future stress testing processes for deteriorating credit will have to cater for exceptions, given the unprecedented precedent set by COVID-19. To model this in step 2, it makes sense for an institution to have a system-driven perspective of their credit and market risk profile. Having this type of data available in a repository — complete with daily calculations — will provide the best-case scenario of inputs for stress testing scenarios.

Due to many COVID-19 driven regulation reprieves, the entire industry has gained a year to reflect on how best to address upcoming Basel IV requirements. Many of the concepts contemplated within the Basel framework can be implemented in stress testing processes that take future regulations and scenarios into account. They are outlined as follows:

Capital conservation buffer — designed to avoid breaches of minimum capital requirements.

Countercyclical capital buffer — aimed to ensure that capital requirements consider the macro-financial environment.As a financial institution’s top line is stressed, there will be greater demand for credit to stay afloat. Decisions by the EBA and NCBs to provide fiscal or monetary help to the real economy translates into credit growth. The same phenomenon is true for North America and in most economies around the world. Thus, step 3 means provisioning for both buffers with stress scenarios and understanding the impact of these buffers in a challenging economic environment.

COVER STORY

05

COVER STORY

There is yet another quasi-esoteric topic to consider — the assumption that all swans look alike, and that risk appetite should be assessed as a percentage of annual earnings. This percentage could be thought of as the level of loss a bank can sustain in a financial year and continue functioning. The amount typically ranges from one to two quarters of earnings, but perhaps it is time to revisit those assumptions. COVID-19 has shown that a drastic reduction in global economic activity in a very short timeframe is entirely possible. Therefore, it follows that step 4 would require a perspective on risk appetite in terms of the economic scenario that is being modeled. While this perspective could differ from institution to institution depending on what risks they are most prone to, it could be dangerous to assume that there is only one right answer. And not just esoterically.

In the European Union, financial institutions are required to have robust ILAAP, ICAAP and IFRS-9 stress testing processes in place as part of their risk management monitoring. However, even without those regulatory obligations, stress testing is increasingly becoming mandatory when assessing the ongoing financial health of institutions. Having an accurate point-in-time view of financial positions that cuts across the below, combined with an understanding of one’s own risk appetite, serves as the basis for developing stress scenarios. At a minimum, positions should include:

Deposits, loans, trading, and banking booksLiquidity ratiosCredit riskMarket riskOperational riskCapital buffers

At its most basic, stress testing can be done using a series of assumptions and utilising end-user computing tools to gain insights. In a post

COVID-19 new normal, financial institutions will seek more depth and detail, leading to an increasingly complex undertaking that will have to examine all members of the flock:

A changing definition of defaultInclusion and/or exclusion of certain types of

exposures and their hedgesAssumptions on the initial and/or scenario-specific

values of collateral and exposures across asset classes

Assumptions about correlations and volatilities in hedging strategies

Assumptions about interconnectedness and risk contagion

Assumptions on liquidity runoff rates and HQLA recognition of various asset classes

Changes to risk appetite, given stress conditionsSo, in other words, a financial institution’s stress testing framework needs to be comprehensive, fully integrated, and built to encapsulate all aspects of an organisation’s business.Other than a vacation far away from swan-inhabited waters, what could mitigate all this stress?Firstly, a data management platform that can consolidate and house point-in-time data sets to provide a holistic perspective that accommodates all of the above considerations. And secondly, leveraging this platform to serve as a foundation of transparent and traceable data to drive stress testing in a world reeling from COVID-19, and perhaps other (as yet) unimagined black swan events.Given the picture outlined above, there is much to be done over the next couple of years to get financial institutions ready for implementation of industrial-strength stress testing processes. On the positive side, effectively addressing these concepts will not only imbue financial institutions with confidence on their Basel journeys, but it will enable them take flight on a favourable breeze in a post-COVID-19 new normal.

EXCHANGE NEWS


07

EXCHANGE NEWS


EXCHANGE NEWS

09

REGULATORY UPDATE

European Union

10

REGULATORY UPDATE


European Union

INDUSTRY NEWS

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’

11

12

INDUSTRY NEWS


MARKET OPINIONS

13

英国机构欧洲机构

14

MARKET OPINIONS


15

VOICES FROM EVENTS

16

’

’

VOICES FROM EVENTS


Leong Sing Chiong

17

VOICES FROM EVENTS

18

COMMENTSANDFEATURES


19

COMMENTSANDFEATURES

COMMENTSANDFEATURES


21

COMMENTSANDFEATURES


COMMENTSANDFEATURES

NEW CONTRACTS

23

24

MACRO-ECONOMIC FOCUS


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2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

16

14

12

10

8

6

4

2

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

3.5

3

2.5

2

1.5

1

0.5

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

7

6

5

4

3

2

1

0

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

1.1

1.05

1

0.95

0.9

0.85

0.8

0.75

0.7

0.65

0.6

25


2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

120

100

80

60

40

20

0

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0.00

-5.00

-10.00

-15.00

-20.00

-25.00

1.11.050.950.90.850.80.750.70.650.6

1998

2000

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

1.15

1.05

0.95

0.85

0.75

0.65

0.55

200

180

160

140

120

100

80

60


2020/3/1 2020/4/1 2020/5/1 2020/6/1 2020/7/1 2020/8/1 2020/9/1

0.0

-20.0

-40.0

-60.0

-80.0

-100.0


27


10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

-35%

-40%2020/2 2020/3 2020/4 2020/5 2020/6 2020/7 2020/8 2020/9

80

60

40

20

0

-20

-40

-60

-80

-1002020/2 2020/3 2020/4 2020/5 2020/6 2020/7 2020/8 2020/9

0.0

-20.0

-40.0

-60.0

-80.0

-100.02020/3/1 2020/4/1 2020/5/1 2020/6/1 2020/7/1 2020/8/1 2020/9/1

0.0%

-10.0%

-20.0%

-30.0%

-40.0%

-50.0%

-60.0%

-70.0%

-80.0%

-90.0%

-100.0%2020/3 2020/4 2020/5 2020/6 2020/7 2020/8 2020/9

2020/2 2020/3 2020/4 2020/5 2020/6 2020/7 2020/8 2020/9

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50%



COMMODITY FOCUS

29

30

COMMODITY FOCUS


COMMODITY FOCUS

31


COMMODITY FOCUS

As North American summer ends, U.S. corn and soybean prices are benefitting from generally dry weather across the midwest that has reduced yields for both crops in the major producing areas. Earlier forecasts had called for 2020 harvests possibly to break records not only for average yields but for total harvested amounts.

Total corn production estimates were sharply reduced by the U.S. Department of Agriculture after a massive storm called a “derecho” flattened at least 550,000 acres of Iowa corn. A derecho is a storm

front of at least 400 kilometers in length with straight line winds that reach hurricane strength. The derecho also affected corn plantings in neighboring Minnesota and Illinois, although to a lesser extent.

Iowa, like much of the rest of the Midwest, had been suffering drought conditions throughout the summer. Some Iowa and Illinois acres were already being harvested early, leading to lower yield estimates, although upper Midwest states including Wisconsin, Minnesota and the Dakotas are seeing improved yields. In September the USDA lowered its yield estimates for the national crop by about 2% to

178.5 bushels per acre, still a record. The forecasted yield is 11 bushels per acre above the actual yield for last year’s crop. That crop was beset, variously, by late planting, cool growing conditions and early snow storms.

Demand for corn is led by its use in livestock feed in the U.S. Prospects for increased meat production are supporting current prices in the face of likely softening of export demand. Expanded corn production in Brazil and elsewhere as well as the continued strength of the U.S. dollar have dampened demand for American corn although the U.S. is enjoying a smaller demand shift away from European producers. Also, prospects have dimmed for a speedy return to earlier demand for corn-based ethanol to be used in gasoline as the U.S. economic recovery slows.

The USDA revised its forecast for the average per bushel farm-level price for U.S. corn up to $3.50, more than 10% higher than its earlier forecast. December corn futures prices on the CME Group’s Chicago Board of Trade began an almost $.60 per bushel climb starting on August 10, the day of Iowa’s derecho, touching $3.79 per bushel on September 18, 2020.

This year, U.S. weather conditions were optimal in

most parts of the country for soybean planting. Spring 2020 was mostly warm and dry, unlike the previous year. And prospects now for continued warm, dry weather during harvest are strong.

The intervening summer drought, however, led the USDA to revise its forecasts for average yield per acre downward. Iowa’s derecho had little effect on soybeans, the plants of which lie closer to the ground and are less susceptible to wind damage. But a severe drought throughout Iowa, Illinois and other major soybean producing states in July and August limited the number of beans that were set in soybean pods, thus curtailing the expected yield. USDA reported that at the end of August only about half of planted soybeans were in good to excellent condition, with the lower yields reducing the total crop forecast slightly, to 4.3 billion bushels.

Soybean futures for November delivery traded as low as $8.30 per bushel in mid April 2020 and did not rise convincingly above $9.00 until mid August when the effects of the summer drought were becoming clear. By mid September 2020 soybean futures on the Chicago Board of Trade had reached as high as $10.46 per bushel, before retreating to about $10.10 per bushel.

USDA forecasts that the average farm price for 2020 soybeans will be $9.25 per bushel.

COMMODITY FOCUS

33


503,717,625

119,433,779

114,704,187

595,321

246,653

123,042

1,706,650,612

1,642,103,731

1,255,179,724

40,530,570

43,672,121

31,840,295

24,575,045

11,324,716

3,007,394

268,611

50,809,667

2,154,607

54,927

5,497

945

STATISTICS

35

STATISTICS

31,135,177

25,374,315

19,686,535

16,574,703

15,005,765

13,965,453

12,452,088

8,831,492

8,760,695

8,256,323

29,442,660

19,823,216

16,780,351

10,882,520

10,101,609

9,968,387

4,790,106

4,697,742

4,645,292

4,135,975


STATISTICS

52,671,201

25,860,410

17,062,994

16,652,537

13,913,588

13,155,166

9,313,292

6,524,665

5,193,195

5,100,800

30,381,486

23,827,185

18,058,689

10,657,941

10,192,398

6,084,243

5,246,213

5,210,266

3,825,927

2,539,976

37

STATISTICS

108,605,769

61,745,393

37,834,160

77,890

11,954

706

54,124,133

43,364,865

39,773,998

37,778,171

10,079,299

DCE NEWS


39

DCE NEWS

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