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How Have Capital Levels of Futures Commission Merchants Changed Since the Global Financial Crisis?
Following the Global Financial Crisis of 2007–09 (GFC), regulators across the world enacted regulations to repair and strengthen financial markets. These regulations included a mandate to have more financial market contracts be cleared through central counterparties (CCPs), which are financial institutions that guarantee the performance of contracts.1 As a result, the central clearing of derivatives transactions increased significantly, and so did the allocation of capital to support this activity in line with regulatory requirements. If demand to centrally clear transactions continues to ...
Working Paper
Portfolio Margining Using PCA Latent Factors
Filtered historical simulation (FHS)—a simple method of calculating Value-at-Risk that reacts quickly to changes in market volatility—is a popular method for calculating margin at central counterparties. However, FHS does not address how correlation can vary through time. Typically, in margin systems, each risk factor is filtered individually so that the computational burden increases linearly as the number of risk factors grows. We propose an alternative method that filters historical returns using latent risk factors derived from principal component analysis. We compare this method's ...
Working Paper
Does Financial Stress Affect Commodity Futures Traders’ Positions?
Financial stress can impact trading behavior in the U.S. commodity futures markets. To clarify the impact, we study absolute changes and relative exposure dynamics in traders' positions during two recent crises: the 2008 Global Financial Crisis (GFC) and the COVID-19 pandemic. The nature of these two crises are very distinct, and we find that traders behaved quite differently. The commodity market collapse during the 2008 GFC followed the classic pattern of a speculative bubble; speculators, including financial institutions and money managers, rushed to close their long positions in commodity ...