Exchanges and CCPs support market participants in the face of the global coronavirus (Covid-19) economic shock
The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has today issued a statement on coronavirus (Covid-19) and current market volatility.
The economic impact of the Covid-19 pandemic has introduced extraordinary volatility in global financial markets, as participants are obliged to reassess their valuations of all investments and associated derivatives as the situation develops. In an environment where uncertainty makes it unusually hard to price assets and for market-makers to operate, exchanges are providing the only way to establish consensus on these valuations in real time. As such, WFE members expect to continue to operate for as long as normal during trading days. CCPs, meanwhile, continue to take prompt action with respect to the credit risk associated with participants’ open positions. The WFE is in turn facilitating the exchange of best practice among its members, who operate over 150 such pieces of infrastructure in over 90 countries around the world.
Volatility has reached levels comparable with the Global Financial Crisis of 2008, with one-day losses not seen since 1987. The situation is made more challenging by high levels of indebtedness and already low interest rates. As the global representative body of exchanges and CCPs, the WFE is working with our member community to share best practice, mitigate risk, and coordinate responses (where permitted by antitrust laws) during this crisis.
A variety of well-established measures are used to address the pressures on the financial system. Examples include: Circuit breakers (sometimes referred to as ‘volatility control mechanisms’) are triggered in order to allow for ‘cooling off’, and to discourage disorderly markets; Pricing bands - the ranges at which market makers are permitted to quote bids/asks - are appropriately adjusted, to allow for continuous trading in the context of high volatility; and Exchanges and CCPs remaining in constant contact with their members, peers and authorities to coordinate updates to help maintain stability across markets.
In addition, exchanges and CCPs have triggered continuity plans (involving, for example, remote working and working from secondary sites) to ensure their operational resilience and ability to serve their markets, against the backdrop of social distancing policies that governments around the world are adopting. Through the WFE, they are sharing best practice on these and other measures taken to keep markets open and resilient. The WFE has also launched a depository of COVID-19-related public communications from exchanges and CCPs on its website as a resource for the financial community and our stakeholders.
The role of financial markets in a crisis
Financial markets provide businesses with crucial funding, and risk management products and services. Investors rely on markets for adequately priced assets and managing portfolio risk. The transparent price formation process that happens on exchanges provides essential market information to investors, asset managers and economic decision-makers. CCPs allow for risk transfer between institutions in a transparent and operationally resilient ecosystem. Central banks use markets and market intermediaries to transmit their monetary policy and promote financial stability.
Even as our present crisis causes large swings in markets and operational pressure on market infrastructures, these functions remain critically important. It is important that markets remain open and that the hours of trading remain as normal, to preserve the benefits of price formation and access to liquidity for society. As for key personnel of other critical national infrastructures, there is a need to ensure exemptions for critical financial market infrastructure personnel in the event of any ‘shelter in place’ or ‘lockdown’ policy.