The ISDA AGM Chicago 2012 vs 2023: What is the case now?

Michael Amos

2 May 2023

ISDA’s 27th AGM in 2012 came weeks before the looming deadline for all standardised over-the-counter derivatives to clear through central counterparties (CCPs). Regulators were scrambling post the financial crisis of 2008 and firms had no clear view of the relationships they had between counterparties. The advances in technology since then have been monumental. However, 11 years on from the last AGM in Chicago and with ISDA set to return there this year for its 37th AGM, we still find financial institutions relying on outdated systems to analyse and capture contract data. These systems are hindering firms from ‘reacting’ quickly to manage unexpected market events, as we have seen from Archegos and more recently with SVB. ‘Blind spots’ still remain the biggest risk, yet the more data a firm has, and can trust, the better it can ‘react’. Michael Amos explores this topic below:

Michael Amos starts:

“The world is everything that is the case” Wittgenstein made this simple statement in his Tractatus. What is the case now? We live in a time of the digital domino effect when information flies around the world instantly. It is consumed and acted upon, before it can be verified – as if that matters at all. Depositors on their mobile phones react. They issue a command to remove their deposits because their confidence is shaken. Immediately. That is the case.

At the Chicago ISDA AGM in 2012 we were addressed by Nobel Prize-winning economist Thomas Sargent from the Chicago School of Economics on what he saw as “the case”: that CDSs were informing regulators of what they needed to know, it was all there before them and now inflation was required to take up the slack. Dodd Frank and EMIR were getting into full swing, transforming the world of derivatives into a new reality of what was going to become “the case”. Derivatives such as CDSs were going to be subject to mandatory clearing, and capital in the form of government bonds was going to be locked up into new forms of collateral in respect of uncleared derivatives.

Eleven years later, today CDSs are still telling their story as to what is “the case”. Banks are now on the end of an even more immediate chain of information. Gilliian Tett wrote about this in her Financial Times article on 6 April: What I learnt from three banking crises. A fall in confidence will result in immediate bankruptcy because of mobile phones and the internet. What is the lesson to be learned? Silicon Valley Bank is a very particular case and the readily available information from the CDS market is contributing in its own way. The same story was spread about Credit Suisse by the internet and the CDS market. It was immediately consumed.

Gillian Tett’s conclusions are plain. The world has changed. Eleven years ago the “fractional banking” model – the holding by banks of less than can be called upon by depositors – was operating on an assumption that deposits cannot fly out the door in a matter of days.

According to Tett’s article, 66% of depositors in the US can now remove their deposits with a click on the basis of information they receive via the internet. No more is “the case” of the South Sea Bubble part of the world. No more are their investors, depositors, sitting in their country homes far away from the financial centres where money is transacted, and information exchanged. Only the minority are left out of this feast of information and immediate reaction.

This is a fact of our world, this is the case. Information, and the ability to react to it, has gone viral. What does that mean?

Eleven years ago, many people already knew and were sowing the seeds of what we now also know: danger is everywhere, simultaneously. Nothing can replace the ability to react, as was learned all too plainly in the case of Archegos. Collateral is king, but it is not the only thing. Interest rates and information are king at the moment. “Stress tests” of banks carried out by regulators did not take into account higher interest rates. Blind spots remain the ultimate king by which all others will eventually be caught.

Banks sit upon a foundation of sand. “Fractional banking” – the foundation that is “the case” here, relies upon confidence. The money does not exist. It is buried deep in contracts with timescales for realisation of a completely different order from the instantaneous ability to withdraw deposits and for assets to fall in value – even government bonds.

It is clear that this disparity governs so much in our world. Can anything be done about this? Well, we can make a start. Information can be on both sides even if the time scale for action will remain different. “Fractional banking” requires confidence as well as diligence. Information can be equalised to a degree, and every degree matters. Everything is potentially “the case”, but the ability to focus and act remains the end.

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