Marcus Cree, vice president, risk solutions, Adaptiv, SunGard’s capital markets business, strikes a comparison between the ides of March and the upcoming March CCP deadline.
In March of 44 BC, Gaius Julius Caesar was killed on the steps of the Forum of Rome – before his ambition to centralize power in the Republic, removing the checks and balances of Roman politics, could be fully realized. It is striking that the date for mandatory clearing is set for mid-March 2013, and there are clear parallels to March 15, 44 BC, better known as the Ides of March.
Crossing the Rubicon
In present day, the road to mandatory clearing began in the aftermath of the credit crisis, and is a central plank of the Dodd-Frank Act and plays a role in many new market reforms across the globe. In essence, its ambition is to remove the systemic risk created by the multitude of opaque bilateral agreements and collateral agreements characteristic of the OTC derivatives market previously. The solution the regulators devised was to take the largest pool of derivatives and to have their trading, clearing and margin/collateralization run centrally through central counterparties, whose overall level of financial health and liquidity could be better tracked by the regulatory bodies.
This backdrop is remarkably similar to the situation in ancient Rome, as a system designed around democracy and accountability had become mired in dishonesty and strife, as Sulla and Pompey fought for supremacy in the most powerful city-state in history. Caesar’s decision to cross the Rubicon River with his legion intact, essentially an act of insurrection, was seen by many, including Caesar himself, as the only way for Rome to maintain its lofty status on the global stage.
I came, I saw, I conquered
In both cases, the battle was fought and the victors were named. In the U.S. financial markets, swaps will be cleared centrally beginning in mid-March 2013 for all institutions with notional trading of 8bn or above, as well as some smaller specialized trading vehicles where the activity is deemed risky.
The margin will, in part be decided by each CCP using a VaR-based method, replicating the method previously used to calculate regulatory and economic capital. This margin is calculated by the CCP, and while member futures commission merchants (FCMs) can dispute the amount on behalf of themselves or their clients, it is not a bilateral collateral dispute as has been the case, but a notional dispute. The margin requested by the CCP must be paid.
Again, there is an echo from the move from republican to imperial rule of the Roman Empire. Caesar and his supporters saw that Rome had become weak and that it needed stronger, more centralized leadership, which in theory would remove the corruption of the elections but would retain a senate as a nod towards the system that had served the Republic through its massive expansion.
Experience is the teacher of all things
What lessons can be learned from the violent demise of one of the most celebrated tacticians in history?
Seismic changes, regardless of intent, need to carry the mass market with them. In Gaius Julius Caesar’s case, the political change was too dramatic for the senate, and it was to be his heir Octavian who would become Rome’s first emperor.
In the case of central clearing, there are the means available for the FCMs and their underlying clients to replicate, validate and maintain a check on their required margins. As long as such remedial actions are taken, the switch to a systemically safer swaps market in the twenty-first century should considerably less painful than the change from republic to empire in Rome 2050 years ago.
