US regulators praise market ‘resilience’ after March stress test

US regulators have expressed relief that the plumbing underpinning capital markets withstood the whipsaw volatility in prices produced by the coronavirus pandemic in the past month.

In interviews with the Financial Times, officials at the two federal agencies in charge of maintaining orderly markets said they had seen minimal problems even as equities and futures were buffeted in record trading.

“The story thus far has been a very good story, a story of resilience,” said Heath Tarbert, chairman of the Commodity Futures Trading Commission, which has oversight of the US derivatives markets.

“That wouldn’t have been necessarily what we would have expected in 2013 or 2015,” said Brett Redfearn, director of trading and markets at the Securities and Exchange Commission, the equity markets regulator.

“Only five or six years ago, we saw a lot more system glitches,” he said, referencing past trading outages at major equity exchanges.

Investors’ fears over a global economic slowdown lead to record demands for funds to backstop futures deals, according to figures shared with the FT, as well as repeated trading halts, putting the nation’s exchanges and clearing houses under their most sustained pressure since 2008.


Record daily amount of variation margin collected from banks

The result has been a dramatic stress test for the post-2008 crisis market infrastructure reforms that US regulators have spent the past decade implementing.

Former regulators, too, have joined in praise of the system’s performance to date, though cautioning there could still be months of trouble on Wall Street if pain in the broader economy shakes up the markets and drives down asset values.

“People ought to draw some comfort with how well the system has held up,” said James Burns, a partner at Willkie Farr who was deputy director of the SEC’s trading and markets division from 2012 to 2014.

“However, as Yogi Berra said, it ain’t over till it’s over.”

The violent market moves in March created record demands for margin at clearing houses run by CME Group, Intercontinental Exchange and the UK’s LCH, regulators’ figures show.

Forcing traders to set aside large amounts of cash, known as margin, as insurance on their trades was a key area of post-2008 crisis reform designed to reduce risk in derivatives markets that had caused havoc to the financial system. Margin reduces the risk to their counterparties of any potential fallout if they are unable to meet their liabilities.

As Saudi Arabia’s decision to provoke an oil price war sent crude and stock prices tumbling on March 8, clearing houses in the US and Europe collected an extra $55bn of variation margin from banks, Mr Tarbert told the FT. That far exceeded the $31.5bn collected in the tumultuous trading after Brexit.

The following week, as markets reacted to the Federal Reserve cutting interest rates, one bank had to stump up an additional $9.6bn of margin within an hour, Mr Tarbert added.

ABN Amro, a Dutch bank, took a €183m charge when one of its clients failed to meet the intense demands for margin. Another institution, Chicago’s Ronin Capital, was wound up after it failed to meet a margin call at the CME.

Mr Tarbert declined to comment specifically on Ronin but said the margin requirements meant that the impact of any defaults would be “nowhere near” what it was in the past. 

“We may see institutions struggle simply because of their exposure. But what we haven’t seen is sort of a widespread concern about the stability of the market itself,” said Mr Tarbert.

On equity markets, the dramatic end of the 11-year bull market generated record trading but not the disorderly collapse in prices seen in the 2010 flash crash, nor the embarrassing outages that hit Nasdaq and the New York Stock Exchange in 2013 and 2015 respectively.

After the flash crash, the SEC revamped the “circuit-breakers” that halt trading across the market, as well as “limit-up, limit-down” tools that target individual stocks, after they failed to prevent that sudden but brief market collapse a decade ago.

The circuit breakers kicked in four times last month, including immediately after equity markets opened. Limit-down restrictions on individual securities activated almost 1,500 times on March 18, said Mr Redfearn, the date the Dow Jones Industrial Index fell below 20,000 for the first time in three years.

Though the circuit-breakers buffered the steep stock markets as intended, officials at NYSE and Nasdaq said the tools could be improved by harmonising them across futures and equities markets.

Currently, trading halts for equities begin after a 7 per cent decline in the market, while futures, which open for trading earlier, halt after only a 5 per cent drop. Equalising the two would mean a suspension of futures trading would be a clearer signal for a subsequent equities trading halt.

The stress also caused cracks in places, with investment platforms such as Robinhood, the start-up trading app, and Morgan Stanley’s wealth management portal, both experiencing outages.

But six years after the SEC renewed its efforts to bolster the integrity of critical market infrastructure with a new systems compliance rule, the nation’s biggest exchanges largely endured.

“Bearing in mind we saw record after record broken . . . we had very few system glitches or short-term liquidity limitations in US equity markets,” said Mr Redfearn.

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