CME Group’s Director Clearing Operations and Risk sat down with Sync NI to discuss the future of Fintech.
Q. Clearing is an essential part of derivatives exchanges – can you briefly explain what this means?
Clearing is all about risk management. When two parties trade on CME Group’s exchanges, they have contractual and financial obligations to one another such as payment of cash or making/taking delivery of a commodity. There is a risk that a party to the trade may not meet their obligations to the opposite side. This is what is known as counterparty risk and where clearing comes into play. CME Group’s clearing house becomes the central counterparty to the buyer and seller in a transaction, which mitigates counterparty risk and ensures parties meet the contractual and financial obligations of a trade. As well as acting as central counterparty to all trades, CME Group’s clearing house mitigates other forms of risk through various methods including requiring customers to route their trades through registered clearing member firms, collecting collateral to cover initial margin and moving mark-to-market on open positions.
Q. Have these processes evolved much over the last 8 years since you started with CME?
It’s a great question, strangely yes and no. It’s a no in the sense that many of these risk management processes applied over 100 years ago when our clearing house was first founded clearing agricultural commodities like butter and eggs. It shows how our business has stood the test of time and how clearing safeguards financial markets. However, it is also definitely a yes! When I look at the past 8 years since I started at CME Group, we have continually launched new products, developed cutting edge trading/clearing systems and come up with new clearing solutions, all of which drive capital efficiencies for our customers and enable them to hedge their risk.
Q. Is there much room to innovate in your sector and where can improvements in Risk management be achieved?
Definitely. At CME Group you can trade futures and options on equities, FX, interest rates, agriculture, energies, metals, cryptocurrencies, weather and environmental contracts, as well as interest rate swaps. We are always looking to innovate by growing our product base and offering new types of contracts to our market participants. We want our markets to be as liquid as possible and to help participants manage risk in volatile periods. This is only possible by striving to innovate and embracing new ideas and technologies. We continually look at new ways to drive margin efficiencies for our customer base such as offering various cross margining programs and developing new risk methodologies. Technology plays a big part in risk management too. Meaningful, low latency, real-time data and information are critical to make decisions in the risk management space, both for CME and its customers.
Q. Is technology the answer to everything in the future or will we still require a human touch?
Personally, I think technology is an enabler that drives things forward but not without human intervention. One example is when CME Group launched Globex and many of its markets moved from open outcry trading floors to electronic trading. There was technology involved for sure, but it couldn’t have happened without human touch and it is still humans on the other end of the trading screen. Even with algorithmic trading and risk modelling there is human intervention, be it designing or validating a model. We have also seen how technology has improved things in our day to day lives but sometimes it goes wrong and we need real people to fix it. I don’t see that changing any time soon. I think we also take comfort that even in the world of automation, we have humans in the background performing checks and making sure things are running as they should be.
Q. What new skills will be required for the FinTech companies of tomorrow?
Knowledge around cloud computing and low latency technologies is undoubtedly important to any FinTech company. CME Group is partnering with Google to move its own trading and clearing systems to Google’s cloud platform. This is a big task but will provide us with many benefits. This year CME Group had its highest trading volume day in its history, when over 66 million contracts traded on our exchange. When you look at it that way and think about the volume of data that needs to be processed in a low latency manner, cloud computing, big data and low latency systems will become increasingly important. AI is a hot topic too. I think it will be a useful tool for young technologists to drive things forward but it is also important to learn its intricacies and protect society from unintended consequences.
This article appears in the summer edition of Sync NI magazine. To receive a free copy click here.
