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Thomas Laux: “Ten years after Lehman, we are much better prepared”

Release date: 20 Sep 2018 | Eurex Exchange, Eurex Clearing

Thomas Laux: “Ten years after Lehman, we are much better prepared”

The tenth anniversary of the biggest financial market shock in the history of the global economy is now upon us: the Lehman bankruptcy completely changed the world of banks, exchanges, clearing houses and their regulators. In this interview, Thomas Laux, Member of the Executive Board and Chief Risk Officer at Eurex Clearing, talks about the approach of Eurex Clearing during the Lehman crisis and which lessons the clearing house learned from it

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Thomas Laux, Member of the Executive Board and
Chief Risk Officer at Eurex Clearing

Can you remember what you were doing when you first heard that Lehman was not too big to fail?

We were in the middle of the financial crisis in 2008 and were constantly wondering which bank would fail next. Bear Stearns had been bailed out a few months earlier. So, when I first heard in the news on Sunday that Lehman had been hit, it wasn’t really a 100 percent surprise anymore. But it immediately became clear to me that this was a real big challenge, and because they were a large member of Eurex and Eurex Clearing it had to be dealt with quickly and with great care.

When you came to the office on Monday, how did the day go at Eurex Clearing?

As a CCP, we definitely had a clear goal to close the positions smoothly, transfer the clients to other Clearing Members and avoid any spill-over effects into the market. But that requires, in particular, the cooperation of the insolvency administrator, which was especially difficult on Monday and Tuesday because they weren't really prepared. So the key focus was to get in detailed contact with the administrator and try to work with them.

What was the further procedure?

We have the legal right to terminate all the transactions with the defaulting Clearing Member once they cannot fulfil their obligations. A clearing member like Lehman typically has – apart from their own house position – also material client positions. These clients are usually still solvent and eager to be active in market again to hedge their risks, especially in crises times with huge market moves. So the focus is to transfer clients to solvent clearing members. If such a “porting of clients” does not work, these positions must be liquidated through the market or via an auction.

This is the normal process. However, it is precisely where client positions are concerned that you need the support of the defaulting member as they usually know their customers best and know to whom they would be willing to transfer their positions.

You had to find clearing members who wanted to take over the positions?

Yes. But the problem was not only finding other Clearing Members – some were quite willing to do so, as it was a huge opportunity for them to extend their client base. The challenge was to get an agreement with the administrator to transfer client positons. Only after that we could start to work closely with the Lehman team. The actual transfer was then done within two to three days.

It was impressive how supportive the Lehman employees were, even if it was pretty clear for them that they would lose their job in a couple of days. They helped to slice and dice their client portfolios and transfer them to other members. If this transfer had not worked, our last resort as a CCP would have been to liquidate everything in the market, which would have been even more stress for the already stressed market.

What are the most significant changes for you since the Lehman crisis?

First of all, the role of a CCP has become more and more important. CCPs are now considered as part of the solution to such a crisis. The regulatory regime around CCPs and especially CCP risk management is much more concrete and clarified today. I think EMIR is a pretty good regulatory standard to ensure that CCPs in Europe are robust, and the bilateral margin rules ensure the right incentives for central clearing. Secondly, the way in which banks are regulated has changed dramatically since then, especially the capital requirements and also the supervision for banks.

And what about the default management process in itself?

This process is now much more professional. Of course, also in 2008, every CCP had this process as well but with less sophistication, less practice and less clarity. Today, at least at Eurex Clearing, we have a dedicated default management team with its own trading expertise. Their main objective is to establish and regularly test this process. We test at least once a year with all our Clearing Members and we include regulators. In the last two years, we have also tested together with LCH and CME, under the supervision of Bundesbank, BaFin, CFTC and the Bank of England. The fact that the process is now much more resilient was most recently demonstrated during the defaults of MF Global and Maple Bank.

Has the financial world really become a safer place?

It clearly has, yes. Of course, there is always the tail risk that something could happen again. But if it does, then I would say we are much better prepared today.

You said that clearing houses gained in importance. What about the risk – should a clearing house fail?

Basically, there are two types of events that could hit a CCP.

Firstly, a market-wide issue of an entire asset class, which is not a CCP-specific problem. In this case the industry or the clearing members are for example not sure how to value certain products or how to support an auction. In such a crisis, a CPP is the “perfect tool” with proven mechanisms to overcome it, manage the crisis centrally and even reduce a certain market segment. The big problem in 2008 was that it was uncertain who had what position at Lehman and who was affected and how much. Now the CCPs give a much clearer overview of where the positions are, who is involved and who is not involved, and especially the regulators look through the CCPs.

In the second case, there are CCP-specific issues, and the market is intact, let’s say a system break-down or a cyber issue. Then service continuity is the key objective, and we have to use the recovery options of our recovery plan, e.g. increase capital, ensure liquidity or transfer the systems to another location etc. Therefore, recovery and resolution of a CCP is important and a widely discussed industry topic today. There is European legislation under way, which is expected for next year.

Can you sleep well at night despite an outstanding volume of nearly EUR 8 trillion at Eurex Clearing?

Yes, I can sleep well. For financial risks, we have a robust waterfall mechanism that tackles them. For liquidity risks, our central bank access helps to manage them. And in line with the operational risks to date, we have installed all the controls and processes to manage them. I am not saying that nothing will ever happen at all. We cannot mitigate all tail risks, but you have to manage and tackle them when they materialize, and I think we have a solid framework here at Eurex Clearing.


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