Evangelos Benos

Bank Behaviour and Risks in Chaps Following the Collapse of Lehman Brothers

We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counterparty default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures.

Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act

We use transactional data from the USD and EUR segments of the plain vanilla interest rate swap market to assess the impact of the Dodd-Frank mandate that US persons must trade certain swap contracts on Swap Execution Facilities (SEFs). We find that, as a result of SEF trading, activity increases and liquidity improves across the swap market, with the improvement being largest for USD mandated contracts which are most affected by the mandate. The associated reduction in execution costs is economically significant. For example, execution costs in USD mandated contracts, where SEF penetration is highest, drop, for market end-users alone, by

Interactions among High-Frequency Traders

3 million–

The economics of distributed ledger technology for securities settlement

4 million daily relative to EUR mandated contracts and in total by about

Managing market liquidity risk in central counterparties

7 million–

The impact of de-tiering in the United Kingdom’s large-value payment system

13 million daily. We also find that inter-dealer activity drops concurrently with the improvement in liquidity suggesting that execution costs may have fallen because dealer intermediation chains became shorter. Finally, we document that the Dodd-Frank mandate caused the activity of the EUR segment of the market to geographically fragment. However, this does not appear to have compromised liquidity. Overall, our results suggest that the improvements in transparency brought about by the Dodd-Frank trading mandate have substantially improved interest rate swap market liquidity.

Liquidity Determinants in the UK Gilt Market

Using unique transactions data for individual high-frequency trading (HFT) firms in the UK equity market, we examine if the trading activity of individual HFT firms is contemporaneously and dynamically correlated with each other, and what impact this has on price efficiency. We find that HFT order flow exhibits significantly higher commonality than the order flow of a control group of investment banks, both within and across stocks. However, intraday HFT order flow commonality is associated with a permanent price impact, suggesting that commonality in HFT activity is information-based and so does not generally contribute to undue price pressure and price dislocations.

High-frequency trading behaviour and its impact on market quality: evidence from the UK equity market

Distributed ledger technology (DLT) is a database architecture which enables the keeping and sharing of records in a distributed and decentralized way, while ensuring its integrity through the use of consensus-based validation protocols and cryptographic signatures. In principle, DLT has the potential to reduce costs and increase the efficiency of securities settlement, the ultimate step of every security transaction. In this paper, we first examine to what extent DLT could add value and change securities settlement. We then characterize the innovation process in the post-trade industry and finally, we describe the economics of a hypothetical DLT-based security settlement industry. Our main conclusions are that: i) DLT has the potential to improve efficiency and reduce costs in securities settlement, but the technology is still evolving and it is uncertain at this point what form, if any, a DLT-based solution for securities settlement will ultimately take, ii) technological innovation in the post-trade industry is more likely to achieve its potential with some degree of co-ordination which could be facilitated by the relevant authorities, and iii) if DLT-based securities settlement becomes a reality, then it is likely to be concentrated among few providers which, in the absence of regulation, could result in inefficient monopoly pricing or efficient price discrimination with service providers capturing much of the market surplus.

Price Discovery and the Cross-section of High-Frequency Trading

In the event of a clearing member’s default, and as part of its default management process, a central counterparty (CCP) will need to hedge the defaulter’s portfolio and to close-out its positions. However, the CCP may not be able to do this without incurring additional losses if the market is illiquid or if the portfolio contains large and concentrated positions. To mitigate this liquidity risk, CCPs often require members to post additional collateral to the initial margin, in the form of “concentration add-ons”. In the absence of a quantitative regulatory standard for calculating concentration add-ons, this paper discusses the different approaches to incorporating market liquidity risk within a CCP’s default waterfall and the challenges that these approaches pose.

The Role of Designated Market Makers in the New Trading Landscape

Large-value payment systems (LVPS) often have a tiered structure where only a limited number of banks have direct access to these systems and every other institution accesses the system through agency arrangements with the direct participants. As such, a high degree of tiering is often perceived as being associated with credit and operational risks. In this paper we use data around five recent de-tiering events in the United Kingdom’s LVPS(CHAPS), to assess the impact of de-tiering on these risks as well as on liquidity usage. We find that the impact of de-tiering is largest on credit risk, where average intraday exposures between first and second-tier banks drop by anywhere between £0.3 billion and £1.5 billion per bank, while the cost of insuring against losses arising from these exposures drops by about £4 million to £19 million per bank, per year. On the other hand, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.