Sign New York Banking Forbearance Agreement Free

Industry sign banking new york forbearance agreement free

great so welcome everybody uh to the sciaga mfm financial seminar series uh today we have a special arrangement we have a panel and uh this panel is essentially targeting uh towards addressing uh what are the implications of kobe 19 on financial markets we have seen a lot of papers a lot of studies about the dynamic of epidemics this is more about what is happening real to the markets and we have the honor of having uh very good speakers that are working on this uh issues uh firsthand like the fed uh and um also the bank of england settlement and uh uh david that is also somebody that has been working with mortgage for a long time and um i would like to like um start with um panelists uh in the order we will have michael fleming uh we'll start and michael is uh vice president uh financial economist in the capital markets function and the federal reserve bank of new york and he has been doing a lot of work in market microstructure financial intermediation and liquidity provisioning and is going to share some insights about the work that they've been doing at the fed in terms of addressing the liquidity problem treasury markets michael the floor is yours great thank you agastino um i appreciate this opportunity to discuss uh how the treasury market behaved in early 2020 in response to the pandemic um before i get going i'll start with a standard disclaimer uh views expressed are my own and not necessarily those of of the federal reserve bank of new york or the federal reserve system um so just for a quick overview uh in march 2020 the treasury market experienced unusually high volatility illiquidity and dysfunction and a sharp rise in yields spurring an unprecedented unprecedented policy response by the fed now there are parts of this um that are not surprising so um the fact that the pandemic led to a lot of uncertainty about economic outcomes um the fact that that led to increased volatility and that that led to deterioration of of liquidity that's all not surprising similarly the decline in yields in early 2020 overall is not surprising as you tend to see a flight to quality and decline in yields at a time of market turmoil um now what is surprising um well the pandemic itself of course but also the extent of the market dysfunction um and also this sharp rise in yields we saw in the march 10th to 18th period um also surprising i think is the unprecedented uh response by the federal reserve so now in getting into the details i think of the market developments it's taking place in five stages so in the first stage yields decline modestly in january and most of february so the 10 year old for example declined from um like 1.92 to 1.34 between between um uh the end of december and february 26th so um so in in the chart below the green line is the uh a plot of the 10-year yield so the first stage i'm talking about this period here where yields are just kind of drifting down a bit um the s p 500 equity index rose over this period and financial market volatility was modest so again on the chart below the this blue line is realized volatility of the 10-year note and that was you know pretty modest through january and most of february um as of february 23rd there were still only 15 confirmed coveted 19 cases in the u.s um so it was really in late february that concerns about the pandemic increased notably so in the second stage we saw increased concerns about that pandemic drive yields sharply lower so the 10-year plunged about 80 basis points between february 26 and march 9th volatility increased sharply and the s p 500 fell almost 8 on march 9th alone so if i can just go back here for one second and um i'm going to change the color here so now i'm talking about this period where the 10-year yield is plunging and volatility is is starting to shoot up um we also saw that liquidity started to deteriorate especially march 6th and march 9. so one measure of liquidity is the bid-ask spread so in the chart below i plot average desk spreads by day for the most recently issued 5 10 and 30-year securities and um you know you can see that these spreads were you know really quite stable uh in the early part of the year and then they started to shoot up um you know in early march here so the 30-year bid-ask spread for example it's it's that's the purple line it's typically just under one thirty second of a point and then you know it shot up to average over um over five thirty seconds of a point at the height of the turmoil so you know what did the fed do it's to start well it cut the fred funds rate by 50 basis points on march 3rd um and um you know due to the risks uh to economic activity and it also increased the size of its sizes of its rebar operations starting march 9th to to address disruptions in funding markets so the third stage is probably the most interesting um aspect of what happened in this stage yields reversed with the 10-year yield quickly rising about 65 basis points by march 18th treasury volatility continued to rise peaking march 13th and the s p 500 declined on that amid high volatility liquidity oh um i'll just go back one last time to that earlier slide so now i'm talking about this period yields rebound and volatility kind of continues to go up and liquidity um yeah continue to deteriorate reaching its worst point march 13th um the badass spreads reached the highest level since the 2007 09 financial crisis um another measure of liquidity is price impact um price impact basically measures how much the price increases or decreases for a given amount of buying or selling and um you can kind of see that the pattern of price impact over time is actually quite similar to the to the power under fit ask spreads um we also saw pricing dislocations across cash and futures markets um indicating a breakdown of arbitrage um so you know what explains this this yield increase over this period well we think there was unwinding of relative value trades by leveraged investors so uh investors that bought treasuries and cash in the cash market and hedged those positions in the futures market that they started unwinding their positions as futures prices rose and this led to higher volatility and higher margins which then spurred further further selling so uh this kind of created a mark what's called you know a margin spiral um we also saw record selling of notes and bonds by foreign investors now this is true both um on a net basis and in gross terms so uh the chart below it's um from daryl duffy's brookings paper and it shows that foreigners gross selling of treasury notes and bonds in march um was a record uh 2.7 trillion dollars those dealers had limited capacity to absorb these sales uh their inventories were already quite high kind of going into the pandemic on they faced balance sheet constraints and internal risk limits um also principal training firms these are firms that are some of the most active firms in the inter-dealer market uh they reduce their activity as a share of overall activity in the market so again the fed would the fed do well it lowered the target rate of further 100 basis points on march 15th um as shown in the chart below um it announced the same day it would increase holdings of treasury securities and agency mbs by hundreds of billions of dollars to support the functioning of these markets which are really critical to um you know to markets overall um and also on march 17th the fed announced it would restart the primary dealer credit facility uh to smooth market functioning by providing funding to primary dealers which are which are market makers for treasury securities and other securities so we then get to the fourth stage liquidity starts to improve um it particularly improved after march 15th uh when there was that fed announcement and especially after march 23rd uh yields declined sharply after march 18th um and of a particular note is that on march 23rd the fomc announced it would continue to purchase treasury securities and agency mbs in the amounts needed to support market functioning and effective uh policy transmission so the chart there shows um the fed purchases of treasuries by day over the first four months of 2020 um and you can see there's um a two week period there in in late march and early april you know when the fed was buying um the fed's purchases were totaling you know 70 to 75 billion per day uh although those you know started to come down after that so you know kind of the last stage is that the markets you know come somewhat as the fed purchases continued so yields were stable pretty much after march 27th uh liquidity measures continued to improve uh equity market volatility declined in the s p 500 rose um even as liquidity was improving the fed did announce some additional measures to to improve market functioning so um on march 31st uh it announced the launch of the fema repo facility this allows foreign central banks to raise u.s dollars against the holdings of treasury securities at the fed thereby reducing foreign central banks incentives to sell treasuries in the open market um also on a on april 1st the fed relaxed the supplementary leverage ratio um it basically implemented a change that excluded treasuries from the slr denominator for bank holding companies which increased the incentive or or decreased the disincentive for banks to hold treasury securities on their balance sheet um oh the the last chart here this is just one more measure of market liquidity um this chart shows order book depth by day for the 5 10 and 30 year um so order book depth is just measured as um the quantity of securities available to be bought or or or sold at the fifth the best five prices in the intra-dealer market and so um what you see is um for the 10-year for example the av that's the um the green line you know the average daily depth was the average depth close to 300 million um in the january and february period and then it dropped as low as um 19 million on march 13th so this is just you know one more measure of of liquidity showing really the um highly unusual um disruption to liquidity at the time so um you know i think overall there's a lot we know about market developments earlier this year but there's still some unanswered questions i'm going to leave you with um first of all you know just what was the role of hedge funds in the march turmoil so i mean there was some early work that was um suggesting that um hedge funds might have played a big role uh just that you know through these uh unwinding of these basis trades but you know recent work is kind of cast out on the importance of of hedge fund sales um we do know that you know there was massive selling uh the data is clear on that but you know who who exactly was selling and why um i think that's you know worthy of further investigation um we know ptf's withdrew from the market again there's good data on that but you know which way does causality go did the ptf withdrawing from the market exacerbate the illiquidity or was it just the illiquidity that caused the ptfs to step back um fourth you know to what extent does the growth of dead outstanding make march 2020 episodes more likely this is the concern expressed by daryl duffy in his recent bookings paper um and then lastly are there policy steps or or additional policy steps that should be taken to reduce the chances of a march 2020 episode recurring um so that concludes my prepared remarks thank you so much michael for this very interesting uh overview uh let's go ahead with the next panelist uh wank uh and yeah maybe michael you can yeah stop sharing and when you can start sharing your slides thank you when you share i will introduce vinyan who is uh like an economist at the bank for international settlement uh in bazel so that's the bank that uh makes the guidelines uh for banks and us and managers and uh she has a phd in economics from the free university of amsterdam and she has been very active in like questions ready to centre of clearing under parties margins and systemic risk please uh go ahead thank you very much thanks a lot agustino for having me here and for the nice introduction um just to check you can uh see my screen and listen to me clearly right yeah we can do this fantastic yes um yeah so uh as michael said the usual disclaimer for me also applies to the views here uh all mine and not necessarily of the bis um so today uh yeah so as uh agustino said uh yeah i would discuss some impact of the covert 19 on ccps or clearing houses central counterparties yeah so i would use them interchangeably basically yes basically as michael already mentioned that the the market turbulence uh induced by covet 19 in march has prompted some large margin calls because of the exceptionally volatile market conditions despite the market turbulence ccps they remained resilient there were few there were few default cases of clearing members so in general market functions rather smoothly at the back end but still these large margin calls were felt strongly among the market participants so here in the bis bulletin we show that in the third panel here that initial margin requirements for equity futures in the u.s has doubled since march and asian ccps in the fourth panel also hiked their initial margin requirements substantially during march and this is a cross-check by other publications so the ecb financial stability report also reported that european ccp's margins including initial margin and variation margin increased from 10 billion euro to over 60 billion euros in march and the bank of england interim financial stability report also shows that the ukccp's variation margin was five times at the peak as high as the pre-covert level so uh so i hope this would convince you that uh march in march was a very exceptional period um large margin calls were uh were issued and and these include both initial margin calls and variation margin calls so you may ask what are the differences between these two so here we show uh the balance sheet the stylized balance sheet of ccp and their clearing member for instance banks and here what you can see is that suppose these two banks they are clearing members of the ccp then to be qualified as a clearing member the banks would need to pledge liquid asset as the default fund with the ccp so these are the dark blue sales so you can see that default fund would sit on the asset side for the banks or clearing members and it would sit at the liability side for the ccp so it's sort of a contingent liability for the ccp and then when the bank a and bank b want to transact a contract both of them would need to pledge initial margin that is because ccp after clear this transaction would officially be the counterparty for both bank a and bank b so in case of each of these banks defaults then the ccp would have to honor their commitment to the to their counterparty so the ccp would bear this counterparty credit risk and to manage that counterparty credit risk ccps would ask for initial margin so these are the light blue cells so again they are the assets for banks and liability for ccps so these are the initial margin while variation margin happened after the the price move of the contract so for instance in this case we have bank a has out of money positions then the bank a would have to settle their mark to market exposure by paying this variation margin to the ccp and the ccp after collecting this variation margin from bank a would distribute that to bank b so as you can see these the variation margins settled market market exposures and they flow through ccp so in this case in this simple uh stylized effect one can see that initial margin that has aggregate uh liquid liquidity impact on their members balance sheet while variation margin has distributional liquid as a liquidity impact so these are sort of a very sim very simple very stylized example in real operations there are uh there are some bells and whistles so for one thing initial margin for instance is more persistent compared to variation margin and that is because of the look back period of initial margin which i would explain later and apart from that some of the ccps they would reinvest the collected initial margin in ripple market and that would mitigate their aggregate liquidity impact apart from that in some of the cases va iation margin can also have temporary aggregate impact if there's some time delay between the collection of the vm and the distribution of vm and this is also related to how ccps manage their manage their liquid assets so if they put that in a ripple market then normally you would expect some operational lag between the collection of vm and the distribution of vm so but in general speaking the the the the practical practicality here would have some impact but not prominent impact on the on the liquidity implications of margins so mainly uh we want to talk about practicality of margins both initial margin and variation margin of this march event so one thing is that to some extent margins they are um they are by default uh procyclical because they have to be risk based you want your margin to reflect the the market conditions uh of the and also the counterparty credit risk of the portfolio so uh in this case uh one would say large price movements would mechanically trigger large variation margin calls and and the practicality of im would also depend on their risk models the risk parameters of the ccps so in general simply put ccps they will set initial margin to cover the potential default losses with a high probability normally with 1999 percentile and to estimate these potential default losses ccps normally use these value at risk models so basically they look at the historical period and see what would be the value at risk of that loss distribution so this means that the length of this historical period the so-called look-back period would be critical so for instance with a long-look pack period one would expect the iron models to be to cover the historical high volatility so the volatility spikes for instance the spikes in march would be less likely to surprise the model while models with a short look back period are likely to be more per cyclical because it would it would move as the short as the volatility spikes come and in the in the case with shock with a short look back period then ccps may be uh forced to catch up by increasing im when when the shock is realized so that is sort of exactly at the wrong time because in stress periods clearing members will also also be in greater need of liquidity so what we look at is the the pre covert uh pre-covered level of this the margin parameters so one thing we see is that the achieve coverage ratio so how the initial margin covered the past observations it's fairly high precovet we see that this is starting from 99.5 so basically for all the different ccps in our in our sample they are above 99.5 percentile so it's very very robust it's very very uh conservative and the margin breaches they are also small but remember these are the pre-covered scenario one but one thing that is rather uncertain or uh uh unnerved uh unliving is the look back period so here we can see that the commodity uh which are the purple bars here and equities uh which are the uh the coffee bar here they are they are pretty small uh the look back period they're pretty uh small compared to other type of products so the the the ongoing debate uh is that is it the case that the commodity and equity ccps or i mean some other ccps they were lagging behind before the covert and needed to catch up with huge margin calls exactly when this when their members were under liquidity stress so this is a very crucial policy uh question because as ccps they're systemically important it is very important to to make sure that the micro prudential regulations on ccps were set correctly and related to that uh some of the jurisdictions they have these antipercenticality margin measures so to some extent uh anti-procedurality doesn't mean that the margin measures they are not processing uh because as i said you want the margin measures to be risk-based you want it to reflect the the counterparty credit risk was higher during the stress period so the antiperspicality margin is more like avoiding excessive practicality so you don't want to have these the margin heights so so large that uh not because of the the market condition has changed but because the ccps were too relaxed uh in the stress period so so for this the for this antiperspicality margin measures it's important to evaluate their impact on the on the market participants and also it is important for policymakers to think about whether a pillar 2 type of counter cyclical buffer would be would be useful for ccp microprudential regulations and then the third question is related to what i have mentioned about this the reliance on ripple market to manage liquid liquid assets so basically ccps have different ways to manage their liquid asset some of them rely on the ripple market while the others relied on the central bank reserve account so normally speaking foreign ccps would not have reserve accounts with central banks but then with this the ripple market you will have operational lag you would have you will have some benefit of recycling liquidity but you will also have some operational glitch potential operational glitch so it's important to understand the cross-border and cross-currency implications of these different methods and to think about whether it's necessary for central banks to extend some temporary access to foreign ccps in stress times so that there's an option for these ccps to put their liquid assets in different in foreign currencies with the with the with the foreign central bank reserve account so i will stop here and i look forward to a a lively discussion uh on the on the covet in general thank you very much thank you so much vincent for a very interesting uh presentation about ccp and systemic risk let us move on uh to the next and last finalist david rios david you can go ahead and share those lights uh hi hello everybody so we're gonna try to give you an overview of the what's been going on in the mortgage market let me introduce you first yeah sure go ahead so basically david is 16 years of experience in mortgage in the mortgage market has been trading a variety of products during his career as a trader and then he joined the columbia in the statistics department as a joint professor and today is going to discuss about the implications of kovi 19 on mortgages and also in markets yeah great ready right great uh screen's up okay yeah it's good perfect let's start great so in march as we've seen before though the markets fell apart the mortgage market was no exception right uh as discussed before march saw both uh funding issues and a wave of unemployment i guess unemployment wasn't discussed before uh as a consequence both the fed reacted quickly and congress reacted quickly so the fed part of the reaction we discussed before congress that part is new okay for the mortgage market this meant two things this meant the two-pronged approach the jab basically was a forbearance of mortgage foreclosures that's the cares act we'll get into that and then the hook was a large-scale mbs purchase program by the fed okay it's that great so let's look what happened just in terms of purchases we so we've already talked a little bit about the fed uh treasury purchase program let's look at the mortgage purchase program so so far since since the fed has started buying the gross purchases have been over a trillion of course there's been paydowns on the old mortgage position they have so the net purchases have been about 600 billion what's also interesting to look as a comparison number as there's been more house purchases and as people refi and take cash out the mortgage market grows in size so while the net purchases have been 600 billion the change in the size of the agency pass-through market has been 400 billion so the headline number of you know a trillion purchased is a big number but the marginal effect is less than that and what's pretty interesting if you compare the purchases now versus what happened in 2008 you can just see in the lower right hand graph that's the fed purchased by mortgage coupon so the fed makes two decisions to buy mortgages sorry to buy mortgages and which coupon to buy they are making much more target the fed seems to be making much more targeted positions about which coupon to buy you see that a changing behavior every month okay now so purchases have spiked and so is production here's just a long-term graph of the last 20 years the blue line is 10-year treasury mortgages uh tend to increase in production when treasuries drop and the orange line is mortgage production number of loans produced by the three agencies per month so you see recently we have this spike in production but the spike we're having now which is interesting is much less than in 2009 and way less than 2003 that's interesting as its own issue okay so this spike in production has translated into lower lower mortgage rates so in other words you know this the fed does these programs to inject more money into the economy some of the money goes directly into banks when the purchase of treasury it goes directly into congress to spend and some of it as the purchase of mortgages ends up in the pocket of homeowners in here you can see what mortgages are being produced entire year basically the tenure has not really moved in rates since march and you can see that the mortgage rate for uh this is one of the sub program which is one of the sub programs has been dropping each and every month even without the 10 year moving too much okay so these are the number of mortgages originated each month stratified by coupon okay now and on the flip side you can also see that the rates you can also see the mortgage rates that the borrowers are leaving these are cprs this is annual prepayment rates for different coupons for the same mortgage program we see and you can see each month the rate at which people are leaving the higher coupons picks up and you can even see some of the lower coupons you know two and three quarters almost nobody left that in june in september they're rating it they're leaving at the rate of 50 per year and this is liquidity slowly getting to the homeowner through being injected by the fed so that's kind of cool to see okay that's one aspect that's the fed purchase of mortgages uh pushing prepayments let's look at another thing let's look at another thing that's happened since then let's look at the credit side a little bit so in march not only did rates move but unemployment spiked a lot of people were told to furlough they couldn't not to go to work they had no income coming in okay under normal conditions this is a huge problem for consumer credit this is a huge problem for credit cards for mortgages for everything okay um great so normally this type of thing would get in the way let's see what congress did so in march congress passed the cares act to address some of the issues one of the things buried in the cares act is a moratorium against foreclosures on agency backed mortgages normally if you miss your mortgage payment for three months the bank has the right to foreclose on your property okay as people were asked to stay home for two months three months it's very easy for people that are normally good credit to lose their property okay congress and and most likely the treasury didn't want this going through and we'll see why uh so that was put into the act ah sorry anyway and you can see you see in the economy that delinquencies have been rising we're just looking at jenny right now because it's easier it's the easiest way to grab the delinquency data here's the 30-day delinquency which is the blue number and the orange number the 60-day delinquency okay so 30-day you miss one payment 60-day you missed two payment this is millions of dollars right these numbers are unprecedented you see the spike coming in with covid with the initial shutdown you see the 60-day spike one month later and you still see delinquencies at a relatively high pace okay great what's amazing is even though we've seen these delinquencies because the delinquencies are not translating into foreclosures we have not seen hpi we've not seen housing prices go down in fact we've seen housing prices go up so normally what you'd expect is a lot of people lose their jobs they need to sell their houses or by them or the bank a lot of houses hit the market prices drop instead we've seen prices go up and a lot of this is because of the moratorium in foreclosures has has had stopped the supply gut from hitting the market okay now why is this interesting for us one reason it's interesting one reason it's interesting for us when you refinance your loan one of the major components is loan to value people look at the value of your home the size of the mortgage if your house if on paper your house drops a lot in value you no longer have access to capital markets if on paper your house stays stable or goes up in price you still have access to the capital markets okay so the fed is trying to use the capital markets to get money into many people's hands some of them are the homeowners congress's cares act stopping the housing prices from dropping has allowed many more homeowners to access the capital markets than would be if that was not passed and we have an artificial drop in housing prices because of a large number of foreclosures over the summer so you see this two-pronged effort part done by congress part done by the fed part takes care of the credit part takes care of the rates and you start to see liquidity slowly enter the mortgage market okay and then there's a lot of fun things to do on that uh there's a lot of fun things to do on that mortgage rates right now are still pretty high considering where the tenure is uh two and a half percent seems like a great mortgage rate but it's still basically two points over the tenure still a traditionally very high mortgage rate you still see production much less in 2003 much less in 2008 so there is some friction in the system that i'm sure if the fed is actually trying to use mortgages to get money in homeowners hands and and to uh that the sources of this friction would be of interest you still see that and then you still see a lot of other funding issues for non-banks so for example this is a sort of a fun graph these are banks these are mortgage loans serviced by banks and non-banks do the intricacies of the mortgage market after 90 days after three months default a servicer can either buy out the loan or keep paying its coupon so it has to fund the loan either way banks that have access to cheap funding are able to buy out the loans they buy out the delinquency pipeline and the 90 plus delinquencies stay pretty low mortgage servicers on the other hand don't have access to this capital and they start choking on these delinquent loans they have to make many more payments than they thought they would ever have to make and it depletes their capital base so there's a lot of fun things about this you get to watch in real time as liquidity enters the system and gets into people's hands and you get to watch the frictions with it and it's fun to watch it unfold okay thank you david i presume you're done okay i think we're good okay thanks thank you david uh so we have heard from uh like the three different panelists now i would like to open the discussion uh to the audience and please feel free to ask any questions i mean just a senior that you want to ask a question in the chat and you will be able to to speak live there is a question by let's see gabriel borajiro i think you have the permission to speak so please go ahead gabriel um augustine i can see the question if you want i can read it and and answer it yeah okay maybe go ahead you can read and that's the answer question um first yeah so the question um well there's two parts to it oh oh i'll read the first part and answer that how's that um with yields so low and low for so long how confident are the fed that rate cuts are having the desired effect on the economy uh it feels like the wider market is interpreting rate cuts as a sign of weakness um so to answer that i mean i would say first of all i'd go back to my disclaimer and say of course i'm not speaking for the fat i'm i'm speaking for myself um and then uh but to answer the question i'd say well you know this has been an issue for some time i mean the zero lower bound has been an issue for some time um the fed of course cut rates to the zero lower bound um it didn't cut rates more because of the zero lower bound so i mean that in itself i mean is kind of evidence that you know the traditional policy tool um you know has kind of limited firepower um you know one one way the fed is responding to this is by providing forward guidance so um you know just looking at like the most recent fomc policy statement for example um it says you know the committee expects it will be appropriate to maintain this target range into labor market conditions have reached levels consistent with committee's assessment of maximum employment and inflate and inflation has risen to two percent and is on track to moderately moderately exceed two percent for some time so um you know this is kind of you know one way the fed has dealt with um having that zero lower bound on the short-term policy rate is by providing forward guidance which you know one would think would put downward pressure on longer term rates as well um and then i think the last way you know one can answer this question is by saying that um i think it's you know widely acknowledged that the fed has limited tools i mean the fed it's it's responsible for monetary policy um there are other parts of the government that are responsible for fiscal policy so yeah certainly the fed has limited tools to address uh something like a pandemic okay thank you michael um so i have a question related to the presentation by benjamin's senator kring um so if i understand correctly uh your point is that if you already have if you are using a large window to decide uh or to determine what's the the worst case losses which determine the margins then they were not then then the um this large the pandemic didn't didn't come as a real deal it was not perceived as a large shock because somehow the margins that uh were set aside were already large enough but for those uh center carrying other parties which were setting the margins using a smaller window then the size of the margin was lower and therefore the pandemic came as a shock is it is it the right way of interpreting it yes and although i i also want to acknowledge that the the march episode uh seems to be even more volatile in some in some sense uh compared to the gfc so people can also argue even with a long enough look-back period still the the march episode would come as a surprise because it's basically unprecedented so to that i i still want to emphasize that uh because the the value at risk measure uh normally used by ccps uh to to calculate this i am um is the is a quantile right so so even though um even though the the the march episode is it might be more volatile for some uh asset classes compared to the gfc compared to the historical largest uh highest volatility still if you have a uh if you have uh the the highest volatility in your sample then the the level of the margin before the before the the covet crisis will still be higher compared to the scenarios where you have a short look at look back period so still the difference between the the march margin and the pre-covert margin level would be different for ccps with a short look-back period and ccps with a long look-back period so the point is that it's it's better to have a long well in terms of mitigating procedurality it is better to have a longer look back period given the the the same risk parameters given other other risk parameters remain the same and does this look back video to explain why we haven't seen many defaults many margin breachs i think one of your first slides was showing that rituals not large so not many remember sir yes so uh indeed so what i show is the uh december uh 2019 margin breaches so that is pre-corbett so pre-covert uh the market basically is in tranquil time and the margin breaches are small but actually the the most recent data the q1 and q2 data i mean q1 data mainly shows that the margin breaches pick up in q1 and but luckily i think uh as michael said uh fed and other central banks as well uh has done a lot in supporting market liquidity so to some extent we are not really seeing a test of the ccps and banks risk management capability because yeah because central banks they are acting as the the the last result of buyers right so so to some extent the central bank intervention support asset prices and resolve liquidity crunch very smoothly very sweetly and and that has helped a lot and i think that is the that is part of the reasons that we don't see a lot of defaults and we don't see a lot of disruptions uh in post-trade financial systems i see thank you there is a question by anders riveros anders do you want to go ahead and ask sure so you the three of you were discussing effects after after the month of march right where we saw the the turmoil in the market which was clear in all of your presentations however the pandemic was hitting large markets way before that we had it started in november then hit europe in january why were these effects in in your respective areas were seen at the beginning of march and not before i think the market put very little probability on that on the cova having such a big impact on the us before then the market market can't see the future it can be wrong all the time what the market's really good at is reacting very quickly when it realizes it's wrong and that's what happened in a very short period of time in march uh michael and young do you want to add anything um no i mean i i agree i mean i would i would have just said yeah that um yeah the market just seemingly didn't think that it was going to be that much of an issue for the u.s until then thank you yeah i tend to agree with the other panelists and i also particularly uh with david on this that markets are markets forecast about about market forecasts about the future might be very uh might be very noisy but cross-sectionally speaking i think it's uh it's more it's more the precise on the um please uh as usual feel free to ask to senior if you want to ask questions but meanwhile i have a question for michael uh regarding the liquidity measures that you're using uh i mean um i i presume that you're also speaking about this time dimensional liquidity because you meant that the inventories of the market makers were becoming large right i mean they were not able to [Music] absorb all this pressure or deserving pressure that's right and uh i mean do you think this dimension like is like responsible for increasing the beta is the primary dimension that is increasing the beta spread or there are other considerations that go into that in what is causing the the spikes yeah sure um i mean first and foremost i would say that pandemic just greatly increased uncertainty about the economy and you know given that you'd expect you know the increased uncertainty to lead to high volatility and the high volatility increases the risk of you know making markets and taking positions and that should lead to wider bid-ask spread so that was all um as expected uh but yes i think um you know dealer balance sheets constraints the fact that dealers already held fairly large positive treasury positions going into the pandemic that that exacerbated the illiquidity so that that was an additional factor that caused spreads uh to widen um and then yeah i mean the other factors discussed as well um you know just the massive selling pressure um and you know perhaps the the fact that the principal trading firms um reduce their activity at least as a share of the overall market thank you so agustino related to that can i ask a follow-up question to michael yes sure um so michael uh so one thing that is that was quite surprising to me is that after the after the announcement of the the temporary exemption of treasury in supplemental supplementary leverage ratio regulation it seems that the market does not did not respond to that very strongly so so is that the case or you you see that differently and mainly do you find that the supplement supplementary leverage ratio is a is a binding factor for for the dealers okay um yeah um so the you know the relaxation of the slr ratio um i mean it took effect after i think you know more significant or you know what more changes that are maybe more relevant to market functioning and in particular um the initiation of the market functioning purchases and then you know the the expansion of those you know the announcement that the fed would kind of buy in the amounts needed to improve market functioning so um i think those were kind of the critical announcements and um you know then the slr announcement came after that and i agree with you i don't um in the time series i don't see anything that suggests um uh you know like a a notable or yeah notable improvement in liquidity after that particular announcement um and it could be that um yeah that there are other there are other regulations that bind so um loosening one doesn't necessarily buy you all that much thank you michael um we have a question from arash raj feel free to ask okay i think garage said it's noisy so i will read the question he said that the decision to meddle with the market to mitigate the effect of quit uh regarding that is it made by career employees or by appointed ones oh sure well this is um kind of like um fed fed you know a fed governance 101 question um so there's the the federal open market committee which is making um uh you know a lot of these decisions the the federal open market committee that consists of um five presidents of reserve banks and then you know seven governors in washington the governors in washington are appointed by the president of the united states um the five regional bank presidents they're appointed by their individual bank board of directors and then approved by the um by the board of governors in washington so um so i'd say it's a mix but um i'd say probably you know for the fomc it's mostly um you know presidential appointees and there is a question by boris davidoff um his question is whether risk mode risk modeling in the reality of the world economy why are these in the fed view on the us economy for the one year period um so um i'm a little unsure kind of like what exactly the question is if he's asking whether it's for one year or not a longer period whether i mean that's fine that's possible interpretation on this question whether these are only for a one year period or for a longer period um what what are only for one year period uh this um this measures of in measures of modeling risk but i don't know maybe we can skip this question because it seems a bit ambiguous yeah so yes you said that if any if there is any risk modelling for the future by the fed if the fed is changing perhaps the way that is modeling risk i don't know it seems a broad question um yeah um yeah i guess i'm not probably not the best person to speak to you know um the risk modeling that that is underdone by the fed but the fed's a huge place we've got lots of people in you know many different areas yeah and there's a question by gabrielle um [Music] that's that's what we talked about that's okay well this this i mean there is yield in the market to the second part there is yield in the market the curve is steep it's the absolute level of yields are lower than people are used to but the yield curve is steep we don't have a flat yield curve there's plenty of yield in the mortgage market again two and two and three quarters is a low rate historically but it's not low compared to where the tenure is i'm sure in the cmbs market when the defaults start coming through you can buy stuff at 10 20 yield so there is there is yield out there it's just the absolute levels are lower than what people are used to but that's that's the world we live in yeah so i mean other questions uh to all of you maybe david specifically me the how would you compare the mortgage market in 2007 2009 and the mortgage market today meaning do you think the reason why the impact on house price is not being that large is because of the lesson learned from 2007 or is more because the shock is uh lower that because the some of the us up and the the especially the u.s economy was quite um quite strong before the crisis hit right it was um not as weak as during 2007-2000 period i think i think one of the big differences is there's much less uncertainty in the value of the underlying assets so in 2008 not only do we have agency mortgages but we had a lot of cash out refi so somebody would buy their house for five hundred thousand dollars three years later they would get a loan for eight hundred thousand dollars so they would have very tight ltv plus instead of the simple structure type mortgages that u.s people generally got they were all social mortgages with interest rate uh options embedded in that and there was a lot more fraud in the underlying mortgages the same for the cmbs market and the same for the agency market on top of that you had cdo markets and cdo square markets that allowed people to sell the same suspect mortgages two or three times so there was huge uncertainty of the value of the underlying assets so for a six month period nobody wanted to touch anything because you could buy a bond that you thought had one point price difference and its price difference could go from par to 50 the buck to zero that scared pushed off a lot of investors here there was some uncertainty that everybody would start defaulting on their house which could lead to fannie and freddie going out of business but they're already in conservative ship so that's the government's problem second is i think by by accident or by purpose congress passed the cares act which kept hpi where it is so nobody's trying to refinance a mortgage that's 20 points underwater as they were in 2008 right so i think i think because the underlying assets are much better quality and people feel much more comfortable with them then there's then there's much more interest i mean and the question i would ask michael is you know we had a lot of liquidity issues with the reits in march too that caused some shocks to the mortgage market but not as much as 2008. there is a question by nolan bradshaw uh noland do you want to ask the question why you could ask the question you want me to ask or you want to ask yourself you can ask please thank you so he's asking uh he said that in the new york times as an article that says that hedge funds and other republican contributors got information that the coronavirus effect was going to be worse than what the triumph the trump white house officials were saying publicly does that information change your understanding of the effects that you have seen in march um i can start uh so for clearing houses um i don't see that directly relate to the the margin calls we see from the ccps so yeah so i would say that does not change my understanding does any other panelists want to add anything no i think i think there's a lot of uncertainty about what it was going to happen i'm sure some people were saying it was going to be better some people's going to say it's worse it's not inside information as a oh i know this company is going to buy the other company i think this virus is going to be worse so that's commodities market you're allowed to trade on what you think the sun's going to what do you think sunshine's going to be where they're growing cotton it's something like that at least in my opinion yeah and i wasn't going to um you know necessarily answer the question directly but you know to go back to kind of the outstanding questions as to um you know who was selling um in march and i think that's it's you know still an open question um as i said you know there was early work which suggested that this margin spiral was you know really an important factor um you know driven by leveraged investors and then you know more recently um the consensus or some work seems to have shifted uh against the view that it was that it was which once okay perfect so we're right on the hour we will have to close here the format part of the presentation uh there will be an informal part uh that will start right away so please stay and uh yeah you can ask questions you we can have a more informal interaction with the panelists and also among urselves and just before i conclude i would like to remind you that uh there are upcoming deadlines for the siam fme conference in fact today is the deadline for the early gary price and mission so please keep this in mind and also keep in mind that uh there are other deadlines regarding mini symposium submissions and contributed tools so start thinking about meaning symbols that you want to organize and uh submit a proposal that we are looking forward to review so thanks everybody and uh please stay on for the informal part we'll stop the recording