Focus On: Operations
Measuring Operational Risk: Part Science, Part Art | Licensing Ops Execs: Great Idea, Bad Execution? | Reducing Operational Errors With OTC Derivatives | A DAY IN THE BACK OFFICE:
Eliminating Operational Risk at a Transfer Agency | Giving a Single Name a Single Identity | TOP OPS EXEC: Timothy Doar, CME Clearing | TOP OPS EXEC: Mike Fish, SWIFT | TOP OPS EXEC: Patrick Kirby, DTCC | TOP OPS EXEC: John McCorvey, Gar Wood Securities | TOP OPS EXEC: Jeff Gooch, MarkitServ | TOP OPS EXEC: James Malgieri, BNY Mellon | TOP OPS EXEC: Hans Hufschmid, GlobeOp Financial Services | TOP OPS EXEC: Conrad Kozak, JPMorgan Chase
TOP OPS EXEC: Timothy Doar, CME Clearing
May 4, 2011
NAME: Timothy Doar
TITLE: Managing director, risk management
COMPANY: CME Clearing
KEY FOCUS: Processing diverse trades, even through market crises
CME Clearing clears for a variety of markets, each present- ing different operational risks, especially during highly volatile times such as last May’s flash crash.
Timothy Doar, the managing director at CME Group who heads up risk management for the clearing unit, says that as the central counterparty and guarantor to the transactions it re- ceives, “we do consider ourselves to be a risk-management organization first and foremost.”
Managing market risk – determin- ing the amount of margin to charge members, type of collateral to post, etc. – is one side of the equation, while processing in as consistent and reliable a fashion as possible is another. CME Group averaged 14.4 million trades daily in March with 85 percent of that volume occurring over CME GlobeEx
electronic trading platform. The re- mainder was split between its live floor traders and its growing CME Clear- Port unit specializing in the clearance of bilateral, over-the-counter negoti- ated trades.
Wall Street giants Morgan Stanley and Wells Fargo, for example, have an- nounced plans to join the CME to clear interest-rate swaps.
Doar notes that “even within the exchange-traded space, the firm has different execution models in play.” The Chicago Mercantile Exchange acquired The Chicago Board of Trade (CBOT) in 2007, and futures commission mer- chants are integral to their execution models. Brokers are more central to the models of the New York Mercantile Exchange (NYMEX) and Commodity Exchange (Comex), both acquired by CME Group in 2008.
“It’s important we optimize our systems to accept transactions from the different venues, then allow for seamless processing of outbound trade confirmations to be sent to our membership,” says Doar, who has held his current position since 2004 and had operational responsibility for integrating the clearing functions of CBOT, NYMEX and Comex into CME Clearing.
Accepting data from trades exe- cuted in different ways poses one set of risks to monitor and control. Another is ensuring CME clearing has sufficient processing capacity to handle market events such as last May’s flash crash, as the firm moves away from a mainframe environment to distributed servers.
“Big questions for us are how much capacity should we have online at any given point in time, and how much excess capacity must be available to support surges in volume,” Doar says. After all, it’s one thing to say the
unit can process 10 million transactions a day but another to handle this when nine million of those transactions are compressed into less than
10 minutes time. Doar notes the volume of activity
generated by the May 6 Flash Crash [that occurred in the securities mar- kets] was “a bit of a challenge for us.” The big drop and reboot of activity re- sulted in backlogs in the CME Group’s derivatives markets, the status of which were openly communicated to mem- bers. Following the incident, Doar says his team “tuned” CME Clearing’s trade processing infrastructure configuration to better handle scenarios where high- volume bursts of inbound transactions must then be sent outbound to futures commission merchants’ back offices. “We are big believers in using real-life experience to tune our systems.”