On Friday March 20th, Ronin Capital two central counterparty clearing houses (CCPs) commenced liquidation of Ronin Capital’s portfolios. This failure was due to the downstream effects of COVID-19 on the markets. FNA Related party analytics identified contagion paths that show that over 200 financial institutions could have been negatively impacted. With no end in sight for COVID-19, the uncertainty that has been shaking up the global financial markets is likely to continue. 

CME auctioned off Ronin Capital’s futures portfolio with no impact to other clearing members. Similarly, the Government Securities Division of the Fixed Income Clearing Corporation (FICC) worked with the regulators on an orderly wind-down of Ronin’s positions. On March 25th, FICC announced that the liquidation process was completed successfully, which meant that no losses would be imposed on GSD surviving member firms as a result of Ronin’s liquidation. 

The CME and FICC default management processes worked as intended. However, we should not take for granted that all CCPs will handle defaults in the same manner. Just a year and a half ago Einar Aas defaulted at NASDAQ Nordic, and surviving clearing members had to contribute $121 million to replenish the default fund. Related party risks are real. Regulators, CCPs and clearing members must prepare for potential failures of other clearing members, and potential downstream effects of such disruptions at other clearing houses. 

How many degrees of separation were there between your institution and Ronin Capital LLC?

As discussed in our recent post, FNA uses publicly available data to help you answer that question. We map connections between CCPs and their participating CMs. Our software helps our clients understand how a shock to one or more nodes in the network for financial institutions would propagate through the system and estimate the potential impact on their institution. In the simple visualization below, we show “who is connected to who” in the global clearing network, and display the contagion path through which the effects of Ronin Capital’s failure could have spread. 

In the visualization above, CCPs are depicted by diamond-shaped icons while CMs are represented by circle-shaped icons. Colors show the geographical region of each node: North America (blue), South America (cyan), Europe and Middle East (orange), Africa (red) and Asia-Pacific (green). Finally, the size of each icon reflects the number of other nodes to which they are connected.

Consider the leftmost point in the diagram as a starting point – Ronin Capital LLC. Ronin was a direct clearing member at CME and FICC. This one path of the potential contagion effects of Ronin Capital failure is clear. If the mutualized default resources of CME and FICC were penetrated all their CMs would have had to contribute again. Thus, we see that over 200 financial institutions are only 2 degrees of separation from Ronin, and all of them could have incurred losses related to Ronin Capital’s failure. Furthermore, 23 other CCPs are 3 degrees of separation from Ronin. These CCPs have an indirect exposure to Ronin through clearing members that they share with CME and FICC.

The second path of the potential contagion related to Ronin is related to Parplus Equity Master Fund Ltd. and is based on the FNA related party data set. FNA aggregated a dataset that combines publicly available ownership data from regulatory filings and other publicly available databases. The FNA related party data shows a strong connection between Ronin and Parplus.  The CEO of Ronin Capital, John Springs Stafford and Ronin Private Investments., LLC have indirect ownership interest in Parplus Equity Master Fund Ltd. Additionally, Parplus Partners CEO James Carney wrote that, together with Ronin, he “developed and successfully implemented the strategy applied in the Parplus Equity Fund.” Related party data combined with the information that trading strategies of Parplus were developed together with Ronin helped us identify Parplus as another entity that is likely to be impacted by the failure of Ronin Capital LLC. 

This second contagion path flows through Parplus Equity to entities its prime brokers (per regulatory filings) those institutions are ABN AMRO CLEARING CHICAGO LLC, ABN AMRO CLEARING BANK NV, and INTERACTIVE BROKERS LLC. Roughly a week after Ronin’s portfolio was liquidated, ABN Amro spokesman, Arien Bikker, stated that ABN Amro clearing business has suffered a pre tax loss of ~$250 million as a result of a forced liquidation of a U.S. client’s positions. The forced liquidation was prompted “after the customer – which traded U.S. options and futures – failed to meet minimum risk and margin requirements.” The following day Risk.net identified Parplus as the source of ABN Amro’s loss.

FNA clients include central banks, financial regulators, and financial institutions. Many of our clients monitor and manage these indirect risk exposures. Other institutions are only now starting to consider these indirect risks. According to Risk.net article RBS decided to exit “client clearing and execution business for futures and options trading, leaving around 150 clients scrambling to find alternative arrangements.” 

COVID-19 spreads through human interactions. Similarly shocks to the financial system can spread through interactions between financial institutions. Masks, gloves, and social distancing can help stem the spread of COVID-19, and robust risk management can help prevent contagion in financial markets. Accounting only for direct exposures does not constitute robust risk management. Does your risk team monitor the indirect exposures? Are they actively managing indirect risks? 

FNA can help you quantify, monitor, and manage your interconnectedness exposures.

Ivana Ruffini (ivana@fna.fi) is FNA’s Managing Director of Advanced Analytics. 

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