A market with no risks. CC&G guarantees
The Central Counterparty of Borsa Italiana and its role as guarantor. «In this way we provide security to the whole market» explains Marco Polito, who became CEO after 28 years spent in Risk Management.
A healthy market is also (if not primarily) a product of the organizations that manage its functions, risks and orderly conduct. Among these key players stand Central Counterparties: they are the ones to guarantee the successful outcome of all the deals taking place on guaranteed markets, ensuring, for instance, that a creditor receives the agreed amount. But how exactly does this work? We asked that to Marco Polito, Chief Executive Officer of CC&G – the acronym for Cassa di Compensazione e Garanzia, the Central Counterparty of Borsa Italiana and of the Group – who, in describing the role of his institution, uses a metaphor: «I like to think of us as the “firefighters” of the market. Despite common perception, the main activity of firefighters is not putting out fires, but introducing measures to prevent them. We do the same with financial transactions: having built a system of guarantees to prevent problems before they happen, we provide security to the whole market».
Marco, tell us about the role of CC&G.
«We are the guarantors of every trade between our member companies. That means we take on the risk of default of one of the two parties, the buyer and the seller: if that happens, we cover the amount due to the counterparty. This is the function of Central Counterparties. This mechanism is made possible by the margin system: as members of CC&G in a regulated market, participants are required to make a margin deposit that would be sufficient to cover the costs of a possible default. This gives certainty to those who access the market that the contractual obligations will be respected, even if a counterparty should go bankrupt. In such a case, the margins of the insolvent party will be used to cover the expenses».
So we can say that your job is to reduce market uncertainties.
«Yes, and it’s a job that starts long before a trade takes place. First, our participants are exclusively banks or investment firms - already supervised institutions – and that in turn, gives us a sound guarantee. Nevertheless, we carry out an in-depth due diligence to ensure that they respect the requirements to participate in the central counterparty system. These requirements refer not only to the creditworthiness or members’ capital adequacy, but also to their organizational structure in respect to the activity they will perform as CC&G member. So you can sense that, together with keeping up to speed with regulatory environment, Risk Management is our primary focus, and it also happens to be the area to which I dedicated a great part of my career».
Since you brought up the subject: CC&G doesn’t operate “in solitude”, but is part of an ecosystem that oversees post-trade market. What is the added value of this network?
«To begin with, we are in a position to provide our clients with an increasingly complete service, supporting them at every step.
Largely speaking, being part of an ecosystem and being able to share expertise is beneficial to everyone, and I’m not just referring to the Group, but also to our clients, and markets in general. Think about an airport, and how it benefits the entire community: local companies, shops, people employed...
We do the same thing. A company listed on a market guaranteed by a solid and reliable Central Counterparty, which offers quality services and contains the risks, leads to the development of the entire financial market, as well as to a greater liquidity and access to capital. And one other aspect in the CC&G role is worth underlying: since it’s the insolvent company itself that repays for the insolvency it generated, there are no costs for the community».
Can you give some numbers to help us understand the size of your activity?
«We operate in 14 markets, including Borsa Italiana and MTS and we cover all the main asset classes: government bonds, shares, equity derivatives … We have about 150 Italian and European clients, and we are present in seven countries. As far as volumes are concerned, we are coming off a year in which we recorded 22 billion euros in collateral to face possible defaults. Our aim is to be a partner of reference to our clients, responding to their needs. Clearly, in our sector it is difficult to imagine a significant increase in a number of clients – there are that many banks, that number doesn’t change much, at most they merge – but we can certainly expand their business by broadening the range of products we cover. In this, we work side by side with the markets we guarantee, contributing to their innovation.
I’ll give you a recent example of this type of successful collaboration: in February, in the occasion of the extension of trading hours for derivatives on IDEM until 22:00, we also expanded our operating window, thus allowing customers to easily finalize post-trade activities on the same day of trading».
In these years, there has been a lot of talk about Regulation: how much of an impact does it have and what can CC&G do for clients?
«Adapting to regulatory changes is a crucial area where we seek to support our clients: SFTR, CSDR, the consolidation of T2/T2S and the dossier on the establishment of a regulatory framework for the recovery and resolution of central counterparties are only some of the items on the agenda that will involve the industry in the near future. All the players will be affected to varying degrees. Our approach is to include our clients in the process from the early stages by creating dedicated working groups where we discuss the issues, listen to their needs, so that they stay involved in the design of our solutions. The intent is on the one hand, to act as a spokesperson for our customers at the relevant forums – such as ESMA or EACH – in coordination with the Italian Authorities; and on the other, to ensure that the solutions we adopt, simplify as much as possible the adaptation process, minimizing the impact».
Following current events, we can’t avoid talking about the ongoing health emergency. In what way has Covid-19 affected your activity?
«I am certain of one thing: you cannot improvise in an emergency. What makes a difference is your ability to plan. To quote Eisenhower, “plans are useless, but planning is indispensable”. He was a general and he applied this principle to battles, but it is valid on every field. In our case, any pre-packaged plan would have proved inadequate to face a similar situation; it was more effective to adapt and carry on operations without sacrificing the quality of work. We were not unprepared. And it was a remarkable “stress test”: we saw very strong market fluctuations, managing volumes three times the average, and we adopted new ways of working and interacting with each other, with our clients and stakeholders. March 12th was one of the most complex days in our history: and we pride ourselves on having handled it effectively».
Tell us a bit about yourself in conclusion. How did you end up in the position of CEO of CC&G?
«I joined the company in 1992, with a one-month contract, within the General Affairs department. Year after year I specialized in Risk Management, collaborating in parallel with trade associations that represented Central Counterparties; these roles really drove my understanding about what it takes to foster relationships in different market infrastructures. As my experience kept growing, so did my international visibility. In 2013, I was asked to undertake a broader role within the Group Risk Management; there, for the first time, I understood what it means to arrive to a new place with a wealth of matured experience: you must build on it, but not let it become a burden and prevent you from looking at things with a new pair of eyes. A challenge within a challenge. I carried out this double assignment until 2018, when I took on the position of General Manager of CC&G, to then become its CEO 16 months later».