Recently the Commodity Futures Trading Commission (CFTC) approved our license to operate a Designated Clearing Organization (DCO) for futures on physically-delivered digital assets. Supplementing our Designated Contract Market license that we have had since 2011, our DCO license enables us to guarantee trades, eliminate counterparty risk and is an important function of a healthy and transparent derivatives market. It is with this in mind that we wanted to take this opportunity to introduce you to our Head of Clearing, Liz James.
She has spent forty years working on clearing arrangements, exchange products, global operations and client services. She has held positions of increasing responsibility at the Bank of England, Chase Bank, ABN Amro, Barclays Investment Bank, and State Street.
We spoke with Liz to learn more about her background in clearing as well as her views on the importance of a clearinghouse, her days as an expert witness and how she is applying what she learned to protect investors in the digital asset markets at ErisX.
Originally Liz James wanted to be a police officer but she was too young to apply for the job at sixteen. Instead her mom’s friend told her about an opportunity at the Bank of England handling the physical delivery of Gilts.
“My first foray into futures was doing the deliveries of long and short bonds, Treasuries and even 3.5% war stocks,” she said. “I was introduced to futures by settling futures contracts in the market.”
Liz described the fast-paced scene in a room crowded with people sitting at their desks in front of keyboards.
“We had these metal bins filled with pieces of paper and if I was on a certain desk for the day, I would have this person’s position in all of the Gilt markets. I could see exactly how much was in their account for the underlying clients,” she said. “I would pull out a piece of paper and we would literally debit the amount from this card and it would get transferred to the counterparty.”
The Jobbers Counter role, which is what Liz called it, went electronic in 1986.
“The counterparties went from seven to fifty and there was no longer a need for someone to manually enter in stock numbers,” she said. “I found myself looking for new opportunities.”
She landed at Chase Bank in their central Gilts office where traders were using futures contracts for hedging purposes. She credits Chase for her hands-on, in-depth experience with clearing.
“I had 12 traders and maintained their positions in the system; I worked with the broker, managed accounting and manually, calculated initial margin which is something you cannot do anymore due to the complexity and risk management procedures the market adheres to,” she said.
An Expert (Witness)
In addition to holding similar clearing roles at Barclays, State Street and ABN Amro; Liz has also been tapped as an Expert Witness in high-profile trials. While she never worked at Lehman Brothers and MF Global, her in-depth experience with clearing and settlements helped shed some light on cases involving these firms. (Liz worked at Barclays during the Lehman failure and was instrumental in integrating the Lehman business and accounts at Barclays’ FCM — a task that took over 3 months.)
“I was brought in to look at if the policies and procedures stood up to protect customers,” she said. “MF Global customers got their money back, which proved that the CFTC and customer segregated funds requirements provided the right protection.”
From this experience, Liz learned the importance of how detailed books and records need to be when you are dealing with clearing members and client money.
“If your books and records aren’t clean and something happens, you and your customers are not in a good spot and this is not what we want,” she said. “Maintaining clean books and records helps us easily see what belongs to who.”
Her New Role
Liz is applying this knowledge to her new role as Head of Clearing at ErisX. Clearing services are integral to the safety and soundness of capital markets. ErisX’s clearinghouse will be the counterparty to every trade, act as the buyer to every seller and the seller for every buyer, for every trade. This mitigates the counterparty risk for traders and obviates the need for bilateral credit and risk relationships between counterparties.
Liz’s team is responsible for ensuring that all ErisX trades get cleared on the clearinghouse’s books and that the information is documented on the correct clearing member’s account.
“When building my team, I knew I needed people that understand the core process of futures clearing but would also be able to adapt to new products and processes. They have to be open to new ideas while integrating core principles and regulations,” she said.
They are also responsible for ensuring that all assets required for trading have been received and allocated to the clearing member’s account as well as managing client withdrawals.
While voluntary, ErisX applies the same principles and similar rulebook that the futures industry operates under to the spot market as well. Liz believes that this will result in further market adoption from the institutional investors and traders.
“We have built foundational exchange and clearing infrastructure to address offerings for cash transactions, as well as a regulated futures exchange and clearinghouse to provide hedging and risk management tools,” she said. “These complementary offerings will enable trading of both spot and futures on a single infrastructure, leveraging intermediary services that investors and individual traders have come to expect from the traditional markets.”
If you would like to stay up to date on the launch of our futures market, our clearing services and how we are improving the digital asset experience, we invite you to sign up for updates.