FIA releases guidelines for volatility brakes

Trade body the FIA has set out best practices for volatility control measures used by exchanges to dampen extreme price moves.

In a paper published on Tuesday, the Washington-based trade association laid out a framework on the design, triggers and use of the measures.

“FIA is pleased to publish this paper, which is the result of discussions with our members and several derivatives exchanges after recent tests of existing volatility control mechanisms (VCMs),” Jackie Mesa, chief operating officer and senior vice president of global policy at the FIA, said in an emailed statement. “We had a lot of questions from market participants about VCMs on derivatives exchanges, and this paper tries to address these questions and offer guidance.”

The issue of when and how to best use the measures, which has long attracted controversy, was addressed by the International Organisation of Securities Commissions (IOSCO) in a consultation in 2018. At the time, trade bodies had been clear that they preferred a tailored approach that could be adapted to different venues and markets. Since the Covid pandemic, the commodity market shock related to the crisis in Ukraine, and event driven volatility caused by rates policy moves have brought the issue to the fore.

“As we state in the paper, the exchanges themselves are the experts here and should be empowered to drive the improvement and implementation of VCMs going forward,” Mesa added. “A transparent approach that provides flexibility, from market to market and product to product, is the only way to balance the need to protect market integrity with the need to respect the critical process of price discovery during volatile times.” 

The London Metal Exchange in July said it would reduce its daily price limit on two metals, after first introducing a methodology to calculate the maximum and minimum thresholds in March – one year after it was forced to suspend its Nickel market and cancel trades.

At the end of last year, Intercontinental Exchange and the European Energy Exchange both voiced concerns about the implementation of gas price caps imposed by European authorities.