Central Counterparties (Chapter 2)

 

Central Counterparties: Mandatory Clearing and Bilateral Margin Requirements for OTC DerivativesBilateral
by Jon Gregory
Published 2014

(Part of my undertaking to read Chapter 2 of books in my library.)

This book was published in 2014, so there will be some contents that are out of date.  A lot of activity has occurred in the central counterparties regulatory world recently.

Many derivatives contracts, such as options, and futures, are traded on an exchange. In an exchange, derivatives contracts are standardised. Standardisation leads to efficiency and tradeability.

While originally, contracts where traded on an exchange where the exchange served merely as a witness, and not a counterparty to the trade.  If a trading party did not live up to the contract, the exchange would fine them or even expel them.

Only approved firms and individuals may trade in an exchange.

Exchanges facilitate margining and netting between trade counterparties, which reduce the magnitude of risk for each side.

There are 3 forms of clearing: direct clearing, ring clearing, and complete clearing. Direct clearing is where each party delivers their contract obligations to the other. If there are offsetting trades, often the practice is to just net the difference, a practice called "netting", or "payment of difference". Ring clearing is an expansion of direct clearing to more than two parties. The parties must agree to join the ring. If A must pay B, who must pay C, then C can receive the payment directly from A. The exchange itself is not a participant other than an enforcer of rules. A disadvantage of rings is that a quality counterparty may be replaced by one that has lower credit quality. Not everyone in the ring benefits. Complete clearing extends and improves the ring by placing the exchange as a central counterparty to all parties. A party no longer has to worry about the credit rating of their counterparty; the exchanges assumes the rights and responsibilites of the counterparty.

Of course, if an exchanges assumes the obligations of a party, it must protect itself from exposures arising from an insolvent party. Two ways to mitigate the exposure is through the practice of initial margins and variation margins.  In addition to margins, a method of loss sharing is also implemented. One practice is requiring all members to make share purchases.

There was resistance to this concept early one: firms with high quality rating felt they lost their advantage over lower quality firms because a firm's credit rating became irrelevant.  The counterparty service can be provided by the exchange, or be provided by another firm offering that service for the eschange.

All derivatives market clearing service became standardised and used central clearing until OTC's arrived on the scene.

To be continued...

***

Fang Bo B2X Table Tennis Blade

Now for a recreational break...

I used to play table tennis in uni, but hadn't played in decades.  Recently, my interest got fired up (I don't recall why). 

Today, I received my copy of a Double Happiness (DHS) Fang Bo B2X blade (B2X). I wanted to try out an ALC blade but didn't want to spend much.  The most popular ones, the Butterfly Viscaria, and Timo Boll ALC, the DHS Hurricane Long 5, and others, were too expensive for my needs. The B2X fit the bill. 

The internet chats say the B2X plays very similarly to the Hurricane Long 3, at 1/3 of the price, and of reasonably good quality ("the Hurricane Long without the quality control", some say).

The Setup: B2X,  Forehand: Hurricane 3 (H3) Hard Black 2.2mm. Backhand: Hurricane 3 Hard Red 2.2mm. But rubbers are unboosted, both are the commercial version you get from tabletennis11.com.   I had tabletennis11.com assemble the racket. I also asked them to lacquer the blade.  I don't bother boosting since I no longer play competitively, and can't be bothered with the routine.

I have two other blades that also have H3 on both sides, all 2.2mm, all unboosted, so I can do some comparisons. I have a Donic Person Powerplay (DPP), and a Yasaka Extra Offensive 7 Power (YEO7P). 

My YEO7P has 'H3 Hard on the forehand, and regular H3 on the backhand, and my DPP uses regular H3 on both sides.  I actually couldn't notice much difference between H3 Hard and H3 regular, except that H3 Hard is 'not softer' than H3 regular.  If I didn't know one of the rubbers was Hard, I wouldn't know,  so it probably doesn't matter.  Maybe the difference shows up when you boost them, which I don't.

The B2X comes in a silver sturdy cardboard box that locks magnetically.  This case a big step up from the flimsy carboard box that comes with Donic blades, or the transparent plastic case that Yasaka blades come with. However, the case is really irrelevant. If you're not a fan of Fang Bo, you might be a little uncomfortable about his large photos on the outside and inside of the box.

Thankfully the B2X no longer comes with Fang Bo's face at the bottom of the handle. The cheap looking plastic seal is still there, but the design is an outline of a trophy.

In most cases, tabletennis11.con usually does as exceptional job assembling my rackets. Whoever assembles the racket there has some superpowers. But he made a minor mistake. He attached the black rubber at the back of the blade, and the red at the front. This is a minor thing because both sides of the blade are the same.  However, the plastic seals on the blade handles, the orientation of the trophy at the bottom of the blade, and the serial number imprint on the side of the blade make it unmistakable (albeit easy to miss) which side is forehand and which side is the backhand. Superpowered, but mortal.

Quality of Workmanship

First, quality of workmanship. The handle and neck of the blade is quite well polished. Not as well polished as Donic blades, but it is smooth. There's no need to sand them. (I received the blade with the rubbers already attached, so I can't comment on the quality of the blade face). 

Playing Impressions

On soft play, the feel reminds me of my DPP, which is a wonderful blade.  Maybe not quite the same as DPP, but way closer to DPP than YEO7P.  The B2X has significantly more vibration than the DPP in soft play. At first I was underwhelmed with the B2X.  Why would I need it if it plays like the DPP?

On harder hitting, I feel like the B2X has more power to give than even the YEO7P, especially in looping. It feels both sharp and at the same time solid. The ball travels faster when looped or driven by B2X. The YEO7 has a walnut surface and feels hard and stiff. It feels very different to the B2X.

With the B2X, all my loops against a lightly overspin serve went waaaay past the table. I had to really close the angle (almost 0 degree, almost perfectly horizontally, it feels like!) before my loops went in. Each time I open the angle a bit, the ball flies off the table again. 

One negative thing is the handle. For some reason, it hurts the inside of the second joint of my index finger. It's not because of any roughness in the blade handle; as I mentioned, it's quite well-sanded and smooth. The problem has more to do with the shape.  The blade face widens up a more slowly than my Donic and Yasaka blades. I never had this problem with Donic, Nittaku, Yasaka, Tibhar, or Butterfly, and never realised a problem like this was possible.

My finger hurts when I use my normal grip with the B2X. I have to hold the blade further down the handle, kind of like how Ma Long holds his blade, with the bottom half of my thumb on the crescent top of the blade handle, and the upper half on the rubber.  I'm not sure if I will adjust my grip or if I should look at shaping the blade -- I don't know how I would do that.

One of my favourite blades I have is a Donic Waldner Legend Carbon (WLC). This blade has a fantastic soft and crisp feel to it.  I want to compare it against B2X to see which one is more powerful.  The WLC seems has a thicker carbon layer than the YEO7P and feels much more carbony than YEO7P (but the hinoki surface gives it great control). My WLC has Friendship 729 Super FX on both sides, so any comparison with the B2X will have to be mindful of that difference.

At this stage, these four blades play differently from each other, and I have no favourites. I like them all.

I will continue to update this as I get more used to the blade.

Juran on Quality by Design (Chapter 2)

Reading Chapter Two of Juran on Quality by Design (paid link)

Chapter 2 "Establish Quality Goals"

NOTES

A goal is an "aimed-at" target. A quality goal is a quality target you are aiming for. The goal would typically include "a number" and a "time table"

Some consider that setting quality goals is part of quality planning, whereas others have the view that quality goals are set outside of quality planning -- the purpose of planning in this case is establishing how to achieve the quality goals.

A vision has no connection to reality until it is translated into quality goals.  Planning is impossible until goals are established.

Tactical quality goals refer to goals designed to meet human (customer) needs. These include product features, process control features, etc.  They are set by middle management in order to meet the strategic goals.

Strategic quality goals are set at the highest level of the organisation. They are often driven by the company's strategic vision and policies. Examples of strategic goals are: "Improve product and service quality ten times (Motorola)", and "Reduce billing errors by 90% (Florida Power and Light Company)". 

Upper management should not become involved with individual tactical quality goals as there are too many, but they need to be involved with them at the 'collective' level.

Quality goals do not only come from customer needs. They can be driven by a company's concept which may need to be marketed to customers (an example is Walkman, which no customer 'needed' or asked for). Goals can originate from regulations, or from internal human desires to be meticulous.

Some of the most important bases of quality goals:

• Technology - in the form of specifications and procedures
• Market - quality goals that affect saleability should be based on the market
• Benchmarking - quality goal made with reference to what other companies are achieving
• Historical - performance in the past is used as the basis for performance in the future. Sometimes the goal is to improve on past performance. Sometimes the goal is ensure stability with past performance.  This basis can be a double-edged sword.

Quality goals are a hierarchy. Primary goals are at the top. These include 'personal health' or, for a car, 'effective transportation'.  Secondary goals are essential in achieving the primary goal, tertiary goals help achieve the secondary goals, and so on until each sub-goal is achievable in technological terms.

Planning is an essential part of achieving generating and achieving quality goals. Planning helps identify what sub-goals are needed (by asking: how can we achieve the primary goals?) and how each sub-goal can be achieved.

Deployment of Quality Goals

'Deployment' means allocating the goal to someone who will deliver the goal.

Strategic goals are subdivided in smaller and smaller sub-goals which are then allocated to someone (eg a middle manager). In Japan, that someone determines what resources they need to accomplish the sub-goal. This arrangement enable participative two-way planning.

Strategic goals are too big and systemic to assign to one person. However, it is imperative that every goal be 'deployed' (ie, allocated). One solution is 'teams'. A team is formed and assigned to deliver the goal. The example mentioned in Chapter 2 is 'Team Taurus', tasked to deliver the strategic goal of making Taurus quality best in class.

Provision of Resources

Goals need resources to achieve them. A key blocker to achieving strategic quality goals is the non-provision of resources to achieve them. The practice of developing strategic quality goals seeks to reuse the existing practices in business. Businesses have processes to allocate resources to define, administer, and delivery business goals.  Strategic quality should be approached the same way.

Corporate Interference

Expect resistance from various areas of an organisation when developing strategic goals. The key cause of resistance is the reduction in autonomy of the various divisions and functions. Strategic goals are directions from above, plans to achieve them by the divisions are approved from above, and people from above will be monitoring the division's achievement of those goals.  All three aspects are reductions in the autonomy of the division, and can cause friction, even in the most harmonious relationships.

Idenitfying the Customer

It's curious that Juran says the "next step" after establishing the quality goals, is identifying the customers.  It seems counterintuitive. Wouldn't you need to know your customers first before meaningful quality goals can be established?