Risk Management презентация

Class #13 – CCP Risk Management
1
Clearinghouses and Central Counterparties
2
Central Counterparty Risk Management Framework
3
Calculating CCP Risk
Annex
4

Class #13 – CCP Risk Management
1
Clearinghouses and Central Counterparties
2
Central Counterparty Risk Management Framework
3
Calculating CCP Risk
Annex
4

Clearinghouses and Central Counterparties
“We allow the City to sleep at night.”
“Post-trade clearing and settlement are sometimes referred to as the plumbing of the financial system. This term may suggest that clearing and settlement systems are of secondary importance. In fact, however, they are more like the central nervous system of the financial system.”
Chris Tupker, LCH.Clearnet
Michael Moskow, Chicago Federal Reserve
“I’m Winston Wolfe. I solve problems.”
The Wolf, Pulp Fiction

Clearinghouses and Central Counterparties
Increasing Interest in Central Counterparties After the 2007/2008 Crisis
Successfully Managed to Cope With an Extremely Challenging Environment
Helped to Mitigate the Consequences of Major Defaults
Broad Scope of Financial Institutions Affected - Banks, Asset Managers, Insurance Companies
Emblematic Case: Lehman Brothers
Clearinghouses Faced a Very Difficult Time, But No Relevant Default Occurred in This Sector

Clearinghouses and Central Counterparties
Clearing, Settlement and Central Counterparty Services
Clearing and Central Counterparty Services
Credit Risk Substitution
Default Management
Clearing Transactions
Exchanges, OTC Markets
CSDs, Banks
Trading
Post-Trading

Clearinghouses and Central Counterparties
Credit Risk Substitution
Central Counterparty (CCP)
Original Buyer
Original Seller
Original Buyer
Original Seller
Credit Risk: Seller
Credit Risk: Buyer
Credit Risk: CCP
Credit Risk: CCP
Substitution
The Central Counterparty Becomes the Buyer to Every Seller and the Seller to Every Buyer

Clearinghouses and Central Counterparties
Default Management
Central Counterparty (CCP)
Original Buyer
Original Seller
Credit Risk: CCP
Credit Risk: CCP
Default Management Procedures
New Buyer
Credit Risk: CCP
Stressed Markets
Uncertainty
Time Constraints
Kitchen Restaurant

Clearinghouses and Central Counterparties
Default Management
Default Management Procedures
Important Risk
Financial Losses Due to Adverse Market Conditions
Example
Original Seller Sold 1M USD at 55,00 RUB/USD
Original Buyer Defaults – Does Not Deliver 55M RUB
Now Market is 50,00 RUB/USD
That Mean That a New Buyer Would Pay Only 50M RUB for 1M USD
Still, The Original Seller is Entitled to Receive 55M RUB in Exchange for 1M USD
Who’s Going to Pay for the Extra 5M RUB?

Clearinghouses and Central Counterparties
Loss Sharing Mechanisms in Central Counterparties
Survivors Pay Model
Defaulter Pays Model
Third Party Pays Model
In the case of a default, losses must be absorbed by the defaulting participant alone. This typically entails having cash and securities posted as collateral prior to the default event (i.e. margin requirements).
In the case of a default, losses must be absorbed by the “surviving” participants (i.e. non-defaulters). This typically entails creating a pool of mutualized resources (i.e. clearing fund) that can be accessed in the event of a default.
In the case of a default, losses must be absorbed by a third party (i.e. non-participant). This typically entails having a guarantor (e.g. the CCP itself, insurance company) that puts its own capital at risk in exchange for a – implicit or explicit – premium.

Clearinghouses and Central Counterparties
Hybrid (Multi-Layered) Mechanisms Tend to be More Efficient and are the Industry’s Norm
Margin Requirements
Clearing Fund
CCP Capital
TP
SP
DP
Activation
The Size of Each Layer Usually Corresponds to a Given Confidence Level
Risk Waterfall
Level of
Confidence
Activation
Margin Requirements
Clearing Fund
CCP Capital
100.00%
99.99%
99.95%
99.50%
0.00%

Clearinghouses and Central Counterparties
Systemic Risk – Avoiding Contagion, Gridlocks and Complexity
CCP
…
No CCP With CCP
= Default
Default Management
Process
Default Management
Process (?)

Clearinghouses and Central Counterparties
Homogeneous Credit Risk – Main Benefits for the Trading Activity
Equal Opportunities for Different Types of Participants
Absence of Credit Spreads
Superior Price Formation
Dynamic Electronic Trading Environment
Anonymous Trading
The Way They Are
The Way They Perceive Themselves

Class #13 – CCP Risk Management
1
Clearinghouses and Central Counterparties
2
Central Counterparty Risk Management Framework
3
Calculating CCP Risk
Annex
4

CCP Risk Management Framework
Central Counterparty Risk Management Framework
Encompasses All Risk Dimensions Present in Day-to-Day Activities of a Clearinghouse
Legal Risk
Operational Risk
Credit Risk
Market Risk
Liquidity Risk
Resiliency
Deterrence
Continuity
Minimizes the probability of adverse events.
Adverse events have limited, well known, consequences.
Smooth operation, even under adverse conditions.

CCP Risk Management Framework
Legal Risk
Main Dangers
Sound Legal Framework
Basic Toolkit
Netting
Certainty and Finality
Collateral Protection
Adherence to Clearinghouse Rules and Procedures
Clarity re Responsibilities and/or Potential Liabilities
Well Structured Contracts
Disputes Concerning Services and Procedures
Settlement Unwind
Litigation re Default Procedures
Collateral Seizure

CCP Risk Management Framework
Operational Risk
Main Dangers
High Availability IT Architecture
Basic Toolkit
IT Disruptions
Human Error, Fraud
Unavailability of Service Providers
Natural Catastrophes
Internal Audits
Adequate Staffing
Business Continuity Plans

CCP Risk Management Framework
Credit Risk
Main Dangers
Well Structured Default Procedures
Basic Toolkit
Default of a Participant
Default of a Financial Services Provider
Declining Credit Quality/Default of an Issuer of Collateral
Declining Credit Quality/Default of an Issuer of Investment Assets (Investment Portfolio)
Continuous, Thorough Credit Assessment
Participants
Financial Services Providers
Issuers – Collateral and Investments
Admission Criteria
Conservative Investment Policy

CCP Risk Management Framework
Market Risk
Main Dangers
Robust Safeguard Structure
Basic Toolkit
Closeout Process Given a Participant Default
Declining Collateral Values due to Adverse Market Movements
Declining Investment Values due to Adverse Market Movements (Investment Portfolio)
Margin Requirements
Clearing Funds
CCP Capital
Collateral Eligibility Criteria, MtM and Haircutting
Conservative Investment Policy, MtM
Comprehensive, Continuous Risk Monitoring Process

CCP Risk Management Framework
Main Dangers
Liquidity Facilities
Basic Toolkit
Closeout Process Given a Participant Default
Liquidity Constraints in the Investment Portfolio
Concentration Limits and/or Add-Ons
Participant Positions
Collateral
Investments
Comprehensive, Continuous Risk Monitoring Process
Liquidity Risk

Class #13 – CCP Risk Management
1
Clearinghouses and Central Counterparties
2
Central Counterparty Risk Management Framework
3
Calculating CCP Risk
Annex
4

Calculating CCP Risk
The Risk Management Problem of a Central Counterparty
Buyer to Every Seller, Seller to Every Buyer
In The Absence of a Default, The CCP is Not Exposed to Market Risk
Zero Net Position
In The Case of a Default
Closeout Procedures
Adverse Market Environment
Financial Losses

Calculating CCP Risk
The Risk Management Problem of a Central Counterparty
Risk Management in Banks and Investment Funds
Full Control the Portfolio Composition/Risk Profile
No Pressing Need to Close Out Positions
Virtually no Limitations Concerning Hedging Procedures
Mark-to-Market Risk (i.e. Losses in Portfolio Value)
Risk Management in Central Counterparties
Very Limited Control the Portfolio Composition/Risk Profile
Positions Have to be Closed Out in a Short Period
Hedging Procedures can be Limited
Closeout Risk (i.e. Losses Inherent to the Closeout Process)

Calculating CCP Risk
The Risk Management Problem of a Central Counterparty
When Modeling the Risk Management Problem Faced by a Clearinghouse, one Must Consider, in a Joint Fashion, the Evolution of Market Variables (Prices and Rates) and the Portfolio Composition, Respecting a set of Important Restrictions Imposed by the Characteristics of Each Asset Under Consideration
t+0
t+1
t+2
t+3
t+4
t+N
...
Closeout Risk Calculation
Open Position (Original Portfolio)
P&L Calculation
Dynamic Process With Frictions
t+0
t+M
Ordinary, VaR-Like Models, Tend to Focus on the Potential Changes in Value (MtM) of a Static Portfolio, and This can be Regarded as Fairly Good Approximation to Closeout Risk in the Case of Highly Homogeneous Portfolios. In the Case of Highly Heterogeneous Portfolios (Multi Asset-Class and Multi Market), However, This is far from Acceptable.
MtM Risk Calculation
(VaR-Like Models)
P&L Calculation
Static Process Without Frictions
Implied Closeout Scenario: All Positions are to be Settled at the Same Time Without any Frictions and With Fully Coinciding Cash Flows

Class #13 – CCP Risk Management
1
Clearinghouses and Central Counterparties
2
Central Counterparty Risk Management Framework
3
Calculating CCP Risk
Annex
4

Annex
Useful References
Principles for Financial Market Infrastructures, CPMI-IOSCO, (2012);
Modelling Risk in Central Counterparty Clearing Houses – A Review, Bank of England, (2002);
The Economics of Central Clearing: Theory and Practice, Pirrong, C., ISDA, (2011).