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NASDAQ CLEARING
COPENHAGEN
NOV 23, 2015
NASDAQ CLEARING
2
▶ First European CCP to obtain EMIR approval and QCCP status
▶ Fourth-largest clearing house in Europe
▶ NASDAQ Clearing offers one harmonized clearing model regardless of products cleared
▶ The key is to create capital, legal and operational efficiency both for Clients and Clearing members
New asset classes
COMMODITIES
FIXED INCOMEEQUITIES
3
PRODUCT COVERAGE
▶ Equity
▶ Repos
▶ Interest Rate
▶ FX (TBD)
▶ Power
▶ Emissions
▶ Freight/Fuel Oil
▶ Iron Ore
▶ Seafood
Fixed Income
Gas
Emissions
Equities
PowerFreight
Seafood
FX
SIZE OF EXPOSURE AND MAIN CONTRACTS
Commodity; 29%
Seafood; 1%
Equity; 34%
Fixed Income; 36%
Equity Fixed Income Commodity
OMXS30 future / option
IRS Nordic Power
Single stock options Bond futures Freight
Repos
4
Danish products
▶ Equity
▶ Single Stock Options
▶ OMXC20
▶ Fixed income
▶ Repos (bullet and callable)
▶ IRS EUR (DKK)
▶ Mortgage bond future
RISK GOVERNANCE STRUCTURE
Commodity RM Financial RM
CROTomas Thyblad
NASDAQ OMX Clearing ABBoard of Directors
Standardized risk reporting to Board of
Directors
Clearing Default Committee (Internal)
Member Risk Committee (External)
Clearing Risk Committee (Internal)
Risk Policy & Instruction to respective Committee
FSA
• Chair: Lars Nyberg• 2 largest FIN
Members• 2 largets COM
Members• 3 largest Clients• Independent CCP
Board member (OJ)
• Chair: Johan Ruden• 3 Intermal members• 2 Independent
members• Lars Nyberg• Osmo Jauri
Credit RM
5
6
NASDAQ OMX Clearing offers three different client segregation models.•Omnibus segregation (2,3,4)•Individual Segregation (5)•Full segregation (6,7)
IDP•76 000 IDP accountsNordic retail offering
Individual Segregation (ICA)•270 ICA accounts•Member posts collateral to NOMX•Possible for clients to post collateral via CM to NOMX •Member fully liable
Full Segregation (DP and CC)•220 DP and CC accounts•Clients to post collateral direct to NOMX•Client fully liable
SEGREGATION STRUCTRE
RISK MANAGEMENT FRAMEWORK
Member admission
Margin requirement
EligableCollateral
Default Management
The Risk Management framewok of NASDAQ Clearing consist of several layers of defence
Financial requirements and credit monitoring to ensure sufficient credit quality
Margin aims to cover potential losses arising in the default management process under normal/stressed market conditions
Additonal resources available in the form of Clearing Capital & Default fund to cover losses beyond the margin coverage
The default management process aims to minimize losses in a default situation
Stress testing
Only collateral with sufficient liquidity and low credit risk
7
NOMX CLEARING MARGIN MODEL OVERVIEW
▶ Margin model assumptions
▶ Other EMIR requirements applied by NOMX Clearing:
+ Minimum look-back period of 10 years used as benchmark (or 25% buffer)
+ Maximum margin offset is 80%
Product group Model Model type
Equity OMSII Parametric
Fixed income CFM Curve stress
Commodities SPAN Parametric
Seafood SPAN Parametric
FX FX-VaR Historical VaR
Assumption EMIR requirement Applied
Condidence level 99% (listed) 99.5% (OTC) 99,2 - 99.5%
Liquidation period 2 days (listed) 5 days (OTC) 2-5 days
Look-back period 1 years 1-10 years
8
RISK PARAMETERS
9
▶ Updated monthly at a minimum
+ Clearing Notice sent out when updated
▶ Parameter value list
+ Specification of pararmeters in models (e.g. Spread, correlation curves, option valuation
parameters)
▶ Margin parameter list
+ Scanning range single stock and index
+ PC1-3 for CFM
+ Span file for COM
▶ Parameters retrieved on website:
+ http://www.nasdaqomx.com/europeanclearing/risk-management (”margin parameters”)
+ ftp://ftp.nordic.nasdaqomxtrader.com/Commodities/PROD/Common/
▶ Other margin tools
+ Concentration risk add-on (margin scaling limits)
– Swedish index products
– Swedish bond products
– Nordic Power
+ Hourly intraday margin calculation
– Pre-defined limits (could be narrowed)
CONCENTRATION MARGIN
▶ To manage concentration in large
exposures, initial margin is scaled when
certain thresholds are breached.
▶ ”Defaulter pays”
0
500
1000
1500
2000
2500
3000
MSEK
Impact of margin concentration charges
Initial margin CCaR
Initial margin (after scaling) CCaR (after scaling)
Wanted Limit to CCaR
Exposure in applicable market
F/I (SE Bond)Equity (SE
Index)COM (Nordic Power)
Limit 1 SEK 1.3 bn SEK 1.0 bn EUR 1 bn
Scaling 1 15% 15% 15%
Limit 2 SEK 2.4 bn SEK 2.0 bn EUR 1.4 bn
Scaling 2 25% 25% 25%
As of Sept 2015
Limits set on Net Initial Margin
10
11
CCAR – HYPOTHETICAL SCENARIOS
11
▶ Hypothetical scenarios
+ Stress parameters (extreme changes in prices and volatility) - distribution of extreme
observations (tail events) using EVT.
+ Minimum of 30 years data (if available)
+ 99.9% confidence level
+ Stress parameters per instrument / occur simultaneously
+ Products grouped into markets based on following criteria:
– Expected behavior in a stressed market
– Significance of a risk exposure stemming from a product
+ Instruments belonging to same market are stressed in the same direction.
▶ Historical scenarios
+ Most sever events identified for each market.
+ Idenfied both up- and downward events.
+ ”100% confidence level”
11
FINANCIAL WATERFALL
12
Loss Sharing Pool OTC Rates 206
MSEK
NOMX Junior CapFIN
105 MSEK
Default FundFIN
1661 MSEK
Default FundCOM
1024 MSEK
Mutualized Default Fund408 MSEK
NOMX Junior Cap
COM70 MSEK
NOMX Senior Capital200 MSEK
Assessment Power 100%
Article 16 – Regulatory Capital715 MSEK
Assessment Power 100%
1
2Defaulted party’s Initial Margin
Defaulted party’s DF contr’b
Default FundSeafood36 MSEK
Assessment Power 100%
NOMX Junior Cap
Seafood5 MSEK
Clearing Capital
All resources shall at all times enable the CCP to withstand the default of at least the two largest clearing members (and their affiliates) to which it has the largest exposures, under extreme but plausible market conditions.
November 15th, 2015
ELIGIBLE COLLATERAL
• Cash (SEK, NOK, DKK, EUR, GBP, USD)
• Government bills and bonds (Sweden, Denmark, Norway, Finland, Germany, UK, Austria, Netherlands) with a minimum AA- and/or Aa3 rating
• Index linked bonds (Swedish government)
• Covered bonds (Danish (in DKK and EUR) and Swedish (in SEK) issued by approved issuers (BRF, LANHYP, NDASS, NYKRE, RDKRE, SBAB, SEB, SHBASS, SPNTAB, LANDBR)
• Worldbank green bonds issued by IBRD (in EUR, SEK, NOK, DKK, GBP and USD)
• Kommuninvest bonds (in SEK issued under the Benchmark program)
• Shares (OMXS30 shares excluding financials and equities with another primary exchange than the Stockholm Stock Exchange
• ETFs (XACT OMXS30, XACT OMXSB, XACT OMX Norden 30)
• EUA and El-Certs for net sellers
• [Bank guarantees (under certain circumstances)]
13
DEFAULT MANAGEMENT
Commodity Equity Fixed Income
• Combination of orderbook liquidity (using internal broker), close out arrangement and proxy
• Combination of orderbook liquidity (using internal broker) and close out arrangement
• Auction procedure adviced by OTC Board and DMC Dealers
14
DEFAULT MANAGEMENT FIXED INCOME GOVERNANCE
Default Committee*
Regulatory Capital
Committee*
Risk Committee
*
Advisory Board
DMC Dealers
Risk Management
Clearing & Operations
NASDAQ OMX ClearingBoard of directors
* NOMX Internal Committees
Member Risk
Committee
15
• OTC advisory board –all swap dealers
• Advise on pricing model, risk model, and operational issues
• Appoints 3 DMC dealers for 12m
• DMC dealers available for the CCP in event of a default
• Take part in fire drill (mandatory)
DEFAULT MANAGEMENT PROCESS – FIXED INCOME
Risk bucketing
Assess risks and default
mgmt approach
Take possesion of
Collateral
Attempt to unwind entire
portfolio
SUC
CESS
DONE
Executehedges
NO
SUC
CESS
Hedgeregistration
Collect and update prices
Hedges
complete?
NO
Auctionpreparation
Runauction
Re-valuate & margin check
Auctionregistration
YES
Auctions
complete?
NO
YES
DMC performance monitoring
DMC performance monitoring
Assemble Default
Committee
HedgingYES
NO
Default notification
Valuation and margin
check
Decide on hedge
strategy
PART I – RISK ASSESSMENT
PART II - HEDGING
PART III - AUCTION
PART IV –DISTRIBUTION OF
LOSSES
16
DEFAULT FIRE-DRILLS
17
• Practice and demonstrate capacity to handle a default situation
• Internal departments and external parties involved
• Focus areas identified each time
• Lessons learned – (update procedures & report to risk committees)General
• 1 / year for each asset class
• Involve desk and/or close out providers
• ”Light version”
• Portfolios based on real portfolios in terms of size / complexity
COM & Equity
• 2 / year
• Include pricing exercise
• Include all DMC dealers / market participants
• ~5 days
Fixed Income
• Useful exercises for Nasdaq Clearing and participants• Regulatory requirements• Ongoing work to harmonize default processes internationally
THANK YOU!