Provider of Global
Capital Market & Cash Data
CCP Risk Assessments
Did you know?
every risk before selecting a clearing house. How is your margin
calculated? Where does it go? What is your full, potential
liability? How can a CCP mitigate your risk?
CCPs will be taking on the burden of
clearing much of the US $633.58 trillion
OTC derivatives market, a market widely
blamed for exacerbating the post 2007
global financial crises. This risk will be
concentrated into CCPs; each CCP has its
own way of operating, its own risk waterfall,
within its distinct regulatory and legal
framework, placing greater systemic risk
upon each one.
Central clearing of OTC derivatives is well underway in the US
with Phases I and II of the CFTC’s implementation having come
into force. The EU is behind in terms of implementation, but
mandatory clearing is expected to enter into force in late 2014.
Issue
There is huge potential for systemic risk in CCPs, and the
consequences of a CCP failure could be very serious for you as
a participant and the market at large. What happens to your
collateral contribution in the event of a default? What happens
Overview
to your open positions? If a major participant at the CCP goes
into default, how quickly does your collateral come under threat?
End users are being forced into mandatory clearing at CCPs.
All of these questions, and more, are hugely important in
How do you assess if these infrastructure institutions are fit
making a decision as to which CCP(s) best fit your needs.
for purpose? In response to G20 and supplementary initiatives
Clearing houses operate within a competitive environment, a
regarding mandatory clearing, Thomas Murray Data Services
risk in itself, so you have choice and it is imperative that you
established an industry-driven central counterparty (CCP) risk
make the right choice. You want robustness and a risk waterfall,
assessment programme. The service supports global regulatory
plus margining requirements that you are comfortable with.
imperatives to assess and monitor CCPs as risk concentrating
There is a regulatory obligation upon clearing brokers to
vehicles.
conduct due diligence of the CCPs that they work with. This
Thomas Murray Data Services has been performing risk
needs to be conducted annually and can be an onerous and
assessments in the post-trade space for over 15 years and now
expensive task. There is also a commercial imperative to
we are working with major CCPs to compile comprehensive
benchmark each CCP, including its membership – the CCP is
risk assessments that will enable our clients to understand
mutualising risk, but who else is in the group?
Thomas Murray Data Services
Horatio House, 77-85 Fulham Palace Road, Hammersmith, London W6 8JA
Tel: +44 (0) 20 8600 2300 Email: enquiries@ds.thomasmurray.com http://ds.thomasmurray.com
Solution
Buy-Side and Regulatory Interest
The Thomas Murray Data Services CCP Risk Assessment looks to
Thomas Murray Data Services has generated a great deal of
determine the extent to which the CCP manages your risk burden.
interest from both the buy side and the international policy
Each assessment brings transparency to the industry for the
community. Our conversations with regulators ensure that our
benefit of users, and offers cost savings to regulated firms that are
work maintains currency with the evolving regulatory thinking.
required to perform due diligence and risk assessments on CCPs.
Groups include: Bank of England, European Central Bank,
BIS, Basel Committee of Banking Supervisors, CPSS, Financial
CCPs become the buyer to every seller and the seller to every
Stability Board, BaFin, IOSCO, FSA, PRC (Federal Reserve) as
buyer. This requires the CCP to step into all eligible contracts,
well as being regular presenters at CCP12 meetings worldwide.
not just selected contracts. This process makes CCPs riskconcentration vehicles so that an assessment of their risk
management techniques is of paramount importance. In such
a situation, transparency is critical, as is the ability to compare
Benefits
one CCP against another where there is user choice. CCPs
are often multi-jurisdictional. Their use for some products is
Some touch points that have triggered interest in subscribing to
mandatory, while for others it is optional. Ownership of CCPs
the service include:
varies, and this can lead to conflicting and diverse stakeholder
interests. An independent assessment of CCP risk is therefore
critical to the users of these entities.
• A level review of the field, with truly independent external
assessment, using a single model across all CCPs.
• A better, deeper understanding of the risk models used,
CCP Risk Assessments Deliver:
the availability of margin offsets and a common industry
standard for classifying the risks globally.
• Transparency on risk that will allow users to choose
counterparties on a basis other than price alone.
Risk Assessment Reports
• Up-to-date analysis of interoperability and any risk issues
An in-depth structured risk assessment report, along with
access to the underlying supporting database.
resulting.
• The collateral crunch has highlighted how CCPs optimise
collateral and how its treatment is increasingly important.
Surveillance
An ability to compare CCPs is extremely useful.
On-going newsflashes (emailed) advising of changes that
• The enormous funds being funnelled into CCPs will put
impact the assessment reports, with the assessments being
their treasury operations under the spotlight. An objective
continuously updated in near real-time.
assessment of the credit risk is required.
• The liquidity management tools that CCPs will rely on in
Global Coverage
a crisis - credit lines, repos, central bank support etc. - are
26 reports are immediately available covering CCPs across 18
major markets.
critical to understand.
• Full-time equivalency savings – reducing the cost of
regulation by wholesaling the solution rather than
duplicating it within each regulated group.
Transparency Index
• Expanded coverage at a low cost. Client requests for CCP
Index of the level of disclosure by each CCP and their
services in markets not currently covered would require
engagement with external reviews.
expensive due diligence.
Thomas Murray Data Services
Horatio House, 77-85 Fulham Palace Road, Hammersmith, London W6 8JA
Tel: +44 (0) 20 8600 2300 Email: enquiries@ds.thomasmurray.com http://ds.thomasmurray.com
Risk Methodology
The CCP Risk Assessments have been designed to provide an
independent assessment of CCPs across a range of defined
risks:
• Counterparty Risk
• Treasury and Liquidity Risk
• Asset Safety Risk
• Financial Risk
• Operational Risk
• Governance and Transparency Risk
All the data for each CCP is structured in a consistent way to
enable users to compare one against the other. Whether it is
CCP Risk
Assessments Service
CCP interoperability or the impact of individual segregation on
the default fund waterfall, the risk assessment should provide
users with a primary source of information.
Cassa di Compensazione e
Garanzia S.p.A. (CC&G) CCP
Risk Assessments Report
CCP Assessment Reports Available
29 CCP Risk Assessments across 21 markets are currently available:
ASX Clear (Futures) Pty Ltd
Australia
SGX-DC
Singapore
CDCC
Canada
SAFCOM
South Africa
LCH Clearnet SA
France
BME CLEAR
Spain
Eurex Clearing AG
Germany
NASDAQ OMX Clearing
Sweden
Hong Kong Clearing Corporation (HKCC)
Hong Kong
SIX x-clear
Switzerland
Hong Kong Securities Clearing Corp Ltd (HKSCC)
Hong Kong
TAIFEX
Taiwan
The Clearing Corporation of India Ltd (CCIL)
India
CME Clearing Europe
United Kingdom
Tel Aviv Stock Exchange Clearing House (TASECH)
Israel
ICE Clear Europe
United Kingdom
CC&G
Italy
LCH Clearnet Ltd
United Kingdom
Japan Securities Clearing Corporation (JSCC)
Japan
CME Clearing (CME)
USA
Korea Exchange (KRX)
Korea
ICE Clear Credit
USA
Bursa Malaysia Derivatives Clearing
Malaysia
ICE Clear U.S.
USA
Asigna
Mexico
The Options Clearing Corporation (OCC)
USA
Contraparte Central de Valores (CCV)
Mexico
Dubai Commodities Clearing Corporation
UAE
The Central Depository (Pte) Limited (CDP)
Singapore
Thomas Murray Data Services
Horatio House, 77-85 Fulham Palace Road, Hammersmith, London W6 8JA
Tel: +44 (0) 20 8600 2300 Email: enquiries@ds.thomasmurray.com http://ds.thomasmurray.com
Risk Definitions & Explanation
The benefits arising from netting and the compression ratios achieved by the CCP
A standard risk model for all CCPs including the following risks and key
Asset Safety Risk
information:
will impact the liquidity requirements of its clearing members.
Some of the margin arrangements provide for the collection of non-cash
Counterparty Risk
collateral that needs to be held in custody. Clearing members will want to ensure
One of the major roles of the CCP is to mitigate counterparty risk between the
clearing members. It does this by ensuring that the margin models and default
fund are sufficient to cover market movements in the event of stress and default.
Clearing members are particularly keen to ensure that the margin and default
models do not expose them to undue exposure while at the same time providing
acceptable levels of risk mutualisation. The membership criteria (including credit
checks), limitations on liability and waterfalls attached to the default fund are all
drivers of counterparty risk. The collateral that a CCP accepts introduces credit
risk that may compound the counterparty risk which the CCP is managing. This
can be managed via concentration limits and risk assessed haircuts. The funds
that a CCP places in the market will also incur credit risk.
that they have title to the collateral in the event of a default by another member
or in the event of a default by the CCP itself. Where the collateral is managed by
a third party the CCP will want to ensure that the proper controls are in place by
that organisation that protect the rights of the clearing members to the collateral.
Where the CCP accepts collateral it should ensure that title is appropriate and
that any rehypothecation is properly controlled. If the CCP engages in stock
lending it should manage the risk mismatch between borrowing and lending.
Financial Risk
The risk to the CCP’s own financial condition, which arises from the CCP’s
contributions to the waterfall, losses arising from Market Risk, competitive
pressures and ability to continue as a viable company. Basel III requires the CCP
Treasury and Liquidity Risk
to contribute to the default fund, which in turn impacts the clearing member’s
Treasury: The CCP collects participants’ margin and default funds and may
invest these independently using its own commercial criteria. These funds can be
significant and represent a large amount of collateral available to the financial
sector. Clearing members (and their clients) who provide these funds, have a keen
interest in knowing how they are invested on their behalf. A CCP can manage its
market risk by ensuring that it has proper Treasury controls around the deposits
and investments that it makes, employing appropriate limits and ensuring that
the safekeeping arrangements are adequate. This is not the market risk embedded
in a derivatives contract.
capital requirement against its own contribution to the default fund. The level
of support from shareholders, clearing members and possibly governments will
mitigate this risk.
Operational Risk
The risk that deficiencies in information systems or internal controls, human
error or management failures will result in losses either to the CCP or its
clearing members, leading to delays, losses, liquidity problems and in some
cases systemic risk. Includes the ability to process transactions efficiently, the
level of STP (either internal or via third parties), the number of trading venues
Liquidity: The CCP is obliged to repay margin monies as positions and risks in the
supported across the range of products and the level of client segregation. This
market vary. It is required, therefore, to ensure that the assets it maintains are
risk can be assessed in terms of the availability of the CCP’s infrastructure and
sufficiently liquid such that it can repay margins at short notice. It may achieve
the level of service quality.
this by ensuring that its market investments are extremely liquid or in cases of
market stress, that it has alternative credit lines to provide liquidity.
•
Funding Liquidity Risk - the risk that a bank will not be able to meet efficiently
the expected and unexpected current and future cash flows and collateral
needs without affecting either its daily operations or its financial condition.
•
Governance and Transparency Risk
The risk that a clearing member may incur a loss arising from the CCP not acting
according to good governance arrangements or not providing full and accurate
information on its activities. The rules, margining methodologies and investment
policies of the CCP should be clear and transparent to the CCP’s stakeholders.
Market Liquidity Risk - the risk that a bank cannot easily offset or eliminate a
The role of the Board and any Committees constituted under the CCP’s rules
position at the prevailing market price because of inadequate market depth
should be clearly laid out and the participants should be suitably qualified. All the
or market disruption.
stakeholders should be identified and represented in the governance of the CCP.
Intermediaries subscribing to the product can white label the
CCP risk assessments for distribution to their end-clients. This
For more information please contact:
provides an independent source of information to end-users
Derek Duggan, Director Sales & Marketing
who need to make a choice of CCP driven by the asset safety
Email: dduggan@ds.thomasmurray.com
considerations on offer. Thomas Murray Data Services’ white
label solution provides a proven solution including real-time
Tel: +44 (0) 20 8600 2300
updates on client customisation.
Thomas Murray Data Services
Horatio House, 77-85 Fulham Palace Road, Hammersmith, London W6 8JA
Tel: +44 (0) 20 8600 2300 Email: enquiries@ds.thomasmurray.com http://ds.thomasmurray.com