ASX Clear - Risk Framework
Exposure Risk Management
AGENDA
1. Risk Overview
2. Initial Margins
3. Collateral
4. Additional Margins
1. Risk Overview
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Risk Overview
Clearing
Participant 1
Clearing
Participant 2
ASX CCP ASX
ASX Clear
ClearFutures
ASX Clear
Reserve Bank of Australia Financial Stability Standard
for Central Counterparties
(FSS)
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Overview of Risk Controls
Clearinghouse own capital
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Exposure Risk Management
• Quantifies, monitors and analyses Clearing Risks from ASX’s
Clearing Houses
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Exposure analysis
Risk parameter reviews
Collateral reviews
Risk monitoring and breach escalation
Internal and external reporting
• Ensures risk controls are undertaken in accordance with approved
policies, standards and procedures.
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2. Initial Margins
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Margins - Derivatives and Cash equities
•
The daily collection of initial margins on ASXCL acts as the primary cover or
protection against loss on positions held in the event of a Clearing Participant (CP)
default under normal market conditions.
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ASX utilises SPAN (Standard Portfolio Analysis of Risk) methodology to calculate
initial margin requirements on ASX Clear Derivative contracts.
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HSVaR methodology is used to calculate the Initial margin requirements on ASX
Clear Cash market.
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Derivatives Initial Margins - SPAN
• SPAN or Standard Portfolio Analysis of Risk was first developed in 1988 by Chicago
Mercantile Exchange (CME).
• It is a portfolio based margining methodology that looks at a portfolio of instruments in the
same ultimate underlying (or Combined Commodity) for calculating initial margin
requirements.
• Key benefits:
• Flexibility in levying varying margin rates across expiries
• Refinement in accounting for volatility
• Precision in forming spreads.
How does SPAN Work?
IM = Max {Scan Risk + Intra-Commodity Spread Charge + Spot Charge –
Inter-Commodity Spread Credit; Short Option Minimum Charge}
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Derivatives Initial Margins - SPAN
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At its simplest form, SPAN considers how the value of an entire portfolio of options and
futures will respond to changes in underlying prices and volatilities based on predetermined 'Price Scan Range - PSR‘ and 'Volatility Scan Range - VSR' parameters set
by the clearinghouse.
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The pre-determined parameters (PSR and VSR) feeding into the scenarios are derived
from statistical analysis of movements in historical price and average implied volatility
respectively.
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In calculating the profit or loss a portfolio will make, SPAN uses 16 'what if' scenarios
where prices and volatilities are altered to varying degrees.
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The risk array representing the maximum likely loss is used in deriving the initial margin
requirement
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Derivatives Initial Margins - SPAN
ASXCL SPAN Scenarios
Scenario Description
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Scenario 6
Scenario 7
Scenario 8
Scenario 9
Scenario 10
Scenario 11
Scenario 12
Scenario 13
Scenario 14
Scenario 15
Scenario 16
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Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
Underlying
equity
equity
equity
equity
equity
equity
equity
equity
equity
equity
equity
equity
equity
equity
equity
equity
price
price
price
price
price
price
price
price
price
price
price
price
price
price
price
price
unchanged; Volatility up; time reduced by 2 days
unchanged; Volatility down; time reduced by 2 days
up 1/3 range; Volatility up; time reduced by 2 days
up 1/3 range; Volatility down; time reduced by 2 days
down 1/3 range; Volatility up; time reduced by 2 days
down 1/3 range; Volatility down; time reduced by 2 days
up 2/3 range; Volatility up; time reduced by 2 days
up 2/3 range; Volatility down; time reduced by 2 days
down 2/3 range; Volatility up; time reduced by 2 days
down 2/3 range; Volatility down; time reduced by 2 days
up 3/3 range; Volatility up; time reduced by 2 days
up 3/3 range; Volatility down; time reduced by 2 days
down 3/3 range; Volatility up; time reduced by 2 days
down 3/3 range; Volatility down; time reduced by 2 days
up extreme move (cover 35% of loss) ; time reduced by 2 days
down extreme move (cover 35% of loss) ; time reduced by 2 days
Total Derivatives Margin on ASXCL consists of Derivatives Initial Margin and Premium
Margin.
Premium Margin is the present market value of the option contract’s position at close
of business. Represents the amount that would be required to close-out the option
positions.
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Cash Market Margins
• On ASXCL, novated Cash Equity settlement obligations attract a cash market
margin (CMM) obligation.
• Calculated based on a CPs net settlement obligation across the T+3 settlement
cycle
Clearing Participant A’s novated unsettled transactions
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The total Cash Market Margin (CMM) obligation comprises :
– Risk Margin
• Historic VaR calculation for securities within the S&P/ASX All Ordinaries fulfilling price
history requirements.
• Flat Rate component for Warrants, Interest Rate Securities and less liquid equities
– Mark-to-Market
• Revaluation of a CPs unsettled novated positions using the closing price from the
previous day
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Cash Market Margins
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The following documentation provides an overview on the application of the Value at
Risk margining utilised:
http://www.asx.com.au/documents/clearing/Cash_Market_Margining_FAQ_April_2013.pdf
https://www.asxonline.com/intradoc-gi/groups/derivatives/documents/communications/asx_036602.pdf
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Cash Market Margins – Historical VaR
• Historical VaR / flat rate risk margin covers any future losses that may be
incurred when closing out the portfolio in the event of a default
• Future losses are determined by looking at historical returns for each security
over an observed period to capture plausible market movements.
• Stocks fulfilling price history requirements and residing in the All Ordinaries are
subject to a historical simulation VaR based on 2 years of 1-day price moves at a
99% confidence interval, plus an add-on (currently 30%).
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Cash Market Margins – Flat Rate Securities
• Securities that currently that attract a Flat Rate are cash equities which are in the
All Ordinaries index and fail to meet price history requirements, cash equities
falling outside the All Ordinaries index, and certain products (e.g. warrants and
interest rate products).
• The confidence interval and holding period used for determining the Flat Rate on
these securities depends on product type and whether the security belongs to the
All Ordinaries Index.
• ASX Clear notifies the market of Flat Rates for any applicable securities, on a
periodic basis.
• A sample of Flat Rates and their confidence interval/holding period is provided
below:
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Cash Market Margins – Flat Rate Securities
• A sample of Flat Rates and their confidence interval/holding period is provided
below:
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3. Intraday Margin Calls
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Intraday Margin
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Intraday margining re-establishes margin cover held by the Clearing House in
circumstances where a Clearing Participant’s (CPs) margin cover has eroded due
to intraday market volatility and position activity.
Intraday Margin Threshold
Re-Calculation of Margin Requirement
Intraday Prices
Intraday Positions
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Intraday Margin Runs
ASX Clear
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ERM will initiate an intraday margin run when the S&P/ASX 200 index moves up or
down by 1% or more.
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Calculations apply real time collateral holdings / valuations and cash lodged (or
assumed to be lodged) following the morning settlements.
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Intraday margins are (generally) called when a Clearing Participant’s margin
shortfall is greater than $100,000 and the shortfall has eroded its previous initial
margin previously posted by 40% or more.
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4. Additional Initial Margins (AIMS)
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Capital Stress Test Model (CST)
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Capital Stress Test quantifies the potential losses to the clearing house in closing
out a defaulting clearing party’s portfolio during extreme but plausible market
volatility.
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ERM use CST to:
- Measure Risk: Evaluate where exposures arise from and assess their potential size
- Monitor Risk: Reporting and monitoring ASX’s Capital against CPs and their credit
ratings (using CP STELs)
- Mitigate Risk: Call Additional Initial Margins (AIMs); Develop policies to manage risk
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Stress testing is undertaken on both ASX Clear using separate Capital Stress
Testing (CST) model
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TRIGGER: CPs are called to lodge stress test related AIMs on days when their
model result exceeds their Stress Test Exposure Limit (STEL);
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CST Model
ASXCL Scenarios
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ASXCL undertakes daily stress testing of Clearing Participant portfolios, across the
cash equity and derivatives markets under a range of scenarios.
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103 different scenarios which are a combination of market wide, sector wide and
stock specific scenarios. Both Price and Volatility shifts are considered in the
different scenarios.
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CBPL Model Overview
• The Capital Based Position Limit (CBPL) is a risk-based Central Counterparty
(CCP) protection to ensure that the CCP is protected against Clearing
Participants running large positions relative to the size of their organisations.
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A CP’s CBPL Usage is defined as the ratio of CBPL Initial Margin to Liquid
Capital.
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TRIGGER ASX Clear: If a CP’s CBPL Usage exceed 3.0, the CP will be required to
lodge CBPL AIMs. The value of AIMs will be sufficient to reduce CBPL Usage to a
level below the threshold (currently 90% of the 3.0 threshold i.e. 2.7);
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Return of the CBPL AIMs can be achieved by:
– an increase in Capital (including drawdown of Approved Subordinated Debt), or
– a reduction in CBPL Initial Margin resulting from a sustained reduction in open
positions.
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5. Summary
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Summary
• Risk Overview
• Initial Margins
• Intraday Margins
• AIMs - Capital Stress Test Model (CST)
• AIMS - Capital Based Position Limit (CBPL)
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