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London Stock Exchange Group
CC&G Risk Disclosure June 2014
Authorization under EMIR
Page 2
Application Package
has been submitted to
Authorities
2013, Sept. 13th 2013, Oct. 25th
First feedback from
Authorities (additional
documentation
requested)
Within six months from the
declaration of completeness
The authorization was obtained with the unanimous opinion of the College of Regulators on full compliance by CC&G of the EMIR requirements to operate as a CCP
2013, Nov. 28th
Application package
declared complete
from the Authorities
Final
authorization
2014, May. 21th
Summary
Page 3
Risks in CCPs
Margins
Default Funds
Interoperability arrangement
Appendix – Sovereign Risk Framework
Risks in CCPs (1 / 2)
Page 4
Risk Definition
Credit Risk The risk that a counterparty, whether a participant or other entity, will be unable to
meet fully its financial obligations when due, or at any time in the future
- Principal Risk The risk that a counterparty will lose the full value involved in a transaction, for
example, the risk that a seller of a financial asset will irrevocably deliver the asset, but
not receive payment
- Replacement Cost Risk The risk of loss of unrealised gains on unsettled transactions with a counterparty. The
resulting exposure is the cost of replacing the original transaction at current market
prices
Liquidity Risk The risk that a counterparty, whether a participant or other entity, will have insufficient
funds to meet its financial obligations as and when expected, although it may be able
to do so in the future
Custody Risk The risk of loss on assets held in custody in the event of a custodian’s (or
subcustodian’s) insolvency, negligence, fraud, poor administration, or inadequate
recordkeeping
Investment Risk The risk of loss faced by an Financial Market Infrastructure when it invests its own or
its participants’ resources, such as collateral
(CPSS-IOSCO Principles for Financial Markets Infrastructures 2012)
Page 5
Risks in CCPs (1 / 2)
Risk Definition
Legal Risk The risk of the unexpected application of a law or regulation, usually resulting in a
loss
Operational Risk The risk that deficiencies in information systems or internal processes, human errors,
management failures, or disruptions from external events will result in the reduction,
deterioration, or breakdown of services provided by an FMI
General Business Risk Any potential impairment of the FMI’s financial position (as a business concern) as a
consequence of a decline in its revenues or an increase in its expenses, such that
expenses exceed revenues and result in a loss that must be charged against capital
Systemic Risk The risk that the inability of one or more participants to perform as expected will
cause other participants to be unable to meet their obligations when due
(CPSS-IOSCO Principles for Financial Markets Infrastructures 2012)
Confidence intervals
Holding period
Lookback period
Main requirement
Minimum 2 days
EMIR Minimum 99,00%. CC&G Pol. minimum: 99,50%
Minimum 1 year
Procyclicality 10 years time series or a 25%
buffer
Topic
Marg
ins
Margins, Default Fund coverage, collateral
Minimum coverage
Main Requirement
CC&G policy minimum:
•“Cover 4”Bond Section •“Cover 3”Other Sections
Topic
Defa
ult
Fu
nd
Status Status
Cash
At least the first 2 most
exposed participants
Minimum 50% of cash
over total Initial Margin
Maximum 45% of
Assets form a single
issuer over total Initial
Margin
Covered by
Page 6
Covered by
Prudential Requirements
100%
Initial Margins
Initial Margins are calculated using Risk Based Margining Methodologies:
• for equity derivatives and cash equity TIMS
• for bonds using MVP
• for energy derivatives using MMEL
• For agricultural derivatives using MMEG
These methodologies are at industry standards
Historical price and yield curve analysis:
• Prudent Confidence Levels: 99.50% - 99.80%
• Prudent Holding Periods: 2-5 days
• Long Term Price Historical Analyses (>20 years where available)
No Significant Changes to Margin setting approach in last 12 months
Approach performed well during the recent crises
Page 7
Margins: Overview of methodologies
Model Type Distributional assumptions Confidence levels Lookback periods Holding periods P&L
methodology
Mark
et/
pro
du
cts
Equity and Equity
derivatives section:
MTA (shares, warrant,
convertible bonds) MIV
(closed-end fund, investment
companies, REIC) , ETFplus
(ETF, ETC)
TIMS (Theoretical Intermarket Margins System)
Industry Standard Scenario Based Analysis
The most conservative result
obtained by assuming
normal distribution and
real distribution of price
variations is considered.
99,5% minimum for the
minimum time
horizon/holding period
required by EMIR (1
year/2 days).
See next slide for grid
details.
Look back periods
ranging from 6
months to 10 years,
plus one for the
whole time series
starting, where
available, from 1991.
• For equity cash: 1
day and 2-days;
• For derivatives: 1
day, 2-days, 3-days.
Full valuation
Bond section
MTS, MoT, EuroMot, Euro tlx
MVP (Method for Portfolio Valuation)
Industry Standard Scenario Based Analysis
The most conservative result
obtained by assuming
normal distribution and
real distribution of yield
variations is considered.
Levels of coverage for
each time series/holding
period analysed are
defined by applying an
internal model, namely
“Sovereign Risk
Framework” (SRF) .
See next slide for grid
details.
Look back periods
ranging from 6
months to 10 years,
plus one for the
whole time series
starting, where
available, from 1999.
Ranging from 3 to 5
days, depending on the
Band resulting form the
SRF analysis.
Full valuation
IDEX
Energy Derivatives Futures
MMeL, a TIMS-like model
The MMeL margining methodology has a structure of
Classes which recognises contracts tradable on the
market grouped by their specific characteristics
(Delivery Period and type of supply: Baseload or
Peakload). Specific classes are assigned to contracts
during the delivery period.
The most conservative result
obtained by assuming
normal distribution and real
distribution of price
variations is considered. 99.5% confidence level 1-year time series 2-days holding period. Full valuation
Agrex
Durum Wheat Futures
MMeG, a TIMS-like model
The margining methodology foresees a Class
structure capable of classifying the contracts which
are actually traded on the market plus additional
Classes for managing Delivery Positions (Covered
and Uncovered from a delivery certificate) and
Matched (between seller and buyer) Positions.
The most conservative result
obtained by assuming
normal distribution and real
distribution of price
variations is considered Same as for Equity
derivatives
Look back periods
ranging from 6 months
to 10 years, plus one
for the whole time
series referred to time
series of comparables.
Same as for Equity
derivatives.
Full valuation
Page 8
-
100
200
300
400
500
600
700
100,00% 99,90% 99,80% 99,70% 99,60% 99,50%
Nu
mb
er
of
Inst
rum
en
ts
Confidence Level
Shares
Unit of Funds
Convertible Bonds
International Shares
Warrants
ETF
ETC
ETN
Backtested Margin Confidence Level By Cleared Instrument
Page 9
Initial Margins: Equities Updated at 26 June 2014
Backtested Margin Confidence Level By Portfolio (Updated at 26 June 2014)
6 breaches from back-test equity portfolio results on 14.194 occurrences (from 18-02-14 to 27-06-14)
Confidence Level: 99.96%; Holding Period: 3 days
CC&G within Risk Appetite for Equities Margins
CL at 99,96% at Instrument Level, 99.96% at Portfolio Level KEY MESSAGE:
• 100% of all cleared instruments observe at least a 99.6%
confidence level over their whole time series (up to 21 years).
• Average Confidence Level 99,96%
1002
250
93 20 2
Backtested Margin Confidence Level By Cleared Instrument
Number of observations from 14.11.2012 380 A
Margined Bonds Average per day 97 B
Daily price variations 37.093 C ~ A x B
Number of breaches with MI in force at the date (See below) 1 D
Confidence Level 99.997% 1 – D / C
CCT Breaches: The breach is on 27 Feb 13 (3,21% price var. Vs 3,10% Margin). The breach is in the duration classes III (conf lev 99,99%) due to the
presence in that class of Italian CCTs that is characterized by a high volatility compared to fixed rate Italian government bonds. An ad-hoc duration class for CCTs has been implemented and tested. CC&G has requested a feedback to LCH in order to develop the same functionality and go live simultaneously.
Historical Breach Analysis Type of Bond Description Breaches
CCT 7yr Bond (floating) 1
BOT 3m, 6m & 12m ZCB 0
CTZ 24m ZCB 0
BTPi Inflation-linked 5,10,15 & 30yr Bond 0
BTP 3,5,10,15 & 30yr Bond 0
TOTAL 1
Initial Margins: Fixed Income Updated at 27 June 2014
Page 10
Backtested Margin Confidence Level By Portfolio
No breaches from back-test Fixed Income portfolio results on 9.422 occurrences
(from 19-02-14 to 27-06-14) Confidence Level: 100%; Holding Period: 3 days
KEY MESSAGE: CC&G within Risk Appetite for Fixed Income Margins
CL at 99,997% at Instrument Level, 100% at Portfolio Level
Prociclicality
…Close positions…
Market Volatility Increases
…More participants hit VaR limits…
…Volatility and correlations increase…
Some participants
hit VaR limits…
Regulatory framework Requirement CC&G approach
Procyclicality
(ESMA art. 28)
One of the following options:
1. Look-back period of at least 10 years; or
2. Margin buffer of 25%; or
3. 25% weight to stressed observation
1. Opt. 1. always applied, where available
2. Opt. 2. applied for new instruments
Page 11
Page 12
0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
-7,87%
0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
-14,04%
0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
14,70%
0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
11,58%
0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
-11,96%
0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
11,76%
0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
03-0
7
05-0
7
07-0
7
09-0
7
11-0
7
01-0
8
03-0
8
05-0
8
07-0
8
09-0
8
11-0
8
01-0
9
03-0
9
05-0
9
07-0
9
09-0
9
11-0
9
01-1
0
03-1
0
05-1
0
07-1
0
09-1
0
11-1
0
01-1
1
03-1
1
05-1
1
07-1
1
09-1
1
11-1
1
01-1
2
03-1
2
05-1
2
07-1
2
09-1
2
11-1
2
Stress Test
Margin Breeches
Stress Test Breeches
Margin Interval
FTMIB: 3 Days Index Variation Vs Margins and Stress Test Scenario
Prudent and conservative Initial Margins to cover nearly all (circa 99,6%) actual 3 days variations
Flexible, quick reacting Stress Test Scenario to cover the most extreme reasonably conceivable event also in changing market circumstances
Stress Test Scenario always larger that actual index variations No Stress Test Breaches
Date Margin
Breaches
Margin
Interval
Peak-Over-
Threshold
23 Jan 2008 -7,87% 7,75% 0,12%
8 Oct 2008 -14,04% 13,75% 0,29%
31 Oct 2008 14,70% 14,50% 0,20%
12 May 2010 11,58% 11,50% 0,08%
01-nov-11 -11,96% 11,50% 0,46%
30 Jul 2012 11,76% 11,25% 0,51%
Initial Margins – Index Derivatives
Intraday Margins Amount (Daily Average)
Intraday Margins Stats
Period Days w/ Req.s No. of Requests Amount Req. Daily Average Average IDM
July 2013 23 216 € 4.995.109.412,63 € 217.178.670,11 € 23.125.506,54
August 2013 21 201 € 5.742.485.050,72 € 273.451.669,08 € 28.569.577,37
September 2013 20 228 € 4.601.325.850,13 € 230.066.292,51 € 20.181.253,73
October 2013 22 227 € 5.981.852.116,29 € 271.902.368,92 € 26.351.771,44
November 2013 19 228 € 7.000.919.806,25 € 368.469.463,49 € 30.705.788,62
December 2013 19 201 € 6.031.774.622,07 € 317.461.822,21 € 30.008.828,97
January 2014 21 226 € 5.120.023.757,51 € 243.810.655,12 € 22.654.972,38
February 2014 20 211 € 5.379.879.497,41 € 268.993.974,87 € 25.497.059,23
March 2014 20 233 € 5.620.437.557,01 € 281.021.877,85 € 24.122.049,60
April 2014 20 247 € 5.922.701.954,19 € 296.135.097,71 € 23.978.550,42
May (2014 21 274 € 7.089.481.439,15 € 337.594.354,25 € 25.874.019,85
June (to day) 20 280 € 7.524.093.789,70 € 376.204.689,49 € 26.871.763,53
FY 2014 (to date) 246 2772 € 71.010.084.853,06 € 290.190.911,30 € 25.611.761,81
Updated at 27 June 2014
Page 13 KEY MESSAGE: Recourse to Intraday Margins with Normal Ranges
€ 0
€ 50
€ 100
€ 150
€ 200
€ 250
€ 300
€ 350
€ 400
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
Millio
ns
Intraday Margin Amount
Page 14
Default Funds
• The size of the Default Funds is gauged on Stress Tests results
• The Default Funds cover the losses in excess of margins for the pertinent market segment (i.e. equity cash & derivatives vs. bonds) in case of catastrophic events
• Four separate Default Funds
– Equity/Derivatives
– Bonds
– Electricity
– Agricultural
• Members contribute on a pro-rata basis
• The contribution to the Default Fund of each Member is adjusted on a monthly basis and is proportional to the average initial margin paid in the previous month
• Lines of Defense (Margins, Default Funds, etc) should not be seen in isolation, but to the contrary, they should be seen as different facets of the same entity
Margins
Default Fund
Stress test
Scenario
Page 15
• Equity Derivatives
– Equity and Index Futures: a one-to-one price variation with their underlying
– Equity and Index Options: recalcutated using the stressed price of their underlying and attributing to each
option an implied volatility equal to twice the implied volatility of the option, having the corresponding
moneyness (the so-called «sticky delta» approach)
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
70,00%
8,00 10,00 12,00 14,00 16,00 18,00 20,00 22,00 24,00 26,00 28,00 30,00 32,00 34,00
Volatilità raddoppiate e traslate
Volatilità rilevate in chiusura
Volatlità raddoppiate
Stress Test - Equity and Equity Derivatives Main Scenarios
Hypotesis Downside Upside
a) largest one-day, two-days and three-days price
variation (upside or downside) since September 2001
Largest one-day, two-days and three-days price
variation (upside or downside) since September 2001
b) 1.20 the value of the «Applicable Margin Interval» 1.20 the value of the «Applicable Margin Interval»
c) 4 times the standard deviation
• Cash Equity
Page 16
Stress Test – Fixed Income Main Scenarios
Hypothesis Yield Increase Yield Decrease
Yield Curve Shock
largest upside or downside, one-day, two-days,
three-days, four-days and five-days yield
variations.
Yield Variations resulting of the linear interpolation
of the largest variation for the previous and next
vertices to the duration of the bond.
Largest between the largest upside and downside,
one-day, two-days, three-days, four-days and five-
days yield variations.
Yield Variations resulting of the linear interpolation
of the largest variation for the previous and next
vertices to the duration of the bond.
Review of Stress Test Scenarios Bond Stress Test Case
Design New Stress Test Scenario “with humps”
(Svensson Model) which goes live in Feb 2008
New Stress Test Scenario based on actual yield variations of Italian Curve
Learn
Monitor
Implement
Communicate
Design
2004-2008
CC&G designs a hypothetical stress test scenario as no historical stress scenario was available for the Eurozone countries in 2004
The Hypothetical Stress Test Scenario is communicated to stakeholders
CC&G executes Stress Tests based on above Scenarios
Late 2007: Consistent humps in the Euro curve which impact the significance of the
Stress Test Scenario
Stress Test Scenario needs to be flexible enough to manage the existence of large
humps in the curve
2008-2012
Stress Test Scenario based on new Model
The “Humpy” Stress Test Scenario is communicated to stakeholders
CC&G executes Stress Tests based on “Humpy” Scenarios
Mid 2010: insurgence of Eurozone Crisis
New Stress Test Scenario now needs to incorporate actual events on each sovereign
Curve
Page 17
Page 18
Risk Management Tests
Assess the adequacy of margining
parameters
Details
• If a small change in the margin parameters (confidence level or holding period) results
in a significant increment in Initial Margin value after
sensitivity test, then it means that margin parameters have to
be amended such as to produce more robust results.
Scope
Sen
sit
ivit
y t
est
Determining the Default
Fund for each Section
Details
Definition of a set of historical or hypothetical scenarios for each
Section
At least the first 2 most exposed participants.
Group policy minimum:
•“Cover 4”Bond Section •“Cover 3”Other Sections
Str
es
s t
est
Assess the adequacy of
margin coverage
• Performed both at instrument level and portfolio level.
• At a portfolio level, it is based on the comparison between the Initial margins and the profits and losses that would apply in
case CC&G was to close out all positions of the portfolio over a hypothesised horizon of n days.
Back t
est
Assess the adequacy of stress test framework
Reverse stress testing adopted by CC&G consists in a
reprocessing of the stress tests using a “trial and error”
approach up to identify the conditions where available
resources are no longer sufficient to cover the Non-
Collateralized Exposure of the two most exposed clearing
members.
Revers
e s
tress t
est
Scope Details
Guarantees deposited by the Defaulter
Defaulter’s contribution to the Default Fund
Skin in the Game
Outstanding Default Fund
CCP capital except regulatory
plus threshold
Unfunded Default Fund
Capped CM’s loss sharing
CC&G own assets
Defaulter’s assets
Page 19
Service closure-cash
settlement with loss
sharing (reduction of
payouts)
Discretional
Default Waterfall
Page 20
Investments
• There is strong regulatory guidance on how CCPs mitigate their investment risk through a number of reinforcing mechanisms, among which:
— CCP shall invest only in cash or highly liquid financial instruments with minimal market and credit risk
– Cash balances with central banks
– Max 5% with commercial banks
— Highly Liquid Financial Instruments are debt instruments backed by: – A Government
– Central Bank
– Qualified Supranational Entities
– Average Time to Maturity < 2yrs
— Diversification by: – Issuer
– Instruments
— Own financial resources which are not invested as per above, do not concur to the CCP capital
• CC&G has access to Central Bank Liquidity
— EMIR: “In assessing the adequacy of liquidity resources, especially in stress situations, a CCP should take into consideration the risks of obtaining the liquidity by only relying on commercial banks credit lines”
Page 21
Markets
CSD
CCPs
Members Members
Trades Trades
Settlement
Instructions
Settlement
Instructions
Margins Margins
Novated Trades
Margins
CC&G – LCH Clearnet SA Interoperability
• The Service covers all Italian Government bonds traded on MTS, on EuroMTS and on
BrokerTec cash and repo platforms
• CCP services jointly provided by CC&G and LCH.Clearnet SA through an interoperability
model
• The terms of the CC&G-LCH.Clearnet SA agreement (December 2002) established that
the two CCPs would set up an integrated Central Counterparty service which would be
seen by users as a single service (that is: a “Virtual Single CCP”)
• One common Risk Margining Methodology using the same parameters (No competition
on Risk Grounds with Members)
• If the 2 players are members of different CCPs, the 2 CCPs will face each other in acting
as “Special Clearing Members/Allied Clearing House”
• In case of a member's default, its CCP will guarantee all its obligations without affecting
the other CCP and the relative members Each CCP would be exposed to losses
exclusively in case of default of one of its own participant and not in the case of default of
a participant of the other CCP (“no spillover”)
Page 22
Interoperability Model
Interoperability – EMIR
• Exchange of Information between CCP: Aligned in formats and contents to the farthest possible
extent to the exchange of information that takes place at group level
• Margins: Group Level Mediation Mechanism comprising LSEG CRO, LCHG CRO, CCPs CEOs and
CROs
• Living Will: CCPs have agreed as interim solution to implement a cash settlement mechanisms; steps
(such as alignments of capital requirements) have been taken towards portability of non-defaulting
members of the defaulting CCP to non-defaulting CCP
Page 23
Link Authorization in parallel with CCP authorization
Guarantees deposited by LCH
Dedicated assets of CC&G
Loss sharing
through reduction of pay outs
Any remaining losses are
allocated to CM pro-rata
based on Default Fund
contributions
Uncapped CM’s loss sharing
CC&G own assets
LCH’s assets
Waterfall for LCH.Clearnet SA Default
Page 24
Service Closure /
Cash Settlement
Appendix
Page 25
Sovereign Risk Framework
Page 26
Background
• This presentation contains a description of the Sovereign Risk Framework
(SRF), implemented by CC&G to develop a tool to measure and monitor
Sovereign Risk and to build adequate protection for the CCP and its
participants
• This SRF aims at representing the state of the art of Sovereign Risk
Management at CCP level:
– Based on a wide set of dynamic market indicators
– No single trigger point, so to eliminate room for potential market manipulation
– Sound statistical and mathematical basis
– Use of local multi-node sovereign curves to incorporate Country-specific factors
– Equal treatment of short and long positions
– Wide set of remedies
– Gradual increase of default lines of defense, so to avoid procyclical effects
Page 27
The Sovereign Risk
• Sovereign Risk has a multiform and complex nature and crises are always
different (e.g. Russia and Argentina), even when the countries affected are
inside the same monetary area (e.g. Greece and Ireland and Portugal)
• Credit Ratings should not be taken as the sole indicator of the actual evolution
of financial crises
• Accordingly, it seems appropriate to take into account a set of different
dynamic market factors to monitor country risk rather than considering as
indicator exclusively the breeching of a single static threshold or credit rating
downgrades
• By the same token, CCPs must retain the capacity to calibrate its
approach in order to be case-specific and should not rely on a one-size-fits-
all approach
• The SRF aims to be objective and measurable, using a set of forward looking
market indicators to predict sovereign risk
Page 28
The Sovereign Risk Framework (1 / 2)
• The scope of the SRF is to develop a tool to evaluate the increases of Country Risk, using market
signals and considering each single country in respect of the general economic and financial context
and evaluating the case-specific optimal tradeoff to protect CC&G and its participants, fulfilling the
following criteria:
– avoid procyclical effects and other unwanted/undesirable consequences
– sound statistical basis (including the application of backtest)
– duration-related margins increases
– trigger points identified among a sufficiently wide set of market indicators
– avoid too specific market targets in order to eliminate room for potential market manipulation
– equal treatment of short and long positions
• Larger toolbox
• Early and careful evaluation of larger set of unambiguous market indicators
– Increases/decreases are in small steps and not in big jumps
• Search for trend indicators rather than static thresholds
– CCPs should attempt to catch “early warnings” so that margin increases do not happen too late,
when the crisis is already acute, generating procyclical effects when are least needed
• Use of country specific curve in lieu of a blended Eurozone curve in order to capture each country’s
specificities
Page 29
The Sovereign Risk Framework (2 / 2)
• Trigger-point automatic actions are not desirable as they may become self-
fulfilling prophecies
• High thresholds late interventions
• Indicators should be forward-looking and a single indicator may not tell it all
– “If you only have a hammer, then everything looks like a nail”
• Adequate consideration should be given to the fact that each sovereign crisis
is different and may require different actions
– “Somebody’s medicine (and quantity) can be somebody else’s poison”
• Margin Increases across the board are suboptimal as unfairly penalizing for
shorter maturities
Page 30
Wide Set of Risk Indicators
• CC&G monitors Sovereign Risk via a market data based model
• The model takes into account a list of >50 countries, without necessarily
presuming safe havens and defines for each country a “credit measure”
which will have multiple inputs including:
– Credit Default Swaps
– Sovereign Bond Spreads
– Default Probabilities
– Credit Ratings
Page 31
Granular Sovereign Risk Tier Structure
• Countries are grouped in Bands so that each Country's credit risk is seen as
relative to its “comparables”
• Within Bands, further risk indicators identify relative trends, in order to point
out countries which are most likely to be “demoted” or conversely “promoted”
• Each country is then assigned a Credit Risk Score, which is a function of its
risk indicators
• Score coherence to ensure respect of the Monotonicity Principle (i.e. market
risk indicators should worsen as country relative creditworthiness
deteriorates)
Page 32
Wide Set of Risk Protection Measures
• Beyond a predetermined threshold, credit demotions (i.e. increase in credit
risk score) imply a progressive increase of risk defenses, first by adopting ad
hoc stress test scenarios, as it would still be considered as an extremely
remote although plausible event, which falls under the commonly accepted
definition of “stress risk”
• As creditworthiness further deteriorates, protection migrates from Default
Fund to Margins
– Gradual Increases of Stress Test Scenario
– Gradual Increase of Confidence Levels
– Gradual Increase of Holding Periods
• In addition, the SRF takes also into consideration the theoretical cost of
buying credit protection up to the maturity of the specific country’s government
bond (Credit Hedging Approach)
Page 33
Conclusions
We consider the Sovereign Risk Framework to be in line with the
following criteria:
– avoid pro-cyclical effects and other unwanted/undesirable consequences?
The SRF is forward looking and keeps into consideration early warnings
– sound statistical basis?
The SRF is based on statistical analysis on specific sovereign curves and on a large date base and is
flexible and adequate to economical environmental circumstances
– duration-related margins increases?
The Margins are based on volatility of the individual nodes of the each sovereign curve
– trigger points identified among a sufficiently wide set of market indicators?
The SRF takes into consideration a wide set of market indicators (Ratings, CDS, CDS Vol, Spreads,
Default Probability, absolute and relative yield variations)
– avoid too specific market targets in order to eliminate room for potential market manipulation?
There are no predefined absolute barriers, all indicators are relative expectations and there is sufficient
executive discretion
– equal treatment of short and long positions?
The SRF does not differentiate between long and short positions
London Stock Exchange Group
Thank You!
Page 34 Page 34