May 22, 2003 Risk management in KELER 1

Risk management inRisk management in

KELERKELER

Budapest

May 22, 2003

Kristóf MatuszkaKristóf Matuszkarisk analystrisk analyst

May 22, 2003 Risk management in KELER 2

Overview

• Introduction

• CCP model

• Risk Management tools

– clearing membership

– monitoring

– margining

– collateral management

– fails management

• Summary

May 22, 2003 Risk management in KELER 3

Introduction

Markets Clearing model Settlement model

BCE derivatives CCP since 1994

BSE derivatives CCP since 1995

BSE cash CCP since May, 2002multilateral netting, T+3 for equities, T+2 for bonds

OTC market real-time DVP

DERIVATIVES

CASH

Markets and C&S models in KELER:

May 22, 2003 Risk management in KELER 4

CCP conception Benefits

• Increased market security via novation

• Anonimity

• Netting and spreads between products &

markets

• Set-offs in margin calculation

• Integrity & connectivity

KELER becomes a seller to every buyer and a buyer to every seller in the exchange transactions.

May 22, 2003 Risk management in KELER 5

CCP conception Types of risk

• Partner risk

• Market risk (price risk, liquidity risk)

• Operational risk

KELER assumes different kinds of risk during its activity:

May 22, 2003 Risk management in KELER 6

Risk Management tools

• clearing membership

• monitoring

• margining

• collateral management

• fails management

May 22, 2003 Risk management in KELER 7

Membership Structure

• Trading & Clearing Membership is independent

from each other

• 3-level clearing membership

– General CM: entitled to clear for other trading members

– Individual CM: clears own & client trades only

– Non-CM: a trading member has no direct link with

KELER, clears through a GCM

• Modularity

May 22, 2003 Risk management in KELER 8

Membership Requirements

• Basic corporate documents

• Approval from the HFSA

• Capital requirements for BCE clearing members:

• Members: banks, brokerage firms, agricultural producers, trading firms, purchasers

ICM - own account

transactions

ICM - own and client

transactionsGCM

BCE grain der. 10 20 500

BCE meat der. 3 20 500

BCE financial der. 20 100 500

Market segment

May 22, 2003 Risk management in KELER 9

Membership Survelliance

• Member rating via Quarterly and Annual Reports

• Calculation of position limits

– market concentration

– and equity-based limits

• Close monitoring of „problematic” members

• On-site visits at the members

– management interview

– checking administration & systems

May 22, 2003 Risk management in KELER 10

Membership Sanctions

In case a member breaches the rules set out in

KELER’s Unified Rules:

• recommendations

• instructions

• extra margin requirements

• suspension of membership

May 22, 2003 Risk management in KELER 11

Monitoring

• Real-time position management & monitoring

– own account

– individual client accounts

• Real-time technical price calculation

• Real-time position evaluation

• Intraday clearing & margining facility

• Daily checking of limit utilizations

May 22, 2003 Risk management in KELER 12

Margining Structure & elements

• Individual margin

– Variation margin

– Initial margin (calculated by SPAN4RM®)

– Basic financial deposit

– Additional margin

• Collective margin

– Collective guarantee funds

• KELER’s equity capital

May 22, 2003 Risk management in KELER 13

Margining Variation margin

To cover price movements in the past

• daily mark-to-market of positions

• calculation of the gains / losses accumulated on the

positions using actual closing prices

• set-offs between different products

• daily price movements, cash settlement for

derivatives

• difference between the closing price and trade price

OR between the actual and last day’s closing prices

May 22, 2003 Risk management in KELER 14

Margining Initial margin

To cover a 1-day price movement in the

future

in normal market conditions

• based on the open positons

• net margining

• portfolio-based calculation using SPAN4RM

(developed by CME)

• margin parameters (price scan ranges)

determined on a VAR basis

May 22, 2003 Risk management in KELER 15

Margining Basic financial deposit

To cover the risk of the positions that potentially

can be opened during the next trading day

• prerequisite for a member to hold positions

• fix sum determined by KELER for each market

segment (in HUF million):

BCE market segmentBasic financial

deposit

Grain derivatives 6

Meat derivatives 1

Financial derivatives 7,5

May 22, 2003 Risk management in KELER 16

Margining Additional margin

In reasonable cases KELER is entitled to call

extra margin from its members with increased

risk exposure

• in case of an increased risk exposure (eg. exceeding

limits, non-performance of reporting obligations, as a

result of an on-site visit)

• as a fix sum or as a percentage of initial margin

May 22, 2003 Risk management in KELER 17

Margining CGF

To cover extreme price movements

• embodies the mutual guarantee between the members

• collective fund is owned by the members but

managed by KELER

• can be utilized in case of a default of any member

• calculation of the contributions to the BCE derivatives

CGF: 2% of the average of the initial margin

requirement of the last 3 months, minimum 0,5 HUF

million, but maximum 6 HUF million - monthly

calculation

May 22, 2003 Risk management in KELER 18

Margining Financial resources

Fiancial guarantee of BCE trades is backed by robust

Funds (in HUF million):

Financial resources (as of 30/04/2003) BCE derivatives All markets

Members' individual margin 3 464 7 995

Collective Guarantee Fund 35 1 093

KELER's capital 10 710

May 22, 2003 Risk management in KELER 19

Collateral management

• KELER-eligible instruments– cash

– bank guarantees

– government bonds

– mortgage bonds

– corporate bonds

– equities in the BUX-index

• Daily mark-to-market of collateral (intraday re-evaluation facility)

May 22, 2003 Risk management in KELER 20

Fails Management

• settlement expediting methods (overdraft via

repo)

• suspension of membership

• blocking cash & securities accounts

• transfer of positions to another member

• set-off between positions

• forced liquidation of positions

May 22, 2003 Risk management in KELER 21

Summary

• Central counterparty clearing

• Integrated risk measurement & manegement for

several markets

• Real-time monitoring and intraday clearing

facility

• Mark-to-market of collateral

• Huge financial resources