NASDAQ CLEARINGfinansforeningen.dk/Admin/Public/DWSDownload.aspx... · NASDAQ CLEARING 2 First European CCP to obtain EMIR approval and QCCP status Fourth-largest clearing house in

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

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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

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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

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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

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RISK PARAMETERS

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▶ 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

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CCAR – HYPOTHETICAL SCENARIOS

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▶ 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”

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FINANCIAL WATERFALL

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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)]

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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

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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

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• 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

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DEFAULT FIRE-DRILLS

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• 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!