Controlling The Tail Risk Management CCP

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1 Controlling The Tail Risk Management CCP Door R.J.O. Daniels 13 oktober 2016 Presentation specifically made for he seminar of VBA. This presentation may not be shared, distributed or copied without prior authors consent.

2 Agenda Page 1 1. Introductie 2. Het waterval concept 3. Toezichthoudersraamwerk CCP 4. Segregatie van rekeningen en overhevelen van posities (Seggreation & Portability) 5. Raamwerk als CCP in de problemen komt (Recovery & Resolution)

3 1. Introductie Van: Bilaterale transacties Bank A Bank B Bank F Bank C Source: BIS, DNB Bank E Bank D Source: BIS,, DNB DNB

4 1. Introductie Van: Bilaterale transacties Naar: Central Clearing Bank A Bank B Bank A Bank B Bank F Bank C Bank F CCP Bank C Bank E Bank D Bank E Bank D Maar Bilaterale transacties zijn nog steeds mogelijk, maar de kapitaal- en liquiditeitskosten zullen hoger zijn.

5 1. Introductie Hoe werkt het? Buyer Trading Participant 1 Trading Venue Seller Trading Participant Trade order 2 Trade confirmation 3 Trade 4 Open position towards CCP 5 Open position towards Clearing member Clearing Member 4 CCP 4 Clearing Member

6 1. Introductie Veel discussies over CCPs Are we building the foundations for the next crisis already? The case of central clearing Counterparty risk has been at the heart of the recent crisis driven by the toxicity of over-the-counter (OTC) derivatives and failure of high profile financial institutions. This has led policymakers to propose laws that would require most standard OTC derivatives to be centrally cleared. Central clearing involves a central counterparty (CCP) intermediating a transaction and acting as an insurer of counterparty risk. This has advantages, potentially leading to enhanced transparency and liquidity in markets and smoothing major systemic problems. The idea is also popular since it represents a single and intuitively simple solution to the severe problem of counterparty risk. However, whilst CCPs may have a role to play in reducing counterparty risk, they can also be counterproductive to the stability of financial markets. In this paper, we argue that the introduction of CCPs should be carefully considered and that, far from reducing counterparty risk, they may actually allow it to breed and contribute to the next crisis. Will CCPs Be the Root Cause of the Next Financial Crisis? The new Tail Risk: Central Clearing Parties CCP contagion fears spark derivatives debate Robust risicobeheersingsraamwerk is cruciaal voor een CCP

7 Agenda Page 6 1. Introductie 2. Het waterval concept 3. Toezichthoudersraamwerk CCP 4. Seggregatie van rekeningen en overhevelen van posities (Seggreation & Portability) 5. Raamwerk als CCP in de problemen komt (Recovery & Resolution)

8 2. Waterval: De waarde van de portefeuille Waarde portefeuille Positief scenario Afslag op de huidige waarde (Haircut) Negatief scenario Q: Vraag hoe groot zou de afslag moeten zijn?

9 2. Waterval: Wat is het risico? Verdedigingslijn 1: Acceptatie clearing member Verdedigingslijn 2: (Intraday) onderpand Waarde portefeuille Haircut op de portefeuille gewone stress Haircut op de portefeuille extreme stress Waarde onderpand (na afslag) Risico dat afgedekt wordt door onderpand Openstaand bedrag i.g.v. extreme stress

10 2. Waterval: Schematisch overzicht Verdedigingslijn 1: Acceptatie clearing member Verdedigingslijn 2: (Intraday) onderpand Verdedigingslijn 3: Default fund contributie van clearing member in default Verdedigingslijn 4: CCP eigen financiële bronnen ( Skin-in-the-game ) Verdedigingslijn 5: Default fund contributie overgebleven clearing members Verdedigingslijn 6: Tweede ronde default fund contributies Verdedigingslijn 7: CCP s eigen capital Verdedigingslijn 8: Recovery and resolution

11 Agenda Page Introductie 2. Het waterval concept 3. Toezichthoudersraamwerk CCP 4. Seggregatie van rekeningen en overhevelen van posities (Seggreation & Portability) 5. Raamwerk als CCP in de problemen komt (Recovery & Resolution)

12 3. Risk Management: Overview regulatory framework Prudentiële vereisten (Risk Management) Default fund en waterval Kapitaal management Liquiditeit management Overige financiële bronnen Margin vereisten Onderpand management Exposure management Beleggingsbeleid Default procedures Model validatie Stress testen Overige vereisten Rapportage verplichting Bijhouden van informatie Governance Conflict of interest Transparantie Segregatie & overhevelen Interoperability Recovery and resolution plan

13 Agenda Page Introductie 2. Het waterval concept 3. Toezichthoudersraamwerk CCP 4. Seggregatie van rekeningen en overhevelen van posities (Seggreation & Portability) 5. Raamwerk als CCP in de problemen komt (Recovery & Resolution)

14 4. Segregatie & Overhevelen CCPs moeten klantinformatie overzichtelijk bijhouden, zodat posities snel kan worden geïdentificeerd Rekeningstructuur: House account, Omnibus accounts (OSA) en Individual accounts (ISA) Faciliteren om posities snel over te hevelen = Portability Upon a Declaration of Default, CCP may trigger the procedures for the transfer of Derivative Contracts and related Collateral deposited by the defaulting Clearing Participant in Individual Client Account(s) and Omnibus Client Account(s) to another Clearing Participant CCP will use all reasonable endeavours to perform the transfer to the back up Clearing Participant within 4 hours after sending the Declaration of Default. Strikte Default Management procedures waaronder het uitvoeren van simulaties waarin het default proces en biedingsproces wordt gesimuleerd.

15 Agenda Page Introductie 2. Het waterval concept 3. Toezichthoudersraamwerk CCP 4. Seggregatie van rekeningen en overhevelen van posities (Seggreation & Portability) 5. Raamwerk als CCP in de problemen komt (Recovery & Resolution)

16 5. Recovery and Resolution FSB on Resolution regimes Key Attributes of Effective Resolution Regimes for Financial Institutions, 2014 An effective resolution regime (interacting with applicable schemes and arrangements for the protection of depositors, insurance policy holders and retail investors) should: (i) (ii) (iii) ensure continuity of systemically important financial services, and payment, clearing and settlement functions; protect, where applicable and in coordination with the relevant insurance schemes and arrangements such depositors, insurance policy holders and investors as are covered by such schemes and arrangements, and ensure the rapid return of segregated client assets; allocate losses to firm owners (shareholders) and unsecured and uninsured creditors in a manner that respects the hierarchy of claims; (iv) not rely on public solvency support and not create an expectation that such support will be available; (v) (vi) (vii) avoid unnecessary destruction of value, and therefore seek to minimise the overall costs of resolution in home and host jurisdictions and, where consistent with the other objectives, losses for creditors; provide for speed and transparency and as much predictability as possible through legal and procedural clarity and advanced planning for orderly resolution; provide a mandate in law for cooperation, information exchange and coordination domestically and with relevant foreign resolution authorities before and during a resolution; (viii)ensure that non-viable firms can exit the market in an orderly way; and (ix) be credible, and thereby enhance market discipline and provide incentives for market-based solutions.

17 5. Recovery and Resolution Hoe kan een CCP in de problemen komen en wat gebeurt er dan? Twee scenario s Clearing member defaults Non-defaulting Clearing member Standard Waterfall mechanism Dedicated Own Resources Recovery Resolution

18 5. Recovery and Resolution Een greep uit de mogelijkheden om een CCP te redden dan wel af te wikkelen => Work in Progress!!! Recovery Tools Verzoek van CCP aan clearing members om extra default fund bijdrage te storten Afslag van winsten Verdelen van verliezen over clearing members Verdelen van posities Tijdelijke sluiting van activiteiten Permanente sluiting Resolution Tools Gebruik maken van de recovery tools Afslag van iniële marge Alle posities overhevelen naar derde partij Geforceerde herkapitalisatie Conversie van schuld naar eigen vermogen (Tijdelijk) niet uitbetalen van uitgaande betalingen van CCP (moratorium)

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