Effective risk management is dependent upon a robust and enforced policy framework and infrastructure that identifies the key components for margining under normal market conditions. These are:
- Variation Margin (VM) – Daily Mark-to-market ("MTM") value of each cleared trade calculated at end of day
- Initial Margin (IM) – the potential futures exposure that closing out a portfolio of cleared trades may present to the CCP in the event of a Clearing Participant default
- Credit Add-on – An additional margin based on ASX's assessment of the Clearing Participants credit quality
- Liquidity Add-on – An additional level of IM used to account for potential additional costs caused by closing out and illiquid or highly concentrated portfolio
- Price Alignment Interest (PAI) – OTC Only. A cost used to compensate Clearing Participants for the loss of alternative investment opportunities incurred through funding VM on a cleared portfolio
On an end of day basis, ASX Clear (Futures) will aggregate a Clearing Participants total margin liabilities, inclusive of client accounts, and compare this value to the amount of lodged collateral. Should there be a deficit, ASX Clear (Futures) will issue a margin call to the relevant Clearing Participants at the beginning of the next local business day.
Intraday at the approx. times specified below ASX Clear (Futures) will repeat the above process:
*Any margins called against house accounts in the previous run will be returned if collateral amounts are no longer required. Amounts to be returned are capped at the total amount called in the previous intraday margin runs.
Each aspect of the ASX Clear (Futures) service adopts margin approaches and methodologies that are commonly used at other CCPs and are considered to meet international best practice. The methodologies used for OTC Margining and Futures respectively are described below.
- OTC Margining, Cross-Margining and Margin Optimisation
- Futures Margining
OTC Margining, Cross Margining and Margin Optimisation
OTC VM represents the daily change in Net Present Value (NPV) of an OTC Clearing Participants cleared portfolio.
In determining the NPV, ASX Clear (Futures) constructs a yield curve based on market prices or rates for benchmark OTC instruments, and calculates a value for all known and forecast cash flows. The total NPV across all relevant cleared trades corresponds to each Clearing Participants accumulated VM, and is calculated both intraday and end of day.
All VM settlements are required to be paid in cash in the same currency of the underlying product.
ASX Clear (Futures) has implemented a Filtered Historical Simulation Value at Risk (HsVaR) model to calculate IM consistent with best practice for OTC interest rate derivative CCPs.
HsVaR measures the maximum potential loss a Clearing Participants portfolio is expected not to exceed with a given probability (the confidence interval), over a given period of time (holding period). The filter ensures that historic returns are scaled according to current market volatility, ensuring that the model adjusts to prevailing market conditions.
Key model parameters are as follows:
|Historical Data Period||Continuous daily price history, capturing the Q4 2008 period of extreme volatility|
|Holding Period||5 days|
|Market Volatility||Scaling factor to allow the adjustment of historic returns. Reviewed on a periodic basis|
At its discretion, ASX Clear (Futures) may apply a credit add-on to a Clearing Participants IM.
The HsVaR model calculated IM under the assumption that positions are closed out at market mid prices. This assumption implied that any given trade/position size will be absorbed by the market without having an impact on liquidity. Should a defaulted position be beyond a standard quoted size for any particular maturity, this may challenge some of the assumptions embedded in the IM model.
Therefore, a liquidity add-on may be charged for concentrated positions. The size or level and potential costs of concentrated positions are determined by market surveys with Clearing Participants and are reviewed periodically.
Price Alignment Interest
As VM represents a cash realisation of profit and loss, there is therefore compensation of funding costs applied via the application of interest to the outstanding VM balance.
Cross Margining and Margin Optimisation
The ASX Clear (Futures) OTC service provides for the opportunity to cross margin select ASX-24 exchange traded derivatives to be margined as part of their OTC portfolio. At present, the list of eligible products is as follows:
|Eligible Futures Contract Code||Contract Name|
|IB||ASX 30 Day Interbank Cash Rate Futures|
|IR||ASX 90 Day Bank Accepted Bill Futures|
|YT||ASX 3 Year Treasury Bond Future|
|XT||ASX 10 Year Treasury Bond Future|
|XX||ASX 20 Year Treasury Bond Future|
*This list may be extended to incorporate other exchange traded products in the future.
OTC Clearing Participants can elect to allocate ASX24 futures products for cross-margining, provided that the allocated futures have the effect of reducing OTC initial margin. Alternatively, Clearing Participants may opt into the ASX Clear (Futures) margin optimisation service that offers:
- Automatic position management – automatically load trade/position data into the optimiser
- Optimisation – the functionality to apply the optimisation algorithm to come up with an optimum trade combination
- Allocation – automatic allocation of ASX24 futures products to obtain cross margining benefits
The Variation Margin (Daily Settlement Amounts) calculation is a process that involves revaluing Clearing Participant positions against daily settlement prices. This assists in reducing the risk to ASX Clear (Futures) by preventing market participants from accumulating losses over a period greater than one business day.
To determine the size of initial margins required from its futures Clearing Participants ASX Clear (Futures) uses the SPAN margining system (Standard Portfolio Analysis of Risk). SPAN was developed by the Chicago Mercantile Exchange in 1988. Since that time, it has become the most widely adopted margining system in the international futures industry, used in many registered clearing entities in the United States as well as throughout Europe and the Asia-Pacific region.
SPAN adopts a portfolio style methodology to the margining of futures and options. Unlike strategy based systems which consider futures and options positions in isolation, SPAN assesses what the risk on a portfolio will be, given changes in futures prices and option volatilities. In making its calculations, SPAN subjects the portfolio to 16 different risk scenarios where futures prices and volatilities are modified to varying degrees and the resultant highest margin liability is then used as the basis for determining initial margin levels.
Not currently applied to futures initial margin.
Note currently applied to futures initial margin.