Clearing Risk Management
One of the key requirements of the Reserve Bank;s Financial Stability Standard for Central Counterparties introduced in March 2013, is that a central counterparty must have risk controls which provide it with a high degree of confidence that it will be able to settle its obligations in the event that the two clearing participants and their affiliates with the largest settlement obligations defaults on ASX Clear (ASXCL) or ASX Clear (Futures) (ASXCLF).
The Clearing Houses have layers of risk controls, which seek both to reduce the likelihood that a clearing participant will default and to manage the risk to the Clearing House if it does. Broadly stated, these include:
- minimum capital requirements for clearing participants, which are monitored through financial returns;
- end of day margining of clearing participants' cash market positions;
- end of day and, at times of high market volatility, intraday margining of clearing participants' derivatives market positions;
- additional margining of clearing participants where projected shortfalls that would arise from closing their positions in stressed market conditions or the absolute size of their positions or margins exceed pre-determined acceptable levels;
- measures to ensure the adequacy of Clearing House resources, including daily stress testing of the amount and liquidity of Clearing House resources required to meet shortfalls arising from default of the two clearing participants’ and their affiliates on both clearing houses with the largest exposures under extreme but plausible market price move scenarios; and
- conditions to restrict permissions, impose limits or direct participants to close out contracts.