Margins and Capital Based Position Limits
To determine the size of margins required from its 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.
The methodology behind SPAN is that it adopts a portfolio style approach 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.
Initial Margins - Initial margins are monies paid to ASX Clear (Futures) by Clearing Participants to cover the performance of positions held. The collection of initial margins is fundamental to the operation of ASX Clear (Futures) and provides protection for ASX Clear (Futures) and its non-defaulting Participants, in the event of a Participant defaulting on its financial obligations.
Intra-day Margins - During periods of extreme market volatility, ie. when price movements are close to or exceed initial margin confidence levels, ASX Clear (Futures) may conduct an intra-day margin call. Such a call can be effected at any point during the trading day and is designed to reduce the risk to ASX Clear (Futures) by allowing the call on extra margins from its Participants based upon current market prices volatilities, and for the Clearing Participants financial status.
Variation Margins (Daily Settlement Amounts) - In addition to the setting of initial margin rates, further risk reduction is achieved through the payment and receipt of daily settlement amounts. This process, which involves revaluing Clearing Participant positions against settlement prices, reduces the risk to ASX Clear (Futures) by preventing market participants from accumulating losses over a period greater than one business day.
Additional Initial Margins - ASX Clear (Futures) applies additional Initial Margins (AIMs) when a Clearing Participant’s position is in excess or is likely to exceed the various limits applicable to that Clearing Participant pursuant to the Clearing Rules and ASX Clear (Futures) risk management policy. These limits include Capital-Based Position Limits (CBPL), Stress Test loss Exposure Limits (STEL), Open Interest position concentration limits and Net Tangible Asset requirements.
Extra Margins - In addition to or instead of Intra-day margins ASX Clear (Futures) may require Clearing Participants to deposit extra margins in relation to their open position and price movements. Extra margins must be paid within one hour of notification. Failure to pay within the prescribed time constitutes an event of default and is immediately referred to the Default Management Team for its consideration.
In relation to margin collateral, ASX Clear (Futures) allows Clearing Participants to fund their Initial and Additional Initial Margin requirements in non-AUD cash deposits and selective foreign and AUD securities. Both foreign cash deposits and securities are subject to valuation haircuts based on the expected worst one-day revaluation. Foreign securities are subject to both a foreign exchange haircut as well as a security valuation haircut. Foreign cash and non cash securities cannot be used for Daily Settlement. The settlement requirements must be paid in the currency of the underlying contract.
Capital Based Position Limits
To limit the contingent liability that ASX Clear (Futures) has to its Participants, positions are restricted to an exposure level calculated to be within their financial capacity. ASX Clear (Futures) imposes a CBPL on each of its Clearing Participants so that its initial margin liabilities can not exceed its CBPL. This effectively limits the amount of exposure that a Clearing Participant may hold relative to their NTA or net liquid assets and is designed to ensure that Participants are able to withstand fluctuations and increased exposures or defaults, which may occur in the underlying contract prices.
The CBPL is applied across all Clearing Participants with each Participant's limit based on its NTA backing or net liquid assets. The formula adopted is:
Participants CBPL = NTA x 200%
Where NTA is the confirmed figure provided on a monthly basis to ASX's compliance and surveillance function. ASX Clear (Futures) may approve the use of a higher percentage figure in the calculation of an individual's Participant's CBPL on an exceptions basis and at the sole discretion of ASX Clear (Futures).
CBPL utilisation is monitored on an ongoing basis. A number of limit utilisation levels are put in place to constantly monitor the exposures of Clearing Participants. Should a Clearing Participant's utilisation reach a level whereby the limit is in danger of being breached, ASX Clear (Futures) may contact the Clearing Participant to discuss likely future utilisation, potential position close outs, the calling of extra margins or the provision of extra capital. Participants are responsible for monitoring their exposures at all times.
* SPAN and Standard Portfolio Analysis of Risk are trademarks of the Chicago Mercantile Exchange. The Chicago Mercantile Exchange assumes no liability in connection with the use of SPAN by any person or entity.