May 22, 2003Risk management in KELER1 Risk management in KELER Budapest May 22, 2003 Kristóf Matuszka risk analyst

May 22, 2003Risk management in KELER2 Overview Introduction CCP model Risk Management tools –clearing membership –monitoring –margining –collateral management –fails management Summary

May 22, 2003Risk management in KELER3 Introduction Markets and C&S models in KELER:

May 22, 2003Risk management in KELER4 CCP conception Benefits Increased market security via novation Anonimity Netting and spreads between products & markets Set-offs in margin calculation Integrity & connectivity KELER becomes a seller to every buyer and a buyer to every seller in the exchange transactions.

May 22, 2003Risk management in KELER5 CCP conception Types of risk Partner risk Market risk (price risk, liquidity risk) Operational risk KELER assumes different kinds of risk during its activity:

May 22, 2003Risk management in KELER6 Risk Management tools clearing membership monitoring margining collateral management fails management

May 22, 2003Risk management in KELER7 Membership Structure Trading & Clearing Membership is independent from each other 3-level clearing membership –General CM: entitled to clear for other trading members –Individual CM: clears own & client trades only –Non-CM: a trading member has no direct link with KELER, clears through a GCM Modularity

May 22, 2003Risk management in KELER8 Membership Requirements Basic corporate documents Approval from the HFSA Capital requirements for BCE clearing members: Members: banks, brokerage firms, agricultural producers, trading firms, purchasers

May 22, 2003Risk management in KELER9 Membership Survelliance Member rating via Quarterly and Annual Reports Calculation of position limits –market concentration –and equity-based limits Close monitoring of „problematic” members On-site visits at the members –management interview –checking administration & systems

May 22, 2003Risk management in KELER10 Membership Sanctions In case a member breaches the rules set out in KELER’s Unified Rules: recommendations instructions extra margin requirements suspension of membership

May 22, 2003Risk management in KELER11 Monitoring Real-time position management & monitoring –own account –individual client accounts Real-time technical price calculation Real-time position evaluation Intraday clearing & margining facility Daily checking of limit utilizations

May 22, 2003Risk management in KELER12 Margining Structure & elements Individual margin –Variation margin –Initial margin (calculated by SPAN4RM®) –Basic financial deposit –Additional margin Collective margin –Collective guarantee funds KELER’s equity capital

May 22, 2003Risk management in KELER13 Margining Variation margin To cover price movements in the past daily mark-to-market of positions calculation of the gains / losses accumulated on the positions using actual closing prices set-offs between different products daily price movements, cash settlement for derivatives difference between the closing price and trade price OR between the actual and last day’s closing prices

May 22, 2003Risk management in KELER14 Margining Initial margin To cover a 1-day price movement in the future in normal market conditions based on the open positons net margining portfolio-based calculation using SPAN4RM (developed by CME) margin parameters (price scan ranges) determined on a VAR basis

May 22, 2003Risk management in KELER15 Margining Basic financial deposit To cover the risk of the positions that potentially can be opened during the next trading day prerequisite for a member to hold positions fix sum determined by KELER for each market segment (in HUF million):

May 22, 2003Risk management in KELER16 Margining Additional margin In reasonable cases KELER is entitled to call extra margin from its members with increased risk exposure in case of an increased risk exposure (eg. exceeding limits, non-performance of reporting obligations, as a result of an on-site visit) as a fix sum or as a percentage of initial margin

May 22, 2003Risk management in KELER17 Margining CGF To cover extreme price movements embodies the mutual guarantee between the members collective fund is owned by the members but managed by KELER can be utilized in case of a default of any member calculation of the contributions to the BCE derivatives CGF: 2% of the average of the initial margin requirement of the last 3 months, minimum 0,5 HUF million, but maximum 6 HUF million - monthly calculation

May 22, 2003Risk management in KELER18 Margining Financial resources Fiancial guarantee of BCE trades is backed by robust Funds (in HUF million):

May 22, 2003Risk management in KELER19 Collateral management KELER-eligible instruments –cash –bank guarantees –government bonds –mortgage bonds –corporate bonds –equities in the BUX-index Daily mark-to-market of collateral (intraday re- evaluation facility)

May 22, 2003Risk management in KELER20 Fails Management settlement expediting methods (overdraft via repo) suspension of membership blocking cash & securities accounts transfer of positions to another member set-off between positions forced liquidation of positions

May 22, 2003Risk management in KELER21 Summary Central counterparty clearing Integrated risk measurement & manegement for several markets Real-time monitoring and intraday clearing facility Mark-to-market of collateral Huge financial resources