Risk Management

KELER CCP as central counterparty provides guarantee undertaking on the BSE derivative markets in line with the provisions of EMIR. When accepting the trades Clearing Members conclude on the BSE KELER CCP enters into the transaction in the legal sense, i.e. it becomes the seller to all buyers and the buyer to all sellers (novation). As a result the Clearing Member has no direct exposure to the risk of default by the other counterparty, as from the moment of novation KELER CCP guarantees the settlement of the transaction. To this end KELER CCP operates a guarantee system, the elements of which are determined in line with the arising risks.

KELER CCP operates a guarantee system to make sure that in case of default by Clearing Members the securities and/or cash obligations are met towards the non-defaulting counterparty. The guarantee system consists of individual and collective guarantee elements as follows:

BSE DERIVATIVE MARKETS

Type	Name	Objective	Eligible instrumentum
Individual guarantee elements	Basic Financial Collateral	The Basic Financial Collateral is to be provided upon entry into the BSE derivative market sections, on one occasion. The objective is to cover individual exposures arising from same day trading. Its amount is fixed for the given derivative sections, and is published by KELER CCP in the applicable announcement. The amount of the Basic Financial Collateral can be supplemented with the liquidity FX deposit (LIDÓ) by markets if it is justified by the risk of products cleared in foreign currencies on the derivative markets cleared. The amount of LIDÓ is published in the applicable announcement jointly with the amount of the Basic Financial Collateral.	In line with the provisions of the Conditions of acceptance of securities and currencies collateral.
	Initial margin	The amount of initial margin is determined by products and is published by KELER CCP in the applicable announcement on its website. The objective is to cover the potential change in the product price of at least two days, with a confidence level of at least 99%.	In line with the provisions of the Conditions of acceptance of securities and currencies collateral.
	Variation margin	On the BSE derivative markets the variation margin is the change in value of the open position of the market participant in a given instrument, it can be profit or loss for the Clearing Member. Its value is calculated daily. On T day it is the difference of the trade price and the same day closing price, on the following days it is the difference of the closing prices of the previous clearing day and the actual clearing day. KELER CCP collects the variation margin thus calculated from the participant making a loss on the open position and credits it to the participant making a profit on its position. The amount of variation margin is 0 at both product and market level. The premium payable by the option holder is settled during the settlement of variation margin.	Bank money only
	Additional Financial Collateral	It is to manage Clearing Member individual risks, to sanction the violation of certain obligations, to supplement the clearing member minimum capital or to cover any (temporary or permanent) shortage of individual or collective guarantee elements.	In line with the provisions of the Conditions of acceptance of securities and currencies collateral.
Collective guarantee elements	Default fund contribution	The Clearing Members form a risk pool to contribute individually to the default fund of the BSE derivative market (KGA). The objective is to cover the basically stress risks that are uncovered by individual guarantee elements. Upon default, if the individual guarantee elements of the defaulting Clearing Member and its default fund contributions and the dedicated own resources of KELER CCP allocated to the BSE derivative markets are insufficient to cover the shortage, the default fund contributions of non-defaulting Clearing Members will be used also.	HUF bank money only

KELER CCP according to the European Parliament and the Council (EU) 2019/834 regulation (EMIR REFIT) article 1. point 10 paragraph (7) publishes the design of it’s initial margin model and it’s key assumptions.

In case of futures the amount of initial margin is determined by underlying product and is stated in the applicable announcement that KELER CCP publishes on its website. The initial margin determined by the underlying product is applied for every expiring instrument, also taking into consideration the instrument’s contract size. This is because the underlying product is more liquid in every case than the expiring futures, and in many expiring cases because of poor liquidity volatility measurement wouldn’t be efficient. The objective of initial margin is to cover the potential change in the price of the instrument for at least two days, with a confidence level of at least 99%.

KELER CCP determines the initial margin based on the calculation of the delta-normal VaR (Value at Risk), in line with the requirements stated in the applicable regulation. The parameters applied are as follows: minimum holding period of 2 days (EMIR 153/2013/EU RTS article 26.), confidence level of 99% (EMIR 153/2013/EU RTS article 24.), and lookback period of at least 1 year (EMIR 153/2013/EU RTS article 25) which contains stress event, if not, the lookback period should be increased until a stress event is included. Additionally, to determine the VaR value, the change in the underlying product’s log yield volatility computed for the lookback period is used. The calculated risk measure is supplemented with the buffer (25%) against procyclicality in line with EMIR 153/2013/EU RTS article 28. Moreover, liquidity and expert buffer can be applied based on sensitivity test.

For futures securities with guaranteed physical delivery there is a delivery month supplementary collateral also in the delivery cycle and 4 trading days before the delivery.

When the portfolio level initial margin requirement is calculated, the margin requirement calculated based on the net open positions at the segregation level concerned and the related initial margin parameter is decreased with the spread discounts determined by KELER CCP.  Spread discounts have two types on derivative capital market: 1. Spread discount between products, which is a percentage discount from the sum of initial margin requirements of different product’s opposing positions 2. Spread discounts between maturities which is a percentage discount from the sum of initial margin requirements because of having opposite positons in different maturities in the same product. The determination of spread discounts is based on the Pearson correlation coefficient of daily yields in both cases.

The initial margin parameter of option products is the same as the initial margin parameter for the underlying product in the case of currency options, index options and grain options. The initial margin parameters of stock option products are equal to the announced margin parameter of the futures product with the same underlying product.

The initial margin requirement to be met is calculated at portfolio level with the use of the SPAN® software developed in Chicago. The SPAN® software for some products calculates the initial margin requirement in the underlying product’s currency. In case of these products, the initial margin is converted to HUF on the given day’s MNB (Hungarian National Bank) exchange rate.

KELER CCP’s initial margin model parameters are reviewed regularly (daily, yearly) in line with legal requirements. The methodology of initial margin determination, the use of the risk measure and the method of spread discount determination are detailed in the methodology document published.

The portfolio based initial margin calculation method’s description:

www.cmegroup.com/clearing/risk-management/span-overview.html

Related links:

Margin parameters

Methodology

The Collective Guarantee Fund (KGA) is the default fund of the BSE derivative markets. Contributions to the fund are determined and collected once a month. In line with the requirements of EMIR the default fund has to cover the higher of the highest risk or the sum of the second and third higher risks (max (1;2+3)) that result from the daily stress tests of KELER CCP. KELER CCP checks daily that the default fund amount is sufficient and should it not be sufficient it takes measures immediately to cover the shortage either by imposing additional financial collateral or by recalculating the default fund. The parameters of default fund determination methodology are published in the applicable announcement; the methodology is described in detail in the methodology document published.

Related links: 
Requirements of Guarantee Funds
Methodology

At the appropriate segregation levels KELER CCP determines the individual collateral requirement to be met. On the BSE derivative markets all individual collateral elements can be provided in the eligible collaterals stated in the Conditions of acceptance of securities and currencies collateral, except for the variation margin that can be provided in bank money only. The contribution to the default fund (KGA), is at Clearing Member level and can be met in bank money only.

In line with the legal requirements KELER CCP accepts only highly liquid instruments as collateral, the value of which is taken into account after the deduction of the appropriate haircut. Haircuts are determined in line with the regulations, depending on the liquidity of the instrument and in the case of securities after consideration of the credit rating of the issuer, based on the calculation of the VaR. The haircut calculated based on the risk measure is to cover a price change of at least 2 days, with a confidence level of 99.9% that is increased with at least the amount of the procyclicality buffer.

Collateral assets are marked to market daily. If justified intraday mark-to-market can be ordered, the conditions of acceptance or the haircuts can also be modified.

KELER CCP caps the total value of collaterals accepted with the application of concentration limits in line with EMIR. The list of eligible instruments, related haircut values and the concentration limit are stated in the Conditions of acceptance of securities and currencies collateral.

Related links:
Conditions of acceptance of securities and currencies collateral

The stress tests simulate with scenarios the effect the already occurred (historic) or possibly occurring (hypothetic) scenario events would have on the value of the current open market interest and the level of risk that KELER CCP runs in case of default by clearing members. In line with the requirements of EMIR the default fund has to cover the higher of the highest risk or the sum of the second and third higher risks (max (1;2+3)) that result from the daily stress tests of KELER CCP. The stress test methodology is detailed in the methodology document published.

Methodology
Stress test results are published each month, please click here to view these results.

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Back tests check at portfolio level the extent to which the margining model of KELER CCP can cover the portfolio level variation margin due to the change of prices only. Back tests examine the changes in the value of the position only from one clearing day to the other, the change in the amount of the positions is not covered by the calculation. Regulations require 99% confidence level annually, this is backtested daily. Details of the back test methodology can be found in the methodology document published.

Methodology
Back test results are published each month, please click here to view these results.

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Sensitivity tests are run at product and portfolio level. At product level we examine what effect the changes in certain parameters (level of confidence and holding period) of the calculated risk measure would have on the product initial margin parameter. At portfolio level we examine with the historic and hypothetic stress test scenarios what effect the % increase/decrease of margin levels and the termination of spread discounts have on the level of risks to be covered by the default fund. Details on the sensitivity test methodology can be found in the methodology document published.

Methodology

Please click here to view the prevailing amount of DF (TEA) and the dedicated own resources and other financial resources of KELER CCP.