Risk Management

KELER CCP as central counterparty provides guarantee undertaking on the spot capital markets (BSE, BÉTa, MTS Hungary) in line with the provisions of EMIR. With the multilateral netting of the transactions the Clearing Members concluded at the venue of trading concerned KELER CCP enters into the transaction in the legal sense, i.e. it becomes the seller to all buyers and the buyer of 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:

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.

Initial margin is determined by product and is stated in the applicable announcement that KELER CCP publishes on its website.

The objective of initial margin is to cover the potential change in the product price 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%, 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 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. In case of new products, when historic volatility is not available, the volatility of a proxy product chosen based on expert approach is used to determine the initial margin.

When the portfolio level initial margin requirement is determined, 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 one type on multinet market: 1. Spread discounts between settlement days, which is a percentage discount from the sum of initial margin requirements of different trading days opposing positions. Its value is published in announcement.

The initial margin requirement to be met is calculated at portfolio level with the use of the SPAN® software developed in Chicago.

KELER CCP’s initial margin model parameters are supervised 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.

Related links:

Margin parameters

Methodology

The Exchange Settlement Fund (TEA) is the default fund of the markets with multinet settlements. 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. Regarding the multinet markets all individual collateral elements can be provided in the eligible collaterals stated in the Conditions of acceptance of securities and currencies collateral. The contribution to the default fund (TEA), is at Clearing Member level and can be provided 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 with the consideration of the credit rating of the issuer, based on the calculation of VaR risk measure. 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 the collaterals accepted with the application of concentration limits in line with EMIR. The list of eligible instruments, related haircut values and the concentration limits 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.

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

Back tests check at the 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.

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

Sensitivity tests are made at product and portfolio level. At product level we examine what effect the changes in certain parameters (confidence level 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.

Sensitivity testing methodology

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