Two central counterparties (CCPs) have experienced clearing member defaults over the past five years that have exceeded the defaulting member’s contribution to default resources and required the use of mutualized resources in the default fund, spreading losses to other CCP participants. These defaults – which occurred in the futures segment of the Korea Exchange and, more recently, at Nasdaq Clearing in Europe – have highlighted weaknesses in some CCP risk management practices and underscore the importance of a more consistent implementation of risk management best practices by CCPs around the world.
This paper outlines ISDA’s current thinking on clearing risk management best practices. Fundamental to these practices is the principle that CCP risk management decisions should be based on the risk profile of a given derivatives product. These best practices call for a holistic, multifaceted and dynamic product-based approach. It is insufficient to rely on a single risk factor as the determinant for exposure – for example, whether it is classified as an exchange-traded or over-the-counter (OTC) derivative. As markets evolve, risk management must also adapt.
ISDA and its members call for broad-based implementation of these best practices to ensure that CCPs have:
- Risk controls and margin requirements that adapt to concentration, liquidity, member credit quality and wrong-way risk in a member’s portfolio;
- Effective and transparent default management processes; and
- Robust membership criteria and greater assurances of continued adherence to them.
Most importantly, these practices will ensure that, outside of an extreme stress event, the default of a member will not be propagated to other members or the wider financial system.
Click on the PDF below to read the full paper.
Documents (1) for CCP Best Practices
Latest
Updated OTC Derivatives Compliance Calendar
ISDA has updated its global calendar of compliance deadlines and regulatory dates for the over-the-counter (OTC) derivatives space.
10 Years of the ISDA SIMM
As the derivatives industry prepared for the September 2016 implementation of initial margin requirements for non-cleared derivatives, one challenge stood out: counterparties needed to agree on the amount of initial margin to be exchanged. But if each firm developed its...
Expanding the Universe of Eligible VM
ISDA conducted a series of interviews with buy- and sell-side firms to understand the drivers of a growing use of non-cash assets as variation margin (VM) for non-cleared over-the-counter (OTC) derivatives and the barriers that remain to expanding the use...
ISDA Response on Hedge Accounting Guidance
On August 14, ISDA responded to an exposure draft from the Financial Accounting Standards Board (FASB). ISDA broadly supports the FASB’s proposed targeted improvements to hedge accounting, including allowing interest rate hedging of held-to-maturity (HTM) debt securities, recognizing all Secured...
