Enterprise Risk Management October 9, 2007 Marie Rey, Managing Director Risk Management, DTCC.
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Transcript of Enterprise Risk Management October 9, 2007 Marie Rey, Managing Director Risk Management, DTCC.
Enterprise Risk Management
October 9, 2007Marie Rey, Managing Director Risk Management, DTCC
DTCC Confidential2
Enterprise Risk Management Governance
DTCC Board of DirectorsCredit & Market Risk Management Committee
Compliance & Operational Risk Management Committee
DTCC Chairman & Chief Executive Officer
Risk Management Managing DirectorDTCC Executive Management Committee Member
Risk Management Department
FRBNYNYSBD
PWCIA
DTCC Confidential3
Enterprise Risk Management
Managing Director
Credit & Market Risk&
Securities ValuationQuantitative Analysis Project Management
Operational RiskManagement
DTCC Confidential4
Role of Risk Management
Protect the safety & soundness of clearance & settlement
Reduce risk of loss due to member failureInsure settlement continues in face of member failure
DTCC Confidential5
Credit & Market Risk Responsibilities
Assess new applicants
On-Going Financial Surveillance
Market Surveillance
DTCC Confidential6
Securities Valuation Responsibilities
Pricing of collateral held across the complex Ratings obtained from outside sources Market prices – external & internal sources Evaluation of adequacy of pricing Determination of appropriate haircuts
DTCC Confidential7
Quantitative Analysis Responsibilities
Mathematical modeling of components of clearing fund requirements
Models validated by third parties Performance of stress tests Performance of back tests
DTCC Confidential8
Project Management Responsibilities
Liaison between risk system users and risk technology staff
DTCC Confidential9
Credit RiskAssessment of an Applicant
Detailed Review Adherence to Corporate
Rules Presentation to Credit &
Market Risk Management Committee
DTCC Confidential10
Credit RiskOngoing Financial Surveillance
Credit Risk Matrix
Parameter Monitoring
Periodic Reviews
7
DTCC Confidential11
Market RiskSurveillance
8
Clearing Fund
DTC Market Risk Review
Market Watch
DTCC Confidential12
Market RiskClearing Fund
The Clearing fund is maintained to protect the Corporation and its members in the event of a member default– NSCC guarantees trades at midnight of T+1– GSD guarantees trades at point of trade comparison
DTCC Confidential13
Market RiskClearing Fund - Composition
The Clearing Fund is comprised of:– Cash (USD) – U.S. Treasuries
DTCC Confidential14
Market RiskClearing Fund
Calculated overnight Requirements sent automatically via email to
Members typically by 7:00 A.M. 9:30-10:00 A.M. deadline for receipt of deficit payment
DTCC Confidential15
NSCC Clearing Fund Methodology
Risk-Based Margining
• Volatility
• Mark-to Market
• Fails
• Market Maker Domination
• Illiquid Charges
• Premium
Intraday Monitoring
DTCC Confidential16
Market RiskVolatility
Largest component of the clearing fund requirement
VaR for equities and fixed income securities
Haircuts
DTCC Confidential17
Haircuts
OTCBB, Pink Sheets and IPOs Applied in instances where there is insufficient
statistical data
DTCC Confidential18
Mark-To-Market (“MTM”)
Unrealized profit and loss on unsettled positions, including fails
(System Price*Net Quantity) – (Contract Value)
No credit is given for a total net credit MTM
DTCC Confidential19
Fails
A trade that has not settled as scheduled Minimum haircut on market value of long and
short (abs) failing positions Haircut may increase based on internal credit
rating
DTCC Confidential20
Market Maker Domination
Measures exposure of correspondent Market Makers
Limited to OTC listed market concentrations
Charge mitigated by credit worthiness
DTCC Confidential21
Illiquid Charges
To capture exposure in illiquid securities Overnight calculation is based on several
components, such as:– Internal credit rating of firm– Position size– Primary market– Average daily volume– Price
DTCC Confidential22
Premium
Member’s clearing fund requirement vs. Member’s capital
Clearing FundCapital
> 1= Premium
DTCC Confidential23
GSD Clearing Fund Methodology
Clearing fund components
Volatility
Margin requirement differential
Coverage component
Premium
DTCC Confidential24
Margin Requirement Differential
Captures changes in VaR
Applies front weighted average of fluctuations
DTCC Confidential25
Coverage Component
Back Test Based
Compares historic P&L of trades against clearing fund requirement
Front weighted
DTCC Confidential26
DTC Market Risk
DTC maintains a fully collateralized system
Collateralization Net debit caps
DTCC Confidential27
Collateralization
Participant is required to have sufficient collateral in its account to support net settlement debits
Collateral includes:
- Participant's deposit to the Participants Fund
- Designated collateral securities in participant’s account
- Securities that are the subject of deliveries from other participants
Collateral is marked-to-market every day, less a haircut Transactions pend until sufficient collateral is available to
support net settlement debit
DTCC Confidential28
Collateralization Review
Review impact of systemic overrides Review impact of price and haircut adjustments
made by Securities Valuation Review impact of price movements
DTCC Confidential29
Net Debit Cap
Based on three largest intra-day net debit balances over a rolling 70 business day period
Limited on a case-by-case basis
Maximum Net Debit Cap
Transactions pend if settlement transactions exceed net debit cap
DTCC Confidential30
Market RiskMarket Watch
Links to news services Market events analyzed Chronology maintained of market events and
actions taken Closeout simulations
DTCC Confidential31
End of Day Line of Credit
Liquidity Needs
Resources