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1. What is the structure of KDPW_CCP’s guarantee system?
The KDPW_CCP guarantee system is based on margins and a clearing fund.
2. How are margins calculated?
Margins are used to cover the risk of clearing transactions of a participant responsible for clearing; they are contributed individually by clearing members. Margins are calculated both for cash transactions and derivatives transactions/positions. The purpose of margins is to cover the risk arising under normal market conditions defined at a significant confidence level. Margins are calculated under the SPAN® methodology.
3. What is SPAN®?
SPAN® (The Standard Portfolio Analysis Of Risk) is a methodology of estimating risk and calculating margins for cash and derivatives positions. Designed and implemented by Chicago Mercantile Exchange (CME) in 1988, it was the first portfolio method used to calculate margins. It is now used by around 50 exchanges, clearing houses, calculation service providers and market regulators around the world. Constantly improved, the methodology supports a broad range of derivatives and cash products. The methodology is accompanied by a line of IT products: PC-SPAN, SPAN Risk Manager, SPAN Risk Manager Clearing.
4. How can a brokerage house use the SPAN® methodology to calculate margins for its clients?
To use the SPAN® methodology, a brokerage house can:- purchase and use the applications PC-SPAN and PC_SPAN-RM and integrate them with the broker’s internal system;- develop proprietary software under the SPAN® methodology licence;- contract a specialty provider of margin calculation services.
5. Is it possible to automate the margin calculation process on the user’s side by using the application PC-SPAN®?
Yes. The margin calculation process using the SPAN® application can be fully automated. This can be done by processing SPAN® batch files using an available SCRIPT FILE or by developing API library reference software. The application PC-SPAN® requires input data files (RISK PARAMETERS FILE and POSITION FILE). KDPW provides a RISK PARAMETERS FILE which contains characteristics of cleared instruments, their prices and risk parameters. The user needs to develop a POSITION FILE which provides the SPAN® application with portfolio positions data. Once the calculation of margins is initiated, the output can be recorded in a RISK REPORT FILE (XML files), which can then be read in order to import data to the broker’s internal system.
6. Where do I get information about / purchase the application PC-SPAN®?
For more information about the application PC-SPAN® and purchase options visit: http://www.cme-ch.com/pcspan/.
7. How are relations between clients and brokers regulated?
So long as the currently applicable regulations remain in force, whereby at the time of issuing an order clients are required to hold a margin not lower than the margin calculated under the rules laid down by KDPW_CCP (Regulation of the Minister of Finance of 20 November 2009 on terms and conditions of conduct of investment firms, banks referred to in Article 70.2 of the Act on Trading in Financial Instruments, and custodian banks, Chapter 3, Title 4, § 70), participants can calculate required margins both under the existing SPAN methodology and the previously applicable rules of calculating margins, i.e., the MPKR model (Resolution No. 201/09 of the Management Board of the National Depository of 2 June 2009, as amended).
8. What messages are used to send margin amounts?
Margin amounts calculated for individual accounts are sent in three messages:
- colr.mrg.001.01 – margins calculated under the SPAN methodology;
- colr.mrg.002.01 – margins calculated under the MPKR model described in Appendix 3 to the KDPW_CCP Detailed Operating Rules;
- colr.exm.001.01 – additional margins.
9. What is the concept of clearing fund in the KDPW_CCP guarantee system?
The purpose of the clearing fund is to cover the risk not covered by individual margins. The clearing fund is a mutual fund, i.e., contributions to the fund are made on a solidary basis by clearing members pro rata to their uncovered risk. KDPW_CCP determines the level of risk it wants to cover in the guarantee system and, on that basis, estimates stress test scenario parameters used to calculate the resources of the fund.
10. What is uncovered risk?
Uncovered risk is a concept used to estimate the resources of the clearing fund. To simplify, uncovered risk is the difference between margins calculated under stress test conditions (which are extreme but plausible) and margins calculated under normal conditions.
11. What markets are covered by the clearing fund?
At present, all markets are divided into three complexes, each covered by a separate fund: A – regulated market (previously covered by the funds FRTG, FRRC, RGTT), B – WSE alternative trading system (previously covered by the fund FASO), C – BondSpot alternative trading system (previously covered by the fund FBSP). Additional margins are calculated separately for each market complex.
12. Do KDPW_CCP messages provide aggregate margins required from Participants by complex?
The required margin is presented in the message corl.mrg.001.01.xml only by derivatives and cash market.
13. How are contributions to the fund updated and paid?
The fund is updated by calculating new required contributions on a monthly basis (“major update”). Participants are informed of the forecast required contribution on each clearing day. The resources of the fund depend on the highest average uncovered risk in the period calculated for each clearing member. A participant’s contribution is proportionate to the average uncovered risk of that participant in the period. Securities are accepted as payment on a daily basis (“minor update”).
14. How is session monitoring performed after the modification of the guarantee system?
Session monitoring is performed in the same way as before the implementation of modifications in the guarantee system: we monitor the risk of changes of participant positions, changes of market prices and risk parameters only for derivatives transactions. We are planning to include cash transactions in session monitoring in 2011.
15. After the risk management rules have been consolidated, are participants required to open individual accounts for clients on the cash market?
No. This is a discretionary decision of each clearing member.
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