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Tests

The KDPW_CCP Risk Management Team conducts a range of tests to validate and assess the models and methodologies used among others to determine margins and contributions to default funds. The main goal of the tests is to ensure the safety of the clearing system. With the tests, KDPW_CCP checks whether the resources of the clearing guarantee system are sufficient to cover exposures to risks under normal and stressed market conditions.

The main tests performed by KDPW_CCP include:
1.     Backtesting
Backtesting is a key part of assessing the adequacy, reliability and correctness of the margin calculation model. The model is backtested automatically on every business day. KDPW_CCP publishes summary test results on a monthly basis on its website under the tab Risk Management/Tests and distributes the summary results to the clearing members. Furthermore, KDPW_CCP provides clearing members on request with detailed backtesting results for their portfolios.
In the event of any breach (a breach is identified where the portfolio loss is greater than the initial margin), the reasons for the breach are investigated. Corrective measures are taken depending on the scale, number and reasons for breaches.
Initial margins are determined for each clearing member at collateral account (portfolio) level under the SPAN methodology for transactions concluded in organised trade and under the historical VaR method for OTC transactions, based on predefined assumptions including among others the confidence interval, the time horizon and the liquidation period. Backtesting is run separately for transactions concluded in both trading systems.
The objective of model backtesting is to confirm whether the initial margins are sufficient at the assumed confidence interval to cover losses incurred under normal market conditions in the predefined liquidation period of the defaulting clearing member’s positions. In its model backtesting, KDPW_CCP assesses the coverage of exposures with margins by comparing the hypothetical loss in the predefined liquidation period against the margin requirement.
Results of back testing of the margin calculation model*


* Last message update: 2019-03-13
2.     Sensitivity testing and analysis
Sensitivity testing and analysis aim to identify the impact of change of market parameters on the value of the portfolio and to define to what extent the margins cover losses incurred under stressed market conditions.
KDPW_CCP tests the sensitivity of all real portfolios and, in addition, defined hypothetical portfolios. Hypothetical portfolios are constructed so that every one of them is sensitive to a different change of market parameters in order to capture all relevant risks to which KDPW_CCP is exposed.
Sensitivity testing is performed automatically on every business day. In addition, KDPW_CCP analyses the results monthly to evaluate the correctness and adequacy of the assumptions and key parameters of the maintenance margin calculation model. Adequate actions are taken in the light of results of the analysis. KDPW_CCP publishes a monthly summary of sensitivity testing on its website.

Results of sensitivity testing and analysis**
** Last message update: 2019-03-12
3.     Stress testing
Stress testing is carried out to ensure that the resources of the clearing guarantee fund are sufficient to cover losses arising from the default of the clearing member to which KDPW_CCP has the largest exposures or of the second and third largest clearing members, if the sum of their exposures is larger. Calculations are based on a defined set of stress-test scenarios which include historical and hypothetical extreme but plausible market conditions.
Based on defined stress-test scenarios, potential loss arising from insufficient coverage of potential exposures with deposited margins is calculated for each clearing member. Next, for each scenario, the largest and the sum of the second and third largest potential loss are calculated and then compared with the value of the clearing fund or the relevant guarantee fund. The results indicate the extent to which the clearing fund or the relevant guarantee fund will be consumed as a result of default of the clearing member(s) to which KDPW_CCP has the largest exposures under extreme but plausible market conditions.
In addition, all resources of the clearing guarantee system are stress-tested to ensure that they are sufficient to cover the loss due to default of the clearing members to which KDPW_CCP has the two largest exposures.
Stress testing is performed automatically on every business day. As a result of the analysis, KDPW_CCP may take measures to mitigate identified risks, including an increase of margin requirements or contributions to the clearing fund or the relevant guarantee fund.
KDPW_CCP publishes monthly test results on its website and communicates the results to the clearing members. In addition, KDPW_CCP provides clearing members on request with detailed test results for their portfolios.
Stress Testing of Clearing Guarantee System Resources (clearing fund)***
Stress Testing of Clearing Guarantee System Resources
(clearing fund + own funds of KDPW_CCP)***
4.     Reverse stress testing
KDPW_CCP performs reverse stress testing in order to identify market conditions under which the resources of the clearing guarantee fund may be insufficient to cover credit exposures.
Test results are analysed and considered in defining scenarios of extreme but plausible market conditions used in stress-testing described in point 3.
Reverse stress testing is performed at least quarterly. The testing programme and procedures including applicable stress-test scenarios are regularly reviewed at least annually.
Testing and analysis results and conclusions are regularly presented to the Risk Committee and other competent authorities and entities.