Collateral margin is defined by the risk for the closeout of a portfolio faced by the clearinghouse.

  • Risk Measure

    In order to calculate the risk for the closeout of a portfolio consisting of positions and collateral from several markets and asset classes, B3 developed an innovative risk measure: Close-Out Risk Evaluation (CORE).

    Key CORE benefits:

    • It calculates the worst accumulated cash flow during the portfolio closeout process
    • It calculates the joint risk for positions and collateral
    • It models three types of risk: market, liquidity for positions and collateral, and cash flow
    • Accurate closeout strategy: position closeout transactions and collateral execution
    • Severe loss (stress test): confidence level of 99.96% or 10Y crisis
    • It considers 10,000 scenarios: historical (since 2002), quantitative and prospective
    • Multi-horizon: daily closeout operations (1 to 10 days)
    • It apllies full valuation
  • Risk Faced by the Clearinghouse

    Originally, the risk faced by the clearinghouse is the credit risk of its participants.
    After a default, the CCP has to close-out the defaulting customer’s portfolio.
    During the closeout processes, the clearinghouse faces a risk of severe losses generated by:

    • Market risk (price fluctuation of positions and collaterals)
    • Liquidity risk (price fluctuation caused by the liquidation of the position against the normal trading flow)
    • Cash flow risk (non-availability of liquid funds to meet financial obligations)
  • Margining Cycle

    Cycle consists of four moments:

    1. Collateral balance calculation;
    2. Collateral posting;
    3. Default window: period in wich the default may occur;
    4. Closeout period

    ciclo-colaterizacao-EN.png

    • To model closeout is necessary assume that margin calculation and collateral posting were performed
    • Daily cycle: default occurs after collateral posting on T+1 and until settlement window on T+2
    • Closeout strategy: set of operations to closeout positions and execute collateral
    • Closeout period: from the last moment of the default window until the end on T+10
  • CORE Components
    1. Liquidity risk:
      • Close-out operations depend on the liquidity of positions and collateral
      • Individual daily liquidity parameters guarantee orderly liquidation processes
      • Liquidity parameters: estimated on market microstructure data (order-book)
    2. Mapping cash flows into close-out risk horizons:
      • All cash flows generated during the close-out period are mapped in time
      • These cash flows depend on the features of positions and collateral:
        - Trading model: listed vs. OTC
        - Settlement cycle: T+0, T+1, T+2, T+3, … , T+N
    3. Market risk:
      • A scenario for a certain risk factor: 10 simulated shocks (1, 2, … 10 days)
      • A scenario for n risk factors: a matrix with n lines and 10 columns
      • The scenario generation process will be explained in a moment

    CORE is a risk measure calculated through three steps

    componentes-core-EN.png

  • Example 1

    Toy Problems

    Base Case:

    • Position: short on 135 contracts on a hypothetical future
    • Future contract cash flow: daily variation margin settlement in the next morning
    • Collateral: cash
    • Liquidity risk parameter: up 200 / day for an orderly liquidation process
    • Market risk: suppose mapping into only one risk factor; 10,000 scenarios

    Close-out strategy (trades start on T+2):

    • Worst case: Buy 135 contracts at the end of T+2

    exemplos1-EN.png

    Calculation of the worst accumulated cash flow by each one of the 10.000 scenarios
    1 scenario, 1 line, 1 10-day price path: accumulated shock in each 10 risk horizons

    horizonte-de-risco-EN.png

    • Worst case for a short position on one risk factor: extreme positive shocks
    Risk horizon (days) 1 2 3 4 5 6 7 8 9 10
    Accumulated shock 8,4% 12,0% 15,4% 18,0% 20,0% 21,5% 22,6% 23,4% 24,0% 24,5%
    Daily shock 8,4% 3,3% 3,0% 2,3% 1,7% 1,3% 0,9% 0,7% 0,5% 0,4%

    estrategia-de-encerramento-EN.png

  • Example 2

    Case 1 - liquidity risk parameter changes from 200/day to 100/day

    Longer and riskier close-out, higher margin

    exemplos2-1.png