The Central Counterparty, BME CLEARING, puts itself before both counterparties in a financial transaction. When interposed, several risks affect the CCP. The main one would be the counterparty risk, also called credit risk. However, there are other risks that affect BME CLEARING, amonge them concentration risk and the wrong way risk. In the side menu, you would be able to find further details about these three risks.
Types of Risks
Credit risk (also called counterparty risk) can be defined as the loss assumed by an economic agent in a financial transaction if its counterparty fails to fulfil its obligations.
As an example, the loss of a counterparty in a loan that is not paid or in a derivatives contract when the other counterparty defaults.
Therefore, is the risk on a value of an asset caused when the counterparty of the contract defaults.
When trading bilaterally (OTC), there must be taken into account critical aspects such as the rating of the counterparty or de credit spread in order to choose the counterparty of the trade and hedge the risk, for example, via Credit Default Swaps (CDS) or any other instrument that enables to cover the counterparty risk.
Trading bilaterally (OTC) has counterparty or credit risk.
With a CCP, the counterparty or credit risk is transferred entirely to the CCP and is almost entirely mitigated in the case of the counterparties.
BME CLEARING, as Central Counterparty, novates the trades, putting itself before both counterparties, performing registration, central-counterparty, clearing and settlement functions.
The main purpose of BME CLEARING is to eliminate the counterparty risk and to ensure the transactions are completed successfully.
For that, BME CLEARING measures risk exposure to its counterparties in real time using its risk management system, considering the current collateral posted.
Besides, BME CLEARING establish solvency requirements for Members based on their category in the CCP, BME CLEARING require the posting of Margins, applies Variation Margin in Futures and xRolling contracts, sets Risk, Margin Call and Concentration Limits, performs stress tests for Margin calculation and follows the Default Waterfall in case of Default.
Cuando en una cartera se tiene una posición con una exposición superior a un determinado nivel, se dirá que la cartera está concentrada, es decir, tiene un mayor riesgo de concentración en dicha posición.
Lo mismo sucedería si el colateral en valores que se aporta para cubrir la garantía también se concentrara en unos determinados valores. Habrá riesgo de concentración en el colateral aportado.
La finalidad de BME CLEARING es la de eliminar el riesgo de contrapartida y garantizar el buen fin de las operaciones constituyéndose como contrapartida única en todas las operaciones que se realizan.
Si una contrapartida incumple, BME CLEARING intentará primero cerrar las posiciones de dicha contrapartida e intentará traspasar las posiciones de sus clientes a otro Miembro y podrá ejecutar total o parcialmente el colateral en valores en que se hayan materializado las Garantías.
Si existe una concentración en la posición o en el colateral, el proceso se complica. Una gran posición es más complicada de cerrar.
Para evitar el riesgo de concentración en el caso del colateral aportado como garantía, se establecerán Límites de Concentración que están explicados en detalle en el apartado de “Activos Admitidos” dentro “Gestión de Garantías”.
En el caso de que una Cuenta de Posición registre una posición que pueda considerarse como “gran posición”, BME CLEARING aumentará en un determinado porcentaje el intervalo de la Garantía por Posición exigida, según se especifica en las Circular “Garantías Adicionales para Grandes Posiciones” de cada Segmento.
Para determinar si una posición es grande o no, se usará el Volumen Medio Diario, explicado en detalle en la Circular General “Volumen Medio Diario”.
As a central counterparty, BME CLEARING has exposure to both counterparties in a transaction and also has credit risk exposure to the issuers of the Margin Collateral accepted in the form of securities.
Both exposures are correlated with the credit quality of the counterparty and the issuer of the security.
If this credit quality suffers a downgrade, the risk of default increase and also the credit exposure, both against BME CLEARING.
This is what is called wrong way risk.
BME CLEARING has measures to avoid or at least mitigate the correlated collateral and the wrong way risk.
For example in the Cash Equities Segment, when stress test is done in securities within the Banking sector, in those securities where the issuer is also a Clearing Member in BME CLEARING, in one of the scenarios of the stress test a -50% downward price movement is applied to that security, applying to the rest of securities the fluctuations indicated in the Cash Equities Segment Circular “Stress Test Calculation Parameters”.
One example regarding mitigation of wrong way risk in the collateral posted in the form of securities are the Haircut Adjustment for the different Government Debts eligible as collateral but not included in the Reference Basket, based on the differential in respect of the latter. If the return on any Government Debt (eligible as collateral but not included in the Reference Basket) in the secondary market, as based on information obtained from the Reuters or Bloomberg agencies is higher than the return of the Reference Basket over two consecutive days, and according to the levels set out in the “Valuation of Securities posted as Margins” Circular, the haircuts of that particular Government Debt will be increased for bond buyer positions, resulting in an increase of the Initial Margin required.