Risk Surveillance Activities...• Futures & commodity swaps • Credit Default Swaps (CDS) & equity...
Transcript of Risk Surveillance Activities...• Futures & commodity swaps • Credit Default Swaps (CDS) & equity...
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Risk Surveillance Activities Division of Clearing and Risk
Risk Surveillance Branch
Market Risk Advisory Committee June 20, 2017
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OVERVIEW
Division of Clearing and
Risk
Risk Surveillance
Branch
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Section 3(b) of the Commodity Exchange Act states that among the purposes of the Act are “to ensure the financial integrity of all transactions subject to this Act and the avoidance of systemic risk.”
The Risk Surveillance Branch (RSB) was established in 2005 expressly to support the Commission in fulfilling this objective.
RSB conducts independent assessments of the risks posed by market participants.
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RSB Responsibilities • Futures & commodity swaps • Credit Default Swaps (CDS) & equity swaps • Data and systems • 1.73 & 23.609 reviews, and 1.12 notices
• Interest Rate Swaps (IRS) • Foreign exchange swaps (FX) • Firm level risk surveillance • Reporting • Margin back testing • Margin model reviews
• Systemic stress testing program • SIMM™ (Standard Initial Margin Model) program development
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Growth in RSB Data Consumption –number of records ingested
0
10
20
30
40
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60
70
EOY 2012 EOY 2013 EOY 2014 EOY 2015 EOY 2016 EOY 2017(Est)
mill
ions
Part 39 (Daily Cleared Futures & Swaps)
Part 20 (Daily Commodity Swaps)
Part 16 & 17 (Daily Futures)
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Derivatives Clearing Organization (DCO) Reporting Under § 39.19
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Initial Margin Requirements – All Red = DCO, Blue = Clearing member (CM)
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On a daily basis, RSB aims to:
Identify positions that pose significant financial risk
Estimate the magnitude of the risks
Compare risks to assets
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MONITORING CLEARED RISKS
Division of Clearing and
Risk
Risk Surveillance
Branch
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POSITION REPORTS
Position risk summary reports generated per trader with the capability to aggregate like risk across DCOs (examples: Crude Oil, Natural Gas, Equities)
Futures equivalent delta position reports identify largest positions in each contract and commodity group
Reports to identify notable short option positions
Inter and Intra commodity spread position reports
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STRESS TESTING
Use a combination of proprietary and vendor risk management systems that interface
Automated stress tests produce more than 5 million records daily Software has ad hoc stress testing capabilities, allowing analyst
to create customized “worst case” scenario for an account
All cleared swaps data at the beneficial owner level
Ability to aggregate stress test results across DCOs and CMs, giving RSB the highest level of surveillance in the industry
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STRESS TEST RESULTS
Variation Margin unsec risk ENC
scenario - - - - - - - million USD - - - - - - - - - unsec/ENC Margin/ENC
trader 1 Hurricane Rita -X X -X X -76% 115%
trader 2 US Credit Downgrade from AAA rating -X X -X X -55% 254%
trader 3 Hurricane Rita -X X -X X -31% 50%
trader 4 TARP Announced -X X -X X -28% 55%
trader 5 TARP Announced -X X -X X -25% 88%
trader 6 Hurricane Rita -X X -X X -21% 20%
trader 7 AIG Bailout -X X -X X -21% 134%
trader 8 Hurricane Rita -X X -X X -20% 5%
trader 9 TARP Announced -X X -X X -20% 25%
trader 10 AIG Bailout -X X -X X -17% 22%
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DASHBOARD WITH HEAT-MAP & CHARTS B Y H I S T O R I C A L O R H Y P O T H E T I C A L S T R E S S S C E N A R I O
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POSSIBLE ACTIONS IF RSB HAS POTENTIAL CONCERNS ABOUT A TRADER’S RISK
Contact the CM If additional assets in the account appear adequate for the unique risk,
RSB may require weekly reporting by the CM If RSB continues to express concerns, CMs have:
required the trader to deposit additional margin asked trader to liquidate or move some positions to another firm acquired additional capital or lines of credit
Contact the DCO, which may require the CM to post additional margin
Contact the trader
Work with other CFTC Divisions as appropriate
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FIRM PROFILE”QUICK REPORT”
Used to convey information on a firm to management, when prompted by: Market events Corporate events Idiosyncratic risks
Types of information
List of clearing relationships Variation margin-to-initial margin percentage - Over the past
30 days, how many of firm’s accounts breached margin? Excess collateral held at CM or DCO Firm’s large customers Firm financial information
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OTHER PROGRAMS ANDPROJECTS
Division of
Clearing and Risk
Risk
SurveillanceBranch
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MARGIN BACKTESTING PROGRAM
Regulation 39.13 (g)(7) requires DCOs to conduct back testing to test adequacy of initial margin (IM).
RSB oversight includes continuous monitoring of the adequacy of DCO margin levels and coverage. Objectives are to:
Assess adequacy of IM for benchmark products at major DCOs
Monitor performance of DCO risk management policies related to establishing IM
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SYSTEMIC STRESS TESTING
CFTC’s Supervisory Stress Test of Clearinghouses (SST) report issued November 2016 Each DCO achieved “cover-two” CM risk was diversified among scenarios & across DCOs
RSB working to automate credit SSTs, as part of a program
Will use positions from “part 39” Futures portion to be automated in 2017 Swaps portion to be added in 2018
RSB currently working to incorporate liquidity
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EXAMPLES OF SPECIAL PROJECTS
SGCCI - Analysis of Central Clearing Interdependencies
CPMI-IOSCO Framework for Supervisory Stress Testing of Central Counterparties
Client porting Survey of clearing members Database to link customers across clearing firms and DCOs
Multi-CCP default exercise
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MULTI-CCP DEFAULT EXERCISE (CONT’D)
CME, Eurex & LCH drills began on April 24, 2017.
BoE, BaFin, Bundesbank & CFTC are nearly finished with post drill interviews.
Regulators will soon begin discussion of auction file format harmonization with CME, Eurex, ICE and LCH.
2018 plans for comprehensive porting exercise, encompassing the impact of the Supplemental Leverage Ratio.
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IN SUMMARY, RSB:
receives a large amount of data
is continually enhancing its ability to analyze these data
conducts independent risk assessments
sees more of the whole picture in derivatives markets than any other supervisory agency customers across CMs & DCOs CMs across DCOs Cleared and uncleared
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REGULATION 1.73 REVIEW PROGRAM
Division of Clearing and
Risk
Risk
SurveillanceBranch
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REGULATION OVERVIEW
Establish risk limits
Order screening
Stress testing House
Customer
Evaluation of ability to fund variation payments
Evaluation of ability to liquidate open positions
Test lines of credit
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PLANNING AND INITIAL REVIEW
Planning (4-6 weeks prior to visit) Contact clearing CM Engagement letter Record request
Initial review (1-2 weeks prior to visit) Preliminary review of requested records Discussion with firm contact Records analysis Rejection log
Reperformance Stress tests
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FIELDWORK
On-site review (1-2 days) 2 to 3 RSB staff members per review
Meet with key personnel at clearing CM
Compare CM’s stress results to CFTC values
Observe intraday risk analyst in action
Discuss accounts or traders that RSB deems risky
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REVIEW PROCESS
Exit interview Discuss each area of the review noting any
areas of concern or issues of non-compliance Recommendations
Solicit feedback from the clearing CM for ways
to enhance the review process
Report Note any issues of non-compliance
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TYPICAL FINDINGS
Interpretation margin adequacy evaluation
Lapse coverage during overnight
Liquidation analysis
Documented procedures and maintaining records
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BENEFITS OF PROGRAM
Unique view of positions across multiple DCOs
Relationship building with day-to-day risk personnel at all clearing CMs
Fieldwork enhances industry knowledge Affords the commission on-site analysis of the risk systems
and procedures being used
Clearing members have voiced support for review program Mutualization of risk
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Questions?
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