ICE CDS Margin Calculator ICE Link GUI. June 2016

Transcription

1 ICE CDS Margin Calculator ICE Link GUI June 2016

2 ICE CDS Margin Simulation Calculator Summary Buy-side firms and their counterparties can access the CDS Margin Simulation Calculator to simulate margin requirements via the ICE Link GUI Simply point and click on positions in the positions blotter to calculate margin as ICE Link already syncs all Buy-side positions with the Trade Information Warehouse Users can also upload sample portfolios, via direct GUI entry or spreadsheet upload, to run what-if scenarios Margin simulation calculations can be run on portfolios consisting of all current clearing eligible instruments (indices and single names) Margin is calculated using the Index Decomposition margin methodology Margin is always at the portfolio level (e.g. fund/legal entity) per FCM Provides users an analysis of the margin results for deeper transparency of the ICE margin methodology 2

3 Risk Management Methodology Initial Margin Modeling Approach Consider small set of hypothetical spread and price scenarios Approach is consistent with prime broker regimes for OTC Scenario-Based Stress Approach Monte Carlo Framework ICE CDS Risk Management Methodology Capture realistic distributional assumptions to model market behavior Provide reliable and efficient portfolio margining (hedging and diversification benefits) Generate large number of hypothetical scenarios to accurately estimate highquantile portfolio risk measures Reflect CDS market dynamics Credit spread behavior Risk asymmetry Liquidity and market depth Jump-to-Default losses Sensitivities to Interest Rate and Recovery Rate assumptions Realistic CDS spread shock distribution assumptions Heavy-tailed asymmetric distributions Time-changing volatilities Term structure shape changes Scenario-based framework Manageable number of scenarios Provide computational transparency and efficiency Monte Carlo benchmark Monitor performance of scenario approach Utilize 20,000 scenarios VaR and Expected Shortfall measures Re-value all instrument for each scenario Use same distribution assumptions as the scenario approach At least five-day risk horizon at 99% quantile Recognizes the shock of default in an OTC market such as CDS can take several days to absorb Dynamic risk measures Revise requirements as market conditions and CDS spreads change Compute daily Improve risk forecasting ability Recognize importance of stability for efficient capital allocation 3

4 Portfolio-Level Initial Margin Index Decomposition Margin Methodology Component Spread Response Risk Captured Instrument spread level variability and changes in credit spread term structure ( curve ) shape Approach Consider six scenarios Widening / contracting credit spread scenarios 3 curve shapes per credit spread scenario Recovery Rate Sensitivity Jump-To-Default Basis Risk Fluctuations of Recovery Rate (RR) assumptions Unexpected credit event losses not accounted for in the market valuation of Single Name (SN) instruments Differences in trading behavior of indexderived and outright SN positions Consider min. and max. reference entity specific RR to determine additional losses Include Loss-Given-Default for sold protection Consider liability associated with 1 credit event using an assumed SN-specific minimum RR Account for liquidity differences (market views are priced into more liquid index instruments sooner than SNs), and expected cash flow differences Liquidity Interest Rate Sensitivity Transaction (bid-offer) costs associated with unwinding CDS instruments in the event of a Clearing Participant default Fluctuations in interest rates Capture the proper liquidation cost for directional as well as well-hedged portfolios Estimate costs based on bid-offer width, derived from the end of day price discovery process Assess sensitivity of portfolio Net Asset Value to defaultfree discount interest rate changes 4 Concentration Initial Margin Costs associated with large position liquidation Total risk requirement Reflect market depth and liquidity Apply to positions that exceed pre-specified thresholds Increase requirements exponentially

5 Margin Calculator Overview Index Decomposition/Offset Methodology Main Methodology Elements Liquidity and Concentration s Based on original Index and Single Name positions Level I Portfolio Benefits: Index Decomposition Notional-Based Approach Provide long-short offsets (notional netting) between Indexderived and outright SN positions Basis Risk s Generate Basis Risk (BR) s during decomposition Jump-to-Default (JTD) s Determine JTD s based on the SN Net Notional Amounts resulting from the decomposition process Risk Factor Spread Response s Estimate P/L for worst-case hypothetical scenario Two credit regimes (Widening / Contracting) Three curve shape regimes Illustration of Methodology Implementation Liquidity s Index Positions Index-Derived Single Names Offsets Outright Single Names Index Decomposition Step: Long-Short Notional Based Offsets Jump-To-Default s Concentration s SELL-CORP IG 3Y SELL-CORP IG 5Y SELL-HY 5Y BUY- CORP IG 5Y SN Net Notional Amounts Liquidity s BUY-ENERGY IG 3Y BUY- CONS IG 5Y BUY- INDU IG 5Y SELL- TMT IG 5Y SELL-TECH IG 5Y Concentration s Single Name Positions Basis Risk s Level II Portfolio Benefits: Risk Factor Correlation-Based Approach Provide long-short and diversification benefits for residual positions based on Kendall tau rank order correlations Correlation- Based Portfolio Benefits* Residual Post- Decomp. Positions IR Sensitivity s Interest Rate & Recovery Rate Sensitivity s Assess impact of fluctuations Portfolio Spread Response RR Sensitivity s 5

6 Margin Calculator Overview Multi-Currency Portfolio Benefits Multi-Currency Methodology Elements Risk Charges Applied to Sub-Portfolio Per Currency Calculation separates multi-currency portfolio trades into subportfolios per currency and applies normal risk calculation charges (Basis Risk, Interest Rate Risk, Recovery Rate Risk, Liquidity & Concentration Risk) Level I Portfolio Benefits: Index Decomposition Notional-Based Approach Provide sub-portfolio currency specific long-short offsets (notional netting) between Index-derived and outright SN position Level II Portfolio Benefits: Risk Factor Correlation-Based Approach Provide long-short and diversification benefits for combined subportfolio currencies residual positions based on Kendall tau rank order correlations in per sub-portfolio calculation Risk Factor Spread Response s Estimate P/L for worst-case hypothetical scenario for combined sub-portfolios Two credit regimes (Widening / Contracting) Three curve shape regimes FX risk (haircut) applied to multi-currency offsets Jump-to-Default (JTD) Calculation JTD initially calculated per sub-portfolio; worst loss of short position selected All JTD converted to single currency with applied FX rate Worst loss of all sub-portfolios selected, with FX risk (haircut) applied if FX rate applied to selected loss 6 Illustration of Multi-Currency Methodology

7 Margin Calculator Tool Launched From a Transaction Launch Projected Margin from the Trade Affirm-Allocation (or) Trade Details Screen Margin Calculator Results Screen 3 1. Prior to clearing a trade, any party to the transaction can calculate the clearing house projected initial margin by selecting the View Projected Margin button after providing FCM and allocation details 2. After selecting the View Projected Margin button, users may select to view the margin amount weighted against all existing cleared positions from yesterdays end of day, only today s trades, all trades (selecting both yesterday and today s trades), or view the isolated margin amount (deselecting yesterdays and today s trades) and select OK to run the calculations 3. The calculator returns the margin results for each fund/portfolio (separate row for each portfolio-fcm combination; users may optionally the calculation results The margin tool may be accessed pre-trade via the New Deal-Upload option in the Menu (or) the GoldSync+ Positions Blotter Note: The Simulation option is for future eligible instruments margin testing or for Self Clearing Participants for ICE Clear Europe 7

8 Margin Calculator Tool Using Existing Positions Users may run hypothetical Margin calculations on noncleared clearing eligible positions in the ICE Link Position Blotter to project the clearing house required minimum margin amounts To calculate margin from the Position Blotter, users may: 1. Filter positions eligible for margin simulation 2. Select All (or) Specific Positions 3. Click the Margin button and select a potential FCM Note: A. ICE Link automatically synchronizes all client DTCC warehouse positions In the Position Blotter, simplifying margin calculations B. Additional positions may be manually entered or uploaded via spreadsheet * C. Cleared trades results are reported in the clearing reports * Note: Buy-side firms have the ability to upload positions for testing clearing house margin requirements by selecting the Upload feature in the GUI Menu, see the Help Documents screen for more details D. The Simulation checkbox is only for ICE Clear Europe calculations for Self Clearing members or for testing with new instruments with ICE Clear Credit 8

9 Margin Calculator Tool Margin Risk Results View all portfolios with summary margin information per portfolio A. 6 key risk components: Spread, Basis, JTD, Liquidity, Concentration and Interest Rate Risk B. FX Rate, Haircut, Equivalent IM and Equivalent Currency for multi-currency portfolios 2. Access Margin Simulation Guides in the results screen 3. Easily share margin results via with one click or export results to spreadsheet/file 9

10 Margin Calculator Tool Spreadsheet Upload of What-if Trades 1. Hypothetical trade positions may be uploaded directly to the Margin Calculator via spreadsheet (CSV file) for testing; the upload template and template instructions are available in the Help Documents screen After selecting the Margin option in the menu, select Upload in the Margin Calculation criteria screen, select the spreadsheet file (CSV) and the Open button to upload (any upload displayed in the errors window). 3. Select the Clearing House the hypothetical portfolio will be cleared to. 4. Select OK. 4 Note: ICE Clear Credit and ICE Clear Europe trades must be uploaded separately; calculations can be mixed with existing noncleared, cleared, and hypothetical trades 10

11 Position Blotter Manual Position Upload/Pre-Trade Margin Test Manual Position Upload (Margin Testing) 1 1. To manually upload a portfolio (position/ trade level) for margin testing, select the New Deal- Single Name or Index option in the GUI menu; On a Pre-trade basis 2 2. In the trade entry screen, select a counterparty (an Executing Broker) and a clearing eligible credit, and select OK when finished. 3. On a Pre-trade basis, users may enter trade details and select the View Proj. Margin button without actually uploading the trade 3 Note: A list of clearing eligible credits and simulation only credits are available in the Margin Upload file in the help documents screen 11

12 ICE Contacts ICE Link Client Services North America Europe + 44 (0) OTC Financial Sales ICESales.OTCFinancial@theice.com North America Europe + 44 (0) Internet 12