LME Week - VaR and Clearing Update

Transcription

1 LME Week - VaR and Clearing Update Friday 3 November 2017 SETTING THE GLOBAL STANDARD

2 Value at Risk (VaR)

3 Initial margin dilemma Regulatory focus vs. Risk focus Regulatory focus: 1. Rule compliance 2. Procyclicality control in Europe 3. Conservativeness Risk focus: 1. Risk Appetite 2. Market Efficiency 3. Accuracy vs Simplicity 3

4 How we currently calculate initial margin A simple illustration 16 Scenarios P&L Matrix Parameters SPAN Portfolio Margining Scanning Risk 36 Individual Spread Buckets Parameters Total Spread Risk Inter-Commodity Credit TOTAL SPAN INITIAL MARGIN 4

5 How does VaR calculate initial margin Single portfolio view P&L Distribution VaR Portfolio Margining TOTAL INITIAL MARGIN Key Differences SPAN looks at combinations of positions with a portfolio and aggregates them all ; VaR looks at how the whole portfolio would perform together 5

6 Different types of VaR How do we choose the right VaR approach Parametric VaR Parametric VaR with Cornish-Fisher Simple Historic VaR Filtered Historic VaR without Random Sampling Filtered Historic VaR with Random Sampling Markov Chain Monte Carlo + Generalised Pareto Distribution Crystal Ball/Time Machine Not so good Model Accuracy Good Good Model Complexity Not so good Good Good Good Implementation Risk Output Stability Not so good Not so good Good Good Replication Not so good 6

7 What does it mean for you as clients Pros and Cons comparison 1. Widely understood and adopted. 2. Easy to communicate. 3. Relatively stable. 1. Rigid structure 2. Inefficient risk assessment for spreads 3. Reliance on add-ons SPAN VaR 1. Efficient risk assessment. 2. Custom designed for LME Clear s markets. 3. Less reliant on add-ons 4. More reactive to current market conditions 1. More complex calculation. 2. Market education required on new methodology. 3. Less stable margin rates. 7

8 Next steps Parallel workstreams Timeline H H H Regulatory Independent Validation Regulatory Approval Ongoing engagement Market Engagement Risk Advisory Group Market Education ISVs & System Specs Member Test Risk Related VaR design Model changes post Validation Model Detail and Data Market Education System Development Project Initiation Business Analysis and Requirements IT Build and Test Launch 8

9 Risk management Commitment to Transparency and Engagement Website Principles and Key Risk Processes slide pack Detailed Service Description CPMI Quantitative disclosure quarterly since Sept 2015 Relationships Dedicated RMs Operations & Risk teams Regular CRO meetings Default management contacts Risk Advisory Group Quarterly meetings Input to Executive and Board Risk Committee Board Risk Committee 4 member representatives 2 year review of tenure 9

10 Clearing update

11 Strategic Pathway Overview 11

12 Clearing model Optimise margin methodologies and asset mobilisation 12

13 Contacts Relationship Management The role of our relationship management team has been expanded to cover both LME and LME Clear businesses Our group address is Aly Wilson +44 (0) Anthony Payne +44 (0) Bethan Wilde +44 (0) Neil Morris +44 (0)

14 Disclaimer Nothing in this document constitutes an offer or a solicitation of an offer to buy or sell any security or other financial instrument or constitutes any investment advice or recommendation of any security or other financial instrument. To the best of LME Clear s knowledge and belief, statements made are correct at the time of going to press. All such statements and all opinions expressed herein are published for the general information of readers but are not to be taken as recommendations of any course of action. LME Clear accepts no liability for the accuracy of any statement or representation. LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from US futures and options customers for trading on the LME pursuant to CFTC rule LME Clear Limited A private limited company, registered in England no An HKEX Company. LME Clear is a Recognised Clearing House authorised and regulated in the UK by the Bank of England. 14