BOND ETP RISK POLICIES AND PROCESSES

Transcription

1 BOND ETP RISK POLICIES AND PROCESSES Date: 9 th Feb 2018 Version: 1.0 Author: JSE Post Trade Services Please note: The purpose of this document is to provide detailed information of the Bond ETP risk policies and processes for review and comment by the various market stakeholders. The document includes the agreed outcomes from the various market workshops that were held to date, as well as the key principles that have been agreed upon by the project steering committee. All outstanding discussions/decisions post the market workshops have been noted and will be updated in due course as details are finalised and approved by the project steering committee. Once feedback is received from all market stakeholders, a final version of the risk policies and processes will be published.

2 1. Introduction South Africa has implemented an electronic trading platform ( ETP ) for bonds traded by Primary Dealers (PDs) appointed by National Treasury (NT). The purpose of this document is to articulate the Bond ETP market s approach to the calculation and management of initial margin (IM). In this market, bilateral exposures will be maintained between primary dealers (PDs), without an entity interposing itself as the central counterparty to two trades. Credit support will however be available in the form of IM, placed on a daily basis. IM will be available to performing counterparts to cover the market risk associated with replacing a trade leg that is unsettled by a non-performing (defaulted) counterpart. This document should be read in conjunction with the following latest documents: Bond ETP Settlement Model (v1.0 published 2 nd Feb 2018) Bond ETP Initial Margin Methodology (v4.0 published 9 th Feb 2018) Bond ETP Default Management Policy (v1.0 published 9 th Feb 2018) 2. Margin governance The Bond ETP Market Committee, chaired by National Treasury (NT), will be responsible for the oversight of the initial margin risk methodology, including any changes to the methodology, review of model performance, model validation, and consideration of the IM profile and adequacy for the Bond ETP market. 3. Placement of initial Margin (IM) It is envisaged that each PD will place their required IM amount in an account with the Corporation for Public Deposits (CPD). There will be an IM account on behalf each individual PD, held in the name of the JSE. However, the IM placed by a particular PD into this account does not become the property of the JSE and each PD faces the CPD as an investment counterparty, and not the JSE. It is anticipated that each PD will specify a cash account to be linked to each individual IM account held with the CPD. It is envisaged that interest on IM will be paid directly into these linked cash accounts. The exact structure and management processes of these accounts with the CPD will be finalised by the end of February Bond ETP Risk Policies and Processes (Version 1.0) 2

3 4. Daily IM determination a) The Bond ETP IM methodology has been developed by the JSE and approved by all PDs and the NT. b) IM will be calculated by the JSE (Post Trade Risk Department) on a daily basis, after market close, using the methodology described in the document Bond ETP Initial Margin Methodology (and as approved by the Bond ETP Market Committee). c) The JSE will publish individual reports to each PD highlighting their minimum required IM balance before 19h00 on each day. These reports will be published as pdf reports to an FTP directory for download. d) In addition, the JSE will publish a consolidated report highlighting the minimum required IM balance for each PD to the NT and the South African Reserve Bank (SARB). e) If the minimum required IM balance for a particular PD exceeds the PD s available IM balance, the particular PD will be required to pay the difference to their respective CPD account by no later than 09h00 on T+1. f) If the available IM balance for a particular PD exceeds the PD s minimum required IM balance, the difference will be paid from the respective CPD account to the particular PD s specified cash account by no later than 09h00 on T+1. g) IM will be calculated and called only once per day, and no intraday calculation or margin calls will be done. h) On a daily basis, the JSE will perform back-testing by comparing each PD s observed profit and loss against said PD s available IM balance. Exceptions will be anonymized and reported to the Bond ETP Market Committee, which is responsible for deciding on an appropriate course of action. i) On a quarterly basis, the JSE will provide each PD and the NT with a set of quantitative disclosures report, with the content of such report provided in Appendix 1. Bond ETP Risk Policies and Processes (Version 1.0) 3

4 5. Calculation errors IM calculation errors can occur as a result of either: Anomalies in the model parameters; Anomalies in the trade data upon which the calculations are based. Trade cancellations not being affected by 16h00 on T. If a trade cancellation is affected after this time, the JSE will include said trade in the data used to calculation net unsettled positions. An IM calculation error will be treated as follows: If the quantum of the error is established before 12h00 on T+1, the JSE will publish the corrected IM reports and notify the affected PDs, SARB and NT of the quantum of any corrective payments that need to be made. If the quantum of the error is established after 12h00 on T+1, any potential corrective payments will only be facilitated on T+2, as a result of the end-of-day IM reports published on T Parameter updates All initial margin parameters will be published on the JSE s website. The exact location where the files containing these parameters will reside will be finalised before the end of February The JSE will publish new parameters at least one business day prior to implementation. 7. Balancing Although the JSE will publish all parameters associated with the IM calculation, the JSE will not rely on PDs, NT or SARB for balancing against the daily IM calculations. 8. Interest payments It is anticipated that interest payments will be made on a monthly basis, on the first business day of the month, to each PD s cash accounts linked to respective CPD accounts. The exact structure of the interest payments will be finalised by the end of February Bond ETP Risk Policies and Processes (Version 1.0) 4

5 9. Appendix 1 Disclosures The ETP Market Committee Shared Quantitative Disclosures will be reported quarterly. This report will contain the information described below. 1. Total value of pre-funded default resources (current value, together with the peak and average over quarter) 1.1. Current exposure 1.2. Potential future exposure 1.3. Prefunded - Aggregate Participant IM 2. Results of back-testing of IM: 2.1. Number of times over the past 12 months that coverage held against any account fell below the actual MTM exposure of that PD account Number of observations Achieved coverage level 2.4. Peak and Average of the last 12 months of the size of uncovered exposure where breached of IM coverage have occurred. 3. Concentration (current value, together with the peak and average over quarter) 3.1. Top 2 largest PD IM (percentage of total IM) 3.2. Top 2 largest PD notional outstanding (percentage of total) 4. Product Liquidity (Current Value + Both Peak and Average of the last 3 months) 4.1. The average daily trading volumes at individual bond level; 4.2. The average daily open interests (as unsettled notional value) at individual bond level. Bond ETP Risk Policies and Processes (Version 1.0) 5