Review of Participation Requirements in Central Counterparties – March 2009 List of tables

Table 1: Australian Central Counterparties’ Risk-management Frameworks

Table 2: Affected Participants’ Capital Relative to Risk-based Requirements

Table 3: International Comparison of Risk Frameworks

Table 4: Impact on Participants’ Profitability of Raising Debt-like ‘Core Capital’

Table 5: Providers of Third-party Clearing Services

Table 6: Alternative Third-party Clearing Models Processes outsourced

Table 7: Exposures to ACH Generated by Affected Participants

Table 1: Australian Central Counterparties’
Risk-management Frameworks
Central
counterparty		 Minimum capital
requirement		 Margins
(coverage)		 Paid-up
participant
contributions		 Order of application
of guarantee fund
ACH Multi-asset $2m (due to increase to $10m, January 2010) and risk–based requirement Equity:
- Additional(a)
Derivatives:
- Initial
(99.7%)
- MTM(b)
- Additional 		No - ACH/ASX capital
($150m)
- Insurance ($100m)
- Emergency assessments
on surviving participants
($300m total)
SFECC
Derivatives 		$5m (due to increase to $10m, or $20m, if a third-party clearer) - Initial
(99.7%)
- MTM
- Additional 		Yes - Defaulter's contributions
- SFECC/ASX capital ($100m)
- Non–defaulters’
contributions
($120m total)
- Insurance ($150m)
- Emergency assessments
on surviving participants
($30m total)
Note: The information in this table is taken from ACH and SFECC rulebooks and procedures and data presented in Reserve Bank assessments of the central counterparties.
(a) Additional margin is that applied in respect of large or concentrated exposures. In the case of ACH, such margin is applied where large exposures are identified through stress testing. For cash equities, this is not currently classified as margin in the ACH Rules, since the funds are not reserved solely to meet the default of the participant that posted them.
(b) MTM = mark–to–market margin.
Table 2: Affected Participants’ Capital Relative to Risk-based Requirements
Core liquid
capital $m 		Number of
participants

 Liquid capital
(LC) Average $m 		Total risk
requirement
(TRR) Average $m 		Ratio LC/
TRR Average
2–3 6 2.09 0.27 7.8
3–5 4 2.43 0.76 3.2
5–7 7 5.96 0.72 8.3
7–10 0 – – –
Note: This table is based on data provided by ASX as at end–November 2008 (adjusted for subsequent resignations or acquisitions/mergers of participants).
Table 3: International Comparison of Risk Frameworks
All values shown are in local currency terms
Central
counterparty 		Minimum capital
requirement(a) 		Margins (b)(c)
(coverage)(d) 		Paid–up
participant
contributions 		Order of application
of guarantee fund
CDP
(Singapore)
Equities 		S$5m None Yes - Defaulter's contributions
- CDP capital (S$25m)
- Non-defaulters’
contributions (S$15m
total)
- Insurance (S$45m)
- Standby letter of credit
(S$75m)
CDS
(Canada)
Equities 		None, but
participants must
observe minimum
standards applied by
their relevant
regulators 		- Initial
(99%)
- MTM 		Yes - Emergency assessments
on surviving participants
(potentially unlimited)
EMCF
(Netherlands)
Equities 		€7.5m – €25m - Initial
(99.7%) 		Yes - Defaulter's contributions
- Non-defaulters’
contributions
- Emergency assessments
on surviving participants
EuroCCP
(UK)
Equities 		Excess of €20m – €70m
over regulatory
requirements 		- Initial
(99%)
- MTM 		Yes - Defaulter's contributions
- EuroCCP capital
- Non-defaulters’
contributions
HKSCC
(Hong Kong)
Equities 		HK$5m –
HK$300m 		- MTM Yes - Defaulter's contributions
- Non-defaulters’
contributions
NSCC
(US)
Equities 		US$0.1m – US$1m
over SEC
requirement 		- Initial
(97.5%) 		Yes - Defaulter's contributions
- Resources from cross-
guarantee arrangements
with DTC, FICC and OCC
- NSCC retained earnings
(min 25% of US$43m)
- Non-defaulters’
contributions
(US$6.6b total)
SIS x–clear
(Switzerland)
Equities 		None, but
participants must be
of particular
regulatory status 		- Initial
(99%)
- MTM		 Yes - Defaulter's contributions
- 50% of SIS default
provisions
- Non-defaulters’ contributions
(CHF 200m total)
- Emergency
assessments on surviving
partcipants
- SIS capital
CME Clearing
(US)
Derivatives 		US$2.5m - Initial
(95 – 99%)
- MTM 		Yes - Defaulter's contributions
- CME capital (US$60m)
- Non-defaulters’ contributions
(US$1.3b)
- Emergency
assessments on surviving
partcipants
(US$3.6b)
OCC
(US)
Derivatives 		US$2.5m - Initial
- MTM		 Yes - Participant contributions
(US$5.5b total)
- Emergency assessments
on surviving participants
OMX
(Sweden)
Derivatives 		SEK10m –
SEK500m		 - Initial
(99.2%)
- MTM 		No - Fund contains OMX
capital and retained
earnings (SEK925m) and insurance (SEK1.2b)
CC&G
(Italy)
Multi–asset 		€3m – €40m
for equities;
€10m – €40m
for derivatives		 - Initial
(97.5 – 99.8%)
- MTM 		Yes - Defaulter's contributions
- CC&G capital (€5m)
- Non-defaulters’
contributions (equities
and equity derivatives:
€750m total)
- Remainder of CC&G equity
Eurex
(Germany)
Multi-asset 		€2.5m – €25m
for equities;
€12.5m – €125m
for derivatives 		- Initial
(99%)
- MTM 		Yes - Defaulter's contributions
- Eurex reserves
- Non-defaulters’
contributions (€1b total)
- Eurex equity (€105m)
- Parental guarantee
(€700m)
JSCC
(Japan)
Multi-asset 		¥300m - Initial
- MTM 		No - Default fund contributions
by member exchanges:
equities ( ¥10.8b);
derivatives ( ¥10.4b)
- JSCC capital ( ¥10.6b)
- Emergency assessments
on surviving participants
(unlimited)
LCH.Clearnet
Ltd
(UK)
Multi-asset 		£5m for equities
(up to US$5b
for interest
rate swaps) 		- Initial
(99.7%)
- MTM 		Yes - Defaulter's contributions
- LCH capital (£20m)
- Non-defaulters’
contributions
(£594m total)
- Remainder of LCH
capital (€209.3m)
LCH.Clearnet
SA
(France)
Multi-asset 		€10m – €37.5m - Initial
(99.7%)
- MTM 		Yes - Defaulter's contributions
- Non-defaulters’ contributions
Note: The information in the table is taken from a variety of public sources, including central counterparties’ websites, rulebooks, self-assessments and guidance documents.
(a) Where a range is shown, this typically reflects the application of different requirements for participants of different status; eg, higher requirements for third–party clearers.
(b) MTM = mark-to-market margin.
(c) CCPs typically have the power to levy additional margins from participants, often based on the observation of large or concentrated positions, or information on the financial standing of the participants.
(d) Coverage, where available, is the central counterparty's stated confidence interval for price movements in the cleared product. However, the quoted confidence interval will apply over different horizons, depending on the central counterparty, since different assumptions are made as to the time frame for close-out.
Table 4: Impact on Participants’ Profitability of Raising
Debt-like ‘Core Capital’
Core
capital
liquid 		Number of
participants 		Additional ‘core
capital’ required with
a minimum of $10
million 		Assumed
debt–like
component
of ‘core
capital’ 		2007/08
profits 		Ongoing
reduction
in profits if
$10 million* 		Per cent
decline
$m Average $m Average $m Average $m Average $m Average %
2–3 6 7.66 5.00 1.32 0.10 (7.6)
3–5 4 6.18 5.00 2.23 0.10 (4.5)
5–7 7 4.57 4.57 0.90 0.09 (10.1)
7–10 0 na na – – –
Note: This table is based on data on participants’ ‘core liquid capital’ provided by ASX as at end-November 2008 (adjusted for subsequent resignations or acquisitions/mergers of participants) and data on participants’ 2007/08 profits reported to ASIC.
* Assuming that participants make maximum use of the additional flexibility in raising debt-like ‘core capital’ (ie, they raise debt-like liabilities up to $5 million) and that the cost of raising funds is 2 percentage points higher than the return on investing them.
Table 5: Providers of Third-party Clearing Services
Provider Number
of brokers
Berndale Securities Limited* 25
Fortis Clearing Sydney Pty Limited 20
UBS Securities Australia Ltd 4
Citigroup Securities
Clearing Australia Ltd 		3
E*Trade Securities Limited 2
Macquarie Capital Securities (Australia) Ltd 1
Note: This table is based on data provided in an ASX Participant Bulletin on 17 October 2008. The data exclude currently suspended trading participants.
* A subsidiary of Merrill Lynch
Table 6: Alternative Third-party Clearing Models
Processes outsourced
Model Trading Clearing Settlement Client sponsor Comment
1
Traditional 		  Process outsourced Process outsourced   The model commonly applied in the retail market. The third-party clearer does not directly control the trade flow or maintain client relationships.
2
Clearing only 		  Process outsourced     This model is not currently utilised, but would be feasible if a broker wanted to maintain maximum control within a
third-party arrangement.
3
Referral broker
(white label) 		Process outsourced Process outsourced Process outsourced Process outsourced In this model, the broker outsources trading, clearing and settlement. It does, however, retain its market participant status as a referral broker.
4
Client
management 		Process outsourced Process outsourced Process outsourced   Here, the broker gives the third-party clearer control over trade flow as well as clearing and settlement, but continues to sponsor client holdings in CHESS. The broker therefore maintains all client relationships.
Note: This table is based on information gathered from ASX and providers of third-party clearing services during the consultation process.
Table 7: Exposures to ACH Generated by Affected Participants
Normal course Stressed
circumstances
Cash equity
exposures(a) 		Derivatives
exposures(a) 		Capital
Stress Test(b)
Core liquid capital
$m 		Number of
participants (c)

 Average
$m		 Max
$m		 Average
$m		 Max
$m		 Average
$m		 Max
$m
2–3 6 0.20 1.72   1.37 3.25   0.36 3.99
3–5 4 0.12 0.67   0.68 1.39   0.31 3.15
5–7 7 0.50 3.72   0.57 1.42   0.74 6.12
7–10 0 – –   – –   – –
Note: This table is based on data on participants’ ‘core liquid capital’ provided by ASX as at end-November 2008 (adjusted for subsequent resignations or acquisitions/mergers of participants) and exposure data for the quarter to end-September 2008.
(a) In the case of derivatives, initial margin collected is a reasonable proxy for normal course exposures faced by the central counterparty (ie, this is the margin collected to protect the central counterparty against adverse price movements arising before a defaulting participant's open positions can be closed out). For cash equity no margin is routinely collected, but ACH does calculate ‘notional’ initial and mark-to-market margins for exposure-monitoring purposes. The sum of both notional margin amounts is taken as the proxy for exposure in this case.
(b) Projected stress exposures offer a gauge of potential losses to the central counterparty across both derivatives and cash equities that could crystallise in more extreme market scenarios, in this case adjusting for any margin already collected on derivatives exposures. Capital stress tests, conducted daily, are based on actual participant clearing positions stressed against severe but plausible price movements.
(c) Not all participants are active in both the cash equities market and the derivatives market. Averages are therefore across only those generating exposures.