Risk Management and Financial Institution Chapter 17 —— Regulation of the OTC Derivatives Market

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Risk Management and Financial Institution Chapter 17 —— Regulation of the OTC Derivatives Market

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• exchange —— 存在exchange clearing house，requires margin

• OTC trade directly with each other,no need to disclose the ditails

17.1 Clearing in OTC Markets

• 两种方式：
  • central clearing 有CCP，central counterparty 存在
  • bilateral clearing

17.1.1 Margin 保证金

• Variation margin 变动保证金—— reflect the change in the value of a derivatives portfolio

• if outstanding derivatives have a value of +$\ast V\ast toAand–$V to B at a particular time, B should have posted a total of $V of collateral with A by that time

• To allow for adverse movements in the value of the portfolio during a period prior to default when no margin is being posted, market participants sometimes require initial margin in addition to variation margin

• reflects the risk of a loss due to adverse market moves and the costs of replacing transactions在违约变现的情况下，如果价格往不利方向变动，则可以用初始保证金弥补

• hair cut —— This means that the market value of the securities is reduced to determine their value for margin purposes

• initial margin 是有利息的

17.1.2 Central Clearing

• 通过Central Clearing 交易双方没有信用风险

• 三家大型的CCP in the world

  • Swap Clear(part of LCH Clearnet in London)
  • ClearPort(part of the CME Group in Chicago)
  • ICE Clear Credit(part of the Intercontinental Exchange)

• Cash and Treasury instruments are usually accepted as margin by CCPs

• he initial margin required from a participant at any given time reflects the volatility of the value of its total position with the CCP

• CCP 要求会员贡献default fund

• waterfall defines who bears the loss：

  • The initial margin of the defaulting member
  • The default fund contribution of the member
  • The default fund contributions of other members
  • The equity of the CCP

17.1.3 Bilateral Clearing

• 使用ISDA master agreement
• 细节包括抵押的使用，品种，haircut使用在CSA，信用支持附件中

17.1.4 Netting

• all transactions between two parties are considered to be a single transaction when：

  • collateral requirements are being calculated计算抵押品时
  • early terminations occur because of a default违约提前终止时

• netting 可以降低信用风险，减少initial margin

17.1.5 Events of Default

• early termination的情形包括：

  • Events of default include declarations of bankruptcy
  • failure to make payments as they are due
  • failure to post collateral when required

• derivatives transactions 不需要法院命令即可处置抵押品

17.2 Post Crisis Regulatory Changes 危机后监管变化

• 变化包括：
  • 要求所有标准OTC衍生品在CCP结算
  • 标准OTC衍生品需要通过电子平台进行交易，价格更透明，这个平台称为 OTFs，organized trading facilities
  • 所有的交易都报告到交易中心知识库中
  • approximately 75% of OTC transactions are now cleared through CCPs while 25% are cleared bilaterally

17.2.1 Uncleared Trades

• 那些没有经过CCP的交易，必须提交保证金
• 不仅仅是变动保证金，还有初始保证金

17.2.2 Determination of Initial Margin: SIMM 如何决定初始保证金

• Note that initial margin is the mirror image of VaR

• This is because exposure increases as the uncollateralized value of a portfolio increases

• Initial margin is specified in the regulations for portfolios of uncleared transactions between two parties as the gain in value over 10 days that we are 99% certain will not be exceeded in stressed market conditions

• 现如今的方法，由ISDA提供，SIMM方法：(不懂)

  • Delta and Vega

• gamma，假设delta是0，no cross gamma

• Estimates of the mean and standard deviation of portfolio change over 10 days：

17.3 Impact of the Changes

• Post-crisis, the vast majority of OTC derivatives will require initial margin

• A related consideration is that, as more transactions are cleared through CCPs, more of the funds of a financial institution will be tied up in default fund contributions.

17.3.1 Liquidity 流动性

• 金融工具的流动性在任何时候都有可能枯竭
• 在未来，二维的评估对银行来说是必须的，一个是capital要求，还有就是流动性

17.3.2 Rehypothecation 再抵押

• 在危机之前，因为再抵押，抵押品的价值其实翻了4倍
• 巴塞尔委员会以及IOSCO机构要求，初始保证金只能再抵押一次

17.3.3 The Convergence of OTC and Exchange-Traded Markets

• 交易所与OTC的界限逐渐模糊

• 更多的OTC交易被定性成为“标准”

• 交易所降低“标准”从OTC市场夺取市场

17.4 CCPs and Bankruptcy

• CCP功能：
  • choosing members
  • valuing transactions
  • determining initial margins and default fund contributions