Knowledge Base
Describe collateral and risk calculation mechanisms in clearing processes
Which principle governs the sizing of the default fund under EMIR?
The 'Cover 2' principle under EMIR stipulates that the default fund must be sufficient to absorb losses exceeding the initial margins of the two largest exposures, calculated under stress conditions. This ensures the CCP has adequate resources to face simultaneous defaults of the most exposed members.
Which methodology uses scenarios combining price and volatility variations to calculate the initial margin?
The SPAN (Standard Portfolio Analysis of Risk) method simulates 16 scenarios combining price and volatility variations to determine the maximum observed loss, which serves as the basis for the initial margin. This method is particularly used for listed derivatives and is valued for its computational simplicity.
What is the minimum frequency imposed by EMIR for variation margin calls?
Article 41 of EMIR imposes a minimum daily frequency for variation margin calls. However, most CCPs make multiple calls per day to better manage risks in real time.
What is the minimum confidence interval required for calculating the initial margin for OTC derivatives under EMIR standards?
Under EMIR technical standards (RTS 153/2013), the minimum confidence interval for calculating the initial margin for OTC derivatives is 99.5%. This means that models must cover losses that could occur in 99.5% of cases, thus ensuring a high level of protection against market risks.
Variation Margin
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Variation Margin represents the daily flows reflecting the mark-to-market evolution of positions. If the value of a position increases compared to the previous day, the member receives funds from the CCP; if it decreases, they pay the difference. These margin calls are required at least daily under Article 41 of EMIR.
The historical observation period for calibrating initial margin models must cover at least 6 months.
The historical observation period for calibrating initial margin models must cover at least 12 months, in accordance with regulatory standards. This allows capturing a wider range of market conditions and ensures better model robustness.
Categorize items by dragging them to the appropriate zones
Items to categorize:
Initial margin calculation methodologies
Accepted types of collateral
Initial margin calculation methodologies include SPAN, VaR/Expected Shortfall, Filtered Historical Simulation (FHS), and Eurex Prisma. Accepted types of collateral include securities eligible for ECB/SNB operations, non-EU government bonds, and equities from major indices. This classification allows a clear distinction between technical approaches and assets used as collateral.
Collateral haircuts are applied only to equities accepted as collateral.
Collateral haircuts apply to all types of assets accepted as collateral, including securities eligible for ECB/SNB operations, non-EU government bonds, and certain equities. The haircut is calculated based on historical volatility, secondary market liquidity, and the issuer's credit risk.