Presentation is loading. Please wait.

Presentation is loading. Please wait.

CORE - CloseOut Risk Evaluation October/2012 CLASSIFICATION OF INFORMATION (CHECK WITH AN X): CONFIDENTIAL AND RESTRICTED CONFIDENTIALINTERNAL USEPUBLIC.

Similar presentations


Presentation on theme: "CORE - CloseOut Risk Evaluation October/2012 CLASSIFICATION OF INFORMATION (CHECK WITH AN X): CONFIDENTIAL AND RESTRICTED CONFIDENTIALINTERNAL USEPUBLIC."— Presentation transcript:

1 CORE - CloseOut Risk Evaluation October/2012 CLASSIFICATION OF INFORMATION (CHECK WITH AN X): CONFIDENTIAL AND RESTRICTED CONFIDENTIALINTERNAL USEPUBLIC X

2 AGENDA RISK MODELING IN MULTI-ASSET CLASS AND MULTIMARKET CLEARINGHOUSES THE CORE MODEL FOR CLEARINGHOUSE RISK CALCULATION CORE MODEL IMPLEMENTATION KEY BENEFITS DERIVED FROM THE CORE MODEL IMPLEMENTATION HEDGING STRATEGIES THAT BENEFIT FROM THE CORE MODEL

3 AGENDA RISK MODELING IN MULTI-ASSET CLASS AND MULTIMARKET CLEARINGHOUSES THE CORE MODEL FOR CLEARINGHOUSE RISK CALCULATION CORE MODEL IMPLEMENTATION KEY BENEFITS DERIVED FROM THE CORE MODEL IMPLEMENTATION HEDGING STRATEGIES THAT BENEFIT FROM THE CORE MODEL

4 4 RISK MODELING IN MULTI-ASSET CLASS CLEARINGHOUSES DEFINING A ROBUST & EFFICIENT RISK MODEL NEED TO BUILD A RISK MODEL THAT REFLECTS, IN A REALISTIC WAY, THE RISK MANAGEMENT PROBLEM FACED BY A CLEARINGHOUSE MULTI-ASSET CLASS AND MULTIMARKET CLEARINGHOUSES OPPORTUNITY TO INCREASE EFFICIENCY VIA RISK-OFFSETTING BUT HOW TO ENSURE THAT EFFICIENCY GAINS ARE ROBUST? Efficiency gains are not considered robust when the assumptions employed by the risk- offsetting model have a low level of adherence to reality, resulting in insufficient resources for the clearinghouse to fulfill its obligations

5 5 THE RISK MANAGEMENT PROBLEM FACED BY A CLEARINGHOUSE MAJOR ASPECTS THAT SHOULD BE TAKEN INTO ACCOUNT BY THE MODEL EVOLUTION (INTERTEMPORAL DYNAMICS) OF THE RISK FACTORS THAT DEFINE THE VALUE OF THE ASSETS AND CONTRACTS INCLUDED IN THE PORTFOLIO, AS WELL AS OF THE PORTFOLIO COMPOSITION ITSELF FRICTIONS, RESTRICTIONS AND OPERATIONAL FEATURES ASSOCIATED WITH EACH ASSET INCLUDED IN THE PORTFOLIO TRADING MODEL – ELECTRONIC VS OTC LIQUIDITY/MARKET DEPTH POSSIBILITY OF A FRACTIONAL SETTLEMENT SETTLEMENT MODEL – RTGS VS DNS CASH FLOW STRUCTURE OF THE ASSET RISK MODELING IN MULTI-ASSET CLASS CLEARINGHOUSES

6 6 A MORE COMPLEX APPROACH THAN THAT OF MODELS BASED ON VAR WHEN MODELLING THE RISK MANAGEMENT PROBLEM FACED BY A CLEARINGHOUSE, ONE MUST CONSIDER, IN A JOINT FASHION, THE EVOLUTION OF THE MARKET VARIABLES (PRICES & RATES) AND THAT OF THE PORTFOLIO COMPOSITION, RESPECTING A SET OF SIGNIFICANT RESTRICTIONS IMPOSED BY THE CHARACTERISTICS OF EACH ASSET UNDER CONSIDERATION PORTFOLIO CLOSEOUT RISK T+0 T+1 T+2T+3T+4T+N... DYNAMIC PROCESS WITH FRICTIONS P&L CALCULATION THIS TYPE OF MODELLING REQUIRES CONCEPTS AND TOOLS MORE COMPLEX THAN THOSE TYPICALLY EMPLOYED BY THE FINANCIAL INDUSTRY (I.E. MODELS BASED ON VAR). IN FACT, THESE MODELS OFTEN FOCUS ON MEASURING THE POTENTIAL VALUE OF A STATIC PORTFOLIO, WITHOUT TAKING INTO ACCOUNT A DYNAMIC CLOSEOUT PROCESS WITH FRICTIONS VARIATION RISK OF THE PORTFOLIO VALUE T+0 T+N P&L CALCULATION STATIC PROCESS WITHOUT FRICTIONS RISK MODELING IN MULTI-ASSET CLASS CLEARINGHOUSES

7 7 A MORE COMPLEX APPROACH THAN THAT OF MODELS BASED ON VAR (CONTD) ALTHOUGH THE MODELS BASED ON VAR MAY BE ADAPTED TO ESTIMATE THE CLOSEOUT RISK, THEIR PLAUSIBILITY IS COMPROMISED WHEN MULTI-ASSET AND MULTIMARKET PORTFOLIOS (I.E. HIGHLY HETEROGENEOUS) ARE CONSIDERED IMPLICIT CLOSEOUT MODEL T+0 T+N UNDERLYING HYPOTHESIS: ALL ASSETS & CONTRACTS ARE TO BE SETTLED AT THE SAME TIME WITHOUT ANY FRICTIONS, WITH FULLY COINCIDING CASH FLOWS AN ALTERNATIVE APPROACH CONSISTS IN THE USE OF A MODEL BASED ON MULTIPLE SILOS, WHERE EACH SILO CONTAINS ONLY ASSETS AND/OR CONTRACTS WITH COMMON FEATURES (I.E. HOMOGENEOUS). IN THIS CASE, THE TOTAL PORTFOLIO RISK IS GIVEN BY THE ALGEBRAIC SUM OF EACH SILO. IMPLICIT CLOSEOUT MODEL T+0 T+N SUM OF RISKS T+0 T+N T+0 T+N SILO 1 SILO 2 SILO 3... RISK MODELING IN MULTI-ASSET CLASS CLEARINGHOUSES

8 8 SILO MODELLING & SYSTEMIC RISK INCREASE SILO 1 SILO 2 EVEN A MODEL BASED ON SILOS, WITH SUPERCOLLATERALIZATION VIA SUM OF RISKS, DOES NOT NECESSARILY ENSURE A MORE ROBUST SYSTEM. IN FACT, A MODEL BASED ON SILOS MAY HIDE IMPORTANT RISKS OF LIQUIDITY FRAGMENTATION AND REDUCE INCENTIVES TOWARDS THE ADOPTION OF A DILIGENT BEHAVIOR IN TIMES OF CRISIS. ORIGINAL SITUATION, AGENTS A & B T+0 T+N COLLATERAL (RISK) = 100 SILO 1 AGENT A HEDGES SILO 2 RISK ON THE MARKET T+0 T+N T+0 T+N SILO 1 SILO 2 AGENT B DOES NOT HEDGE AT ALL T+0 T+N T+0 T+N INCREASED MARKET VOLATILITY COLLATERAL(RISK) = 200 COLLATERAL (RISK) = 100 T+0 T+N SILO 2 DISINCENTIVE TOWARDS A DILIGENT BEHAVIOR LIQUIDITY RISK INCREASES IN THE SYSTEM LTCM SCENARIOS (1998) & NTN-D CRISIS (2002) RISK MODELING IN MULTI-ASSET CLASS CLEARINGHOUSES

9 AGENDA RISK MODELING IN MULTI-ASSET CLASS AND MULTIMARKET CLEARINGHOUSES THE CORE MODEL FOR CLEARINGHOUSE RISK CALCULATION CORE MODEL IMPLEMENTATION KEY BENEFITS DERIVED FROM THE CORE MODEL IMPLEMENTATION HEDGING STRATEGIES THAT BENEFIT FROM THE CORE MODEL

10 10 THE CORE MODEL FOR RISK CALCULATION THE CORE MODEL THE CORE MODEL WAS SPECIFICALLY DEVELOPED BY BM&FBOVESPA TO ALLOW FOR ROBUST AND EFFICIENT RISK ESTIMATION IN A MULTI-ASSET CLASS, MULTIMARKET CLEARINGHOUSE MAJOR FEATURES CONSIDERS THE INTERTEMPORAL DYNAMICS OF THE PORTFOLIO CLOSEOUT PROCESS CONTEMPLATES IMPORTANT FRICTIONS & RESTRICTIONS ASSOCIATED WITH THE SETTLEMENT PROCESS OF ASSETS AND CONTRACTS – TRADING DYNAMICS, MARKET LIQUIDITY AND DEPTH, CASH FLOW STRUCTURE, ETC ESTIMATES, IN BOTH A JOINT AND A CONSISTENT MANNER, THE MARKET AND LIQUIDITY RISKS ASSOCIATED WITH A PORTFOLIO CLOSEOUT PROCESS

11 11 OVERVIEW: CLOSEOUT RISK CALCULATION IN THREE STEPS 2. RISK EVALUATION T+0 T+1 T+2T+3T+4T+N... Defines the (stress) scenarios associated with the dynamics of each risk factor relevant to the portfolio. All assets and contracts are reevaluated considering the scenarios defined in this step (full valuation). 3. POTENTIAL P&L CALCULATION T+0 T+1 T+2T+3T+4T+N... Calculates and aggregates intertemporally P&L associated with each scenario, considering the defined closeout strategy CLOSEOUT RISK Result: Two risk measuresmarket and liquiditythat are estimated both jointly and consistently PERMANENT LOSS TRANSIENT LOSS THE CORE MODEL FOR RISK CALCULATION

12 12 OVERVIEW: PERMANENT & TRANSIENT LOSS T+0 T+1 T+2T+3T+4T+N POTENTIAL P&L DETERMINATION CASH NEED BY T+N PERMANENT LOSS V0 + V1 + V2 + V3 + V VN V0 + V1 V0 + V1 + V2 V0 + V1 + V2 + V3 V0 + V1 + V2 + V3 + V4 V0 + V1 + V2 + V3 + V VN CASH NEED BY T+4 CASH NEED BY T+3 CASH NEED BY T+2 CASH NEED BY T+1 CASH NEED BY T+0 CASH FLOW AMOUNTS CASH NEED ON T+N MAXIMUM BETWEEN TRANSIENT LOSS EQUALS THE CORE MODEL FOR RISK CALCULATION

13 13 T+0 T+1T+2T+3T+4 T+5 RISK ITERATION NAIVE STRATEGY1 OPTIMAL STRATEGY DEFINITION2 OPTIMAL STRATEGY3 CLOSEOUT PORTFOLIO DETAIL: CLOSEOUT STRATEGY DEFINITION FUTURES, BUY, IMMEDIATE SETTLEMENT OPTIONS, SELL, SETTLEMENT ON T+3 ONLY SWAP, SELL, SETTLEMENT ON T+5 ONLY MINIMUM RISK THE CORE MODEL FOR RISK CALCULATION

14 14 T+1 CLOSEOUT PORTFOLIO T+0T+2 DETAIL: PORTFOLIO COMPOSITION & RISK FACTOR EVOLUTION T+3T+4 T+5T+6 T+1T+0 T+2 T+3T+4T+5T+6 RISK FACTOR EVOLUTIONMARKET FACTOR 1 FACTOR 2 FACTOR n P&L ALONG THE PROCESS THE CORE MODEL FOR RISK CALCULATION

15 15 DETAIL: RISK FACTOR EVOLUTION & MULTIVARIATE SCENARIO GENERATION T+0 – T+1 – T – T+N... FACTOR 1 FACTOR 2 FACTOR n T+0 – T+1 – T+2 –... – T+N # SCENARIO RISK FACTOR... MULTIVARIATE SCENARIO GENERATOR T+0 – T+1 – T – T+N FACTOR 1 FACTOR 2 FACTOR n... SCENARIOS TO DETERMINE P&L DURING THE CLOSEOUT PROCESS THE CORE MODEL FOR RISK CALCULATION

16 16 DETAIL: P&L DETERMINATION DURING THE CLOSEOUT PROCESS T+1T+2T+3T+4T+5 T+6 SCENARIOS POSITIVE FLOW NEGATIVE FLOW PERMANENT LOSS TRANSIENT LOSS PERMANENT LOSS TRANSIENT LOSS PERMANENT LOSS TRANSIENT LOSS PERMANENT LOSS TRANSIENT LOSS... WORST CASE SCENARIO #1 #2 #3 #nSCN THE CORE MODEL FOR RISK CALCULATION

17 AGENDA RISK MODELING IN MULTI-ASSET CLASS AND MULTIMARKET CLEARINGHOUSES THE CORE MODEL FOR CLEARINGHOUSE RISK CALCULATION CORE MODEL IMPLEMENTATION KEY BENEFITS DERIVED FROM THE CORE MODEL IMPLEMENTATION HEDGING STRATEGIES THAT BENEFIT FROM THE CORE MODEL

18 18 HEDGING STRATEGIES BENEFITING FROM THE CORE MODEL MAIN EXAMPLES HEDGING AN OTC DERIVATIVES POSITION ON THE LISTED DERIVATIVES MARKET CORE RISK T+0 T+1 T+2T+3T+4T+N... CURRENT MODEL T+0 T+T T+0 T+T T+0 T+N SILO 1 OTC POSITION SILO 2 LISTED DERIVATIVES SILO 3 COLLATERAL SUM OF RISKS CLOSEOUT RISK CORE RISK: PORTFOLIO CLOSEOUT COST (POSITIONS + COLLATERAL) MUST BE EQUAL TO OR LESS THAN ZERO CURRENT MODEL: COLLATERAL-HAIRCUT EQUAL TO OR GREATER THAN RISK (OTC) + RISK (LISTED DERIVATIVES)

19 19 HEDGING STRATEGIES BENEFITING FROM THE CORE MODEL MAIN EXAMPLES (CONTD) ASSET BEING HEDGED IS POSTED AS COLLATERAL CORE RISK T+0 T+1 T+2T+3T+4T+N... CURRENT MODEL T+0 T+T T+0 T+N SILO 1 LISTED DERIVATIVES SILO 2 COLLATERAL SUM OF RISKS CLOSEOUT RISK CORE RISK: PORTFOLIO CLOSEOUT COST (POSITIONS + COLLATERAL) MUST BE EQUAL TO OR LESS THAN ZERO CURRENT MODEL: COLLATERAL-HAIRCUT EQUAL TO OR GREATER THAN RISK (LISTED DERIVATIVES)

20 20 HEDGING STRATEGIES BENEFITING FROM THE CORE MODEL MAIN EXAMPLES (CONTD) EQUITIES BORROWER HOLDING COLLATERAL IN SHARES OF THE SAME COMPANY, BUT OF A DIFFERENT TYPE (PREFERRED VS COMMON) CORE RISK T+0 T+1 T+2T+3T+4T+N... CURRENT MODEL T+0 T+T T+0 T+N SILO 1 EQUITIES LENDING SILO 2 COLLATERAL SUM OF RISKS CLOSEOUT RISK CORE RISK: PORTFOLIO CLOSEOUT COST (POSITIONS + COLLATERAL) MUST BE EQUAL TO OR LESS THAN ZERO CURRENT MODEL: COLLATERAL-HAIRCUT EQUAL TO OR GREATER THAN RISK (LENDING)

21 AGENDA RISK MODELING IN MULTI-ASSET CLASS AND MULTIMARKET CLEARINGHOUSES THE CORE MODEL FOR CLEARINGHOUSE RISK CALCULATION CORE MODEL IMPLEMENTATION KEY BENEFITS DERIVED FROM THE CORE MODEL IMPLEMENTATION HEDGING STRATEGIES THAT BENEFIT FROM THE CORE MODEL

22 22 CORE MODEL IMPLEMENTATION MODEL COMPONENTS & IT ARCHITECTURE OPTIMAL CLOSEOUT STRATEGY DEFINITION PRICE GENERATION BASED ON MULTIVARIATE SCENARIOS RISK AGGREGATION & CONTROL INTERFACE WITH THE RTC PLATFORM (CINNOBER) SPECIFIC SOFTWARE TO DEAL WITH OPTIMIZATION ISSUES VERY HIGH PERFORMANCE PARALLEL ARCHITECTURE USING GRAPHIC UNITS WITH MULTIPLE PROCESSORS (GPUs) HIGH PERFORMANCE SOFTWARE DEVELOPED IN C++ BY BM&FBOVESPA RISK PLUG-IN DEVELOPED BY BM&FBOVESPA IN TANDEM WITH CINNOBER

23 MODEL DEFINITION, PROTOTYPE CONSTRUCTION, DEFINITIVE MODEL TESTING CORE MODEL DEVELOPMENT INDEPENDENT ASSESMENT, FEASIBILITY ANALYSIS, SUPPORT TO MODEL DEFINITION 23 CORE MODEL IMPLEMENTATION TEAMS INVOLVED RISK MANAGEMENT OFFICE FINANCE CONCEPTS (MR. MARCO AVELLANEDA/NYU & MR. RAMA CONT/COLUMBIA) IT OFFICE POST-TRADING

24 24 CORE MODEL IMPLEMENTATION PROJECT STATUS - MACRO PROTOTYPE PRESENTATION DEC2010 MAR2013DEC2012DEC2011 CONCEPTUAL MODEL MATHEMATICAL MODEL JUL2010JUL2011 PROTOTYPE RISK PLUG-IN/CORE

25 AGENDA RISK MODELING IN MULTI-ASSET CLASS AND MULTIMARKET CLEARINGHOUSES THE CORE MODEL FOR CLEARINGHOUSE RISK CALCULATION CORE MODEL IMPLEMENTATION KEY BENEFITS DERIVED FROM THE CORE MODEL IMPLEMENTATION HEDGING STRATEGIES THAT BENEFIT FROM THE CORE MODEL

26 26 KEY BENEFITS DERIVED FROM THE CORE MODEL IMPLEMENTATION ROBUST MODELLING PROVIDING EFFICIENCY GAINS WITHOUT GIVING UP SAFETY GREATER EFFICIENCY IN CAPITAL ALLOCATION FOR PORTFOLIOS WITH RISK MITIGATION STRATEGIES (HEDGE) DEVELOPED SPECIFICALLY TO DEAL WITH THE RISK MANAGEMENT PROBLEM FACED BY CLEARINGHOUSES TRANSPARENT & INTUITIVE MODEL – ASSUMPTIONS CA BE EASILY VALIDATED INCENTIVES TO THE ADOPTION OF PRUDENTIAL MEASURES TO MITIGATE RISKS CIRCUMVENTS THE SILO APPROACH, SO LIQUIDITY FRAGMENTATION IS AVOIDED AND SYSTEMIC RISK MITIGATED MARKET & LIQUIDITY RISKS ARE TREATED IN BOTH A JOINT AND A CONSISTENT MANNER

27


Download ppt "CORE - CloseOut Risk Evaluation October/2012 CLASSIFICATION OF INFORMATION (CHECK WITH AN X): CONFIDENTIAL AND RESTRICTED CONFIDENTIALINTERNAL USEPUBLIC."

Similar presentations


Ads by Google