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Enterprise Risk Management

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Presentation on theme: "Enterprise Risk Management"— Presentation transcript:

1 Enterprise Risk Management
October 9, 2007 Marie Rey, Managing Director Risk Management, DTCC

2 Enterprise Risk Management Governance
DTCC Board of Directors Credit & Market Risk Management Committee Compliance & Operational Risk Management Committee DTCC Chairman & Chief Executive Officer FRBNY NYSBD PWC IA Risk Management Managing Director DTCC Executive Management Committee Member Risk Management Department DTCC Confidential

3 Enterprise Risk Management
DTCC Confidential

4 Role of Risk Management
Protect the safety & soundness of clearance & settlement Reduce risk of loss due to member failure Insure settlement continues in face of member failure DTCC Confidential

5 Credit & Market Risk Responsibilities
Assess new applicants On-Going Financial Surveillance Market Surveillance DTCC Confidential

6 Securities Valuation Responsibilities
Pricing of collateral held across the complex Ratings obtained from outside sources Market prices – external & internal sources Evaluation of adequacy of pricing Determination of appropriate haircuts DTCC Confidential

7 Quantitative Analysis Responsibilities
Mathematical modeling of components of clearing fund requirements Models validated by third parties Performance of stress tests Performance of back tests DTCC Confidential

8 Project Management Responsibilities
Liaison between risk system users and risk technology staff DTCC Confidential

9 Credit Risk Assessment of an Applicant
Detailed Review Adherence to Corporate Rules Presentation to Credit & Market Risk Management Committee DTCC Confidential

10 Credit Risk Ongoing Financial Surveillance
Credit Risk Matrix Parameter Monitoring Periodic Reviews 7 DTCC Confidential

11 Market Risk Surveillance
Clearing Fund DTC Market Risk Review Market Watch 8 DTCC Confidential

12 Market Risk Clearing Fund
The Clearing fund is maintained to protect the Corporation and its members in the event of a member default NSCC guarantees trades at midnight of T+1 GSD guarantees trades at point of trade comparison DTCC Confidential

13 Market Risk Clearing Fund - Composition
The Clearing Fund is comprised of: Cash (USD) U.S. Treasuries DTCC Confidential

14 Market Risk Clearing Fund
Calculated overnight Requirements sent automatically via to Members typically by 7:00 A.M. 9:30-10:00 A.M. deadline for receipt of deficit payment DTCC Confidential

15 NSCC Clearing Fund Methodology
Risk-Based Margining Volatility Mark-to Market Fails Market Maker Domination Illiquid Charges Premium Intraday Monitoring DTCC Confidential

16 Market Risk Volatility
Largest component of the clearing fund requirement VaR for equities and fixed income securities Haircuts DTCC Confidential

17 Haircuts OTCBB, Pink Sheets and IPOs
Applied in instances where there is insufficient statistical data DTCC Confidential

18 Mark-To-Market (“MTM”)
Unrealized profit and loss on unsettled positions, including fails (System Price*Net Quantity) – (Contract Value) No credit is given for a total net credit MTM DTCC Confidential

19 Fails A trade that has not settled as scheduled
Minimum haircut on market value of long and short (abs) failing positions Haircut may increase based on internal credit rating DTCC Confidential

20 Market Maker Domination
Measures exposure of correspondent Market Makers Limited to OTC listed market concentrations Charge mitigated by credit worthiness DTCC Confidential

21 Illiquid Charges To capture exposure in illiquid securities
Overnight calculation is based on several components, such as: Internal credit rating of firm Position size Primary market Average daily volume Price DTCC Confidential

22 Premium Clearing Fund > 1= Premium Capital
Member’s clearing fund requirement vs. Member’s capital Clearing Fund > 1= Premium Capital DTCC Confidential

23 GSD Clearing Fund Methodology
Clearing fund components Premium Coverage component Margin requirement differential Volatility DTCC Confidential

24 Margin Requirement Differential
Captures changes in VaR Applies front weighted average of fluctuations DTCC Confidential

25 Coverage Component Back Test Based
Compares historic P&L of trades against clearing fund requirement Front weighted DTCC Confidential

26 DTC Market Risk DTC maintains a fully collateralized system
Collateralization Net debit caps DTCC Confidential

27 Collateralization Participant is required to have sufficient collateral in its account to support net settlement debits Collateral includes: - Participant's deposit to the Participants Fund - Designated collateral securities in participant’s account - Securities that are the subject of deliveries from other participants Collateral is marked-to-market every day, less a haircut Transactions pend until sufficient collateral is available to support net settlement debit DTCC Confidential

28 Collateralization Review
Review impact of systemic overrides Review impact of price and haircut adjustments made by Securities Valuation Review impact of price movements DTCC Confidential

29 Net Debit Cap Based on three largest intra-day net debit balances over a rolling 70 business day period Limited on a case-by-case basis Maximum Net Debit Cap Transactions pend if settlement transactions exceed net debit cap DTCC Confidential

30 Market Risk Market Watch
Links to news services Market events analyzed Chronology maintained of market events and actions taken Closeout simulations DTCC Confidential

31 End of Day Line of Credit
Liquidity Needs Resources DTCC Confidential

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