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

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Presentation on theme: "Enterprise Risk Management October 9, 2007 Marie Rey, Managing Director Risk Management, DTCC."— Presentation transcript:

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

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

3 DTCC Confidential 3 Enterprise Risk Management Managing Director Credit & Market Risk & Securities Valuation Quantitative Analysis Project Management Operational Risk Management

4 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

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

6 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

7 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

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

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

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

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

12 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

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

14 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

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

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

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

18 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

19 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

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

21 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

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

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

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

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

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

27 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 participants 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

28 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

29 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

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

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

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