Central Counterparty Risk Management
Typically at a Central Counterparty (CCP), the Risk Management function is responsible for the day-to-day risk management of an array of cleared products across many markets. The Risk department must continually measure and monitor all risk. Their tasks include monitoring at product-level, measuring and ensuring adequate coverage for risk through the use of margin and stress testing models, and ensuring all risk techniques are 'fit for purpose'. CCP's risk functions are also typically responsible for product-level default management and new product approval process.
Razor is used for Central Counterparty Risk Management at a number of locations around the world. Clearing Participant Risk Management involves high volume of trades (volumes in excess of 10,000,000 trades are not unknown), margining, capital stress testing, liquidity stress testing, SPAN, Historical and Monte Carlo Simulation based VaR, Default Management and Limit Management. The main objective is to use Razor to meet the Clearing House's counterparty credit and liquidity risk management requirements as the central counterparty to all trades executed on the exchange.
As the CPSS-IOSCO Recommendations for Central Counterparties highlight, risk management expectations of clearing organisations are rising steeply, hence Razor is being used to enhance the risk management capabilities to maintain international regulatory best practice principles and methodology. These significant projects provide the Clearing House with an industry best-practice overnight and intra-day risk management solution, including extensive use of Razor's VaR and stress testing capabilities, setting a new benchmark for risk management by central counterparties. Razor provides the Clearing House with the scalability to meet their high and growing volumes and to cater for future product enhancements.
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Resources
White Paper - Emerging from the financial crisis: A new era for CCP risk management
As the global financial and regulatory community seeks to implement solutions to prevent future market dislocations, a unique window of opportunity has opened for CCPs. This paper from Razor Risk Technologies provides some insights aimed at assisting CCPs to gain competitive advantage amidst this new era of risk management. It also outlines some key characteristics of an effective risk management technology system to assist CCPs in adapting quickly to new market pressures and legislative changes as they come into play.