CPSS-IOSCO Recommendations for CCPs
In 2004, a consultative report, "Recommendations for Central Counterparties", was issued by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO). The report aimed to set out comprehensive standards for risk management of a central counterparty (CCP) and made 15 recommendations on the operation of CCPs, covering issues such as participation requirements, margin setting, default procedures and governance.
Compliance to the following CPSS-IOSCO recommendations is supported by the use of Razor:
- Recommendation 2 – Participation requirements
Razor supports a very flexible and hierarchical representation of organisational structure to fully reflect each CCP’s specific risk model requirements, and complex participant structures and relationships. Razor can support the recording and reporting on all participant information as part of the ongoing monitoring of all participant requirements. - Recommendation 3 – Measurement and management of credit exposure
Razor supports multiple configurable models for measurement of credit exposures, including Monte Carlo simulation, scenario analysis, stress testing, liquidity stress testing, capital stress testing, and others. Razor supports extensive limit and excess management and automated workflow to control and effectively manage these exposures on daily, intraday and near real-time bases. - Recommendation 4 – Margin requirements
Razor supports multiple configurable models for calculation and management of accurate margin requirements in real-time, such as for Initial Margin, Variation Margin, Portfolio margining, and the Collateral requirements. These include simulation based methods of HSVaR, volatility adjusted HSVaR, MCVaR, scenario based methods of SPAN, TIMS and others, and more conservative methods such as risk adjusted Face Value or Market Value as may be required for less liquid securities. - Recommendation 5 – Financial resources
Razor supports the monitoring of financial resources, and evaluation against default exposures. - Recommendation 6 – Default procedures
Razor supports the default management process, and measurement and monitoring of capital adequacy. Razor’s sensitivity based and scenario analysis capability and the extensive what-if scenario capability support this requirement. Similarly the capital and liquidity stress testing function in Razor supports this requirement. - Recommendation 7 – Custody and investment risks
Razor supports the risk management for assets held by a CCP. - Recommendation 10 – Physical deliveries
Razor supports the measurement of risk associated with physical delivery obligations. - Recommendation 11 – Risks in links between CCPs
Razor supports a very flexible and hierarchical representation of organisational structure to fully reflect all participant structures and complex relationships across multiple exchanges. Razor’s mapping rules can be configured to fully reflect these structures and relationships to support the CCP specific risk models and hence cross-border risk and exposure measurement is supported by Razor. - Recommendation 12 – Efficiency
The cost-effective Razor application supports a safe and secure technical and operational environment. Razor’s security model and audit trail function supports this requirement. - Recommendation 14 – Transparency
Razor provides a flexible reporting framework to support these transparency requirements.
For further information, please contact us.
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.