ice clear credit cds initial margin calculator overview
TRANSCRIPT
ICE CDS Margin Calculator
ICE Link GUI
June 2016
2
ICE CDS Margin Simulation Calculator Summary
• Buy-side firms and their counterparties can access the CDS Margin Simulation Calculator
to simulate margin requirements via the ICE Link GUI
• Simply point and click on positions in the positions blotter to calculate margin as ICE Link
already syncs all Buy-side positions with the Trade Information Warehouse
• Users can also upload sample portfolios, via direct GUI entry or spreadsheet upload, to
run “what-if” scenarios
• Margin simulation calculations can be run on portfolios consisting of all current clearing
eligible instruments (indices and single names)
• Margin is calculated using the Index Decomposition margin methodology
• Margin is always at the portfolio level (e.g. fund/legal entity) per FCM
• Provides users an analysis of the margin results for deeper transparency of the ICE
margin methodology
3
Risk Management Methodology Initial Margin Modeling Approach
Scenario-Based
Stress Approach
Monte Carlo
Framework
ICE CDS
Risk Management Methodology
• Consider small set of
hypothetical spread and price
scenarios
• Approach is consistent with
prime broker regimes for OTC
• Capture realistic distributional
assumptions to model market behavior
• Provide reliable and efficient portfolio
margining (hedging and diversification
benefits)
• Generate large number of hypothetical
scenarios to accurately estimate high-
quantile portfolio risk measures
• Reflect CDS market dynamics
− Credit spread behavior
− Risk asymmetry
− Liquidity and market depth
− Jump-to-Default losses
− Sensitivities to Interest Rate and
Recovery Rate assumptions
• Realistic CDS spread shock
distribution assumptions
− Heavy-tailed asymmetric
distributions
− Time-changing volatilities
− Term structure shape changes
• Scenario-based framework
− Manageable number of scenarios
− Provide computational transparency
and efficiency
• Monte Carlo benchmark
− Monitor performance of scenario
approach
− Utilize 20,000 scenarios
− VaR and Expected Shortfall measures
− Re-value all instrument for each
scenario
− Use same distribution assumptions as
the scenario approach
• At least five-day risk horizon at 99%
quantile
− Recognizes the shock of default in an
OTC market such as CDS can take
several days to absorb
• Dynamic risk measures
− Revise requirements as market
conditions and CDS spreads change
− Compute daily
− Improve risk forecasting ability
− Recognize importance of stability for
efficient capital allocation
4
Unexpected credit event losses not accounted
for in the market valuation of Single Name
(SN) instruments
Concentration
Requirement
Basis Risk
Requirement
Jump-To-Default
Requirement
Risk Captured
Spread Response
Requirement
Instrument spread level variability and changes in
credit spread term structure (“curve”) shape
Costs associated with large position
liquidation
Interest Rate Sensitivity
Requirement
Portfolio-Level Initial Margin Requirement Index Decomposition Margin Methodology
Recovery Rate
Sensitivity
Requirement
Fluctuations of Recovery Rate (RR) assumptions
Liquidity
Requirement
Component
Consider six scenarios
− Widening / contracting credit spread scenarios
− 3 curve shapes per credit spread scenario
Consider min. and max. reference entity specific RR to
determine additional losses
Include Loss-Given-Default for sold protection
Consider liability associated with 1 credit event using an
assumed SN-specific minimum RR
Differences in trading behavior of index-
derived and outright SN positions
Account for liquidity differences (market views are priced
into more liquid index instruments sooner than SNs), and
expected cash flow differences
Transaction (bid-offer) costs associated with
unwinding CDS instruments in the event of a
Clearing Participant default
Capture the proper liquidation cost for directional as well
as well-hedged portfolios
Estimate costs based on bid-offer width, derived from the
end of day price discovery process
Fluctuations in interest rates
Assess sensitivity of portfolio Net Asset Value to default-
free discount interest rate changes
Reflect market depth and liquidity
Apply to positions that exceed pre-specified thresholds
Increase requirements exponentially
Approach
Initial Margin
Requirement
Total risk requirement
5
Margin Calculator Overview Index Decomposition/Offset Methodology
Correlation-
Based Portfolio
Benefits*
Index-Derived
Single Names
Outright
Single Names
Index Decomposition Step: Long-Short Notional Based Offsets
Portfolio Spread
Response
Requirement
Index
Positions
IR Sensitivity
Requirements
SN Net Notional
Amounts
Residual Post-
Decomp. Positions
Basis Risk
Requirements
Single
Name
Positions
Offsets
Jump-To-Default
Requirements
Concentration
Requirements
Liquidity
Requirements Concentration
Requirements
Liquidity
Requirements
Illustration of Methodology Implementation Main Methodology Elements
Liquidity and Concentration Requirements
− Based on original Index and Single Name positions
Level I Portfolio Benefits:
Index Decomposition Notional-Based Approach
− Provide long-short offsets (notional netting) between Index-
derived and outright SN positions
Basis Risk Requirements
− Generate Basis Risk (BR) Requirements during decomposition
Jump-to-Default (JTD) Requirements
− Determine JTD Requirements based on the SN Net Notional
Amounts resulting from the decomposition process
Risk Factor Spread Response Requirements
− Estimate P/L for worst-case hypothetical scenario
Two credit regimes (Widening / Contracting)
Three curve shape regimes
Level II Portfolio Benefits:
Risk Factor Correlation-Based Approach
− Provide long-short and diversification benefits for residual
positions based on Kendall tau rank order correlations
Interest Rate & Recovery Rate Sensitivity Requirements
− Assess impact of fluctuations
RR Sensitivity
Requirements
SELL-CORP IG 3Y
SELL-CORP IG 5Y
SELL-HY 5Y
BUY- CORP IG 5Y
BUY-ENERGY IG 3Y
BUY- CONS IG 5Y
BUY- INDU IG 5Y
SELL- TMT IG 5Y
SELL-TECH IG 5Y
6
Margin Calculator Overview Multi-Currency Portfolio Benefits
Illustration of Multi-Currency Methodology Multi-Currency Methodology Elements
Risk Charges Applied to Sub-Portfolio Per Currency
− Calculation separates multi-currency portfolio trades into sub-
portfolios per currency and applies normal risk calculation charges
(Basis Risk, Interest Rate Risk, Recovery Rate Risk, Liquidity &
Concentration Risk)
Level I Portfolio Benefits:
Index Decomposition Notional-Based Approach
− Provide sub-portfolio currency specific long-short offsets (notional
netting) between Index-derived and outright SN position
Level II Portfolio Benefits:
Risk Factor Correlation-Based Approach
− Provide long-short and diversification benefits for combined sub-
portfolio currencies residual positions based on Kendall tau rank
order correlations in per sub-portfolio calculation
Risk Factor Spread Response Requirements
− Estimate P/L for worst-case hypothetical scenario for combined
sub-portfolios
Two credit regimes (Widening / Contracting)
Three curve shape regimes
FX risk (haircut) applied to multi-currency offsets
Jump-to-Default (JTD) Calculation
− JTD initially calculated per sub-portfolio; worst loss of short
position selected
− All JTD converted to single currency with applied FX rate
− Worst loss of all sub-portfolios selected, with FX risk (haircut)
applied if FX rate applied to selected loss
7
Margin Calculator Tool Launched From a Transaction
1. Prior to clearing a trade, any
party to the transaction can
calculate the clearing house
projected initial margin by
selecting the View Projected
Margin button after providing
FCM and allocation details
2. After selecting the View
Projected Margin button, users
may select to view the margin
amount weighted against all
existing cleared positions from
yesterdays end of day, only
today’s trades, all trades
(selecting both yesterday and
today’s trades), or view the
isolated margin amount
(deselecting yesterdays and
today’s trades) and select OK to
run the calculations
3. The calculator returns the
margin results for each
fund/portfolio (separate row for
each portfolio-FCM combination;
users may optionally email the
calculation results
Note: The ‘Simulation’ option is for
future eligible instruments
margin testing or for Self
Clearing Participants for ICE
Clear Europe
Launch Projected Margin from the Trade Affirm-Allocation (or) Trade Details Screen
Margin Calculator Results Screen
1
2
The margin tool may be accessed pre-trade via the ‘New Deal-Upload’ option in the Menu (or) the GoldSync+ Positions Blotter
1
3
8
Margin Calculator Tool Using Existing Positions
Users may run hypothetical
Margin calculations on non-
cleared clearing eligible positions
in the ICE Link Position Blotter to
project the clearing house required
minimum margin amounts
To calculate margin from the
Position Blotter, users may:
* Note: Buy-side firms have the ability to upload positions for testing clearing house margin requirements by
selecting the Upload feature in the GUI Menu, see the Help Documents screen for more details
1. Filter positions eligible for margin
simulation
2. Select All (or) Specific Positions
3. Click the Margin button and select
a potential FCM
Note:
A. ICE Link automatically synchronizes
all client DTCC warehouse positions
In the Position Blotter, simplifying
margin calculations
B. Additional positions may be
manually entered or uploaded
via spreadsheet *
C. Cleared trades results are
reported in the clearing reports
D. The Simulation checkbox is only for
ICE Clear Europe calculations for
Self Clearing members or for testing
with new instruments with ICE Clear
Credit
9
Margin Calculator Tool Margin Risk Results
1. View all portfolios with summary margin information per portfolio
A . 6 key risk components: Spread, Basis, JTD, Liquidity, Concentration and Interest Rate Risk
B. FX Rate, Haircut, Equivalent IM Requirement and Equivalent Currency for multi-currency portfolios
2. Access Margin Simulation Guides in the results screen
3. Easily share margin results via email with one click or export results to spreadsheet/file
1
2
3
10
Margin Calculator Tool Spreadsheet Upload of “What-if” Trades
1. Hypothetical trade positions
may be uploaded directly to
the Margin Calculator via
spreadsheet (CSV file) for
testing; the upload template
and template instructions are
available in the Help
Documents screen
2. After selecting the ‘Margin’
option in the menu, select
‘Upload’ in the Margin
Calculation criteria screen,
select the spreadsheet file
(CSV) and the Open button
to upload (any upload
displayed in the errors
window).
3. Select the Clearing House
the hypothetical portfolio will
be cleared to.
4. Select OK.
Note: ICE Clear Credit and ICE
Clear Europe trades must be
uploaded separately; calculations
can be mixed with existing non-
cleared, cleared, and hypothetical
trades
1
2 3
4
11
Position Blotter Manual Position Upload/Pre-Trade Margin Test
1. To manually upload a portfolio
(position/ trade level) for margin
testing, select the New Deal-
Single Name or Index option in
the GUI menu; On a Pre-trade
basis
2. In the trade entry screen, select
a counterparty (an Executing
Broker) and a clearing eligible
credit, and select OK when
finished.
3. On a Pre-trade basis, users
may enter trade details and
select the ‘View Proj. Margin’
button without actually
uploading the trade
Note: A list of clearing eligible credits
and simulation only credits are
available in the Margin Upload file in
the help documents screen
Manual Position Upload
(Margin Testing)
1
2
3
12
ICE Contacts
ICE Link Client Services
North America +1 770 738 2101
Europe + 44 (0) 20 7488 5100
OTC Financial Sales
North America +1 212 323 6020
Europe + 44 (0) 20 7429 4500
Internet
https://www.theice.com/clear-credit