We run a range of tests to validate and assess the models and methodologies used, among others, to determine the amount of margins and contributions to the default funds. The main objective of the tests is to ensure the safety of the clearing system. As part of the tests, we check whether the resources of the clearing guarantee system are sufficient to cover risk exposures under both normal and extreme market conditions.
Backtesting
Backtesting is a key element in assessing the adequacy, reliability and accuracy of the margining model. Backtesting of the model is performed automatically every business day. Synthetic test results are published on the KDPW_CCP website on a monthly basis and communicated to clearing members. In addition, each KDPW_CCP clearing member can receive detailed test results for its own portfolios.
In the event of any exceedances (understood as cases where the loss on a portfolio exceeds the initial margin), the cause is investigated. Depending on the scale, number, and causes of exceedances, appropriate corrective action is taken.
Initial margins are determined for each clearing member at the collateral account (portfolio) level using the SPAN methodology for transactions in organised trading and the Expected Shortfall methodology for transactions in non-organised trading (OTC) based on pre-determined assumptions including, among others, the confidence level, time window, and liquidation period. Backtesting is carried out separately for transactions on both trading venues.
The purpose of the backtesting of the model is to check that the initial margins are sufficient to cover, with the assumed confidence level, the losses incurred under normal market conditions over the assumed liquidation period of the defaulting clearing member’s position. As part of the backtesting of the model, KDPW_CCP assesses the level of coverage of exposures with margins by comparing the amount of the hypothetical loss over the assumed liquidation period with the amount of the required margin.
In the event of any exceedances (understood as cases where the loss on a portfolio exceeds the initial margin), the cause is investigated. Depending on the scale, number, and causes of exceedances, appropriate corrective action is taken.
Initial margins are determined for each clearing member at the collateral account (portfolio) level using the SPAN methodology for transactions in organised trading and the Expected Shortfall methodology for transactions in non-organised trading (OTC) based on pre-determined assumptions including, among others, the confidence level, time window, and liquidation period. Backtesting is carried out separately for transactions on both trading venues.
The purpose of the backtesting of the model is to check that the initial margins are sufficient to cover, with the assumed confidence level, the losses incurred under normal market conditions over the assumed liquidation period of the defaulting clearing member’s position. As part of the backtesting of the model, KDPW_CCP assesses the level of coverage of exposures with margins by comparing the amount of the hypothetical loss over the assumed liquidation period with the amount of the required margin.
* Last message update: 2024-08-14
Sensitivity testing and analysis
Sensitivity testing and analysis aim to identify the impact of change of market parameters on the value of the portfolio and to define to what extent the margins cover losses incurred under stressed market conditions. KDPW_CCP tests the sensitivity of all real portfolios. Sensitivity testing is performed at least once a month. In addition, results are analysed more frequently where increased market volatility, reduced liquidity or increased position volume or concentration is observed. Adequate actions are taken in the light of results of the analysis. KDPW_CCP publishes a monthly summary of sensitivity testing on its website.
** Last message update: 2024-08-14
Stress testing
Stress testing is carried out to ensure that the resources of the clearing guarantee fund are sufficient to cover losses arising from the default of the clearing member to which KDPW_CCP has the largest exposures or of the second and third largest clearing members, if the sum of their exposures is larger. Calculations are based on a defined set of stress-test scenarios which include historical and hypothetical extreme but plausible market conditions.
Based on defined stress-test scenarios, potential loss arising from insufficient coverage of potential exposures with deposited margins is calculated for each clearing member. Next, for each scenario, the largest and the sum of the second and third largest potential loss are calculated and then compared with the value of the clearing fund or the relevant guarantee fund. The results indicate the extent to which the clearing fund or the relevant guarantee fund will be consumed as a result of default of the clearing member(s) to which KDPW_CCP has the largest exposures under extreme but plausible market conditions.
In addition, all resources of the clearing guarantee system are stress-tested to ensure that they are sufficient to cover the loss due to default of the clearing members to which KDPW_CCP has the two largest exposures.
Stress testing is performed automatically on every business day. As a result of the analysis, KDPW_CCP may take measures to mitigate identified risks, including an increase of margin requirements or contributions to the clearing fund or the relevant guarantee fund.
KDPW_CCP publishes monthly test results on its website and communicates the results to the clearing members. In addition, KDPW_CCP provides clearing members on request with detailed test results for their portfolios.
*** Last message update: 2024-08-14
Based on defined stress-test scenarios, potential loss arising from insufficient coverage of potential exposures with deposited margins is calculated for each clearing member. Next, for each scenario, the largest and the sum of the second and third largest potential loss are calculated and then compared with the value of the clearing fund or the relevant guarantee fund. The results indicate the extent to which the clearing fund or the relevant guarantee fund will be consumed as a result of default of the clearing member(s) to which KDPW_CCP has the largest exposures under extreme but plausible market conditions.
In addition, all resources of the clearing guarantee system are stress-tested to ensure that they are sufficient to cover the loss due to default of the clearing members to which KDPW_CCP has the two largest exposures.
Stress testing is performed automatically on every business day. As a result of the analysis, KDPW_CCP may take measures to mitigate identified risks, including an increase of margin requirements or contributions to the clearing fund or the relevant guarantee fund.
KDPW_CCP publishes monthly test results on its website and communicates the results to the clearing members. In addition, KDPW_CCP provides clearing members on request with detailed test results for their portfolios.
*** Last message update: 2024-08-14
Reverse stress testing
KDPW_CCP performs reverse stress testing in order to identify market conditions under which the resources of the clearing guarantee fund may be insufficient to cover credit exposures.
The results are analysed and taken into account when defining a set of scenarios of extreme but plausible market conditions for the stress tests.Reverse stress tests are carried out at least quarterly.
The testing programme and procedures, including the stress scenarios, are reviewed regularly at least once a year.Testing and analysis results and conclusions are regularly presented to the Risk Committee and other competent authorities and entities.
The results are analysed and taken into account when defining a set of scenarios of extreme but plausible market conditions for the stress tests.Reverse stress tests are carried out at least quarterly.
The testing programme and procedures, including the stress scenarios, are reviewed regularly at least once a year.Testing and analysis results and conclusions are regularly presented to the Risk Committee and other competent authorities and entities.