Counterparty Risk Management
Nasdaq Clearing handles traditional business risks, as well as specific risks that are unique to the derivative clearing services it provides. The most noteworthy of these risks, with respect to the risk of loss, is counterparty default, i.e. the risk that one or several market participants will default on their obligations to the clearing organization.
The ability of Nasdaq Clearing to manage overall counterparty risk is dependent upon several factors, including:
- The Quality and Controls of the Overall Clearing Operations
- The Quality and Controls of the Collateral That is Pledged by Participants
- A Sound Legal Foundation (established Rules and Regulations)
- Proactive Risk Management
- The Financial Strength of The Clearing Organization As Evidenced By Its Capital Resources & Financial Liquidity
Nasdaq Clearing relies on a multi-asset risk system, Genium Risk, and customized margin methodologies per individual asset class. The margin calculation determines the appropriate amount of required collateral to compensate for the counterparty risk it assumes in its capacity as a clearing organization. The validity of the margin methodologies is supported by comprehensive testing program including regular margin back testing, model testing and sensitivity testing. The margin models are also subject to annual validation by external parties.
Nasdaq Clearing also relies on a proprietary capital-at-risk calculation model and system (CCaR) to serve as the main driver in establishing an appropriate level of default fund and overall clearing capital. CCaR generates implied “loss given default” calculations based on extreme stress counterparty default assumptions. These are well defined, extreme stress, risk parameter assumptions applicable to an extensive range of market price movement scenarios along with well defined counterparty default assumptions. Also the CCaR model is subject to regular testing and an annual validation of external party.