Forexclear initial margin
These various layers of protection are our risk management framework, a series of interlocking defensive barriers that work in concert to protect your cleared trades and the collateral posted against them. We have designed state-of-the-art safeguards to protect our Clearing Members and their clients, not to mention the stability of the global financial system. Risk management is at the core of everything we do at ForexClear.
Even before we agree to admit a new entity as a Clearing Member, we are scrutinizing it to ensure it has the capabilities to meet our exacting risk management standards. That philosophy runs right through every step of the clearing process at our CCP and all the way to the settlement of a Clearing Member default. Let us explain our process in a little more detail. The Details Membership criteria As our first line of defence, ForexClear sets stringent and transparent eligibility requirements for prospective Clearing Members.
A candidate for membership must demonstrate that it has the necessary expertise and competencies to appropriately value, risk manage and default manage cleared trades. Fire drills Once admitted to ForexClear, Clearing Members must participate in periodic fire drills to continually validate their operational readiness.
This involves simulating a default to test Clearing Members ability to participate in a resolution, ensuring that our Clearing Members are kept constantly on their toes. Initial margin As members and clients clear trades, ForexClear collects initial margin from them to cover potential losses in the event of a default.
We calculate initial margin using a historical simulation expected shortfall methodology, which uses ten years of historical market data to estimate the potential loss distribution. Many of the protections and safeguards that counterparties enjoy at CDSClear have been developed, enhanced and refined through our hard-won practical clearing experience at LCH.
These protections include: A resilient margin model Based on historical simulations with scaled returns. CDSClear employs the same margin methodology as SwapClear, which successfully resolved the default of Lehman Brothers with no cost impact on fellow interest rate swap Clearing Members Expected shortfall Initial margin calculated under the expected shortfall methodology to a 5-day confidence interval of Margin is calculated and posted every day for all new positions.
Variation margin is collected daily and must be met in cash. Posting cash margin Euro Clearing Members must deposit Euro cash collateral via an account held within a central bank connected to the TARGET 2 system or be represented by a payment agent holding such an account. US Dollar cash collateral is subject to a 4.
British Pound cash collateral is subject to a 5. Posting securities as margin CDSClear currently allows Members to post securities as collateral issued by twelve Sovereign Governments as well as a selection of Supranationals and Agencies. Collateral segregation Clearing Members and clients clearing at CDSClear have access to the full suite of collateral segregation models available under the European and US legal frameworks. Clients have protection over the value of collateral recorded as their Legally Segregated Value.
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Initial margin and maintenance margin
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For firms subject to Basel III requirements, clearing trades also leads to capital benefits. The RWA and leverage ratio framework also benefit from the increased netting effect of consolidating positions against a single counterparty, which may reduce overall capital requirements. ForexClear recently undertook a cost comparison examining a number of portfolios across a diverse set of participants, including dealers, hedge funds and asset managers.
Once you combine the potential higher capital costs of bilateral trades with additional IM — which firms subject to UMR have to pay to their bilateral counterparties — it tilts the balance in favour of clearing as many products as possible, including NDFs.
How should market participants re-evaluate their exposure to particular FX derivatives and counterparties to minimise capital costs in light of the next UMR phases? Kahyang Chong: Market participants preparing for UMR face a demanding and complex process with numerous steps, as the International Swaps and Derivatives Association highlighted in its fact sheet, Getting ready for IM regulatory requirements — What steps do I need to take?
Major work is required for all participants to comply with the new rules. This involves calculating and monitoring AANA; determining when they are in scope in each jurisdiction and for which entities; for each trading counterparty, agreeing to new credit support annexes CSAs and custody relationships; reconciling margin numbers on a daily basis; and managing the daily postings required under the CSAs, potentially with third-party assistance. For the buy side, this work may lead to substantial legal and operational overheads.
Buy-side firms may need to evaluate their trading relationships and choose to reduce the number of trading counterparties to lower these overheads. Clearing can be a viable solution to help reduce this burden. All cleared trades are governed under CCP rules and margin terms, and only light-touch documentation is required to set up new trading counterparties. This may lead to wider counterparty selection and a shorter time-to-market, ensuring participants continue to access a wide range of dealers for best execution.
Which market participants would benefit most from clearing, and what procedures would they need to undertake to do so? Learn about our editorial policies What Is Initial Margin? Initial margin is the percentage of the purchase price of a security that must be covered by cash or collateral when using a margin account. However, this regulation is only a minimum requirement; some equity brokerage firms may set their initial margin requirement higher.
Key Takeaways Initial margin is the percent of a purchase price that must be paid with cash when using a margin account. But brokerages and exchanges can set initial margin requirements higher than the Fed minimum. Initial margin requirements are different from maintenance margin requirements, which is the percent of equity that must be retained on an ongoing basis in the account. To open a margin account at a brokerage firm, an account holder first needs to post a certain amount of cash, securities or other collateral, known as the initial margin requirement.
A margin account encourages investors, traders, and other market participants to use leverage to purchase securities with a total value that's greater than the available cash balance in the account. A margin account is essentially a line of credit in which interest is charged on the outstanding margin balance. Securities in the margin account are paid for with cash loaned to the account holder by the brokerage firm and are designated as collateral.
This process allows for magnification of potential profits but also magnifies potential losses. In the extreme event that securities purchased in a margin account decline to zero value, the account holder needs to deposit the full initial value of the securities in cash or other liquid collateral to cover the loss. In other words, this initial margin requirement would give the account holder a 20x leverage factor. During periods of high market volatility , futures exchanges may increase initial margin requirements to any level they deem appropriate, matching the power of equity brokerage firms to increase initial margin levels above those required by Fed regulation.
Initial Margin vs. Maintenance Margin Initial margin is distinct from maintenance margin.
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