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CISI Capital Markets Programme: Derivatives > Chapter 6: Principles of Clearing and Margin > Flashcards

Chapter 6: Principles of Clearing and Margin Flashcards

1
Q

What is Clearing?

Definition

A

The process through which derivatives trades are confirmed and registered.

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2
Q

Why is Registration for Derivatives Different from that of Equities?

Think Registrar.

A

Equities: Registration is the companies log of the legal holders of the shares.

Derivatives: Registration is where the trade has been recognised by the clearing house.

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3
Q

What are Benefits of Using a Central Counterparty?

For clearing derivatives.

A
  • Greatly reduces (bit does not eliminate) credit risk
  • Guarantees the performance of the contract, for its member only.
  • Gives a higher degree of confidence in the system
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4
Q

Do Most Derivatives Exchanges have Their Own Clearing House?

A

Yes.

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5
Q

What is the TRS?

When clearing derivatives.

A

Trade registration system.

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6
Q

What is Novation?

When clearing (definition)

A

When the counterparty becomes a buyer to the seller and a seller to the buyer.

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7
Q

What is a “Give Up” When Clearing a Trade?

Who gives to who?

A

When a Non-Clearing member has to “Give Up” the trade to a General clearing memeber during registration.

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8
Q

What are the Stages of a “Mutual Guarantee” to Ensure Debts are Paid Following Default?

What is it AKA?

A

AKA Waterfall.

  1. Defaulting members margin
  2. Defaulting members contributions to default fund
  3. Other members contribution to default fund
  4. Clearing house own funds
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9
Q

What are the Stages of a “Independant Guarantee” to Ensure Debts are Paid Following Default?

What can this include.

A
  1. Defaulting members margin
  2. Clearing house own funds (can include insurance)
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10
Q

What are the Contributions Values to the Default Clearing Fund Based On?

A

Proportionate volume and value of average daily trades novated.

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11
Q

What is an Initial Margin?

Definition?

A

Up front retractable deposit based on a worst probable move in price.

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12
Q

What is SPAN?

What does this do?

A

Standard Portfolio Analysis of Risk.

Collects all the derivatives positions of a clearing member into portfolios and calculates the risk of each portfolio.

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13
Q

What is the Variation Margin?

A

Payment and receipt of unrealised losses and profits on a daily basis.

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14
Q

What are the Two Ways in Which are Initial Margin is Calculated?

Which one is used?

A
  • Scanning Risk (SPAN) + Inter month change + Spot month - Inter-commodity credit
  • Short option minimum charge (only when the short has written deeply out the money options)

+ / - are the adjustments

Which ever is greater.

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15
Q

What is Intermonth Change?

When calculating intital margin?

A

Essentially just intra-market spreads e.g. Long tin future September and Short tin future December

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16
Q

What is Inter-Commodity Credit?

When calculating initial margin?

A

An intermarket spread e.g. a long gilt future and a short bond future.

17
Q

How is Variation Margin Collected?

Through which system, what is important about this?

A

Protected Payment Systems (PPS)

It is a single payment system.

18
Q

What is Maintenance Margin?

When will a margin call occur?

A
  • Where variation margin is paid out of initial margin, held at the clearing house.
  • Margin calls made when initial margin falls below a pre-determined (maintenance level) level. This is slighlty more than the initial margin.
19
Q

Is Maintenance Margin used by UK Clearing Houses?

Who might use this?

A

No, but brokers tend to use this method with their clients.

20
Q

How Much is Owed When the Maintenance Margin is Breached?

A

The total amount to bring it back in line with the intial margin.

21
Q

What are the Pros and Cons of Maintenance Margins?

A
  • Pros: Reduced Administration
  • Cons: Margin Shocks
22
Q

What is a Margin Shock?

With maintenance margins?

A

When a large margin call is requested after the variation margin had remianed inside the predetermined level.

23
Q

What Forms of Collateral are Acceptable for Variation Margins?

A

Usually cash only.

24
Q

What Forms of Collateral are Acceptable for Initial Margins?

There are 4.

A

Cash / bank guarantees / certificates of deposit / gov debt.

25
Q

What are Collateral Conditions for Initial Margins?

A
  • Must be lodged with depositories and custodians
  • Collateral must be marked to market daily and is subject to a published haircut.
26
Q

What are Unacceptable Forms of Collateral for Initial Margins?

There are 2

A
  • Undated bonds
  • Foreign currency bonds (gilts in euros)
27
Q

Under the FCA Laws, How Long Can a Firm Extend Credit for in the UK without a Formal Agreement?

For variation margins.

A

Up to 5 business days.

28
Q

When is Intra Day Margin Used?

A

This is used for emergency situations, such as a sudden increase in volatility.

29
Q

What is the Threshold Amount?

Within the collateral process.

A

The maximum unsecured credit exposure a counterparty is willing to take.

30
Q

What is the Minimum Transfer Amount?

Within the collateral process, how does this help?

A

The minimum movement that warrants a margin call, reduces the cost and number of payments by setting a minimum amount of collateral that will be transferred.

31
Q

What is the Delivery Amount?

A

The amount paid to cover the risk.

32
Q

What is the Return Amount?

A

When the risk falls it is the amount of collateral that is returned.

33
Q

What is the Credit Support Annex?

What does this set out.

A

Defines rules and conditions under which collateral will be transferred.

34
Q

What is the Collateral Support Documentation?

What does this set out.

A

Sets out timings and prodecures of marking-to-market.

35
Q

What is the Role of Banks for Tripartate Agreements, During OTC Derivatives?

A
  • Mark-to-market
  • Monitor collateral value
  • Manage delivery and return amounts
  • Pay interest on collateral
36
Q

What is the Purpose of Uncleared Margin Rules?

A

To adress counterparty credit and default risks from OTC derivative trades.

37
Q

What is the Scope of Uncleared Margin Rules?

A
  • Non standardised OTC derivatives
  • Entities with an aggregate average notional amount (AANA) of unlceared contracts exceeding a set figure. e.g. 8 billion dollars.
38
Q

What is the Adopted Method of Calculating Initial Margin?

A

ISDA Standardised Initial margin schedule (SIMM)

CISI Capital Markets Programme: Derivatives (11 decks)

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