JSE Clear employs various risk measures in its role as the CCP to mitigate counterparty credit risk in the derivatives markets, including:

• Clearing membership requirements including financial and capital adequacy requirements as well as operational and risk management requirements.
• Products are assessed against predefined criteria to determine which are admitted for clearing.
• Prefunded resources are maintained to ensure the obligations of market participants can be met in the event of default. Prefunded resources are comprised of initial margin and the default fund.
• Initial margin requirements are determined through statistical methodologies to ensure that all exposures are adequately collateralised. The sufficiency of the margin is back tested daily against actual market movements to ensure required coverage levels are maintained.
• The default fund is sized to ensure the sufficiency of total prefunded resources in the event of a clearing member default under extreme but plausible market scenarios. Stress testing is performed daily to monitor the sufficiency of the default fund.
• In the event of a clearing member default, losses will be funded in accordance with the risk waterfall as follows:
  • Initial margin of the defaulted clearing member is used first.
  • Should initial margin be insufficient, the defaulting clearing member’s contribution to the Default Fund is used.
  • Thereafter, JSE Clear’s contribution to the Default Fund is used.
  • If any obligations to the market remain thereafter, the non-defaulting clearing members’ contributions to the Default Fund are utilised.
  • Should the financial resources listed above be insufficient to cover the defaulting clearing member’s obligations, the shortfall will be apportioned through a process of variation margin gains haircutting and affected market participants will have a claim against the defaulting clearing member for losses incurred.

JSE Clear determines the amount and regularly tests the sufficiency of the total financial resources available to cover default through stress testing. Financial resources consist in general of variation margin payments to settle daily position profits and losses, initial margin held throughout the lifetime of the position and a default fund. JSE Clear considers a list of relevant stress scenarios, both historic and hypothetical, as it relates to stress testing of credit and liquidity risk.

Credit stress testing results are used to inform the size of the JSE Clear default fund. On a daily basis, the results are used to monitor and manage JSE Clear’s exposure to clearing members.

The aim of stress testing for liquidity risk is to assess whether JSE Clear has sufficient liquid resources to meet intra-day and multi-day obligations under stressed conditions. There are broadly two types of scenarios that could cause a liquidity stress – the default of a clearing member or an operational event.

See JSE Clear’s Liquidity Policy