Derivative Market Risk Management
JSE Clear (formerly known as Safcom), a wholly owned subsidiary of the JSE, is the clearing house for all Exchange-Traded Derivatives in South Africa. In this capacity, JSE Clear novates all matched trades transacted through the JSE. JSE Clear has a number of clearing members, who clear for its members, through which clients’ trade. Each member is responsible for its client’s losses (if a client defaults); just as each clearing member is responsible for the losses of the members for which it clears, should those members default. If a client (or trading member) cannot make good on its obligations, the trading member (or clearing member) will stand good for those obligations. JSE Clear, therefore, ultimately protects against the risk that one of the clearing members possibly default on their obligations. This could be as a result of one or more of its members’ inability to pay its obligations or by its own doing. The structure forms the basis of the JSE Clear risk management framework and is shown in the diagram below.
List of Clearing Members
Lines of defence
JSE Clear employs an array of risk mitigation measures. First, JSE Clear has set entry requirements to becoming a clearing member (financial, capital adequacy requirements and risk management capability). Second, all trades are collateralised through a system of margins. The sufficiency of the quantum of margin is back tested against actual market experience to ensure performance is at the expected confidence interval. Stress testing is done to test and measure the shortfall of margins in extreme market events. Last, JSE has established a default fund to which all clearing members must contribute. The default fund can only be accessed to cover losses suffered as the result of a clearing member default. If a default should access the default fund, the defaulting clearing member’s contributions would be used first. Thereafter, JSE Clear’s contributions will be used if needed and last the non-defaulting clearing members’ contributions, if there is still any loss outstanding.
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.
An initial margin is required when a trade is initiated, and variation margin is posted daily to account for daily profits and losses. The variation margin is the daily profit or loss and is exchanged daily between the parties to every transaction. This prevents there being a build-up of winnings to be paid by the losing party. The initial margin is akin to a "good faith" deposit on the position that is registered in the name of a person or member. JSE Clear's margins are quantified per contract, per beneficial owner and updated regularly. The margin is segregated at client level and some level of offset is given to positions in similar contracts. JSE Clear back tests margins regularly to ensure that margin coverage is as specified by the methodology used. In addition, stress testing is done daily to estimate the amount by which losses could exceed the margin posted in the case of an extreme market event.
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To ensure its readiness in the case of a default, JSE Clear has documented its default management processes and procedures and tested these during simulation exercises. JSE Clear also has a clearly defined and transparent full risk waterfall that defines how risk mitigants will be used for default purposes. In the case of a clearing member default, positions will be closed out by the clearing house and any losses incurred will be apportioned in terms of the risk waterfall.
Click here to see JSE Clear's Default Fund Policy
In accordance with the JSE Derivative Rules, JSE Clear separates all client margins and clearing member default fund contributions from its own moneys and manages and invests these margins and default contributions according to terms and conditions set by the JSE. All funds are placed with high credit quality local commercial banks.
JSE Clear ensures, in accordance with the JSE Clear Investment mandate, that sufficient funds are available on a daily basis to return margin on trades settled and /or cover losses in the case of a default, by adhering to the following placement limits; at least 30% of the total fund size must be invested on call at all times, not more than 30% of the amount on call may be invested with one institution, maximum tenor for investment of funds is 180 days and weighted average maturity of the fund may not exceed 50 days.
The PTS Risk Management Team is responsible for ongoing risk management of the Derivatives Market, reporting to the Director of Post Trade Services and acting under delegated authority from the JSE Board. To ensure continuing stakeholder engagement, the Risk Management Team consults regularly with the JSE Clear Advisory Committee, an independent advisory committee. All risk management policies and methodologies are brought to the JSE Clear Risk Committee for review. The JSEC Risk Committee and JSEC Board consist of representatives from the clearing members, independent experts and JSE management.
Links and reference documents
JSE Derivatives Rules
JSE Clear Policy Document - SSF and IDX Requirements