BRAZIL: BM&FBOVESPA Clearinghouse Publishes Risk Management Manual

Wednesday June 21 2017

BM&FBOVESPA Clearinghouse has published a Risk Management Manual. The manual describes the risk management model adopted by the clearinghouse, meaning the risk management rules, procedures and criteria associated with the transactions to which it acts as central counterparty. Its risk management model consists of several elements, among which the following stand out:

• chain of responsibilities in the settlement process;
• safeguard structures
• risk monitoring;
• collateral management process; and
• risk calculation model.

The chain of responsibilities in the settlement process is a set of (co-)(inter-)responsibility relations between the different classes of participants and BM&FBOVESPA in the performance of obligations arising out of the transactions accepted by the clearinghouse, that is, in the settlement of such transactions. The safeguard structure organises the mechanisms established for the purpose of mitigating losses associated with default events, that is, associated with any failure to meet obligations during the transaction settlement process, pursuant to the chain of responsibilities. Chapter 1 and appendix 1 deal with the BM&FBOVESPA safeguards, whereas chapter 2 presents the chain of responsibilities and procedures applicable by BM&FBOVESPA in the event of default by participants.

Risk monitoring covers control of the use of the operational limits assigned to participants; analysis of the pre-trade risk limits assigned by full trading participants to investors holding direct market access; and monitoring of intraday risk through which the risk of each participant and the relevant impact on safeguards are assessed during trading hours and upon transaction registration. Risk monitoring is the subject matter of chapter 3 and appendix 2 of the manual.
The collateral management process comprises the rules and procedures associated with the transfer, custody, valuation and liquidation of collateral, as detailed in chapter 4 of the manual.

The risk calculation model defines how to quantify potential losses in the event of default by one or more participants, as well as the impact of such an event on the BM&FBOVESPA safeguards. The risk calculation model, including parameters, is defined by the BM&FBOVESPA Market Risk Technical Committee, which is 7/160 responsible for ensuring constant review of the calculation model, which is presented in chapter 5 and appendix 3.

The content of the manual applies to the derivatives markets managed by BM&FBOVESPA, excluding equities derivatives and derivatives on exchange-traded funds (ETFs), covering the transactions executed in exchange-traded markets as well as in organized OTC markets using the “collateralized” and “partially collateralized” registration modes.

The manual is complemented by:

• The clearinghouse rules;
• The clearinghouse operating procedures manual;
• The BM&FBOVESPA access rules and manual; and
• Applicable circular letters and external communications published by BM&FBOVESPA and in force.

The values of parameters utilized in the calculation criteria and methodologies presented in the manual are available on the BM&FBOVESPA website.

Please click on the above link for more information.