4.3. Risk Management, Including Measures to Maintain
High Quality Management by NCC as CCP
Risk Management Framework Compliance with the Regulatory Requirements and
Functioning as a clearing house, central counterparty, credit institution, and commodity delivery operator (CDO) in Moscow Exchange Group’ markets, NCC uses the up-to-date risk management framework (RMF) meeting the regulatory requirements and year after year, endeavors to approximate increasingly the international standards.
To ensure its operational reliability, NCC applies the risk management approaches in compliance with the requirements of the Bank of Russia, recommendations of the Basel Committee on Banking Supervision, as well as the international standards of the Committee on Payments and Market Infrastructures of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions (CPMI-IOSCO) for systemically important infrastructural organizations.
During the reporting year, NCC made a number of amendments to its internal documents regulating CCP’s risk management, generally in connection with improvement of the risk management framework of the Company as a clearing house, central counterparty and commodity delivery operator, and with regard to the scheduled review of internal documents in compliance with the requirements of the Bank of Russia. In particular, the significant amendments were made to the following documents:
- Risk and Capital Management Strategy – in its new restated version, the results of identification of the most significant risks were updated; risk description was updated, the distribution of powers between NCC’s business units in the process of risk and capital management was specified, and the updated, more detailed set of quantitative and qualitative risk appetite indices and their thresholds for 2021 were provided taking into account the risk appetite metrics of Moscow Exchange Group and the events occurred during the reporting period;
- Rules on Risk Management Framework Organization – the document was updated with account of the amendments made to the regulations of the Bank of Russia and NCC’s internal documents and the changes in the organizational structure of NCC’s risk management;
- Stress Testing Methodology– the procedure for determining stress scenarios with respect to trades with liquidity providers was introduced; the procedure for changing the values of stress scenarios was defined when analyzing the validity of market risk stress scenarios; significant risk factors were identified during stress testing and the procedure for their determination and approval was established; usage of stress testing indicators was specified;
- Methodologyfor determining the dedicated capital of CCP NCC – the new restated version established the enhanced approach to measuring the dedicated capital and additional dedicated capital and to distribution of the dedicated capital between markets.
- Model Validation Methodology – a number of amendments were made to update the above with account of the regulations of the Bank of Russia and NCC’s internal documents.
As noted above in this report, in 2021 the milestone events for NCC’s risk management framework included successfully completed operational audit of the Company carried out by PwC, the international auditing and consulting company, and the Road Map of the Strategy for the Risk Management Framework Development till 2024 drawn and approved by NCC’s Supervisory Board (RMF Strategy). During the reporting period, the new approach was drafted for risk identification and management using a new, thorough and enhances risk appetite, which comprised the register of key risks, their quantitative and qualitative restrictions with account of the key stakeholders’ interests, and the necessary mechanism for informing and escalation.
Managing Risk of Clearing House and Central Counterparty
In 2020, the development of NCC’s risk management framework was primarily focused on ensuring the financial sustainability and reliability of NCC as a clearing house, CCP, and commodity delivery operator and was carried out in the following main areas:
- ensuring the adequacy of financial resources for settlements both in normal and extreme market conditions;
- improving the safeguard structure (default waterfall) default;
- improving the risk assessment methodology required for NCC to new clearing products’s lunch;
- implementing the measures to maintain compliance of the Company’s current activities with the requirements imposed by the Bank of Russia on qualified CCPs, whose management quality was recognized as ‘satisfactory’ in compliance with Regulation 658-P;
- providing information transparency to enable clearing members to assess risks adequately and supervisory authorities to supervise their activities efficiently.
System for Margining Clearing Members’ Trades
NCC uses a variety of models to determine the collateral requirements depending on the specific markets. The model for determining collateral requirements considers the specifics of instruments and, accordingly, is applied with minor differences based on each market specifics.
The scenarios used in the margining models are calibrated on the basis of historical data and consider the potential price movement scenarios for those assets that have not been reflected by the historical data yet, so as to secure at least 99% confidence probability for the required collateral amount in all markets.