Risk-management system

Principles and methodology

  1. Principles of initial margin calculation
  2. Methodology for compiling a list of major futures contracts, secondary futures contracts and securities admitted to trading in the on-exchange trading mode with settlement on T+4
  3. Description of the volatility curve estimation algorithm
  4. Description of how changes in trading limits for MOEX derivatives instruments work
  5. Tools for Clearing members to manage risks of clients' trading activity

Algorithm of initial margin calculation

The basis of the Derivatives market guarantee system is the algorithm of initial margin calculation (initial margin – further IM) to each open interest of every market participant. One of the special features of the guarantee system of Derivatives market is the online calculation of orders and positions' collateral. Such an approach allows to minimize the risk of default on obligations and constantly assess the positions" market risk level of each clearing member.

The algorithm is based on the experience of the leading global exchanges, the previous experience of Moscow Exchange as an organizer of derivatives trading and the suggestions of the top specialists of the derivative market in Russia.

  1. Procedure for connection to the Initial Margin calculation module
  2. Fees

The algorithm of IM calculation is represented in the form of a separate software module. This module is an autonomous computing facility and can be integrated with the help of the API interface or OLE technology into a different software product. At the moment this module is used by the exchange during a trading session to control the sufficiency of funds of the market participants and their clients at the moment of their submitting the orders and calculating IM to the positions opening as a result of the trades. This module is also used in the clearing when determining the requirements for IM size for the next trading period.

Path of market participants" orders in the course of their processing on Derivatives market:

Structure of IM calculation module

Module is a Data base in the memory and a set of procedures for working with this data. There are 4 types of data saved in the module:

  1. A list of traded instruments, by which it is planned to conduct analysis of positions" risks
  2. Parameters of risks assessment by which IM is calculated  
  3. A list of clearing sections where participants" positions are taken into account (hierarchy of trading sections is the same as the one used on Derivatives market: Clearing member's section > Subbroker's section > Client's section)
  4. Trading information (a number of open interests in each section and by each instrument, a number of active orders and their prices)

All procedures of interaction with the module can be divided into several types:

  1. Procedure of a module initialization
  2. Procedure of receiving exchange parameters of risk assessment by the instruments traded on Derivatives market. Alternatively, setting of own parameters.
  3. Procedure of working with the data kept in the module (amendments, update or reading)  
  4. Procedures of IM calculation at each level subbroker - > client. (In order to calculate IM on the Clearing member level it is sufficient to summarize IM sizes by subbrokers of the given firm).

Exchange parameters of risks assessment are downloaded to the module from the exchange server. Both current parameters (updated in real-time mode) and parameters for the past periods are available for download. Active connection with the Exchange or Internet is required for using the module.

IM calculation module is a universal software product which allows to calculate the requirements for clients" positions' collateral for the clients" accounts in total, their open interests and active orders both all at a time and in a non-stop mode for transactions. The mode of calculating IM for transactions is optimized by the speed of computing in such a way so that the clients" actions are processed on the exchange non-stop and without a noticeable delay.

On the basis of the IM calculation module Moscow Exchange has developed a products line which will allow the market participants to integrate service of settlement and guarantee control into an existing complex of services, provided to the clients on the derivatives market.

Versions of IM calculation module

Version Opportunities Potential users

1. Client's version:

  • Program distribution along with realization of module connection to MS Excel
  • Example of using a software module
  • Description of interface of interaction with a module
  • Determination of IM size, required for any positions and orders for the instruments traded on Derivatives market on the basis of parameters set by the exchange
  • Forecasting the IM size depending on the change of market prices, volatility curves and other basic parameters of IM calculation  
Clients working on Derivatives market

2. Firm's version:

  • Program distribution along with realization of module connection to MS Excel
  • Example of using a software module
  • Description of interface of interaction with a module
  • Determination of requirements for IM at a level of separate clients
  • Determination of IM size for the total number of clients" accounts (on the level of a subbroker)  
  • Forecasting the IM size depending on the change of market prices, volatility curves and other basic parameters of IM calculation   
  • Additional opportunities in analysis of the risk profile for each clients and subbrokers
Clearing companies working on Derivatives market  

3. Firm's version (extended):

  • Program distribution along with realization of module connection to MS Excel
  • Example of using a software module
  • Description of algorithm's business logic + technical description of the software product (technical requirements)  
  • All opportunities of the Firm's version +
  • An opportunity to change the lists of instruments  
  • A full list of parameters of risks assessment with an option to change them  
  • Clearing companies working on Derivatives market which use their own parameters of IM calculation by clients (non the ones used by the exchange)
  • Companies working on the derivatives market, which use the Exchange model of IM calculation for risks assessment of the clients working on other markets   
  • Software vendors on the stock market for the companies working on Derivatives market.

Distribution of Client's version of IM calculation module.