A clearing organization is required to have financial resources as a consequence of the risks assumed in the clearing activities. This section describes CCaR, a proprietary methodology and system developed by Nasdaq Clearing to determine the required clearing capital.
Nasdaq Clearing relies on a proprietary capital-at-risk calculation model and system, CCaR (Clearing Capital at Risk), as the main driver for establishing an appropriate level of clearing capital. The methodology is approved by the Swedish FSA and complies with the Committee on Payment and Settlement Systems (CPSS), the Technical Committee of the International Organization of Securities Commissions (IOSCO) and the European Market Infrastructure Regulation (EMIR) stipulations as of March 2012.
A clearing house has counterparty risk in each position that it clears. To cover that risk, the clearing house requires that all counterparties post margins. The purpose of the CCaR measure is to estimate the risk that posted collateral may be insufficient to cover the costs of closing out the positions of a defaulted counterparty. The system generates implied loss given default calculations based on assumptions on extreme price movements and levels of simultaneously defaulting counterparties. The two main differences between the assumptions in CCaR and the ones applied in the margining methodology are the following:
- Market movements in margin calculations are described as “sufficient to cover a majority of normal trading days”, while the movements applied in CCaR are designed to be “extreme but plausible”, in order to comply with IOSCO and EMIR regulations on capital adequacy.
- Margins are applied to all accounts, but the CCaR value is calculated as the aggregated loss for a predefined number of simultaneously defaulting accounts in the worst extreme scenario applicable that day.
For each individual account and extreme scenario, a stressed market value is calculated and compared to the margin requirement applied to the corresponding account. The difference between the greatest stressed market value and the margin requirement is the CCaR value for that account. The CCaR value reflects the amount of Nasdaq Clearing’s capital that is at risk for that scenario, if that counterparty were to default.
Calculating CCaR Parameters
CCaR parameters set the stressed market values, on each product set, which drive clearing capital in the CCaR system. Nasdaq Clearing follows a systematic and homogeneous procedure to calculate CCaR parameters for each product line and asset class. The purpose of following an objective methodology is to measure capital contributions fairly, such that stress levels neither penalize nor favor any particular market or product. The extreme but plausible scenarios generated by these CCaR parameters are based on the long-term historical tail risk of each product and asset class with 99.9% confidence. The stressed market values for each product set are completely independent (i.e. fully decoupled) from the level of margins.