ENTERPRISE RISK MANAGEMENT
Management of Financial Risk
The Group has in place robust risk management processes and procedures to manage counterparty/settlement risks and prevent a systemic impact on the market. Bursa Malaysia Securities Clearing Sdn Bhd (BMSC) and Bursa Malaysia Derivatives Clearing Berhad (BMDC) (collectively referred to as “Clearing Houses”) act as the central counterparty for equities and derivatives trades, respectively, and thus are subject to counterparty credit risk. The processes and procedures of these two Clearing Houses are in line with the PFMI issued by the Committee on Payment & Settlement Systems (CPSS), a Technical Committee of the IOSCO. The management of financial risk is guided by the following principles:-
The risk mitigation measures that have been put in place to manage Financial Risk are outlined below:
Daily mark-to-market of outstanding positions and intraday revaluation of positions and collaterals;
Initial and variation margin requirements; as well as prudent cash and collateral management;
Monitor Trading Clearing Participants’ (TCP) and Clearing Participants’ (CP) capital adequacy ratios and adjusted net capital levels;
Monitor settlement flows for both BMSC and BMDC and manage clearing house’ exposure vis-à-vis other financial institutions;
Perform daily stress-tests on adequacy of the Clearing Guarantee Fund (CGF) of BMSC and the Clearing Fund of BMDC respectively, to ensure that they are sufficient to protect the Clearing Houses under extreme but plausible market scenarios;
Perform daily stress tests on adequacy of liquid resources of the Clearing Houses to ensure that there are sufficient liquid resources to meet its settlement obligations on a timely manner; and
Conduct annual default drill exercises by simulating default scenarios to test the effectiveness of the Default Management Procedures to ensure they remain robust and relevant in the face of the uncertain market environment. In 2017, there were no settlement defaults by any TCP or CP and neither the CGF nor the Clearing Fund needed to be called upon.
For details on CCP risk management practices please refer to Clearing Risk Management.