Financial Risk Management
Overview
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 (“BMSC”) and Bursa Malaysia Derivatives Clearing (“BMDC”); are licensed under the Securities Commission of Malaysia’s Capital Market Services Act 2007 as approved clearing houses. As central counterparty (“CCP”) for equities and derivatives markets, these clearing houses alleviate settlement risk for the participants by undertaking the counterparty role through novation and ensuring the fulfilment of settlement obligations for traded contracts.
CCPs have reformed their role from a clearing and settlement facility into systemically vital financial market infrastructure now essential for upholding the resiliency and integrity of the capital market. They must adhere to global best practices for risk management and disclosure.
The risk management measures of these two Clearing Houses are in line with the PFMI jointly issued by the International Organization of Securities Commissions (IOSCO) and Committee on Payments & Settlement Systems (CPMI), a technical committee of the Bank for International Settlements (BIS). The management of financial risk is guided by the following principles:-
Principle 4 of PFMI (Credit Risk) |
requires the CCP to maintain sufficient financial resources to cover its credit exposure to each participant and manage its credit exposure arising from its payment, clearing and settlement processes effectively. |
Principle 5 of PFMI (Collateral) |
requires the CCP to accept only collaterals with low credit, liquidity and market risks while ensuring appropriate haircuts and limits are imposed accordingly. |
Principle 6 of PFMI (Margin) |
requires the CCP to manage its current and potential future exposures through the collection of margins. |
Principle 7 of PFMI (Liquidity Risk) |
requires the CCP to maintain sufficient liquid resources in all relevant currencies to effect same-day, intraday and multiday settlements with a high degree of confidence. |
Principle 16 of PFMI (Custody and Investment Risk) |
requires the CCP to safeguard its own and participants’ assets and invest in instruments with minimal credit, market, and liquidity risks. |
The risk mitigation measures that have been put in place to manage Financial Risk are outlined below:
- Daily margining and mark-to-market of outstanding positions with an additional routine intraday margin collection for BMDC following the introduction of the night trading session;
- Actively monitor Trading Clearing Participants’ (TCP) and Clearing Participants’ (CP) capital adequacy ratios and adjusted net capital levels;
- Perform daily stress tests on adequacy of credit and liquid resources of the Clearing Houses to ensure that there are sufficient resources under both normal and extreme circumstances; and
- Conduct annual default drill exercises to test the effectiveness of the Default Management Procedures.