BMSC and BMDC as Central Counterparty (CCP)
Default Management
While the risk management measures are designed to prevent clearing participant from defaulting on its obligation, BMSC and BMDC have in place contingencies to manage such an unlikely event. In particular, both Clearing Houses have recourse to default resources maintained in the form of Security Deposit and Direct Clearing Participant Deposit (BMDC only) as well as Clearing Guarantee Fund/Clearing Fund contributed by clearing participant and the clearing houses.
During a default situation, any shortfall or losses will first be covered by margins, excess cash and collateral of the defaulting participant. Should these be insufficient, its Security Deposit, Direct Clearing Participants Deposit and Clearing Guarantee Fund/Clearing Fund contribution will be utilised. In the unlikely event that there are still residual losses, BMSC and BMDC can resort to the Clearing Guarantee Fund/Clearing Fund contributions from the clearing house and non-default participants. Clearing participants are liable make good any further shortfall if Clearing House suffers losses exceeding the amount available in the Clearing Guarantee Fund/Clearing Fund.
Size of the Clearing Guarantee Fund/Clearing Fund and adequacy of total default resources are determined by applying rigorous stress test technique. In line with the PFMI, total default resources should be sufficient to cover losses caused by the default of two clearing participants. The stress test model, among others, applies a range of relevant stress scenarios taking into consideration historical extreme scenarios as well as hypothetical/forward-looking scenarios. A reverse stress test is also conducted to complement the regular stress test and to identify how severe stress conditions would be covered by the total default resources.Default waterfall resourcesfor BMSC