BMSC and BMDC as Central Counterparty (CCP)
Overview
Initial margin, also known as performance bond requirement are good faith deposit collected to guarantee the performance of the open positions. The collection of initial margin is a critical tool available to the Clearing House to mitigate potential future exposure. In line with the concept of “defaulter pays”, the initial margin collected should be sufficient to cover potential fluctuations in the market value of a defaulting participant’s open positions following an event of default until they are fully closed out or hedged. BMSC and BMDC adopts the recommendation under PFMI Principle6: Margin, in designing the initial margin model to achieve at minimum 99%one-day coverage under normal market circumstances.
The CCPs credit exposure to clearing participants are primarily mitigated by collection of margin as recommended under PFMI Principle 4: Credit Risk, to address both current exposure and potential futures exposure. In order to prevent the accumulation of losses, BMSC and BMDC requires all outstanding or open positions to be marked-to-market at least once daily. The resulting profits and losses are known as variation margin or settlement variation. These amounts, calculated at every settlement cycle are posted to participants’ account and must be paid off every day in case of deficit.
For participants clearing BMD products the shortfall must be settled before start of next day trading and in cash of the relevant contract settlement currency. This risk management measure typically resets value of positions to zero on daily basis and in turn mitigates potential futures exposures. Settling in the trading currency of the contract will mitigate potential mismatch of cash flow during settlement processing time.
For participants of BMSC, the mark to market variation margin is collected as of start of day, at 10am, as part of the equities margin requirement and also during intraday margin call.