As a central clearing counterparty, CDCC contributes to the integrity and stability of the Canadian financial markets by protecting market participants from counterparty risk (also known as default risk or credit risk). CDCC guarantees the financial obligations of every contract that it clears by acting as the buyer to every seller and the seller to every buyer.
CDCC applies rigorous risk management procedures to protect its Clearing Members and indirectly, their clients, against extreme, but potential market events.
Below are the most important aspects of risk management at CDCC.
CDCC maintains rigorous membership standards, including minimum capital requirements, to ensure the creditworthiness of its Clearing Members.
CDCC requires that every Clearing Member deposit into an account with the Corporation an initial margin to cover the performance of positions held, therefore reducing the risk of a defaulting Clearing Member. CDCC can also issue a margin call requiring a Clearing Member to deposit extra acceptable collateral or securities into his account to bring his margin account up to the maintenance margin. The maintenance margin or variation margin is the minimum amount of collateral that must be kept in the margin account at all times.
CDCC has set up daily capital margin monitoring to evaluate the credit risk of its Clearing Members. Daily tracking of a Clearing Member's margin and capital enable CDCC to determine whether a Clearing Member is in a precarious financial position.
For added protection against a defaulting Clearing Member, CDCC requires that every Clearing Member contribute to the Clearing Fund. If a Clearing Member defaults, CDCC will liquidate the defaulting Clearing Member's margins and utilize his contributions to the Fund. CDCC will use other Clearing Members' contributions if the defaulting Clearing Member's margins and Clearing Fund deposits are insufficient to cover the loss.
CDCC takes a conservative approach to manage the securities accepted for margin deposits and to calculate haircuts that apply to these assets. Haircuts account for the potential loss of value if CDCC needs to liquidate the securities.
A fundamental objective of a CCP is to guarantee the integrity and continuity of payments and processes even in the event that a Clearing Member defaults on its obligations. CDCC has developed a default process, which is set forth in Appendix 1 « Default Manual » of CDCC's Operations Manual, to ensure that efficient mechanisms and processes are in place and are capable of limiting the adverse impacts of such an event.
CDCC is responsible for monitoring and identifying corporate actions in underlying interests. As a result, CDCC may need to adjust the terms of a derivative contract to reflect the new situation. On all occasions, CDCC informs Clearing Members and market participants of such adjustments.
Every quarter, CDCC reviews and publishes a list of underlying interests eligible for clearing. The criteria for acceptability of underlying interests of exchange-traded derivative products and OTC instruments are detailed in Schedule A « Risk Manual » of CDCC's Operations Manual.
For more information about risk management at CDCC, please click on the following links: