Risk Management

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.

Membership Standards

CDCC maintains rigorous membership standards, including minimum capital requirements, to ensure the creditworthiness of its Clearing Members.

Limited Clearing Members ("LCMs")

Limited Clearing Members or "LCMs" are a different type of Clearing Member. This type of membership is reserved for qualified Canadian buy-side participants. CDCC maintains a different set of membership standards for LCMs, including minimum credit requirements, operational readiness and ability to perform the obligations of a Clearing Member at CDCC.

Margin Requirements

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.

Additional Capital Margin

CDCC has set up daily capital margin monitoring process to evaluate the credit risk of its Clearing Members (excluding LCMs) that can result in CDCC asking for Additional Capital Margin. Daily tracking of a Clearing Member's margin and capital enable CDCC to determine whether a Clearing Member is in a precarious financial position.

Clearing Fund Deposit

For added protection against a defaulting Clearing Member, CDCC requires that every Clearing Member (excluding LCMs) 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 Clearing 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.

Since LCMs do not contribute to the Clearing Fund, CDCC requires that LCMs cover the risk exposure that arises if the total value of their risk to the CDCC is greater than the aggregate amount of the LCM's Adjusted Base Initial Margin and the total value of the Clearing Fund.

Approved Collateral

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.

Default Management

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.

Contract Adjustment Process

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.

Ongoing Analysis of Acceptability of Underlying

Every quarter, CDCC reviews and publishes a list of underlying interests eligible for clearing. The criteria for acceptability of underlying interests of exchange-traded and customized derivative instruments are detailed in Schedule A « Risk Manual » of CDCC's Operations Manual.