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Margining

A key safeguard of CDCC's risk management process is the requirement that Clearing Members post collateral in the form of margin to guarantee the performance of their contract obligations. CDCC's risk-based margin is determined using industry-accepted methods and it is designed to provide the proper levels of protection to cover market movements on open positions and unsettled transactions.

Margining

Margin Requirement is composed of the Initial Margin and the Variation Margin.

Initial Margin

The Initial Margin is composed of the Base Initial Margin (or Adjusted Base Initial Margin, as the case may be) and the Additional Margins. In order to cover the Initial Margin described below, Clearing Members shall deliver to CDCC an acceptable collateral.

Base Initial Margin

The Base Initial Margin requirement covers the potential losses and market risk that may occur as a result of future adverse price movements across the portfolio of each Clearing Member under normal market conditions.

Specifically, the Corporation uses a volatility estimator as described below and a confidence level over 99% under the Normal distribution’s or the Student’s t-distribution assumption. The Corporation also considers a variable number of days as an acceptable liquidation period. The Base Initial Margin amount is calculated using the historical volatility of the daily price returns of the Underlying Interests for Options contracts and Share Futures, the daily price returns of the Futures prices for Futures contracts (excluding Share Futures) and the yield-to-maturity (YTM) daily variation of the on-the-run security for Fixed Income Transactions.

With respect to the Limited Clearing Members, the Base Initial Margin is multiplied by the Effective Ratio to calculate the Adjusted Base Initial Margin.

Additional Margins

In addition to the Base Initial Margin (or Adjusted Base Initial Margin, as the case may be), the Corporation requires Margin Deposits for the following Additional Margins:

  • Additional Margin for Concentration Risk
    As previously mentioned, the Base Initial Margin requirement is intended to cover potential portfolio losses over an acceptable Close-out Period. Close-out Periods are set on a product specific basis and depend especially on their liquidity. For sizeable positions which cannot, due to their size compared to the total of open positions in a product or a group of products, be liquidated within the pre-defined Close-out Period for the product or group of products, leading to a longer Close-out Period for that Clearing Member, CDCC will require Additional Margin for Concentration Risk. The Concentration Risk methodology will add a number of liquidation day(s) to the pre-defined Close-out Period that will be applied to the incremental positions that are above a certain threshold. The thresholds are determined based on the average trading volume of the product.
  • Additional Margin for Specific Wrong-Way Risk
    The Specific Wrong-Way Risk arises when the exposure of a Clearing Member in its own products is adversely correlated with the credit worthiness of that Clearing Member.

    CDCC has identified three particular situations where the Specific Wrong-Way Risk exists:
    • Put Options:
      When a Clearing Member holds a Short Put Option position on its own shares or the shares of its Affiliates, the full strike value amount is charged.
    • Share Futures:
      When a Clearing Member holds a long Share Futures position on its own shares or the shares of its Affiliates, the full settlement value amount is charged.
    • Unsettled Items:
      The full strike value amount is charged for Option products and the full settlement value amount is charged for Share Futures when a Clearing Member holds a position on itself or its Affiliates.
  • Additional Margin for Mismatched Settlement Risk

    The Mismatched Settlement Risk is the risk arising from a lag between the settlements of positions which result in a Margin offset. More specifically, CDCC faces a risk that a Clearing Member settles a position that provides either a Base Initial Margin offset with other positions or a Variation Margin credit on the rest of the portfolio.

    Given the fact that Margin offsets are granted when Fixed Income portfolios have both long and short positions, the Additional Margin charge will be calculated on a gross basis for the positions that could cause mismatched settlement exposure prior to a default.

    In order to address the Mismatched Settlement Risk, CDCC will perform forward looking analysis to forecast material changes in Margin Requirements as a result of end of day settlement for Fixed Income Transactions.

    The Additional Margin for Mismatched Settlement Risk will be calculated by using the maximum of A or B, minus the total Margin Requirement for Fixed Income Transactions:
    • Where A represents the maximum of the Margin Requirement for buy transactions that settle on the current Business Day (t) or Margin Requirement for sell transactions that settle on the current Business Day (t), to which is added the remaining Margin Requirement for Fixed Income Transactions that settle on t+1 and beyond.
    • Where B represents the maximum of the Margin Requirement for buy transactions that settle on the next Business Day (t+1) or Margin Requirement for sell transactions that settle on the current Business Day (t) and the next Business Day (t+1), to which is added the remaining Margin Requirement for Fixed Income Transactions that settle on the second Business Day following the Transaction (t+2) and beyond.
  • Additional Margin for Intra-Day Variation Margin Risk
    The Intra-Day Variation Margin Risk arises when market volatility of cleared volumes produces unusually large Variation Margin exposures. In order to address the Intra-Day Variation Margin Risk, CDCC may call for additional Margin from each Clearing Member if it determines that the intra-day exposure for Futures and Fixed Income Transactions to the Clearing Member exceeds certain limits (thresholds expressed in percentage) in relation to the Clearing Member's respective Margin Requirement and Clearing Fund contribution. Additional Margin for Intra-Day Variation Margin Risk is subject to a minimum value (floor).

    Since the Variation Margin for Fixed Income Transactions is calculated on a daily basis, the Intra-day Variation Margin will compare the previous Business Day's value to the current requirement. If the current requirement is less than the previous Business Day’s requirement, no Additional Margin will be required.

    The Additional Margin for Intra-day Variation Margin Risk requirement is the sum of the Additional Margin for Intra-day Variation Margin risk in respect of Futures and the Additional Margin for Intra-day Variation Margin risk in respect of Fixed Income Transactions.
  • Additional Margin for Variation Margin Delivery Risk
    This Margin Requirement covers the risk incurred by the Corporation in guaranteeing to each Clearing Member having pledged specific securities to cover its Net Variation Margin Requirement, the return of such specific securities, in the event that another Clearing Member to which the specific securities were initially delivered fails to return such specific securities and becomes Non-Conforming or is Suspended. In this case, the Corporation will have to buy the specific securities in the market to return to the Clearing Member that had initially pledged the specific securities. To cover this potential risk, an amount representing a percentage of the total Variation Margin requirement or a specific percentage set at the securities level will be collected from the Clearing Member who initially receives the specific securities, as Additional Margin for Variation Margin Delivery Risk.
  • Additional Capital Margin
    On a daily basis, the Corporation measures the credit exposure of all Clearing Members (excluding Limited Clearing Members) that arises if the exposure of a Clearing Member is superior to its capital amount.

    Additional Capital Margin is determined by the Corporation as part of the Daily Capital Margin Monitoring (DCMM) process intended to evaluate the credit risk of its Clearing Members (excluding Limited Clearing Members).

    In the event that the sum of the Base Initial Margin and Variation Margin requirements for Options and Unsettled Items of the Clearing Member exceeds the capital amount, Additional Margin in the amount of the excess will be collected from the Clearing Member.

    The capital level is derived from regulatory reports received on a regular basis. The Corporation uses the Net Allowable Assets (NAA), the Net Tier 1 capital or any other comparative measure to assess the capital level of each Clearing Member.
  • Additional Margin For Uncovered Risk of Limited Clearing Members (LCMs)
    This Margin Requirement covers the risk exposure that arises if the total value of the risk represented by an LCM to the Corporation is greater than the aggregate amount of the Limited Clearing Member’s Adjusted Base Initial Margin and the total value of the Clearing Fund.

    The risk represented by the LCM is determined by the Corporation by calculating the estimated loss that the Corporation would face in extreme but plausible market conditions. This Additional Margin is calculated on a daily basis and is required from Limited Clearing Members only.

Variation Margin

The Variation Margin requirement covers the risk due to the change in price of a Derivative or Fixed Income Instrument or a change in the Floating Price Rate since the previous evaluation.

Products Variation Margin Coverage Type
Option Contracts Collateralized
Futures Contracts Cash Settled
Fixed Income Transactions Collateralized (subject to Variation Margin Process)
Unsettled Items Collateralized
  • Options Contracts
    For Options contracts, the Variation Margin is collateralized daily based on the Option Price reported by the Exchange, or the last Converge® Option Price , as the case may be, and, in the event of the unavailability or inaccuracy of such price, the Corporation shall set such price in accordance with the best information available as to the correct price.
  • Futures Contracts
    For Futures contracts, the Variation Margin (Gains and Losses) is cash settled every Business Day based on the last Settlement Price reported by the Exchange, and, in the event of the unavailability or inaccuracy of such price, the Corporation shall set the last Settlement Price in accordance with the best information available as to the correct price.
  • Fixed Income Transactions
    The Variation Margin Requirement in respect of each Fixed Income Transaction is calculated on a daily basis and represents the sum of the Price Valuation Requirement and the Repo Rate Requirement.
    • Price Valuation Requirement
      The Price Valuation Requirement represents, in respect of a Repurchase Transaction, an amount which is the aggregate amount calculated in respect of the difference between (i) the Market Value of the Purchased Security and (ii) the Repurchase Price of the Repurchase Transaction, plus any Coupon Income payable to the holder between the calculation date and the Repurchase Date, and, in respect of a Cash Buy or Sell Trade, an amount which is the difference between (i) the Market Value of the Purchased Security and (ii) the Purchase Price of the Cash Buy or Sell Trade; which amount is owed to the Corporation by a Fixed Income Clearing Member that is a party to such Repurchase Transaction or Cash Buy or Sell Trade or by the Corporation to such Fixed Income Clearing Member.
    • Repo Rate Requirement
      The Repo Rate Requirement represents a change in the current Floating Price Rate and means, in respect of a Repurchase Transaction, an amount which is calculated in respect of the difference between the Floating Price Rate and the Repo Rate; which amount is owed to the Corporation by a Fixed Income Clearing Member that is a party to such Repurchase Transaction or by the Corporation to such Fixed Income Clearing Member.

Unsettled Items

The Underlying Interest of an Option contract with physical delivery that has been exercised or assigned in the money, but is not yet settled (i.e. the Underlying Interest is not yet delivered) is considered an Unsettled Item. Similarly, the Underlying Interest of a Future contract with physical delivery that has expired is considered an Unsettled Item.

The Variation Margin for Unsettled Items with respect to both Options and Futures contracts is collateralized. With respect to Variation Margin for Unsettled Items related to Options contracts, the Corporation calculates a Variation Margin requirement equal to the intrinsic value of the Option multiplied by the position and the contract size. With respect to Variation Margin for Unsettled Items related to Futures, the Corporation calculates a Variation Margin requirement equal to the difference between the last Settlement Price of the Futures and the Price of the Underlying Interest related to the Futures, multiplied by the position and the contract size.

For more details on how CDCC computes margin requirements, please see Section 6 of the Risk Manual: https://cdcc.ca/f_rules_en/cdcc_operations_manual_en.pdf