Argentina Clearing S'A'

1
Argentina Clearing S.A.

• Risk Management

2

• Index
• Introduction 3
• Legal Risks 5
• Market Risks 8
• SARP (Portfolio Risk Management System) 12
• Credit Risks 17
• Operational Risks 19
• Depositary Risks 21

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Introduction

• One of the main concerns on the part of
  participants and authorities, as regards
  financial derivatives trading, is the implicit
  risk of this type of instruments in face of the
  risk pattern and the high level of leverage
  entailed in the negotiations of those
  instruments.

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Introduction

• Negotiation in financial markets exposes its
  participants to potential risks, such as
• Legal Risks
• Market Risks
• Credit Risks
• Operational Risks
• Depositary Risks
• ArgentinaClearing provides a sound
  infrastructure as regards legal regulations,
  information systems, resources and market
  supervision following international standards.

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Legal Risks

• Concept Loss risk due to the existence of
  different interpretation criteria in face of the
  ambiguity of current regulations on the subject. 
• Legal Relationships Clearing Members (CMs)
  maintain a principal to principal relationship
  with ArgentinaClearing. Clients maintain a
  principal to principal relationship with CMs
• Legal and Regulatory Framework Public Offer Law.
  Markets and Clearing Houses Regulation.
  Securities National Commission (Comisión Nacional
  de Valores). Bankruptcy Law. Trust law.
• Bankruptcy Law It does not favour clients funds
  or collaterals in Clearing Houses possession.

6
Legal Risks Mitigation

• Clearing House Rulebook
• Guarantee Trust Contract for CMs Obligations.
• Guarantee Trust Contract for Third Parties
  Transactions.
• CMs-Brokers Registration Contract.
• Agreement on Clients Account Opening.
• PriceWaterhouseCooppers Legal Opinion about legal
  structure.  

Maximum Standard of Legal Safety possible in
Argentina Only for CMs that register Third
Parties transactions Only for CMs that carry
out brokers clearing.
7
Legal Risks Mitigation

• ArgentinaClearing Legal Structure
• There is a clear segregation among Argentina
  Clearings, ROFEXs, CMs and CMs clients
  funds.
• CMs collateral in the Guarantee Trust can not be
  claimed by ROFEXs , ArgentinaClearings, CMs or
  CMs clients creditors.
• Risks related to depositories funds are taken by
  CMs and/or their clients, not by ROFEX and/or
  ArgentinaClearing.
• In case CMs default, collateral in the Guarantee
  Trust can not be subject to legal restrictions as
  regards their use.
• CMs are obliged to comply as regards the
  operations they guarantee, whether those
  operations are their own or their clients.
• Clients collateral is protected in case of CMs
  propietary account default.

8
Market Risks

• Concept Loss Risk due to adverse price
  fluctuation
• Central counterparty The Clearing House is the
  CMs central counterparty with their profits and
  losses resulting in a zero sum .
• Margin System The Clearing House manages a
  margin system whose aim is to mitigate market
  risk and make sure that it receives payments from
  those who lost in order to settle the accounts of
  those who got profits.

9
Market Risk Mitigation

• Daily Mark-to-market Daily profits and losses
  resulting from the current market value and
  previously negotiated prices. They are paid and
  settled the following day. (T1).
• Margins Guarantee settlement at client level and
  request of payment to CMs on the basis of gross
  amount. (long and short positions from different
  clients do not compensate).
• Intraday risk monitoring
• Daily Operational Limit (Limite Operativo
  Diario-LOP) Total amount of margins that can be
  generated and submit the following day (T1),
  determined according to CMs collateral at the
  beginning of each day.
• Intraday Margins When LOP is exceeded margins
  are submitted the day they are generated.(T0)
• Intraday Mark-to-market In case of high
  volatility, losses are paid the day they are
  generated.(T0)

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Market Risk Mitigation

• Position Limits these are set at client and CMs
  level in order to
• prevent market manipulations.
• make sure that each CM is solvent enough to
  fulfil its upcoming liabilities.
• make sure that the Clearing House can liquidate
  CMs positions in case it defaults.
• Emergency Actions In case of emergency
  situations the Clearing House is empowered to
• Increase margin amounts.
• Reduce position limits.
• Restrict eventual transactions.
• Procedures in case of CMs default
• In case of CMs default, the Clearing House is
  able to liquidate their open interest and face
  possible losses by means of collaterals provided
  by the defaulter.

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Market Risk Mitigation

• Guarantee Use Order in case of default
• Collateral contributions to the CMs Third
  Parties Transactions Trust, when necessary.
• Collateral contributions to the CMs Obligations
  Trust.
• Defaulter CMs contributions to the CMs Default
  Guarantee Trust .
• CMs Default Guarantee Trust proportionally
  distributed among the CMs.
• Guarantee Special Fund provided by the Rosario
  Board of Trade.
• Capital reserves set aside for that purpose.

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SARP(Portfolio Risk Management System)

• Developed by ArgentinaClearing based on SPAN, the
  world-wide used Chicago Mercantile Exchange
  margin system.
• It calculates margins on portfolios consisting of
  futures and options at each client level.
• The requested margin is the following-day maximum
  possible loss, considering different scenarios of
  price fluctuation and volatilities.
• Furthermore, it is an efficient means for
  assessing spreads.

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SARP calculates requested margins every 30
minutes or less. It also works out each clients
profits and losses, as well as options premiums
and compares them with their balances.
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Intraday risk monitoring
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Intraday risk monitoring
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Actions to be taken Example
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Credit Risks

• Concept Loss risk due to counterpartys default.
• Central Counterparty The Clearing House is the
  CMs central counterparty, therefore
• 1- In case of a CMs potential default the
  Clearing House faces Credit Risk.
• 2- In case of Clearing Houses default, CMs face
  Credit Risk.
• 3- 2 is a consequence of 1, since CMs profits
  and losses represent a zero sum.

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19
Operational Risks

• Concept Loss risk due to information system or
  internal control deficiencies.

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Operational Risks Mitigation
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Depositary Risks

• Concept Loss risk due to default on the part of
  depositary entities in which collaterals are
  kept.
• Risks related to funds depositories are taken by
  CMs and/or their clients, not by ROFEX and/or
  ArgentinaClearing.

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Depositary Risks Mitigation

• Compulsory fund diversification among the
  different depository entities. Those funds can
  not exceed the following percentages at each
  entity
• From 20 to 35 at each local custody entity
  authorised by ArgentinaClearing according to
  credit classification.
• The funds total amount at custody entities from
  the CMs same economic group can not exceed
  35().
• ()Argentina Clearing reserves the right to
  modify these percentages and limits, which will
  be immediately applicable.