Risk management

Muqassa shall collect Margins that are based on the risks in the cleared portfolios (market risk, liquidity risk, etc.).  More precisely, margins will cover the current exposure (Variation Margin) and expected future close-out (“Initial Margin”) cost of the portfolios.

With regard to Initial Margin (“IM”), Muqassa has adopted Nasdaq’s Delta Hedge methodology which is highly compatible with CME SPAN® in that it uses the same set of parameters to estimate portfolio risk.  The key components of the IM methodology are:

• Type of Model: Simple historical Value at Risk (“VaR”) model used in calculating historical risk per instrument / instrument group.
• Margin Period of Risk (“MPoR”): minimum 2 days.
• Confidence Interval: minimum 99%.
• Lookback period: 10 years.
• Anti-Procyclicality Coefficient (“APC”) – 25% buffer on margin calculations.

In addition, Additional Margin may also apply; however, this is market specific, and can include add-ons such a concentration margin, margin for rolled-over trades, add-on for breach of risk limit etc.

Specifically, for the Cash Market, stocks are divided into tiers based on pre-defined set of criteria. Each tier has a number of stocks that share similar attributes in terms of market cap, traded value, and standard deviation of returns.

Gross margining is adopted by Muqassa, whereby each client account of a clearing member is margined separately. Margin will be evaluated continuously intraday, in the event that there is a collateral deficiency then an Intra-Day Margin Call (IDMC) will be issued. The Clearing Member will have to remedy the deficit as notified from time to time.

IM coverage is backtested on a daily basis by comparing it with the actual realised profits and losses.

The IM will be validated on an annual basis by independent external experts.

The market specific margin attributes are captured within our Quarterly Quantitative Disclosure available in the Disclosures section. 

Stress Testing
Stress-testing is performed daily to ensure that the financial resources are sufficient to cover risk exposures under extreme but plausible market condition, and more precisely looks at “tail-risk”. In conducting stress testing and to consider ‘extreme but plausible’, Muqassa analyses both historical scenarios as well as hypothetical scenarios. The results of the stress testing form the basis for Stress testing.

The following are some of the main components for the Default Fund and its calculation:

• Default fund size - Cover 2 (Highest stress loss of the largest two participants and their affiliates in preceding 90 days) with a buffer of minimum 10%
• Recalculated on a monthly basis with the discretion to perform an ad-hoc calculation
• Default Fund allocated to members based on average Initial margin of members. The Default fund requirement is to be contributed in cash in SAR.
• Supplemental Default Fund Contribution: 1x

A Stress Test Exposure Limit (“STEL”) may also be used to address any potential uncovered credit loss by setting a limit on each Clearing Member’s stress loss relative to the total Default Fund size from those Clearing Members that bring increased ‘concentration’ risk to the CCP. The limit will represent the amount of stress loss in percentage relative to the Default Fund size. The limits are set in accordance to the ICS as determined by Muqassa.

Default Management
In the event that Muqassa, and more specifically the Default Management Committee (“DMC”), determines that a Clearing Member is, or appears to be unable, to meet its obligation in respect of the Clearing Documentation than an Event of Default may be declared and the internal Default Management Procedure (“DMP”), which is in alignment with the Clearing Documentation, for that specific market will be followed. At this point, Muqassa will have an unmatched book and will be exposed to the market risk on the Defaulting Clearing Member’s portfolio.

The main objective of the DMP is to:

• Manage the risk exposure and impact associated with a defaulting Clearing Member;
• Minimize and stem the losses arising from the default and liquidity risk associated;
• Ensure the continuity of critical services for non-defaulting Clearing Members; and
• Limit the disruption and prevent wider financial market impact.

In summary, and in the Event of Default being declared, the DMC has a number of tools it can utilize to primarily address an un-matched book and is market dependent but can include:

1. Porting – Transferring positions and/or collaterals of the non-defaulted accounts under the defaulted member to another clearing member
2. Hedging – Neutralising the overall risk of the defaulter’s portfolio
3. Closing-Out – via Brokers, where appropriate
4. Auction – Allocating the positions to the non-defaulting Clearing Members by a tender

The actions of the DMC will be considered a success if Muqassa regains a matched book and any monetary losses are able to be fully allocated to the Default Waterfall, preferably without utilising Non-Defaulting Clearing Member’s Upfront contribution and within the Stressed Period of Risk (“SPOR”)

An unsuccessful outcome would be where there are positions outstanding or the monetary losses that exceed that of the Default Waterfall. At this point, Muqassa may wish to trigger the Recovery Plan. More generally the recovery tools are listed within the Clearing Rules under “Additional actions upon an Event of Default

Default Waterfall
Muqassa has designed the following Default Waterfall that is in line with international best practice:

• Defaulting Clearing Member’s Margin contribution (including excess).
• Defaulting Clearing Member’s Default Fund contribution.
• Muqassa’s contribution to the Default Fund (Skin-in-the-Game).
• Non-Defaulting Clearing Member’s Upfront contribution to the DF.
• Non-Defaulting Clearing Member’s Supplemental Default Fund contribution.

Muqassa may elect to have more than one default waterfall and in the event it does, every effort will be made to ensure that cross-contamination between segments is removed, i.e. a default in one segment cannot directly affect another segment in terms of the resources used.

Muqassa Recovery Plan

Muqassa has developed a comprehensive Recovery Plan designed to permit it to continue to provide its critical services. The Recovery Plan identifies the critical services provided by Muqassa and scenarios that may prevent it from being able to provide its critical services. The Recovery Plan will also identify the criteria that will trigger the implementation of it and the appropriate recovery tools.

Muqassa’s Recovery plan has been approved by the Board of the Capital Market Authority and the Saudi Central Bank.

Pricing

Price Management details the steps for determination of the margin and collateral prices which will be used within the Intraday and end of day with respect to:

• Cleared instruments subject to margining
• Non-cash collateral assets accepted as Collateral, for valuation purposes, if any.

Prices are needed to calculate daily margins including variation margins, collateral valuation and compensation for late delivery.

Intraday Pricing

• Margin price and Collateral price (before haircut) is selected as the latest price out of the Last and the Mid (out of Bid and Ask) prices from Exchange.
• Muqassa uses last paid prices or average of simultaneously existing bid/ask prices, whichever comes last. Bid/ask prices with larger spreads and one-legged bid/ask prices are not used.
• Theoretical price calculated by Muqassa, 
• Previous day's end of day price

End of Day Pricing
The Margin and Collateral Prices are derived according to the above mentioned sequence until price is discovered.  In case of no trade within the day for a specific instrument, theoretical pricing will be applicable.

Theoretical pricing in Fixed Income Market
Calculation of theoretical price for the FIs will be via yield curves bootstrapped with selected FIs and/or benchmark instruments for related maturities
Members can see the prices for instruments in the Risk parameter file published intraday and End of day by Muqassa.