Market Risk

Methodologies for calculating a first level of guarantees:

  • Daily Mark to Market
  • Mark-to- Market is the procedure by which profits and losses (P&L) resulting from trades are settled on a daily basis (and not upon the expiration of the contract).
    These differences result in the daily valuation that is carried out by Argentina Clearing taking into account the original price of the transaction and the settlement price of each contract.
    In t+0, Argentina Clearing debits losses and credits profits in each ALyC’s Clearing and Settlement Account.
    In t+1, the Clearing House collects all debit balances and pays credit balances requested by the ALyCs.

Methodologies for calculating a second level of guarantees::

  • Margin
  • It is the guarantee amount claimed by Argentina Clearing to guarantee open positions for each portfolio.
    Argentina Clearing applies the gross clearing method by which the ALyC must deposit guarantees for each account's' open position held at the end of each trading session; that is to say, there is no clearing whatsoever between opposite positions held by the ALyC’s accounts.

    Risk Management System
    Argentina Clearing owns a proprietary Portfolio Risk Management System, whose purpose is to manage the risk of a marketable securities portfolio, determining the maximum expected loss within a given period of time and a given confidence level, under normal market conditions. For such purposes, the system poses scenarios based on the risk factors to which the contracts included in the portfolio are exposed.

    Contracts Margins

  • Risk System Parameters:
    • Range
    • In order to determine the Price Variation Range for each product and position, the system implements the Value-at- Risk technique, which is the statistical measurement that estimates the maximum probable loss for an open position for a derivative instrument within a particular time frame and at a given confidence level. This parameter is revised at least once a month.

    • Volatility
    • Maximum, medium and minimum volatilities are determined for option contracts and they are revised at least once a week.

    • Inter-month Spread Charges:
    • The Risk Management System assumes in each scenario the same price variations for all contracts of the portfolio; therefore it is considered that futures prices for the different positions vary in perfect correlation, that is, with correlation 1. However, prices for a product’s different positions do not generally show perfect correlation. Therefore, the Risk Management System adds an inter-month spread charge to cover the basis risk that may exist for portfolios containing futures and options with different maturity dates. It is a necessary complement to the 18 scenarios that fixes the assumption of perfect correlation between different positions of the same product.
      In order to calculate the Spread Charge, the system defines Levels of Combined (consecutive) Assets and Priorities. which are exhausted level-by- level.
      The Spread Charge is easy to calculate when there only are futures contracts. This is not so when option contracts are included as well. In order to calculate the spread, the system converts options to their equivalent in futures contracts. In order to make this calculation, the system takes into account the option's delta. The delta measures the number of underlying asset units to which the option is equivalent.

    • Inter-commodity Spread Credit:
    • The prices of related commodities tend to vary with certain correlation. Therefore, gains obtained from the position of one product may offset losses incurred by the opposite position in another correlated product. In this way, in order to recognize the lowest risk for the portfolio holding opposite positions in correlated commodities (inter-commodity spread), the Risk Management System calculates a credit that is deducted from the total margin requirements calculated for each individual commodity.
      The Risk Management System identifies the net delta for each position and then calculates the spread formed for holding positions in different correlated products. Argentina Clearing is responsible for determining the degree of correlation between commodities as well as the credit amount recognized for holding this type of spread.

  • Position Concentration Limits
  • The purpose of establishing position limits is to prevent a market participant from holding a hegemonic participation, giving rise to the possibility of following unhealthy market practices.
    Argentina Clearing establishes open position limits per account, for each maturity date of a futures position. Such limits are defined in terms of the total number of contracts (deltas) that a account may hold, in absolute values or as a percentage of a position’s total number of open contracts (deltas). The number of option contracts is calculated based on the delta. Additional margins are established for contracts exceeding established limits.

    Communications about Limits

  • Additional Margins
    • Commodity Delivery Process - Additional Margins:
    • futures contracts settled by physical delivery may entail principal risk by delivering commodities before receiving payment or vice versa, by paying before receiving the commodities. For cash-settled contracts, there is no principal risk. To mitigate this risk, Argentina Clearing shall charge an additional margin calculated by taking into account the principal risk (tons in delivery process * settlement price * exchange rate) and the ALyC’s net worth. Should the principal risk be higher than the net worth, an additional margin shall be charged in multiples of $ 100,000, up to a maximum of $ 300,000.

  • Back-Testing
  • The procedure used for backtesting calculation consists of comparing the daily margin requirement through current account debits against daily differences generated for such accounts.

  • Stress-Testing
  • The procedure used to calculate backtesting consists of comparing the daily requirement of current account margins against the daily differences generated for those accounts.