Principles of Risk Management in the MICEX Futures Market
One of the main characteristics of the derivative instruments exchange market is anonymous trading and centralized clearing for all transactions settled in the trading system. This means that the necessity to evaluate the risk of non-fulfillment of obligations under exchange transactions by contractors is considerably reduced for traders and exchange members.
This function is performed by the clearing organization, which guarantees settlements of all obligations undertaken by market participants in compliance with closed exchange transactions with futures and options circulating in the exchange. The risk management system is generated by the clearing organization in order to minimize the risks of derivative instrument exchange trade and to ensure financial security and risk protection for the clearing system itself.
The risk management system has two main functions in the exchange trade market:
- risk management;
- financial inspection.
These functions allow the following goals to be achieved:
- preventing accumulation of losses;
- ensuring the availability of sufficient resources for covering future obligations;
- early disclosure of financial and transaction problems;
- providing rapid and adequate operations for overcoming financial problems and protecting the clearing system.
The general principles of the risk management system in the MICEX Futures Market include:
- continuous monitoring of risks arising in connection with price fluctuations in the market and regulation of corresponding limits;
- preliminary collection of margins from market participants for assuring fulfillment of open position obligations (deposit margin);
- creating special risk cover funds;
- market-to-market and variance margin transfers;
- explicit regulation of procedures in cases of obligation non-fulfillment;
- guaranteeing timely settlements and the safety of clearing participants resources;
- regulatory monitoring of clearing participants’ credit quality.