The role of the BCDC is to provide risk management via risk control methods, including managing capital adequacy requirements of Members, monitoring of Member performance and trading history and imposing margin requirements on the BFX Members. The BCDC is also responsible for enforcing position limits based on capital, online monitoring of Member positions and automatic disablement from trading when limits are breached.
To ensure a high level of security and protection against the risk of default by any of the Clearing Members, the BCDC will implement margins which are the funds or securities that are deposited by Clearing Members as collateral for a given position that is opened. The type of margins the BCDC will require from a Member will be the initial margin and variation margins. The initial margin is the minimum amount of capital deposited before engaging in a transaction, which may vary based on the market conditions and the Members' portfolio.
Variation margins are not based on collateral deposit. The variation margin is a daily payment based on the profit and losses referred to as Mark-to-Market (MTM). It is carried out on a real-time basis and is calculated by comparing the difference between the traded price (or previous day's closing price) and the last trade price made on the Exchange.
The BCDC will use the internationally accepted SPAN®* based margining system, which is designed to calculate margin levels that are considered appropriate and adequate to protect against market risk, while not tying up excessive funds.
In order to further protect market participants from any counter party credit risk, the BCDC has also established a Settlement Guarantee Fund (SGF), which acts as a default fund upon the occurrence of a settlement default of a Member. The BCDC will decide how the fund can be utilised and will only be used after the full utilisation of the initial and any additional security margins.
*SPAN® is a registered trademark of the Chicago Mercantile Exchange and the BCDC has obtained a right to use it as its margining system.