Risk Surveillance Activities

Division of Clearing and Risk 

Risk Surveillance Branch

Market Risk Advisory Committee 

June 20, 2017 

1 
OVERVIEW

 

Division of 

Clearing and 

Risk

Risk 

Surveillance 

Branch

2 
Section 3(b) of the Commodity Exchange Act states that among the 

purposes of the Act are “to ensure the financial integrity of all 

transactions subject to this Act and the avoidance of systemic risk.”

The Risk Surveillance Branch (RSB) was established in 2005 

expressly to support the Commission in fulfilling this objective. 

RSB conducts independent assessments of the risks posed by 

market participants.

3 
RSB Responsibilities

• Futures & commodity swaps

• Credit Default Swaps (CDS) & equity swaps

• Data and systems

• 1.73 & 23.609 reviews, and 1.12 notices

• Interest Rate Swaps (IRS)

• Foreign exchange swaps (FX) 

• Firm level risk surveillance

• Reporting

• Margin back testing

• Margin model reviews

• Systemic stress testing program

• SIMMTM (Standard Initial Margin Model) program development

4 
5 
Growth in RSB Data Consumption –

number of records ingested 

 

0

10

20

30

40

50

60

70

EOY 2012 EOY 2013 EOY 2014 EOY 2015 EOY 2016 EOY 2017

(Est)

millions 

Part 39 (Daily Cleared Futures & Swaps)

Part 20 (Daily Commodity Swaps)

Part 16 & 17 (Daily Futures)

6 
Derivatives Clearing Organization (DCO)

Reporting Under § 39.19 

7 
Initial Margin Requirements – All

Red = DCO, Blue = Clearing member (CM)

8 
On a daily basis, RSB aims to:

 Identify positions that pose significant financial risk

 Estimate the magnitude of the risks

 Compare risks to assets

9 
MONITORING CLEARED 

RISKS 

Division of 

Clearing and 

Risk

Risk 

Surveillance 

Branch

10
POSITION REPORTS

 Position risk summary reports generated per trader with the 

capability to aggregate like risk across DCOs (examples: 

Crude Oil, Natural Gas, Equities)

 Futures equivalent delta position reports identify largest 

positions in each contract and commodity group

 Reports to identify notable short option positions

 Inter and Intra commodity spread position reports

11
STRESS TESTING

 Use a combination of proprietary and vendor risk management 

systems that interface

 Automated stress tests produce more than 5 million records daily

 Software has ad hoc stress testing capabilities, allowing analyst 

to create customized “worst case” scenario for an account

 All cleared swaps data at the beneficial owner level

 Ability to aggregate stress test results across DCOs and CMs, 

giving RSB the highest level of surveillance in the industry

12
13

STRESS TEST RESULTS

Variation Margin unsec risk ENC 

scenario - - - - - - - million USD - - - - - - - - - unsec/ENC Margin/ENC

trader 1 Hurricane Rita -X X -X X -76% 115%

trader 2 US Credit Downgrade from AAA rating -X X -X X -55% 254%

trader 3 Hurricane Rita -X X -X X -31% 50%

trader 4 TARP Announced -X X -X X -28% 55%

trader 5 TARP Announced -X X -X X -25% 88%

trader 6 Hurricane Rita -X X -X X -21% 20%

trader 7 AIG Bailout -X X -X X -21% 134%

trader 8 Hurricane Rita -X X -X X -20% 5%

trader 9 TARP Announced -X X -X X -20% 25%

trader 10 AIG Bailout -X X -X X -17% 22%
DASHBOARD WITH HEAT-MAP & CHARTS

BY HISTORICAL OR HYPOTHETICAL STRESS SCENARIO

14
15

POSSIBLE ACTIONS IF RSB HAS POTENTIAL 

CONCERNS ABOUT A TRADER’S RISK

 Contact the CM

 If additional assets in the account appear adequate for the unique risk, 

RSB may require weekly reporting by the CM 

 

 If RSB continues to express concerns, CMs have:

 required the trader to deposit additional margin

 asked trader to liquidate or move some positions to another firm

 acquired additional capital or lines of credit

 Contact the DCO, which may require the CM to post additional margin

 Contact the trader

 Work with other CFTC Divisions as appropriate 
FIRM PROFILE

”QUICK REPORT”

 Used to convey information on a firm to management, when 

prompted by:

Market events

Corporate events

Idiosyncratic risks

 Types of information

List of clearing relationships

Variation margin-to-initial margin percentage - Over the past 

30 days, how many of firm’s accounts breached margin?

Excess collateral held at CM or DCO

Firm’s large customers

Firm financial information

16
OTHER PROGRAMS AND

PROJECTS 

Division of 

Clearing and 

Risk

Risk 

Surveillance

Branch

17
MARGIN BACKTESTING PROGRAM

 Regulation 39.13 (g)(7) requires DCOs to conduct back testing 

to test adequacy of initial margin (IM).

 RSB oversight includes continuous monitoring of the adequacy 

of DCO margin levels and coverage. Objectives are to:

 Assess adequacy of IM for benchmark products at 

major DCOs

 Monitor performance of DCO risk management policies 

related to establishing IM

18
SYSTEMIC STRESS TESTING

 CFTC’s Supervisory Stress Test of Clearinghouses (SST) 

report issued November 2016

 Each DCO achieved “cover-two”

 CM risk was diversified among scenarios & across DCOs

 RSB working to automate credit SSTs, as part of a program

 Will use positions from “part 39”

 Futures portion to be automated in 2017

 Swaps portion to be added in 2018

 RSB currently working to incorporate liquidity

19
EXAMPLES OF SPECIAL PROJECTS

 SGCCI - Analysis of Central Clearing Interdependencies

 CPMI-IOSCO Framework for Supervisory Stress Testing of Central 

Counterparties

 Client porting

 Survey of clearing members

 Database to link customers across clearing firms and DCOs

 Multi-CCP default exercise

20
MULTI-CCP DEFAULT EXERCISE (CONT’D)

 CME, Eurex & LCH drills began on April 24, 2017.

 BoE, BaFin, Bundesbank & CFTC are nearly finished 

with post drill interviews.

 Regulators will soon begin discussion of auction file 

format harmonization with CME, Eurex, ICE and LCH.

 2018 plans for comprehensive porting exercise, 

encompassing the impact of the Supplemental 

Leverage Ratio.

21
IN SUMMARY, RSB:

 receives a large amount of data

 is continually enhancing its ability to analyze these data

 conducts independent risk assessments

 sees more of the whole picture in derivatives markets 

than any other supervisory agency

 customers across CMs & DCOs

 CMs across DCOs

 Cleared and uncleared

22
REGULATION 1.73 

REVIEW PROGRAM 

Division of 

Clearing and

Risk

Risk 

Surveillance

Branch

23
REGULATION OVERVIEW

 Establish risk limits

 Order screening

 Stress testing

House

Customer

 Evaluation of ability to fund 

variation payments

 Evaluation of ability to 

liquidate open positions

 Test lines of credit

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PLANNING AND INITIAL REVIEW

 Planning (4-6 weeks prior to visit)

Contact clearing CM

Engagement letter 

Record request

 Initial review (1-2 weeks prior to visit)

Preliminary review of requested records

Discussion with firm contact 

Records analysis

 Rejection log

Reperformance 

 Stress tests

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FIELDWORK

 On-site review (1-2 days)

2 to 3 RSB staff members per review

Meet with key personnel at clearing CM

Compare CM’s stress results to CFTC values

Observe intraday risk analyst in action

Discuss accounts or traders that RSB deems risky

26
REVIEW PROCESS

 Exit interview

Discuss each area of the review noting any 

areas of concern or issues of non-compliance

Recommendations

Solicit feedback from the clearing CM for ways 

to enhance the review process 

 Report

Note any issues of non-compliance

27
TYPICAL FINDINGS

 Interpretation margin adequacy evaluation

 Lapse coverage during overnight

 Liquidation analysis

 Documented procedures and maintaining records

28
BENEFITS OF PROGRAM

 Unique view of positions across multiple DCOs

 Relationship building with day-to-day risk personnel at all 

clearing CMs

 

 Fieldwork enhances industry knowledge

 Affords the commission on-site analysis of the risk systems 

and procedures being used

 Clearing members have voiced support for review program

Mutualization of risk

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Questions?

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