Specialeforsvar ved Sophie Glasmann

SPECIALEFORSVAR ved Sophie Glasmann 

Titel: Central Clearing of Foreing Exchange Derivatives - Stability analysis of a Central Counterparty

Abstract: The main objective of this thesis is to discuss central clearing with respect to FX derivatives. The work gives a brief overview of the evolution of the FX derivatives market as well as current trends, regulation and risks. A short discussion examines the reasoning for the current ruling on the exemption of FX forwards and swaps from any central clearing requirements. A trader’s counterparty credit risk exposures is modelled for FX forwards traded in a bilateral setting as well as for the trading of FX futures via a Central Counterparty. The comparison indicates that central clearing is beneficial for the trader’s counterparty credit risk under certain conditions. The model accounts for daily settlement of contracts as well as default fund contributions to a CCP. Current and future exposure is determined using a semi-analytical approach of potential future exposure. If the netting benefits of a CCP are sufficiently large to offset the increase in exposure caused by the default fund contribution, central clearing is more attractive for a trader. The effect of loss mutualisation is incorporated into the model by a dependency of the portfolio variance on the default probability of the Central Counterparty. A comparison of the current rulings on capital requirements shows moreover that the model’s results are in line with the opinion of regulators. The key issue for a better market infrastructure is the stability of the Central Counterparty and its sound risk management. An approach for the measurement of a CCP’s liquidity risk exposure is outlined using the example of FX futures and options offered by Eurex Clearing AG, an entity of Deutsche Börse Group. Relevant risk management techniques of the CCP are outlined to be able to analyse all factors impacting the liquidity risk exposure. A strategy is suggested to incorporate the new product into the already existing liquidity tool of Eurex Clearing. The analysis of trading data from December 2014 points out that the CCP is currently well funded. A forecast of liquidity requirement based on a Monte Carlo simulation for exchange rates illustrates the extreme sensitivity to FX settlement amounts on market factors which exacerbates the liquidity risk management enormously. Eurex Clearing’s financial resources are currently more than sufficient but several extensions of the current framework are suggested to mitigate tail risks and ensure a sound liquidity risk management in the future. 

Vejledere:   Peter Norman Sørensen, Ø.I., Stefan Knoblauch, Deutsche Börse Group
Censor:       Søren Dahlgaard