Impact of Close-out Process on Level and Adequacy of Margin Requirements for Futures and Options

Due to the increase in the volume of transactions in the OTC derivatives market, the influence and role of the central counterparty that implements contract clearing increases. The accumulation and aggregation of risks in one financial institution stimulates the demand for the development of risk management systems. The main ways of CCP to minimize exposure to risk are netting positions and collateral. Collateral requires more attention, since collateral, on the one hand, should guarantee stability in the market, and on the other hand, should increase the efficiency of transactions in terms of the costs of participants. In addition, from a computational point of view, the calculation should be fast enough. These requirements are met by the Standard Portfolio Analysis of Risk – an approach based on 16 scenarios that allows you to conduct a rapid analysis of the behavior of contract prices and calculate margin requirements. However, the SPAN method underestimates the potential losses on OTC contracts, since positions on OTC instruments often have liquidity constraints. To account for the liquidity of contracts in the portfolio, the CORE (Close-Out Risk Evaluation) methodology developed at the Sao Paulo Stock Exchange B3 S. A. is considered. The main objective of the CORE approach is to take into account the limitations when liquidating portfolio positions. The CORE approach simultaneously offers a solution for considering the liquidity risk, but also sets the problem of choosing the optimal strategy for liquidating a position. The task of the central counterparty is to identify a liquidation strategy that sets minimum margin requirements while maintaining the level of sufficiency in predicting losses. In this paper, using the Python programming language, we demonstrated the SPAN approach, the influence of the CORE module, as well as ways to generate scenarios for changes in contract prices during the liquidation period. The work done confirms the importance of choosing a strategy for liquidating contracts and reveals differences in the ways of generating scenarios for changes in contract prices that affect the establishment of margin requirements.