To ensure its ability to fulfill its obligations, ICE Clear Canada maintains rigorous risk management processes, consisting of the following multiple safeguards.
Financial Integrity of Clearing Participants
All Clearing Participants complete a detailed application process to ensure they meet the criteria for creditworthiness and operational efficiency. In maintaining the integrity of derivative markets, ICE Clear Canada avails itself of the strict regulatory and reporting requirements that exist within the industry. In particular, ICE Futures Canada or other SROs (where applicable):
ICE Clear Canada reviews each Clearing Participant's regulatory capital reports every month in order to ensure that each Clearing Participant remains financially sound. Clearing Participants are also required to file annual audited financial statements. These financial reports are reviewed to ensure that participants meet ongoing capital requirements.
If ICE Clear Canada's Board of Directors determines that the financial or operational condition of a Clearing Participant makes it necessary or advisable (for the protection of the Corporation, other Clearing Participants, or the market) to impose restrictions on a Clearing Participant, the Board has the authority to take any of the following steps, at its discretion. First, the clearance of opening transactions by the Clearing Participant may be limited or prohibited. Second, the Clearing Participant may be required to reduce or eliminate existing long positions or short positions in the Clearing Participant's accounts. Third, the Clearing Participant may be required to transfer any of its accounts to another Clearing Participant.
If ICE Clear Canada determines from its monitoring of financial adequacy that a Clearing Participant is insolvent or does not meet ICE Clear Canada's minimum capital requirements, the Corporation's Board of Directors may, at its sole discretion, suspend that Clearing Participant's clearing privileges for such time and under such terms and conditions as the Board determines. Alternatively, if the Board determines that it is in the public interest or in the interest of ICE Clear Canada to allow the Clearing Participant to continue to clear transactions, it may require that appointed auditors regulate and generally supervise the said Clearing Participant's activities as they relate to its performance as a Clearing Participant.
As discussed in detail above, ICE Clear Canada's first line of defense against a Clearing Participant's default is its capital monitoring process. Given a strong participant base, the likelihood of a default is greatly reduced. Notwithstanding the financial strength of its Clearing Participants, ICE Clear Canada settles all options and futures trades, marks all futures positions to market, and collects margin on a daily basis.
Irrevocable Payment Processing System
All payments to and from the Clearinghouse, including daily settlements, marking to market, and intra-day margin calls, are collected via an irrevocable payment processing system.
Daily Margin Requirements
ICE Clear Canada requires each Clearing Participant to maintain margin deposits with the clearinghouse. These deposits are designed to cover the market risk that is associated with each Clearing Participant's derivative positions. The assessment of this risk, in turn, is based upon a set of well-defined criteria that is established by the Corporation.
Margin requirements are collected daily (or more frequently during periods of market volatility). The calculation of margin requirements is based on the assumption that the liquidation of a defaulting Clearing Participant's positions would be carried out over a two day period.
The method used to establish margin requirements is the ICE Risk Model system. The ICE Risk Model is designed to evaluate the overall risk in an entire portfolio and accurately match requirements to risk. It treats futures and futures options uniformly, while recognizing the unique features of options.
ICE Clear Canada maintains two types of accounts for its Clearing Participants: client and firm accounts.
ICE Clear Canada's margin system analyzes all positions (futures and options on futures) held in each account of every Clearing Participant. It then projects a liquidating value for each account, based on multiple projected market moves. Using this projection, ICE Clear Canada collects margin to cover potential losses in the event that such a liquidation becomes necessary. Margin deposits must be in the form of cash, T-Bills, short-term government debt or letters of credit.
Margin requirements are comprised of three components. First, premium margin represents the cost of liquidating all options and futures contracts at their market prices. Second, additional margin represents the difference between a position's current market value and a projected theoretical market value. Third, spread margin is calculated for futures positions, based upon the expected relative price movements between old crop and new crop contract months.
One of the key components in assuring that the clearinghouse maintains appropriate levels of margin is ICE Clear Canada's ability to make intra-day margin calls during periods of increased volatility. ICE Clear Canada continuously monitors price changes and issues intra-day margin calls when necessary. These calls are made whenever market volatility is such that the price movement of a particular underlying interest is greater than a predetermined threshold of its respective margin interval.
In establishing margin requirements, ICE Clear Canada recognizes the importance of maintaining a prudent balance between ensuring adequate deposits to fulfill its guarantee and avoiding any excess requirements that would have the effect of discouraging the liquidity and efficient operation of the market.
Under no circumstances will the margin deposits of one Clearing Participant be used to cover a default of another Clearing Participant. Clearing Participants' margin deposits are insulated from losses incurred by the failure of another Clearing Participant. ICE Clear Canada's Guaranty Fund, on the other hand, is a shared obligation of all Clearing Participant's that may be used to cover any excess losses not covered by a particular Clearing Participant's margin deposits.
ICE Clear Canada has established a Guaranty Fund to cover residual risks that may be encountered during the default of a Clearing Participant. In particular, these risks are those associated with settlement, concentration, and economic volatility. The Guaranty Fund represents the mutual obligations of all Clearing Participants. Under this system, if the margin deposits and Guaranty fund deposits of a defaulting Clearing Participant were to prove inadequate to provide for the timely and orderly liquidation of the Clearing Participant's derivative positions, the Guaranty Fund contributions by the non-defaulting Clearing Participants would be utilized.
While ICE Clear Canada's risk management processes are designed to ensure that a Clearing Participant fulfills its obligations, ICE Clear Canada's Rules provide a specific framework in which the Corporation would act should a Clearing Participant become insolvent and/or fail to fulfill its obligations. ICE Clear Canada's Rules provide the Corporation with a number of specific alternatives for dealing with such circumstances including, but not limited to, the following: