ISDA recommended risk management best practices to ensure "greater consistency in risk practices at CCPs across the globe."
In the Best Practices paper, ISDA recommends, among other things, that:
- risk management be consistent with the underlying risk of a particular product (e.g., distinguishing products traded on a central order book from OTC-cleared products);
- CCPs have "robust membership requirements" (i.e., financial and operational capability) that are reviewed consistently;
- products that are cleared by a CCP be adequately "standardized and liquid";
- CCPs ensure that there is sufficient participation in the auction of a defaulting member's portfolio;
- margin be calculated across all products in a consistent manner, taking into consideration concentration, liquidity and wrong-way risk;
- position limits and controls for erroneous trades should be established and implemented at the exchange level;
- CCPs disclose information regarding their margin and stress testing models, default procedures and other matters to allow participants to "perform meaningful due diligence" on the CCP;
- the default fund be appropriately sized;
- the default management process be tested on a regular basis; and
- clearing members that underwrite the counterparty risk of a CCP participate in the CCP's governance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
