Financial Crime World

Risk Assessment in Finance: A Key Concern for Malaysia’s Financial Market

In a bid to mitigate potential risks and ensure stability, Bursa Malaysia Securities Clearing Sdn Bhd (BMSC) and Bursa Malaysia Derivatives Clearing Berhad (BMDC) have implemented robust risk management processes and procedures. As the central counterparty for equities and derivatives trades respectively, these clearing houses are vulnerable to counterparty credit risk.

Aligning with International Standards

To address this concern, BMSC and BMDC have aligned their practices with the Principles for Financial Market Infrastructures (PFMI) issued by the Committee on Payment & Settlement Systems (CPSS), a Technical Committee of the International Organization of Securities Commissions (IOSCO).

Key Principles of Risk Management Framework

The financial risk management framework is guided by several key principles, including:

  • Daily mark-to-market valuation of outstanding positions
  • Intraday revaluation of positions and collaterals
  • Initial and variation margin requirements for trading clearing participants and clearing participants
  • Prudent cash and collateral management

Additional Measures to Mitigate Financial Risks

To further mitigate financial risks, the clearing houses:

  • Monitor capital adequacy ratios and adjusted net capital levels of their participants
  • Monitor settlement flows and exposure to other financial institutions
  • Conduct daily stress tests on the Clearing Guarantee Fund (CGF) and Clearing Fund to ensure they can withstand extreme market scenarios

Liquidity Stress Tests and Default Drill Exercises

In addition, the clearing houses:

  • Perform daily liquidity stress tests to guarantee sufficient liquid resources to meet settlement obligations in a timely manner
  • Conduct annual default drill exercises to test the effectiveness of default management procedures and ensure they remain robust in an uncertain market environment

Results: A Successful Risk Management Strategy

The results of these measures have been impressive, with:

  • No settlement defaults reported by trading clearing participants or clearing participants in 2017
  • Neither the CGF nor the Clearing Fund was called upon to settle any defaults
  • The success of these risk mitigation measures underscores the importance of effective financial risk management in Malaysia’s financial market.