Risk Management in Finance Industry Takes Center Stage in Malaysia

In a bid to prevent systemic risks and maintain market stability, Malaysia’s finance industry has implemented robust risk management processes and procedures. At the heart of this effort are Bursa Malaysia Securities Clearing Sdn Bhd (BMSC) and Bursa Malaysia Derivatives Clearing Berhad (BMDC), also known as the Clearing Houses.

Central Counterparties: A Vulnerable Position

As central counterparties for equities and derivatives trades, respectively, these institutions are vulnerable to counterparty credit risk. To mitigate this risk, they adhere to guidelines issued by the Committee on Payment & Settlement Systems (CPSS) of the International Organization of Securities Commissions (IOSCO).

Key Principles in Managing Financial Risk

The management of financial risk is guided by several key principles:

• Daily mark-to-market valuations and intraday revaluations of outstanding positions and collateral
• Initial and variation margin requirements
• Prudent cash and collateral management
• Close monitoring of capital adequacy ratios and adjusted net capital levels of Trading Clearing Participants (TCPs) and Clearing Participants (CPs)
• Management of exposure vis-à-vis other financial institutions by monitoring settlement flows

Stress Testing and Default Drills

To ensure that they are adequately prepared for extreme market scenarios, the Clearing Houses perform daily stress tests on the sufficiency of their clearing guarantee funds and clearing funds. Furthermore, they conduct annual default drill exercises to test the effectiveness of their default management procedures.

Effectiveness in 2017

In 2017, these measures proved effective, as there were no settlement defaults by any TCP or CP, and neither the clearing guarantee fund nor the clearing fund was called upon. The Clearing Houses’ risk management practices are outlined in detail on Clearing Risk Management.

Conclusion

The implementation of robust risk management processes and procedures has enabled Malaysia’s finance industry to effectively prevent systemic risks and maintain market stability. The Clearing Houses’ commitment to adhering to guidelines and employing various risk mitigation measures has ensured the smooth functioning of the financial markets.