>   Credit Stress Testing Methodology
Credit Stress Testing Methodology
Stress Test for Credit Risk

Commodity Derivatives Segment :

Frequency: Daily

Note: Day of Stress test –'S' day
The loss on closing out of client/proprietary positions is as per the following scenarios:

Scenario:

  • Historical Scenarios
    • Peak Historical Return
      Price movement in respect of each underlying over the Margin Period of Risk ("MPOR") during the last 15 years is considered:
      Scenario 1 A: Maximum percentage rise over MPOR
      Scenario 1 B: Maximum percentage fall over MPOR
    • Peak Historical Price Volatility
      Historical Price movement [Exponentially Weighted Moving Average ("EWMA") volatility] in respect of each commodity during the previous 15 years is to be considered. Percentage price movement equal to 3.5 times the peak historical volatility adjusted for applicable MPOR period of the commodity shall be considered (subject to a maximum of 110% of the price movement considered for the commodity under the peak historical return scenario).
      Scenario 2 A: Maximum percentage rise
      Scenario 2 B: Maximum percentage fall
    • Augmented historical
      Top 10 days are identified during the previous 15 years based on average of absolute percentage price change across all commodities witnessed over the MPOR period. For each of the day, percentage price change in each commodity is identified (in case there is unavailability of prices in any of the commodity on any of the identified days, price change is equal to applicable initial margin in the commodity to be considered). All the price movements are scaled up by 10%.
      One scenario corresponding to each of the 10 identified days is generated.

  • Hypothetical scenarios
    • Stressed MPOR
      It is assumed that liquidation of open positions would require 5 days and percentage price movement equal to 3.5 times current volatility adjusted for 5-day period (i.e. scaling up by square root of 5) is considered.
      Scenario 4 A: Percentage rise over 5-day period
      Scenario 4 B: Percentage fall over 5-day period
    • Stressed PSR and VSR
      Price movement in respect of each underlying to the extent of 1.5 times the normal Price Scan Range ("PSR") over the MPOR period and change in implied volatility equal to 1.5 times the normal Volatility Scan Range ("VSR") is considered.
      Scenario 5A: Underlying price increasing by 1.5 PSR adjusted for MPOR period and volatility increasing by 1.5 VSR.
      Scenario 5B: Underlying price decreasing by 1.5 PSR adjusted for MPOR period and volatility increasing by 1.5 VSR.

ICCL carries out the Stress test using each of the scenarios as follows:
a. By stressing positions in all commodities simultaneously
b. By first identifying the top 10 commodities based on Open Interest ("OI") and stressing 1 commodity at a time (ignoring positions in other commodities and the corresponding margins)


Methodology

The percentage price movements identified in each of the above scenarios is applied to the commodity price on the day for which the stress test is being done. All open positions are assumed to be squared up at the theoretical price corresponding to the revised prices/volatility of the underlying in each of the scenarios. For each Clearing Member, the credit exposure is calculated as follows:
  • The time of stress test is end of day
  • It is assumed that the Clearing Member will default in paying the settlement obligations and all outstanding positions will be squared off at the theoretical price corresponding to the revised price/volatility of the underlying in the scenario.
  • Loss is calculated at client portfolio level.
  • For each client, residual loss is equal to:
    Residual Loss = loss due to close-out of client positions - margin supporting client positions
  • All residual losses (residual profits to be ignored) for all clients is grossed to compute total residual losses due to client positions.
  • Loss due to close-out of proprietary positions is considered.
  • Loss at (5) and loss at (6) and the net pay-in/pay-out requirement of the Clearing Member is assessed against required margins (excluding margin supporting client positions and excess collateral, if any) and other mandatory deposits of defaulting member to calculate credit exposure of ICCL towards the member. Equity scrips as collateral, if any, shall be valued with minimum 20% haircut.

Coverage

  • Up to September 30, 2019
    For each of the scenarios, ICCL considers the maximum of:
    • Credit exposure due to simultaneous default of at least 2 Clearing Members (and their associates) causing highest credit exposure.
    • 25% of the credit exposure due to simultaneous default of all Clearing Members.
  • From October 1, 2019
    For each of the scenarios, ICCL shall consider the maximum of:
    • Credit exposure due to simultaneous default of at least 2 Clearing Members (and their associates) causing highest credit exposure.
    • 50% of the credit exposure due to simultaneous default of all Clearing Members.