Margin requirements and collateral deposits
As a central counterparty for the derivatives market, B3 Clearinghouse requires collateral to be pledge by its participants as a mean to protect itself from the risk associated with their transactions. Should a participant default, the Clearinghouse will be responsible for the settlement of its trades, however, it can use the participant´s pledged collateral to compensate for any such losses that may occur.
Collateral margin is defined by the risk for the closeout of a portfolio faced by the clearinghouse.
In order to calculate the risk for the closeout of a portfolio consisting of positions and collateral from several markets and asset classes, B3 developed an innovative risk measure: Close-Out Risk Evaluation (CORE).
Key CORE benefits:
- It calculates the worst accumulated cash flow during the portfolio closeout process
- It calculates the joint risk for positions and collateral
- It models three types of risk: market, liquidity for positions and collateral, and cash flow
- Accurate closeout strategy: position closeout transactions and collateral execution
- Severe loss (stress test): confidence level of 99.96% or 10Y crisis
- It considers 10,000 scenarios: historical (since 2002), quantitative and prospective
- Multi-horizon: daily closeout operations (1 to 10 days)
- It apllies full valuation
As Brazil is a final beneficiary owner model, B3 collateral management system accounts are segregated by each beneficiary owner in specific Custody Accounts. The system updates investor positions on a real-time basis.
