FORTS risk management system is based on risk sharing between the RTS as the organizer of trade and the separate legal entity – Clearinghouse, in accordance with of the Federal Service for Financial Markets regulations.
FORTS Clearinghouse is the provider of centralized clearance and settlement services to market participants. FORTS trades are cleared and settled pursuant to rules and procedures that reflect general international practices and include several risk management innovations that the current state of the Russian financial system requires and the FORTS sophisticated technology permits.
FORTS relies on two tiers of members, clearing and non-clearing. Only clearing members have access to Clearinghouse services. Clearing member applicants are subject to a thorough initial assessment of their financials, operational capabilities and staff competencies. Each application to become a FORTS clearing member is subject to approval by the RTS Derivatives Market Committee and the RTS Settlement and Risk Management committee. Each non-clearing member must establish a clearing relationship with a clearing member.
Along with the Initial Market and the Contingency Funds formed by the Clearing members, RTS forms the Reserve fund from its own funds. As the market grows and the volumes increase the size of the Reserve fund also increases.
Up-to-date information about the size of the Initial Margin, Contingency and Reserve fund can be found on the RTS web site in Funds value report.
Clearing is performed in batch processing run immediately after the end of the trading session and the results are made available shortly thereafter. All of the day’s trades and all of the open positions are marked-to-market to the day’s settlement price.
All clearing payments and collections occur into and out of RTS Clearinghouse’s account with the Non-Banking Credit Organization "RTS Settlement Chamber". Since the Settlement Chamber is not allowed to invest RTS members’ funds, it guarantees riskless settlement. Market participants do not need to open additional accounts with any other settlement entity; this arrangement facilitates trouble-free market entry, saves the participants’ financial resources and accelerates clearing and settlement process.
The financial crisis in Russia in August 1998 has clearly demonstrated that Western-style risk management systems based mainly on statistical evaluation of future scenarios (analyzing price history and clearing members’ default rates) can prove too risky in the current state of Russian financial system. Traditional risk management systems imply that unpaid losses becomes known a posteriori after the trade has been executed but whatever they are, market participants are able to cover them. In Russia significant price movements and other potentially destabilizing occurrence might result in massive defaults, thus shifting the settlement responsibilities on the Exchange. To prevent this, FORTS Rules stipulate that:
- In futures contracts trading daily price limits and an initial margin covering a two-day price movement are set up;
- Clearinghouse facilities integrated with the trading system check every bid and offer online ensuring that after a trade is executed settlement would be possible in the worst case price scenario on T+2 (prepayment of initial margin)
- All clearing members must contribute funds to the Contingency Fund;
- According to the decision of the RTS Board of Directors, RTS maintains a back-up Reserve Fund. The assets deposited in the Fund increases as the total open interest grows.
- If a clearing member defaults, the guarantees are used in the following order:
- An initial margin of the defaulting clearing member.
- Its contribution to the Contingency Fund
- The Reserve Fund
- Other clearing members’ contributions to the Contingency Fund.
Positions of defaulting clearing member(s) normally are closed out through the market. If the price reaches its limit and trading halts, price limits are automatically increased during the session provided sufficiency of available guaranteed for settlement in new limits.
If, despite widening the price limits, it is still impossible to close positions out within one trading session, positions are transferred during clearing to other clearing members at the limit price, the price that still enables losses to be covered by guarantees.
FORTS trading rules give exact and detailed procedures for price limits management and settlements in case of default. These rules clearly define the notion of ‘force majeure’ to avoid possible misuse of guarantees. The information on the initial margin and the size of Contingency and Reserve Funds is being published daily on the RTS Web site. The money is being held at accounts of the Clearinghouse with the RTS Settlement Chamber and the Savings Bank of Russia.
To strengthen FORTS’ financial safeguards system, the RTS and the Clearinghouse obtained $1 million each in default insurance.
For further information please contact the RTS Derivatives Division at (7 095) 705-9031.
