Ankara, 25-27 September 2019...• Maintaining adequate funding liquidity to meet known and unknown cash requirements • Promoting stable and sufficient earnings to meet return objectives

Energy Market Development

Risk Management Training for

BOTAS

Ankara, 25-27 September 2019

Workshop leader: Jan Haizmann

AcademiaStudies & Gratuation Universität Freiburg (Germany)

1st State Exam in Law (1990)

In Munich 2nd State Exam in Law (Ass.iur 1994),

Post-Grad: Brussels University (Dr. iur. - 1998) und London University (LL.M.

1991)

Admission to The German Bar, OLG München 1994Career

1994-1999 Associate Lawyer Graf von Westphalen, Freiburg & Brussels Office

1999-2001 Director Regulatory Affairs, ENRON, London and Frankfurt

2001-2002 Senior Legal Counsel, TXU Energy Trading SA, Geneva

2003-2005 Front Desk Gas, Glencore Energy, London

Since 2006 Chairman EFET Legal Committee, Director EFET Brussels Office

Board Member EFET, Amsterdam,

Member of the EEX Exchange Council, Leipzig

Founder and Managing Director of CORREGGIO CONSULTING, Brussels - successful boutique

advisory firmwww.correggio-consulting.eu- Multiple advice in arbitration proceeding context

- building own practice as independent international expert for energy trading

- planned co-operation with network of lawyers and industry expertsin partnership with European Energy Lawyers Association: www.eela.eu

Introductio

n

225-27 September 2019 BOTAS Workshop, Ankara

http://www.correggio-consulting.eu/

http://www.eela.eu/

Agenda - Day 1

• DAY ONE - Legal Basis Risk/ Contractual Training

– Introduction into traded gas market and market risks

– Contractual training

– What needs to be in a trading contract?

– What is the advantage of standardization (Back-to-Back

risk)

– EFET Trading Gas Agreement in detail

– Questions and Answers

– Test on Contractual Issues


Agenda - Day 2

• DAY TWO (Morning Session)

• Introduction to risk policies for political risks

– KYC principles

– ways to manage trade restrictions such as sanctions

• trade sanctions on Russia and Iran

• DAY TWO (Afternoon Session)

• Regulatory risk

– introduction into compliance system

– REMIT reporting obligations as envisaged by the EU


Agenda - Day 3

• Market Risk Management, Credit Risk Management, Operational

Risks

– Market risk management & ways to mitigate currency risks

– Credit risk management through credit arrangements

• ways to mitigate insolvency risk

• collateralization of trading (what type of collateral)

• functionality of letters of credit

• functionality of parental guarantees

• functionality of a credit department and credit setting with

counterparties

• clearing

– Operational Risks

• Force Majeure scenarios

• non-delivery due to grid failures

– Questions and Answers 525-27 September 2019 BOTAS Workshop, Ankara

Correggio ConsultingBoutique consulting company set up in 2006 by Jan Haizmann

after 15 years of legal and commercial practice


Day Three

Market risk management

Credit risk management

Operational risks


Risk Management in the Energy Trading Business

• Overview, rules and mandates in commodity trading

• Open positions: standard products

• Market risk and limit setting

• Credit risk and credit risk limit setting


Risk Management aims at the protection of financial strength & transparency of risk

- to take well assessed risk in a defined range, an energy trading company needs to carry out:

• Identification

• Analysis

• Quantification

• Monitoring

• Management and control of risk

�Risk Management is a verifiable contribution to a sustainable

economic development of the company!

Risk Management: Definition


Definition of Risk Appetite

Risk Capacity

Maximum risk that can be taken without breaching

financial covenants• Protecting capital required to achieve business plans or maintaining

leverage ratios

• Maintaining adequate funding liquidity to meet known and unknown cash

requirements

• Promoting stable and sufficient earnings to meet return objectives

Risk Appetite

Maximum risk required to meet business objectives

• Setting adequate buffers that ensure risk capacity is not breached under

stress (e.g. 1 in 20 years), define business potential per company

• Set limits from top of the house down to traders

Risk Taken

Current and potential risk level• Monitor current risk level and leading indicators of changes in risk

Risk Appetite

Risk

Take

n

Risk Capacity


Business Concept

Market RiskRisk the company is willing to take by holding open

positions• Producers / suppliers can take market risk or stay unhedged

• Dynamic hedging can increase notional amount of hedging activity

• Traders take market risk as part of business activity

Credit RiskRisk the company is willing to take regarding OTC

transactions• Hedging OTC incorporates credit risk

• OTC cleared trades can avoid credit risk but create liquidity risk

Liquidity RiskRisk the company is willing to take in the clearing /

margining area• Hedging on exchanges incorporates liquidity risk because of the

margining regime (variation margins and initial margins)

• Liquidity management is crucial

Market

Risk

Credit

Risk

Liquidity

Risk

Hedging

Futures

Hedging

Forwards

Margining

Operational

RiskAlways present

OTC

clearing


Definition & supervision of the risk management framework

• Definition of the risk strategy and the risk tolerance level

• Co-ordination of activities by the Risk Management-Committee

• Definition of risk reporting necessities on holding/parent level

• Approval of mandates, orders and company limits

• Approval of new product groups

“Rulebook Commodities”

Risk Management Process

Risk Management Process


Calculation of exposures and supervision of limits (trading

level)

• Risk analysis and definition of detailed limit systems

• Forward curve generation

• Quantification of risk out of trading and wholesale activities

• Mark-to-market, profit & loss, credit exposure, VaR calculations and

related reporting

• Supervision of limits and coverage of economic capital employed

• Development and certification of models and methods for quantification

Trading Risk Management Process

Trading Risk Management

Process1325-27 September 2019 BOTAS Workshop, Ankara

Contains risk management principles and objectives for commodity trading and regulates / defines also:

• transaction principles,

• the orders to the companies as well as the full mandates,

• assignment of tasks and responsibilities,

• approved markets,

• the market and product approval process,

• limits (limits) and the procedure to be applied in case of limit violations,

• the basic risk measuring ratios,

• the framework for risk reporting.

Credit Rule Book


Open Positions

in Standard

Products


25MW 31,5€/MWhSell

Flat Position

Forward: contract traded OTC and physically delivered

Future: contract traded on an exchange and financially settled

Buy 25MW 31,2€/MWh

Forward

Forward

• Physically flat position and

• Financially flat position

• We are flat and fully covered (hedged)

• We have locked in P&L of 0,3€/MWh

German Gas Baseload Cal

2018


Sell

Open Position

German Gas Baseload Cal 2018

Buy 25MW 31,1€/MWh

Forward

Future

• Physically open position and

• Financially flat position

• We are flat and fully covered (hedged) if a liquid spot market exists

where gas is available

• Risk of loss money if we cannot buy without basis risk in the spot

market

Forward: A contract traded OTC and physically delivered

Future: A contract traded on an exchange and financially settled

25MW 31,5€/MWh


Sell

Open Position


Forward: A contract traded OTC and physically

delivered

Buy 25 MW EPEX Spot Index

Forward

Forward

• Physically flat position and

• Financially open position

• We have a market risk position (delta position)

• We loose money if prices increase

25MW 31,5€/MWh


Open Position

Sell


Buy 0 MW

• Physically open position and

• Financially open position

• We are short and fully uncovered (no hedge)

• We loose money if prices increase

Forward: A contract traded OTC and physically delivered

Forward25MW 31,5€/MWh


Probability

You cannot make money with hedging but you can fix

status quo

Hedging

Hedging leads to

• The P&L distribution gets slimmer

• The downside moves up

• Upside potential is reduced

P&L


Open Position

Open position also exist in FX if

• We buy in USD and sell in EUR (e.g. LNG)

• We buy in EUR and sell in USD

Open position also exist in interest rates if

• Buy short term and sell long term storable commodities

• Investments in assets in general


Market Risk and

Market Risk Limit Setting


Risk Categories

Market Risk (CRR applies – regulatory capital)

• Risk resulting from changes in market parameters which

affects all

open positions at asset-, trading and wholesale transactions

• Drivers: market prices, volatilities, exchange rates, spreads, interest rates, correlations

Managing Market Risk• Definition and monitoring of Stop Loss Limits

• Definition and monitoring of Volumetric Limits

• Definition and monitoring of Value-at-Risk (VaR) Limits

• Definition and monitoring of Stress Limits


Market Risk Measuring and

Limits

Time

P&L

Toda

y

Forward Looking LimitsBackward Looking Limits

Control action possible


Backward-Looking Limits

• Stop-Loss Limit

• Limits the YtD Total P&L (actual

value of the portfolio)

• Draw-Down Limit

• Limits the YtD Total P&L relative to

the maximum YtD Total P&L

Backward-Looking is a limit type which limit the business on the basis of

the YtD Total P&L. This YtD Total P&L contains the valuation of open

position as a component called unrealised P&L

The maximum loss can go over this value during closing of the positions


Market Risk Measuring and

LimitsBackward Looking Measures / Limits

• Profit and Loss (P&L)

• Based on a review of the deviation of the contract valuations

• Starting with the current calendar year of all contracts

• Discounted P&L consists of a realized and an unrealized component

• Stop-Loss Limit

• Total amount to limit accumulated annual losses that may have arisen to date (based on

total P&L values)

• If exceeded, all positions covered by the mandate must be closed

• Maximum Loss = Stop-Loss Limit + VaR

• Draw-Down Limit• To protect cumulative annual profits that have already been gained (based on the YTD total

P&L values) .

• If exceeded, all positions covered by the mandate must be closed

• Maximum Loss = Draw-Down Limit + VaR


Forward-Looking

Limits

How to set forward looking limits?

• Forward-Looking-Limits limit fluctuations of the P&L in the near future.

• The target is to limit open positions.

• Typical Values are between 1

and

1

10 100of the Stop-Loss Limits.

• This should make sure we have enough time to react.


Risk Measuring and

LimitsForward Looking Measures / Limits

Open positions

• Financially and / or physically open positions

• Net open positions are influenced by fluctuation of the market prices

• Movement of the P&L in a portfolio can be roughly estimated as the amount of

move of the market prices times the net open position (spread positions not

covered!)

• Monthly limits are set for every delivery point per product (cover spread

positions)

Value at Risk• Calculation of the largest possible loss (measured in monetary units), which the

open positions in an unfavourable development of the market can exceed with a

specific probability within a defined holding period

• Limits a possible negative P&L movement / P&L development

• If exceeded, positions covered by the Full Mandate must be reduced immediately


Lunch Break


OTC

Credit Risk Limit Setting


Risk Categories

Credit Risk

• Risk resulting from business partners' non-compliance with contractual obligations (e.g. not able or not willing to pay, insolvency, non-performance)

• Drivers: credit worthiness of business partners, delivery period, MtM ofthe deal and contractual terms like payment conditions, terminationclause, netting clauses (payment, close-out)

• Managing Credit Risk

• Scoring of Counterparts

• Definition and supervision of limits per Counterpart

• Counterpart and exposure monitoring

• Management of collaterals


Scoring

Agreements

Collateral

Credit Pricing

Respond

Exposures

Payments

Ratings Share

price Bonds

CDS

Key Performance

Indicators

Reduce Exposure

Terminate contract

Stop deliveries

Use Collateral

Prevent

Basic Principle:„No Counterpart

without Limit“

Detect

Short term

MonitoringNear Time

Reporting

Components Credit Risk Management


Definitions within Credit Risk

EXPOSURE

monetary value (under

consideration)

RISK

exposure * probability

(of default)


The actual credit exposure is the total of:

• Deliveries already made but not yet invoiced (including those during contract cancellation)+

• Deliveries already invoiced but not yet paid

+

• Positive MtM of future deliveries

Netting of all those components in case of a default (close-out

netting) reduces exposures significantly.


Credit Risk Tools

• EFET Manual on Credit Risk is useful tool for

credit management (www.efet.org)

• Collateral: Cash

• Collateral: Bank LoC

A guarantee from a financial institution covering the

liabilities of a debtor in case of default.

• Collateral Parental Guarantee


http://www.efet.org/

Starting Point : Structured Portfolio

Optimisation of a Flex Gas Supply Agreement


Credit Exposures

Time

Credit Limit

Dec Jan Feb

Future Settlement Exposure

Future Exposure

Settlement period Settlement period

Future Performance Exposure

Stop selling products

with delivery in January!!


Integrated Perspective to Risk

Management

Market price risk arises from significant

asset / contract positions

Credit Risk results from counterparts not

honouring market price risk hedges and

increases if these same hedges move in-

the-money. Hence, we get market risk back

Market Price

Risk

…to actively balance Market, Margin and Credit risks

Margin Risk results from hedging on

exchanges, bi-lateral and OTC

margining, Market price movements

require cash collateral to be posted

Default Risk

(Credit Risk)

Margin Risk

(Cash flow Risk)

Regulatory

& Operational

Risk


Hedging reduces market price risk and

increases cash flow certainty into the

future, thus supporting investments

1

1Market Price

Risk

Integrated Perspective to Risk

Management

Credit Risk is lower than market price

risk because the credit risk is diversified

across many counterparts and the

probability that all counterparts fail at the

same time is low

Counterparty credit limits cap excessive

exposure. Sometimes this requires

additional business to be done via

clearing i.e. converting credit to margin

risk

Default Risk

(Credit Risk)

Margin Risk

(Cash flow Risk)

2

2


Counterparty Credit Limits

Credit risk is preferable to market price

risk & margin risk because:Market

Price

Risk

Counterparty Credit limits are an important control process within the

integrated

risk framework…

• Exposure from one market can be diversified

across 10-20 counterparts

• Does not consume large and volatile quantities

of cash needed for investment

• Exposure can be simply limited & netted by

counterparty (depending on jurisdiction)

• Other tools can be used to reduce risks should

market conditions change (Margining,

triangulation and or credit default

hedging/insurance)

Counterparty Credit Exposure Limits

are:• Set based on the financial strength of a

firm, its sector and location

• Regularly reviewed

Default Risk

(Credit

Risk)

Margin Risk

(Cash flow

Risk)

Regulatory

&

Operational

Risk


The Role of Margining

Market Price

Risk

Margining plays an important role in our risk management but it does have limitations…

Margining bi-laterally, OTC or via an exchange,

can be a helpful risk management tool.

It does, however, have some limitations:

• Requires significant cash facilities to

deal with large and volatile cash calls

• Can lead to a reduction in cash

availability for investment activities

• Can lead to additional borrowing costs

(rating agency assessments)

• Operationally more complex therefore

increased operational risk

• There are limitations on the products

that can be traded

• Still requires some credit risk to be taken

with Banks (clearing), Banks (cash

facilities) and the clearing houses or

counterpart

Default Risk

(Credit Risk)

Margin Risk

(Cash flow Risk)

Regulatory

& Operational

Risk


The impact of clearing

• They are usually structurally long or short, thus

resulting in limited netting opportunities and

therefore market movements require significant

cash collateral to be posted

• Utilities require cash for investments, most of

their assets are not fungible

Market Price

Risk

Clearing requires a ready supply of cash…

This raises 2 issues for energy companies:

Options for energy companies are:

• Don’t hedge or hedge significantly less, tolerate

market risk, volatile earnings and reduced

investments

• Use margining and secure cash facilities against

existing asset base from Banks, links utilities into

systemic bank failure

• Margin and reduce investments to provide additional

free cash flow € Who makes investment in energy

assets?

Default Risk

(Credit Risk)

Margin Risk

(Cash flow Risk)

Regulatory

& Operational

Risk


Legal Set-up Cleared Trading

An Overview

> Clearinghouse (“CH”)/Central Counterparty (“CCP”): Bilateral trading relationships with

multiple Clearing Members (“CM”)

> CM: Bilateral trading relationships with CH/CCP and multiple Non- Clearing Member

(“NCM”)

> NCM: Multiple transactions within a bilateral trading relationship with a CM

CM2

NCM/CP1

NCM/CP2

NCM/CP3

CH/CCP CMT Trader/NCM

CM1

CM3

I. Clearing Rules

III. NCM Agreements

II. Clearing Agreement


– Variation Margin

– Default of CM

– Close-out

– Transfer of Position

and Collateral


I. Clearing Rules

>Clearinghouse (“CH”): Bilateral trading relationships with multiple Clearing

Members (“CM”)

>Clearing Rules:

– How transactions are entered into

– Initial Margin

CM2 CH/CCP CMT

CM1

CM3



I. Clearing Rules

>Risk Mitigators for CH

–Regulated CM: Most Clearing Rules require that CM must be

financial institutions or hold similar sort of financial licenses

–Initial Margin: Is collateral in form of cash or predefined securities to cover “Close-out Risk” of the CH and are to be posted for the benefit of the CH only and calculated on historic worst case scenarios in market movements

• Close-out Risk is the risk of non-favourable movements in market price

between early termination of entire portfolio of transactions and

replacement of portfolio

–Liability Funds: CMs pay, proportional to their trading volumes, funds into a

segregated liability fund

–Close-out / Transfer of position to new CM


– Default of NCM

– Close-out


II. Clearing Agreement

>CM/NCM: Multiple transactions within a bilateral trading relationship

>Risk Mitigators: Clearing Agreement (Terms & Conditions of CM; partly

bespoke)

– How transactions are entered into (possibly via Give-up Agreement)

– Transaction “back-to-back” with transaction CM/CH

– Settlement (Variation Margin (“VM”))

– Collateral (Initial Margin (“IM”))

CH CM NCM


• Clearing

• Collateralisation of transactions against default risks (i.e. theadjustment and administration of positions, calculation ofvariation margin (daily mark to market) and calculation andlevy of margins

• Settlement

• physical and financial fulfillment of transactions

• For the physical settlement ECC is via its affiliated companyECC Luxembourg contractually linked with the majorEuropean Transmission System Operators for power andnatural gas and is also linked to the national register forCarbon Certificates and performs deliveries of EUA andCER 4

7

Definitions: example of ECC


• Clearing Member (CM) – Takes the (financial) risk of his Non-

Clearing Members, can be also a Trading Participant ( 2.1 Clearing

Conditions).

• Non-Clearing Member (NCM) – Trading Participants that are not

Clearing-Members need a Clearing Member to be admitted to

exchange trading and clearing ( 2.2 Clearing Conditions ).• Trading

Participant

– can be either Clearing

Members or Non-Clearing Members, an acceptance process for each product/proof of

delivery capability required ( 2.3 Clearing Conditions ).

• ECC Lux – 100% affiliated company of ECC AG, operates as a

warehouse for ECC AG and undertakes physical delivery/nominations

Definitions and Roles of the ECC

Participants


Central Counterparty

Clearing Member

(CM)

Clearing Member

(CM)

CM-Agreement ECC-CM

NCM-Agreement

CM-NCM-ECC

NCM-Agreement

CM-NCM-ECC

BörsenExchanges

Clearing Services Agreement

Fundamental Basis for Taking

Part at ECC Clearing


• Spot contracts are concluded between ECC and the Buyer/ Seller, 3.4.3 Clearing Conditions

• Derivative contracts are concluded between ECC and the Clearing Member and simultaneously

between the Clearing Member and the Trading Participant 3.4.2 Clearing Conditions.

• Financial fulfilment (payments and margin requirement) goes via the Clearing Member. All payments

are settled between ECC and its Clearing Members on TARGET days through central bank system .

• Physical fulfilment is performed by ECC Lux towards Buyer and Seller, ECC remains to be in the

contractual chain 3.4.4 Clearing Conditions

Contractual Relationships Contracts

Buyer SellerClearing

member

Clearing

Member

Transmission System

Operator /

Certificate Register

(Derivative)

PaymentsPayments

Deliveries Deliveries

EEX Power

Derivatives GmbH

European Commodity

Clearing Luxembourg S.à.r.l.

Central Bank System

(Spot)(Spot)

(Derivative)


• ECC AG takes the counterparty risk of all transactions.

• In order to ensure fulfilment of all transactions in case of an insolvency or any case of non-performance ECC demands collaterals, so-called margins.

• The calculation is based on international approved methods.

• ECC accepts approved securities or cash as collateral.

• NCM is obliged to provide margins no less than ECC requests from CM according to the calculation method of ECC.

Margin Calculation - Risk Pyramid

ECC

Margin

Trading Participant

Margin

Clearing

Member

Clearing Fund

Trading

Participant

Clearing

Member


Coffee Break


Agenda Day 3

– Operational Risks

• Force Majeure scenarios

• non-delivery due to grid failures

– Questions and Answers


Operational Risk Management (ORM)

Operational Risk is of loss resulting from inadequate or failed

processes, people and systems or from external events.

ORM is defined as a continuous cyclic process which includes risk

assessment, risk decision making, and implementation of risk controls,

which results in acceptance, mitigation, or avoidance of operational

risk.


Operational Risk: Energy Market Processes

Source: CEER 2014

Sett

lem

ent

/ D

eliv

ery

Mar

ket

Spot / Futures / Derivatives Gas / PowerOrder Mgmt Execution

M-Control M-Surveill

Exchange

Execution on Marketplace

Clearing House

Payment Delivery / Netting

CCP

Clearing Bank

TSO

SCADA

Commercial / Physical Dispatching

Pipeline Satus Own Storage

Balancing Service

Provider

Trader / Shipper

3rd Party Storage

Other TSODSO

Spot / Futures / Derivatives Gas / Power

Financial & Physical Settlement

Trading Risk

Planning Back-Office

Execution Back-Office

Broker

Primary /Secondary Capacity Mgmt.

Platform

Confirmation Matching

Collateral Managemen

t

Regulatory Reporting

Buy / Sell commodity

Buy PrimaryBuy / Sell Second Capacity

OTCClearing Request

Trade Data

Clear.Report

SellPrimary

Capacity AllocationUpdate

Bal.Offer

Bal. CfT

Bal. Req.

Bal. Contr.

Bal.Settl

OTC Execution

Margin Call

Margin Call

ClearingReport

Nomi-nation

Nomi-nation

ClearingReport

Buy / Sell commodity

Physical Settlement Financial Settlement TradingBalancingStandardized Market Comm. Interface


Operational Risk Management

• Lack of general process maturity in commodity trading

• Exponential ratio between the value of an operation and

the potential damage or loss

• Given the increasing liquidity in some markets, volumes

are rising year after year

• Most processes are highly time critical

Why do you need it?


Implement: Operational Risk

Management

• Documentation & Formalisation: Processes (STeP),

Procedures, Working Instructions, Manuals,…

• Regular risk assessments, audits and mitigation plans

• Adequate organisation (function and processes)

• Tools


Standard Gas Trading Processes,

automatic data communication

• Communication relationships:

– Traders – Gas Trading Platform: Trading interface, trade data exchange

– Traders – Capacity Trading Platform: Bidding, base data exchange

– Traders – Traders: OTC trades, OTC secondary capacity trades

– Traders – Gas TSO: nomination

– Traders – Regulators: EMIR / REMIT reporting

– Gas Trading Platform – CCP: Settlement

– CCP – Trader: Clearing reports, margin calls

– TSO – BSP: Requesting balancing services

• Not covered:

– TSO-DSO related processes

– Storage / LNG specific processes


Standardisation of Back-Office

Functionalities

• Cross-functional teams and workgroups with clear and shared

objectives

• Industry alignment and adoption on standardisation of existing

processes, even longer for new processes (except for regulatory or

legal deadlines)

• Actively managing the standardised processes is required (never

ending task)

• Cost-sharing implementation and service vehicle for EFET

standardised processes

• Turkish traders should seek to use standard European standard

processes -> deviation constitutes risk factor


Operational Risk: Example Deal Flow I

1) Feeding Contractual Terms into Energy Trading System

(ETS)CREDIT: entering and

approving credit terms

TREASURY: entering

and approving any

security related issues

BACK OFFICE: entering

any operational details

(e.g. address details, bank

account, codes for

scheduling etc.)

LEGAL: entering and

approving any other

relevant legal terms (e.g.

insolvency terms,

jurisdiction etc.)

MARGINING: entering

and approving terms of

CSA if margining applies

LEGAL: final approval of terms entered into trading system;

entering of NETTING OPINION to allow for net exposure calculation of

system

CREDIT: linking of approved trading limits in ETS:

Trading limits for the relevant CP

to be entered into ETS

Linking limits of each CP to:

Limits for applicable

markets and products

Limits of relevant portfolio

Limits of individual traders

CP active in ETS for Trading – day to day deal flow and continuous monitoring starts


2) Day to Day Deal Flow

FRONT OFFICE:

Trade with CP takes place:

Quantitative

Analysts:

Modeling of

trades to

determine impact

on limits and

portfolio

exposure

Providing terms of trade in

writing to Back Office (term

sheet/email)

Booking of trades in ETS

BACK OFFICE:

Control if bookings and written

terms of trades match

If booking

results in

hitting of

trading

limits

Clarification

with Front

Office and

adjustment of

booking or

term sheet

• Issuance of Confirmations

Entering other operational

information in relevant

systems for Back Office

Ops (e.g. scheduling,

payment time frames)

Final flow of

trade into ETS

as exposure

value

Systematic

inclusion into daily

trade reporting,

and CP & portfolio

exposure reporting

system

Limit and risk

control through risk

management and

other controlling

bodies

Consultation with

Legal if

confirmations

require unusual or

unknown terms

+ -

Operational Risk: Example Deal Flow

II


3) Ongoing Monitoring and Risk Control

Risk Control Credit Risk Management

(CRM)

Legal Risk Monitoring Operational Risk

Monitoring

• daily control of trade

portfolio (produced by ETS

at the end of the trading

day)

• Control that transferred

collateral (if CSA) meets

own calculation and ETS

terms

• control of market prices,

volatility and liquidity and

impact on trading limits

(potentially adjust ETS)

• control if modeling reflects

market reality

• Approval of potential excess

of limits in coordination with

risk management

• General credit risk

assessment of CP (yearly

after issuance of new financial

report, and, depending on

credit standing, half yearly)

• Specific assessment for

specific transactions if

required, to allow for higher

trading limits (value, volume,

tenor)

• Monitoring of expiry of

security provided by the

counterparty

• Monitoring of potential

payment or delivery defaults

and other credit defaults

• Adjustments of

documentation if changes

in legal form of CP

• Amendments to

agreement if credit terms

or other legal terms of

documentation

(Master/Confirmation)

need to be changed or

drafted specifically

Follow “documentation flow”

• Review of new security

documents provided by

CP

• Termination of

agreements if required

• Updating CP address

and billing details in

ETS

• Securing proper

application of own

payment streams and

physical

delivery/acceptance

systems (scheduling)

• Monitoring CP

payments and

physical

delivery/acceptance

IT/Systems:

• updating ETS and other relevant systems (e.g. for modeling,

scheduling) and ensuring process runs with minimum disturbance

• Granting access to ETS to relevant personnel and ensuring

restriction of access for relevant staff if necessary

Compliance/Regulatory:

• Keeping abreast relevant legislation and

reporting to Legal, if impact on trading flow

• Monitoring required licenses for traders etc.

Reporting

irregularities

Do docs

need

amending?

INTERNAL AUDIT AND GENERAL MANAGEMENT:

continuous supervision of all processes, compliance with general business decisions/plans, and with any relevant internal policies

Reporting

irregularities


Thank you for your attention!

Q & A

63

Dr. Jan Haizmann, Managing Director

CORREGGIO CONSULTING Ltd.

93, rue Le Corrège, 1000 Brussels

tel: 32 (0) 472 365 725

[email protected]

mailto:[email protected]

http://www.correggio-consulting.eu/

Documents

Ankara, 25-27 September 2019...• Maintaining adequate funding liquidity to meet known and unknown cash requirements • Promoting stable and sufficient earnings to meet return objectives