MBSD requires all Clearing Members to deposit collateral in the form of cash and eligible securities, which is referred to as Clearing Fund. The primary purpose of the Clearing Fund is to provide readily accessible liquidity to facilitate settlement and reduce loss-related costs which may be incurred in the event of a Member’s insolvency or failure to fulfill its contractual obligations to MBSD.
MBSD applies its risk management process to all matched* trades until such time that:
- The trade is canceled, or
- The trade has settled vs. MBSD.
The methodology used by the MBSD to calculate a member’s Required Fund Deposit** to the Clearing Fund analyzes portfolio risk according to one main component: the Value at Risk (“VaR”) Charge on end-of-day positions (“EOD VaR”) to cover the uncertainty of market volatility for observed positions at end-of-day (prior day).
In addition, “special charges” and “collateral premiums” may be levied at the discretion of MBSD to mitigate perceived risks in excess of those systematically addressed via the Clearing Fund deposit components referenced above. MBSD has the ability, as stated in its Rules, to issue an intraday Clearing Fund call (or calls) when warranted.
The entire Required Fund Deposit will be the sum of EOD VaR, plus premiums or special charges to address additional risks (i.e. credit, reputation, legal, etc.) or non-compliance with MBSD Rules. The calculation of these charges may be subject to certain floors and other special rules in certain circumstances. The calculation of the final charge is also subject to a minimum, and other restrictions, depending on membership type.
With respect to the floors and special rules, the following should be noted:
- An absolute floor is applicable for the total unadjusted Required Fund Deposit (which is the calculated requirement minus any premiums or special charges). This floor is equivalent to $100,000 for most membership types and applied to each portfolio. Unregistered Investment Pools (“UIPs”) are subject to a higher absolute floor of $1,000,000.
- The End-of-Day VaR component has a dynamic floor which is equivalent to 5 basis points of gross position. As mentioned above, the total unadjusted Required Fund Deposit will not be less than the absolute floor.
*For brokered PMAT trades, MBSD looks through the Broker to the uncompared Dealer, and the uncompared Dealer is margined for the trade. If the trade is DK’d by the Dealer, the Broker is assessed for the margin.
**Pursuant to the MBSD Rules, the term “Required Fund Deposit” means the amount a clearing member is required to deposit to the Clearing Fund pursuant to Rule 4. MBSD Rule 1, Definitions.