Risk Management


Muqassa maintains an integrated and comprehensive risk management system and ensures that its risk management framework identifies, measures, monitors and manages the risks that it bears from Clearing Members as well as other key institutions.

Muqassa follows The Three Lines of Defense (3LoD) model as given below, that is:

  • 1LoD – Functions that own and manage risk.
  • 2LoD -   Functions that oversee risk management and compliance.
  • 3LoD -   Functions that provide independent assurance, i.e. Internal Audit.

Muqassa has a low risk appetite for financial, liquidity, operational, market and credit concentration risk. This appetite helps drive the setting of conservative values when deciding on key measures such as the Default Fund Cover or Investment Duration.

Muqassa’s risk management policy, procedures and systems and controls have been developed to meet both CPMI-IOSCO’s Principles for Financial Market Infrastructures (PFMIs) and international best practices.

Credit Risk

Muqassa’s Credit Risk Assessment Framework (CRAF) will be used to assess, quantify and monitor the level of credit risk that it is materially exposed to from each counter party that it is exposed to.

There are three general types of counter parties as a source of credit risk:

  • Clearing Members
  • Service Providers & Financial Infrastructures
  • Investment Counter parties.

Each of the counter parties listed above will be assigned an Internal Credit Score (ICS) on a scale of one to six, where six corresponds to the highest level of creditworthiness. There is a range of inputs to the ICS including both qualitative as well as quantitative factors. An ICS will be assigned to a counter party upon application as well as on an on-going basis with a watch list maintained for those members who require closer monitoring.

Default Fund

Muqassa conducts daily stress testing to ensure that its financial resources are sufficient to cover risk exposures under extreme but plausible market conditions. Total Default fund size calculation is based on the daily stress test results. The following are some of the main components for the Default Fund and its calculation:

  • Default fund size - Cover 2 (Highest stress loss of the largest two participants and their affiliates in preceding 90 days) with a buffer of minimum 10%
  • Recalculated on a monthly basis with the discretion to perform an ad-hoc calculation
  • Default Fund allocated to members based on average Initial margin of members. The Default fund requirement is to be contributed in cash in SAR.
  • Supplemental Default Fund Contribution: 1x

A Stress Test Exposure Limit (STEL) will be in place to address the potential uncovered credit loss by setting a limit on each Clearing Member’s stress loss relative to the total Default Fund size from those Clearing Members that bring increased ‘concentration’ risk to the CCP. The limit will represent the amount of stress loss in percentage relative to the Default Fund size. The limits are set in accordance to the Internal Credit Score (ICS) as determined by Muqassa.

Reverse stress testing is performed to indicate under which scenarios the total financial resources will be insufficient for Muqassa to continue as a going concern.

Default Waterfall

Muqassa has designed the following Default Waterfall that is in line with international best practice:

  • Defaulting Clearing Member’s Margin contribution (including excess).
  • Defaulting Clearing Member’s Default Fund contribution.
  • Muqassa’s contribution to the Default Fund (Skin-in-the-Game).
  • Non-Defaulting Clearing Member’s Upfront contribution to the DF.
  • Non-Defaulting Clearing Member’s Supplemental Default Fund contribution.
Margining Framework and Process

Muqassa shall collect margins that are based on the risks in the cleared portfolios (market risk, liquidity risk, etc.) and not on the credit risk of the Clearing Member. More precisely, margins will cover the current exposure (Variation Margin) and expected future close-out (Initial Margin) cost of the portfolios.

With regard to Initial Margin (IM), Muqassa has adopted Nasdaq’s Delta Hedge methodology which is highly compatible with CME SPAN® in that it uses the same set of parameters to estimate portfolio risk.  The key components of the IM methodology are:

  • Type of Model : Simple historical Value at Risk (VaR) model used in calculating historical returns.
  • Margin Period of Risk (MPoR): minimum 2 days.
  • Confidence Interval: minimum 99%.
  • Lookback period: 10 years.
  • Anti-Procyclicality Coefficient (APC) – 25% buffer on margin calculations.

The following additional margins also apply, where applicable:

  • Concentration Risk Margin – to protect Muqassa against expected increased future close-out cost due to large and/or concentrated positions.
  • Stress Margin – to cover for tail risk of portfolios not captured by IM.

Gross margining is adopted by Muqassa, where each client account of a clearing member is margined separately. Margin will be evaluated continuously intraday, in the event that there is a collateral deficiency then an Intra-Day Margin Call (IDMC) will be issued. The Clearing Member will have 90 minutes to remedy the deficit.

IM coverage is backtested on a daily basis by comparing it with the actual realised profits and losses.

The IM will be validated on an annual basis by independent external experts.

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Default Management & Recovery

Muqassa’s Rule book outlines its high level rights in handling a Clearing Member default, whilst the more detailed Default Management Procedure (DMP) contains the guidelines, routines and procedure for the management of a Clearing Member default. The main objective of the DMP is to:

  • Manage the risk exposure and impact associated with a defaulting Clearing Member;
  • Minimize and stem the losses arising from the default and liquidity risk associated;
  • Ensure the continuity of critical services for non-defaulting Clearing Members; and
  • Limit the disruption and prevent wider financial market impact.

In summary, and in the Event of Default being declared, the Default Management Committee (DMC) has a number of tools it can utilize to primarily address an un-matched book:

  1. Porting – Transferring positions and/or collaterals of the non-defaulted accounts under the defaulted member to another clearing member
  2. Hedging – Neutralise the overall risk of the defaulter’s portfolio
  3. Close-Out – via Brokers, where appropriate
  4. Auction – Allocate the positions to the buyer non-defaulting Clearing Members by a tender

The actions of the DMC will be considered a success if Muqassa regains a matched book and any monetary losses are able to be fully allocated to the Default Waterfall, preferably without utilising Non-Defaulting Clearing Member’s Upfront contribution. An unsuccessful outcome would be where there are positions outstanding or the monetary losses that exceed that of the Default Waterfall.

On an annual basis a default ‘firedrill’ will test the sufficiency of the default management process, with feedback post fire-drill fed back to the appropriate stakeholders.

Recovery & Wind Down Plan

In the event that positions remain or the monetary loss is greater than the Default Waterfall resources, the Recovery Plan (RP) will be invoked. Due to the breadth of the recovery scenarios, the RP is not intended to be prescriptive, instead it allows for the flexibility in its use of identified tools and the sequence in which such tools are utilized. All the tools within the RP have legal basis provided for in Muqassa’s Rule book.

Should Muqassa decide it cannot recover then it will follow the Wind Down Plan (WDP), which will ensure that Muqassa closes in an orderly manner considering the market dynamics at the time.


Muqassa permits both business as usual as well as post-default portability that enables a client to transfer both their positions and associated collateral to a Replacement Clearing Member (RCM) on satisfaction of a number of set conditions.

Post-default portability is not guaranteed and the probability of success is highly dependent on many factors including account structure (ISA/OSA) and the availability of a RCM.