CCLV helps modernize Chilean financial market

Reducing total market risk with IBM Algo Market Risk and IBM Algo Credit Exposure

Published on 30-Oct-2012

"With IBM, we have a sophisticated and advanced measurement of the requirement and valuation of the instruments deposited on guarantee, as well as the risk inherent to all the members of CCLV. This combination provides us with an accurate measure of market risks." - Gonzalo Ugarte Encinas, Chief Research and Development Officer, CCLV

Customer:
CCLV

Industry:
Financial Markets

Deployment country:
Chile

Solution:
Algorithmics Solutions, BA - Business Analytics, BA - Risk Analytics

Overview

In August 2010, the Santiago Stock Exchange in Chile – known locally as the Bolsa de Comercio de Santiago (BCS) – created a new central counterparty: the Contraparte Central S.A. (CCLV). This move, in response to new legislation on securities settlement systems, was part of the country’s drive to modernize market operations and attract more foreign investors. In fact, it was required for Chile’s entry into the Organization for Economic Co-operation and Development (OECD).

Business need:
CCLV, Chile’s newly established central counterparty, needed to quickly prove itself to domestic and foreign market participants. It wanted to reduce systemic and counterparty risks in a way that satisfied international standards.

Solution:
Established a solid risk management platform based on IBM products. CCLV chose IBM for its expertise and experience in South American markets, as well as its ability to help design a financial risk management model tailored to the needs of CCLV and the Chilean market.

Benefits:
Enables CCLV’s risk analysts, risk manager, and chief officers to measure the exposure of the central counterparty and each participant. This helps to efficiently control risks for CCLV and its participants while reducing the total market risk.

Case Study

In August 2010, the Santiago Stock Exchange in Chile – known locally as the Bolsa de Comercio de Santiago (BCS) – created a new central counterparty: the Contraparte Central S.A. (CCLV). This move, in response to new legislation on securities settlement systems, was part of the country’s drive to modernize market operations and attract more foreign investors. In fact, it was required for Chile’s entry into the Organization for Economic Co-operation and Development (OECD).

With a main objective of reducing systemic and counterparty risks and meeting international standards, CCLV is based on the former Clearing and Settlement System (SCL) – a system used by local brokers to settle their transactions – and the Derivative Clearing House, both owned by BCS. CCLV’s purpose is to manage the clearing and settlement of financial instruments for the equity and derivative stock markets as a Central Counterparty, and to serve as a Clearing House for bonds, money markets, and stock repos. In addition to providing clearing and settlement systems, CCLV implements operational and financial risk administration, giving greater efficiency in guarantees and liquidity management for local brokers.

Tasked with proving their value

The BCS had only 15 months to establish the new securities clearance and settlements systems in compliance with the new legislation. During that time, it needed to set up a new company (in other words, CCLV) with all the necessary facilities, employees, a risk system interconnected with the real-time gross settlement (RTGS) system managed by the Central Bank of Chile, and modify the SCL.

Once the CCLV was established, the major challenge was to win and maintain the confidence of the Chilean securities markets. “As the first Central Counterparty to operate on the Chilean stock market, we need to provide reliable and efficient services to CCLV users,” explains Gonzalo Ugarte Encinas, Chief Research and Development Officer for CCLV.

In order to succeed, CCLV required a system that would enable it to manage non-compliance risks – such as lack of securities or cash – by participants. Moreover, the system would have to interoperate with the financial instruments’ clearing and settlement systems. “We needed to adopt international recommendations and best practices for risk management,” continues Ugarte.

Choosing IBM for experience and flexibility

After assessing many of the options available, CCLV chose IBM for its extensive experience with risk systems, as well as its successful projects in the Mexican and Brazilian markets. Another deciding factor: The team that would implement the system for CCLV had previous experience in the Chilean market.

According to Ugarte, the IBM team played a key role in the success of the project. It helped design a new financial risk management model tailored to the needs of CCLV and the Chilean market. It also enabled CCLV to respond to the market’s demands by adapting the intra-day calculation of guarantees and valuation of instruments within the solution, which is based on IBM® Algo Market Risk and IBM Algo Credit Exposure. “IBM’s adaptations fit perfectly into the array of financial instruments on the Chilean risk management market,” says Ugarte. IBM also recommended a risk valuation methodology, which CCLV adapted.

IBM products are integrated into the CCLV system, composed of the SEBRA-SCL clearing and settlement system and the SEBRA guarantee system (platforms implemented and maintained by BCS). IBM Algo One, the basis of all of IBM Algo analytics solutions, is the architectural framework that enabled this integration and manages enterprise-wide data flow processes. IBM Algo Market Risk receives market data under a link up with SEBRA systems. Through the CCLV system, users can view the calculations of required guarantees and the valuation of the guarantees paid, both of which are generated via the IBM Algo One framework.

According to Ugarte, CCLV was impressed with the flexibility of the IBM solution in integrating with its existing systems. It was also impressed that IBM developed its project within a reasonable period of time, helping CCLV to meet its goals within the limits imposed by Chilean laws and regulations.

“The success of the system’s implementation has been a key factor in the smoothness of our operations, which has been recognized by the Santiago Stock Exchange – our parent company – and also by the market participants and corresponding authorities,” explains Ugarte.

Efficiently controlling and reducing risks

The IBM solution is an essential component of CCLV’s daily monitoring activities. CCLV uses its in-house systems combined with IBM solutions to estimate the market risk of all transactions entering CCLV in equities, bonds and money markets every hour. This usage considers the market value assessment and historic scenarios of the participants and CCLV portfolios, which are used in Value-at-Risk models to determine the amount of guarantees that participants must hold in order to operate in the CCLV.

The system also estimates risks under crisis scenarios in order to determine which agents should not be covered in the event of high volatility and should therefore be asked for additional guarantees. Current regulations allow guarantees in cash and financial instruments. As a result, it is important for CCLV to determine the values at which the latter will be accepted as guarantees, considering the individual volatility of the instruments. Once the guarantees have been deposited, CCLV needs to consider the exposure of the portfolio as a whole and separate from the positions portfolio, because the guarantee portfolio mitigates the positions portfolio. CCLV also uses the solution to estimate inexistent prices when there are no transactions in an instrument, and to calculate the retrospective test.

With the IBM solution, CCLV’s risk analysts, risk manager, and chief officers can measure the exposure of the central counterparty and each participant. They can even measure exposure in an instrument in a particular hour.

According to Ugarte, “We re-run the batch several times per day to be timed with the market. Because the IBM solution enables us to re-run the batch and measure exposure at any given point, we can efficiently control risks for CCLV and its participants while reducing the total market risk.”

Inspiring confidence in market participants

The IBM solutions are integrated to the clearing and settlement systems administered by CCLV, while providing the flexibility to support CCLV’s future needs. Going forward, CCLV plans to incorporate the Santiago Stock Exchange derivatives market into their systems. By tapping into the IBM Algo One framework, CCLV will be able to estimate the derivatives risk.

According to Ugarte, the IBM solutions have become a fundamental component of the clearing and settling process for financial instruments. “With IBM, we have a sophisticated and advanced measurement of the requirement and valuation of the instruments deposited on guarantee, as well as the risk inherent to all the members of CCLV. This combination provides us with an accurate measure of market risks.”

The creation of the only central counterparty in the Chilean market and the adoption of international standards in risk management have put CCLV in line with the most developed financial markets. “International stock markets are now confident about participating in the Chilean Securities Market,” concludes Ugarte.

About IBM Business Analytics

IBM Business Analytics software delivers data-driven insights that help organizations work smarter and outperform their peers. This comprehensive portfolio includes solutions for business intelligence, predictive analytics and decision management, performance management, and risk management.

Business Analytics solutions enable companies to identify and visualize trends and patterns in areas, such as customer analytics, that can have a profound effect on business performance. They can compare scenarios, anticipate potential threats and opportunities, better plan, budget and forecast resources, balance risks against expected returns and work to meet regulatory requirements. By making analytics widely available, organizations can align tactical and strategic decision-making to achieve business goals.

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Products and services used

IBM products and services that were used in this case study.

Software:
Algo Market Risk, Algo Credit Exposure

Legal Information

© Copyright IBM Corporation 2012. IBM de Chile, Av. Providencia 655, Santiago, Chile, 200-6000. Produced in Chile. October 2012. IBM, the IBM logo and ibm.com are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might be trademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at “Copyright and trademark information” at www.ibm.com/legal/copytrade.shtml This document is current as of the initial date of publication and may be changed by IBM at any time. Not all offerings are available in every country in which IBM operates. The client examples cited are presented for illustrative purposes only. Actual performance results may vary depending on specific configurations and operating conditions. It is the user’s responsibility to evaluate and verify the operation of any other products or programs with IBM products and programs. THE INFORMATION IN THIS DOCUMENT IS PROVIDED “AS IS” WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND ANY WARRANTY OR CONDITION OF NON-INFRINGEMENT. IBM products are warranted according to the terms and conditions of the agreements under which they are provided.