Margining

CDS's CNS Participant Fund relies on risk-based margin determined using industry-accepted methods and it is designed to provide the proper levels of protection to cover market movements on CNS positions.

CNS Participant Fund

The CNS Participant Fund is calculated daily and consists of a Base Initial Margin, plus Additional Margins "Add‐Ons". The CNS Participant Fund is calculated at the Ledger Level, and finally summed and aggregated for each CNS Participant, arriving at the CNS Participant Fund collateral requirement.

Base Initial Margin (IM)

is designed to ensure that, in the event of a participant's default under normal market conditions, the pledged Base IM will sufficiently cover market risk from adverse price movements with over 99% confidence. Each CNS Participant's portfolio of CNS positions is divided into two broad groups: (i) those that are eligible for calculation of risk on a portfolio basis ("Diversification Eligible"), and (ii) those where the risk of the CNS position is determined on a stand‐alone basis ("Non‐Diversification Eligible").

Base IM relies on a Filtered Historical Value‐at‐Risk (VaR) methodology for "Diversification‐Eligible" equity securities. The methodology further aims to mitigate procyclicality with a stress component calculated with a Stress Value at Risk (SVaR). Diversification effects are incorporated by allowing gains and losses to offset themselves on each of the days in the historical observation period.

For "Non‐Diversification Eligible" securities, a Flat Rate Margining methodology is used. Flat Rate Margining applies the security's haircut to the market value of the security to arrive at its margin requirement. Flat Rate Margining does not allow for intrinsic diversification effects.

Total Base IM = Base IM _{Diversification} + Base IM _{Non-Diversification}

Additional Margin Add-Ons

In addition to the Base Initial Margin, the CNS Participant Fund includes margin for the following Additional Margin Add-Ons:

• Additional Margin for Mark-to-Market Risk
  This Margin Add-On covers the risk incurred by CDS in the event that a CNS Participant fails to cover their start-of-day (unpaid) Mark-to-Market obligation at Payment Exchange. To cover this potential risk, CDS collects a margin from CNS Participants with a net negative (debit) start-of-day Mark-to-Market obligation.
   
• Additional Margin for Intraday Variation Margin Risk
  This sub-component of the Mark-to-Market Margin Add-On covers the risk arising when intraday market volatility creates unusually large intraday variation margin exposures. For more information regarding the schedule and thresholds for intraday variation margin, please refer to this Fact Sheet.
   
• Additional Margin for Market Liquidity Risk
  This Margin Add-On covers the liquidity and concentration risk arising when CDS has to close-out CNS positions at a price different than the market price. This risk is divided into two components: (i) the inherent market liquidity risk which is mainly associated with the bid-ask spread, and (ii) the additional liquidity risk due to concentrated positions that cannot be liquidated within the bid-ask spread.
   
• Additional Margin for Specific Wrong-Way Risk
  This Margin Add-On covers the risk that arises when the exposure of a CNS Participant in its own securities are adversely (i.e., positivity) correlated with the creditworthiness of that Participant. Right-Way Risk due to negatively corrected positions may decrease the margin requirement for Specific Wrong-Way Risk. The Margin Add-On cannot be lower than zero.
   
• Additional Margin for Residual Incremental Risk
  This Margin Add-On covers the risk that arises from daily portfolio fluctuations (i.e., position risk) as CNS Participants execute trades throughout the day. As a result CDS may be exposed to a different (un-margined) portfolio profile before CDS has collected the CNS Participant Fund requirement the following morning.

For more details on how CDS computes its CNS Participant Fund collateral requirements, please refer to the CDS Financial Risk Model.