Credit Risk

Credit risk (also called counterparty risk) can be defined as the loss assumed by an economic agent in a financial transaction if its counterparty fails to fulfil its obligations.

As an example, the loss of a counterparty in a loan that is not paid or in a derivatives contract when the other counterparty defaults.

Therefore, is the risk on a value of an asset caused when the counterparty of the contract defaults.

When trading bilaterally (OTC), there must be taken into account critical aspects such as the rating of the counterparty or de credit spread in order to choose the counterparty of the trade and hedge the risk, for example, via Credit Default Swaps (CDS) or any other instrument that enables to cover the counterparty risk.

Trading bilaterally (OTC) has counterparty or credit risk.

With a CCP, the counterparty or credit risk is transferred entirely to the CCP and is almost entirely mitigated in the case of the counterparties.

BME CLEARING, as Central Counterparty, novates the trades, putting itself before both counterparties, performing registration, central-counterparty, clearing and settlement functions. 

The main purpose of BME CLEARING is to eliminate the counterparty risk and to ensure the transactions are completed successfully.

For that, BME CLEARING measures risk exposure to its counterparties in real time using its risk management system, considering the current collateral posted.

Besides, BME CLEARING establish solvency requirements for Members based on their category in the CCP, BME CLEARING require the posting of Margins, applies Variation Margin in Futures and xRolling contracts, sets Risk, Margin Call and Concentration Limits, performs stress tests for Margin calculation and follows the Default Waterfall in case of Default.