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Practice paper

An innovative approach for optimising CCP default management through agent-based modelling

Richard Wise, Tao Chen and Dingqiu Zhu
Journal of Risk Management in Financial Institutions, 17 (3), 286-293 (2024)
https://doi.org/10.69554/FHSR7487

Abstract

This paper develops a rigorous model to analyse the market impact of liquidation. Invoking innovative techniques from agent-based simulation, we construct the order book's reaction function to liquidation. A methodology is then developed for establishing the optimal close-out strategy which balances the velocity of positional liquidation with that consequential market reaction function. This model can be used in parallel to more traditional calculations of market volatility to ensure that the overall risk capitalisation of a central clearing counterparty remains robust. In the case of financial markets, agent-based models often seek to account for the so-called stylised facts of financial markets. Stylised facts are simply empirical regularities that appear to be stable across markets and over time. Such facts range from statistical concepts, such as the distribution of returns, to more abstract notions such as stock market bubbles and crashes.

Keywords: margin; concentration risk; liquidity risk; central clearing counterparty; CCP; default management; agent-based model; ABM

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Author's Biography

Richard Wise is the Group Chief Risk Officer of Hong Kong Exchanges & Clearing Limited. Prior to this role, he has worked within risk management in the investment banking industry since 1993, and of note, at JP Morgan for 21 years where he headed the Global Market Risk Management function.

Tao Chen is the Group Head of Quantitative Risk Management at Hong Kong Exchanges & Clearing Limited. He worked at the London Metals Exchange prior to his relocation to Hong Kong, where he headed quantitative research and development. He has worked extensively in the investment banking industry — primarily in London.

Dingqiu Zhu is the Head of Quantitative Solution in the Quantitative Risk Management department of Hong Kong Exchanges & Clearing Limited. Prior to his relocation to Hong Kong, he worked in various major international investment banks in London in numerous quantitative research roles.

Citation

Wise, Richard, Chen, Tao and Zhu, Dingqiu (2024, June 1). An innovative approach for optimising CCP default management through agent-based modelling. In the Journal of Risk Management in Financial Institutions, Volume 17, Issue 3. https://doi.org/10.69554/FHSR7487.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 17 / Issue 3
© Henry Stewart
Publications LLP

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