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CME simulates failures and resulting operational risks with FNA

CLS operates a global multi-currency infrastructure to settle FX trades. It is one of the largest Financial Market Infrastructures (FMIs) in the world, settling an average value of USD$5 trillion each day. CLS wanted to prove to its members the value of the service in not only reducing risk but also in saving liquidity and its associated costs. FNA measured the liquidity savings of the CLS service to its members across multiple RTGS Systems and using advanced analytics, was able to model exactly the savings brought about by its multilateral netting solution. FNA demonstrated that CLS provided an estimated annual collateral cost savings of more than $400 million across all of its members.

Background

Operational failure of a large settlement member of a CCP might cause unexpected operational challenges to the CCP or its settlement members. CME wanted as part of the engagement with their regulator to understand what kind of challenges might manifest under different stress scenarios.

Objective

Develop a simulation model on how the network would “rewire” itself in the case of operational incapacity of a settlement member. Evaluate resulting operational risks for the CCP and for remaining settlement members.

Outcome

Simulations show that depending on the structure of connections and failing member, more operational risk may be born by the CCP or one or more non-failing settlement members. FNA Platform is used to satisfy concerns about backup planning, and to predict operational challenges in case of an operational failure of one or more settlement members.

 

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