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Credit risk (Counterparty or clearing and settlement-related risk)
Thailand Clearing House Co. Ltd. (TCH) acts as a central counterparty for all clearing members and to guarantee
settlement of all transactions traded on SET and Thailand Futures Exchange. By so doing, TCH becomes a substitute seller to
every buyer and substitute buyer to every seller, the so-called Novation process. Thus, as guarantor for every transaction,
TCH is exposed to counterparty risk, and a sound and effective risk management framework is necessary for preventing losses
and mitigating any that may occur.
Current risk management measures to reduce counterparty risk include setting qualifications of clearing members so
that they have sufficient financial strength to handle their risk exposure, have robust risk management policies, measures,
and systems and capable personnel. TCH monitors members’ financial status and liquidity, overseeing trading activities and
limits to ensure that each member’s pending settlement value for equities and debts is in line with their financial status.
If a member’s risk exposure exceeds the specified limit, additional collateral is needed. Measures used include stress testing
to evaluate maximum losses possible in clearing and settlement after considering members’ risk exposure caused by price
fluctuations of each financial instrument. TCH has clearing funds as financial resources to reduce potential damage from
member defaults in clearing and settlement of both the equity and derivatives markets. The clearing funds as of December 31,
2012 were THB 1,084 million for equity and THB 507 million for derivatives. Moreover, SET has clearing reserve funds of
THB 2 billion for equity and THB 300 million for derivatives transactions to gain the confidence of investors in TCH’s clearing
and settlement system if an emergency arises.
In addition, to address liquidity risk in clearing and settlement, TCH has arranged overdraft lines of THB 3 billion
and THB 400 million for equity and derivatives transactions, respectively, with commercial banks which act as settlement banks
for clearing houses.
SET has continuously reviewed and improved its risk management measures and has chosen Oliver Wyman, a leading
global management consulting firm, to strengthen its operations, covering trading, clearing and settlement, depository,
registrar, and risk management. Oliver Wyman’s results showed that overall TCH’s risk management is in line with
international standards both in preventing default and alleviating any damage done.
Last year, TCH extended its clearing and settlement services for USD futures and sector index futures. TCH regularly
reviews margin rates, risk management measures, and collateral rates to handle potential losses arising from trading such
products continuously. Furthermore, TCH has developed an intraday risk monitoring system to support its new trading
and clearing systems, which is part of SET’s plan to enhance its competitiveness.