It’s probably a good start to try and put my job title into context. The nature of our business means that the company is naturally exposed to a degree of financial risk at all times, and my role is to capture, quantify and monitor the counterparty and market risks that we face. My team act as a second line of defence function, with responsibility for developing a framework for the company’s ongoing financial risk governance, appetite and oversight. The dealing desks operate as our first line of defence, employing their hedging strategies within the financial risk framework, allowing them to operate efficiently and manage risk on an intraday basis.
I work closely with the quants desk, who have some incredible analytical skills and access to a phenomenal amount of historical and real time data. Collaboration here is especially important when it comes to a wide range of tasks. These include deriving appropriate margin requirements, routine stress testing to guard against reasonable and probable scenarios, as well as assessing for extreme and adverse “black swan” events through thematic reviews.
Obviously in an ideal world, we simply manage this risk by looking to match buy and sell orders off against one another, but when that’s not the case, we have a framework in place that allows excess risk to be managed within the agreed exposure limits. One good example of how important effective risk management can be was the EUR/CHF unpegging in 2015 - having carefully monitored mounting pressure on the Swiss National Bank to remove the Franc/Euro peg, our identification of the market risk meant we were able to take a series of proactive measures ahead of the event.
My team also monitor counterparty risk, which is the risk of losses arising from the default of the counterparty to a derivatives transaction, where the exposure is dependent on market factors. To manage our counterparty risk from a client base that ranges from retail investors to major institutions, we have a series of mitigation tools available on our platform including tiered margins, as well as instrument and asset class position limits. My team periodically reviews these offerings in light of current and expected market events/volatility to ensure our counterparty risk is managed effectively for all sides.
Clients need to pass our standard due diligence requirements to be onboarded, but beyond that we are constantly reviewing our counterparties from both a commercial and risk perspective. We always work with clients to provide them with a competitive product offering to serve their business needs – but the reality is that this all needs to be considered in the context of the underlying market. The more attractive the offer, the more frequently it will need to be reviewed. Again, this is readily understood by the sophisticated counterparties, but they clearly find confidence in our approach here, especially as we move towards our goal of a very low latency model.
Investing in CMC Markets derivative products carries significant risk of losing money rapidly due to leverage and is not suitable for all investors. You could lose more than your deposits. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading.
