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Argentina Clearing S.A.

2. Index:Introduction3Legal Risks5Market Risks8SARP

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Argentina Clearing S.A.

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    1. Argentina Clearing S.A. Risk Management

    2. 2 Index: Introduction 3 Legal Risks 5 Market Risks 8 SARP® (Portfolio Risk Management System) 12 Credit Risks 17 Operational Risks 19 Depositary Risks 21

    3. 3 Introduction One of the main concerns on the part of participants and authorities, as regards financial derivatives trading, is the implicit risk of this type of instruments in face of the risk pattern and the high level of leverage entailed in the negotiations of those instruments.

    4. 4 Introduction Negotiation in financial markets exposes its participants to potential risks, such as: Legal Risks Market Risks Credit Risks Operational Risks Depositary Risks ArgentinaClearing provides a sound infrastructure as regards legal regulations, information systems, resources and market supervision following international standards.

    5. 5 Legal Risks: Concept: Loss risk due to the existence of different interpretation criteria in face of the ambiguity of current regulations on the subject.  Legal Relationships: Clearing Members (CMs) maintain a principal to principal relationship with ArgentinaClearing. Clients maintain a principal to principal relationship with CMs Legal and Regulatory Framework: Public Offer Law. Markets and Clearing Houses Regulation. Securities National Commission (Comisión Nacional de Valores). Bankruptcy Law. Trust law. Bankruptcy Law: It does not favour clients’ funds or collaterals in Clearing House’s possession.

    6. 6 Legal Risks Mitigation: Clearing House Rulebook Guarantee Trust Contract for CMs’ Obligations. Guarantee Trust Contract for Third Parties’ Transactions*. CMs-Brokers ** Registration Contract. Agreement on Client’s Account Opening. PriceWaterhouseCooppers Legal Opinion about legal structure.  

    7. 7 Legal Risks Mitigation: ArgentinaClearing Legal Structure There is a clear segregation among Argentina Clearing’s, ROFEX’s, CMs’ and CMs’ clients’ funds. CMs’ collateral in the Guarantee Trust can not be claimed by ROFEX’s , ArgentinaClearing’s, CMs’ or CMs’ clients’ creditors. Risks related to depositories’ funds are taken by CMs and/or their clients, not by ROFEX and/or ArgentinaClearing. In case CMs default, collateral in the Guarantee Trust can not be subject to legal restrictions as regards their use. CMs are obliged to comply as regards the operations they guarantee, whether those operations are their own or their clients’. Clients’ collateral is protected in case of CMs’ propietary account default.

    8. 8 Market Risks: Concept: Loss Risk due to adverse price fluctuation Central counterparty: The Clearing House is the CMs’ central counterparty; with their profits and losses resulting in a zero sum . Margin System: The Clearing House manages a margin system whose aim is to mitigate market risk and make sure that it receives payments from those who lost in order to settle the accounts of those who got profits.

    9. 9 Market Risk Mitigation: Daily Mark-to-market: Daily profits and losses resulting from the current market value and previously negotiated prices. They are paid and settled the following day. (T+1). Margins: Guarantee settlement at client level and request of payment to CMs on the basis of gross amount. (long and short positions from different clients do not compensate). Intraday risk monitoring: Daily Operational Limit (Limite Operativo Diario-LOP): Total amount of margins that can be generated and submit the following day (T+1), determined according to CMs’ collateral at the beginning of each day. Intraday Margins: When LOP is exceeded margins are submitted the day they are generated.(T+0) Intraday Mark-to-market: In case of high volatility, losses are paid the day they are generated.(T+0)

    10. 10 Market Risk Mitigation: Position Limits: these are set at client and CMs level in order to: prevent market manipulations. make sure that each CM is solvent enough to fulfil its upcoming liabilities. make sure that the Clearing House can liquidate CM’s positions in case it defaults. Emergency Actions: In case of emergency situations the Clearing House is empowered to: Increase margin amounts. Reduce position limits. Restrict eventual transactions. Procedures in case of CMs’ default: In case of CMs’ default, the Clearing House is able to liquidate their open interest and face possible losses by means of collaterals provided by the defaulter.

    11. 11 Market Risk Mitigation: Guarantee Use Order in case of default: Collateral contributions to the CMs’ Third Parties’ Transactions Trust, when necessary. Collateral contributions to the CMs’ Obligations Trust. Defaulter CMs’ contributions to the CM’s Default Guarantee Trust . CMs’ Default Guarantee Trust proportionally distributed among the CMs. Guarantee Special Fund provided by the Rosario Board of Trade. Capital reserves set aside for that purpose.

    12. 12 SARP(Portfolio Risk Management System) Developed by ArgentinaClearing based on SPAN, the world-wide used Chicago Mercantile Exchange margin system. It calculates margins on portfolios consisting of futures and options at each client level. The requested margin is the following-day maximum possible loss, considering different scenarios of price fluctuation and volatilities. Furthermore, it is an efficient means for assessing spreads.

    13. 13

    14. 14 Intraday risk monitoring

    15. 15 Intraday risk monitoring

    16. 16 Actions to be taken: Example

    17. 17 Credit Risks Concept: Loss risk due to counterparty’s default. Central Counterparty: The Clearing House is the CMs’ central counterparty, therefore: 1- In case of a CM’s potential default the Clearing House faces Credit Risk. 2- In case of Clearing House’s default, CMs face Credit Risk. 3- 2 is a consequence of 1, since CMs’ profits and losses represent a zero sum.

    18. 18

    19. 19 Operational Risks: Concept: Loss risk due to information system or internal control deficiencies.

    20. 20 Operational Risks Mitigation

    21. 21 Depositary Risks Concept: Loss risk due to default on the part of depositary entities in which collaterals are kept. Risks related to funds’ depositories are taken by CMs and/or their clients, not by ROFEX and/or ArgentinaClearing.

    22. 22 Depositary Risks Mitigation Compulsory fund diversification among the different depository entities. Those funds can not exceed the following percentages at each entity: From 20% to 35% at each local custody entity authorised by ArgentinaClearing according to credit classification. The funds total amount at custody entities from the CM’s same economic group can not exceed 35%(*). (*)Argentina Clearing reserves the right to modify these percentages and limits, which will be immediately applicable.

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