IHOFX has a risk system that covers all business sectors. Potential risks are assessed in terms of their probability of occurring and the potential scope of disruption that can be caused.
The Management Board is kept updated about the risk situation on a daily basis and reports to the Supervisory Board on a quarterly basis. The Management Board has overall responsibility for risk management. Administrative reporting is done in the case of significant changes in the risk situation.
The possible risk areas include counterparty risk, market price risk, liquidity risk, operational risk, as well as business and regulatory risk.
Counterparty risk is characterized through the potential risk that business parties might not fulfill their payment obligations under the applicable contract, or will not do so in a timely manner, resulting in a loss for the Group.
IHOFX pursues a risk policy that includes using its margin scheme, clearing fund, and own financial capital to cover this default risk with a high degree of protection. Daily back monitoring is used to assess the accuracy of the margin scheme on an ongoing basis. IHOFX simulates counterparty risk in extreme but realistic market situations using regular stress tests and adjusts the clearing fund and its own financial capital in such a manner that the counterparty risk, as well as the risk of both of the largest Clearing Members defaulting at the same time, is protected.
Low default risk depends on market participants' responsibility to pay the transaction or clearing fees that are owed. The credit status of trading participants is continually tracked based on financial criteria and rating details. The query of whether the payment of transaction fees relates to individual trading participants is also examined within this context.
Market Price Risk
Market price risks are characterized as significant changes in asset value caused by changes in valuation-relevant market parameters such as exchange rates. There are no market price risks in the clearing sector as a result of the positions. Market price risks arising from other activities are minor and are managed in compliance with the circumstances.
Liquidity risk is characterized through the possibility that a client would be unable to meet the payment commitments at the agreed-upon period in a contract. The current procedures do not result in any critical date discrepancies due to the complexity of the followed market plan in place.
Liquidity risk is managed on IHOFX using liquidity criteria defined by supervisory legislation. This is a special continuous liquidity outlook as well as an overview of the consequences of multiple market growth scenarios.
The risk program utilizes approved methods of system development and rigorous test protocols to achieve the basic goal of reducing operational risks. IHOFX either performs key activities in-house or outsources them to specialized partners. The service providers' consistency is continually assessed as part of the procurement process and the service level agreement system. Internal and external auditors examine the internal management scheme on a regular basis to ensure that it is of high standard. Both basic systems include mechanism definitions and management operations.
For ongoing tracking and monitoring of cases of malfunctioning during operations, a damage incident archive is held. Any untoward events that occur during operations – even though they do not result in direct financial loss – are reported in this database and analyzed as a result.
Business risk is described as the results of new participants entering the market, regulatory or other legal changes, technological changes, or product environment adjustments that have a negative impact on earnings in the medium to long term.
Compliance risk, according to IHOFX, implies not only recognizing areas of risk, such as industry standards and internal governance, but also understanding how certain areas of risk strategically influence the stakeholders' expectations. As a result, IHOFX monitors and reviews risk factors in order to anticipate new regulations, make necessary changes, and remove redundancies.
IHOFX settles all transactions via Clearing Members. As a result, IHOFX has a low chance to be exposed to compliance risk. Risk analysis processes are used to re-evaluate this type of risk on a regular basis. In addition, continuous monitoring processes are undertaken by the Market Surveillance Office.
Sensitive data that requires special protection is handled with care and preserved against unauthorized access in accordance with internal policies. In order to prevent conflicts of interest, rules of conduct have also been established.
Risk Coverage Capital
Overall, risks that are not protected by defined risk coverage capital or the margin structure are currently undetectable.