Option risk classification

Combined with G30 Group's risk classification of financial derivatives, option risk can be divided into market risk, credit risk, operational risk and legal risk. As financial derivatives, options and futures have the same risks, such as market fluctuation risk and credit risk. At the same time, in terms of options, some risks have special forms, such as market manipulation risk. In the case of risk, credit risk, fraud risk and legal risk of many OTC options transactions can be avoided through centralized and unified trading and liquidation. For floor option trading, the focus is on the management of market risk and operational risk.

I. Market Risk

Market risk, also known as price risk, refers to the risk that the price change of the underlying assets leads to the price change of the derivative products. According to the different scope of influence, market risk can be divided into the price fluctuation risk of a single derivative and the systemic risk that the whole financial market is affected.

(A) the risk of price fluctuations of a single variety

Wheat, copper and other varieties on the Chicago Mercantile Exchange (CME) experienced a rapid rise or fall in terms of the risk of large price fluctuations. While the futures price fluctuates greatly, the option price also rises or falls rapidly. The exchange takes measures such as adjusting the range of price limit, formulating the adjustment mechanism of price limit and adjusting the margin.

(2) Systemic risk

Systemic risk is the risk faced by options, futures and other derivatives, and the American option market also experienced a financial crisis in 2008. It should be pointed out that after the crisis, American regulators introduced new laws and regulations and strengthened market supervision. At the same time, by increasing the net capital of brokerage members, they gradually concentrated customer deposits in several large-scale and well-funded futures companies, which improved the futures companies' ability to resist systemic risks.

Second, credit risk.

Credit risk, also known as default risk, refers to the risk caused by the default of one party to the derivative contract. According to different default subjects, credit risk can be divided into member credit risk and customer credit risk.

(A) member credit risk

The default of members is mainly manifested in the illegal use of customer funds, which is consistent in the options and futures markets. 20 1 1, MF Global embezzled customer funds, 20 12, Bailey Financial embezzled customer funds, which seriously hit the confidence of market investors. American regulators and exchanges deal with the above risks by clearly defining the scope of the use of client funds by brokerage members and formulating a mechanism for comparing the balance of client funds. In the domestic market, the margin monitoring center also supervises the funds of members and customers.

(B) Customer credit risk

The credit risk of customers is mainly manifested as unilateral default when customers lose money. This kind of risk mostly occurs in the OTC market, such as the default of structured products of OTC crude oil options of Shennan Power Company in 2008.

Three. operational risk

Operational risk refers to all kinds of risks that may occur in the process of option trading and affect the normal trading of options. According to different subjects, operational risk can be divided into exchange operational risk, brokerage member operational risk and customer operational risk.

(A) the operational risks of the exchange

According to the nature of risks, the operational risks of exchanges can be further subdivided into three categories.

One is the risk of violation, including market manipulation and other behaviors. The characteristic of option market manipulation is that it does not directly manipulate the option market, but affects the option price by manipulating the option target market, thus making a profit. For example, 20 10 South Korea stock index market manipulation case and 2007 London aluminum market suspected manipulation case. The main reason for this kind of risk events is that there is no warehouse restriction or the actual control relationship accounts are not merged and restricted. Take the aluminum market in London as an example. A fund holds more than 40% future positions and more than 70% spot warehouse receipts. In the option market, consistent with the way of preventing manipulation risk in the futures market, we should establish a position limit management system based on actual control relationship account management.

Other futures market manipulation cases include 1932 wheat market manipulation case, 2008 US silver market manipulation case, 1996 copper market manipulation case and 2000 US options market settlement price manipulation case.

Second, abnormal trading risks, including excessive speculation, such as bad speculation in Baosteel's warrants in 2006. Exchanges can respond by strengthening real-time monitoring.

The third is the risk of emergencies, including the collapse of brokerage companies, system failures, natural disasters, wars and other emergencies. This kind of risk is consistent with the way to prevent the risk of unexpected events in the futures market.

(B) the operational risks of customers

The operational risks of customers are mainly internal control risks, fraud risks and appropriateness risks.

The risk of internal control is mainly manifested in the unauthorized transactions of customers' employees, thus causing great losses. This kind of risk exists in both futures and options markets. For example, the Sumitomo copper incident in Japan in 1996 and the Guotong incident in 2005.

The risk of fraud is mainly manifested in that investors are deceived or misled by false propaganda and suffer losses. Because of rampant fraud in the market, the United States banned option trading twice. For example, the 1978 London option fraud case, which led to the third ban on American option trading, led to the preferential fraud case in which American option trading was banned for the first time.

The appropriateness risk is mainly manifested in the complex option structured product transactions of customers with low risk tolerance, resulting in heavy losses, such as the CAO incident in 2004, CITIC Pacific incident in 2008, China Eastern Airlines incident in 2008, Shennan Power incident in 2008 and DBS Bank incident in 2008. For this kind of risk, customers can avoid it by strengthening internal control and avoiding participating in OTC options trading. In the preparation of domestic options listing, we can also establish an investor suitability system, strengthen the training of investors, and let investors fully understand the market risks.

Fourth, legal risks.

Legal risk refers to the possibility that the financial derivatives trading contract is legally invalid and the contract content does not conform to the provisions of laws and regulations, which will bring losses to the participants in the option market. Most of this risk exists in over-the-counter transactions.

Compilation of international options market risk cases

I. Market Risk Cases

A Risk Case of Price Fluctuation-The US wheat price rose rapidly in 2008.

Affected by the sharp decline in wheat stocks and the depreciation of the US dollar, the wheat futures prices of the three major exchanges in the United States rose "substantially and rapidly" in early 2008.

The March wheat contract of Minneapolis Exchange rose from 10.36 USD/bushel at the beginning of 2008 to 24 USD/bushel at the end of February 2008, with an increase of 132%. Among them, the contract has 10 daily limit in June 65438+ 10, and1daily limit in February. During this period, the Chicago Board of Trade (CBOT) wheat March contract rose from $8.85/bushel to 1 1.99 $/bushel, an increase of 35%. March wheat contract on Kansas City Futures Exchange rose from 9. 13 USD/bushel to 12.57 USD/bushel, with an increase of 38%. In addition, the wheat variety contracts of the above three exchanges in other months also rose to a certain extent. On February 25, 2008, all the wheat contracts of the above three exchanges had daily limit, and most of them had daily limit on February 26.

Consistent with the rapid rising trend of futures prices, the wheat March contract options series of the above three exchanges also showed a rapid rise.

The Commodity Futures Trading Commission (CFTC) and the above three exchanges have taken two measures. The first is to expand the scope of price restrictions. The price limit of wheat futures trading is raised from 30 cents/bushel to 60 cents/bushel. The second is to formulate a relaxation mechanism for price limits. If two or more wheat futures contracts delivered in the same trading day reach the price limit, the price limit of wheat futures contracts in each month of the next trading day will be increased by 50% on the original basis. If there is no wheat contract limit for three consecutive trading days, it will return to 60 cents/bushel.

A case of systemic risk-2008 financial crisis.

The financial crisis from 2007 to 2009, also known as the subprime mortgage crisis, originated from the mortgage risk in the United States in early 2007. After the risk surfaced, it seriously hit investor confidence and then triggered a liquidity crisis. Even though many central banks injected huge amounts of money into the financial market several times, they failed to prevent the outbreak of the financial crisis. In September 2008, the financial crisis began to get out of control, which led to the closure or takeover of many large financial institutions, including Lehman Brothers and American International Group.

On May 8, 2009, CFTC announced its intention to substantially increase the regulatory requirements for the adjusted net capital of futures commission merchants (FCM) and recommended brokers (IBs). Among them, the minimum adjusted net capital supervision requirement for futures brokerage companies increased from $250,000 to $654.38 million, and the minimum adjusted net capital requirement for introduction broker IBs increased from $30,000 to $45,000.

CFTC made it clear that in order to meet the new regulatory standards, FCMs needs to significantly increase its capital. The agency also predicts that the number of FCMs will decrease, and customer deposits will gradually be concentrated in the hands of a few FCMs with sufficient capital.

Second, the case of credit risk.

(1) Member's credit risk case-MF Global 2011misappropriation of customer's funds.

Due to its holding of US$ 6.3 billion of European sovereign bonds, MF Global was downgraded by several rating agencies after the financial statements of 20110 were published on October 25th, resulting in its share price falling and financing difficulties. In order to protect the interests of corporate customers, the US Securities and Exchange Commission (SEC) and CFTC require MF Global to sell its brokerage business. In the process of selling brokerage business, MF Global was found to have misappropriated nearly $600 million in client funds for its own business, and suffered losses due to the failure of business decisions.

In view of the above situation, the SEC and CFTC require MF Global to go bankrupt immediately. On 20 1 1 10 and 3 10, Mann Finance formally filed for bankruptcy with the court, becoming the largest bankruptcy case of financial institutions in the world since the bankruptcy of Lehman Brothers in 2008.

201165438 On February 5th, CFTC promulgated new regulations on the use of clients' funds by commission agents and clearing houses. Among them, brokers are allowed to use client funds to invest in domestic bonds, institutional bonds, corporate bonds and commercial bills; It is forbidden for brokerage companies to invest in sovereign bonds of foreign governments with clients' funds, or to exchange clients' assets between different trading departments with internal repurchase agreements. If it is really necessary to invest in overseas treasury bonds, an application for exemption must be submitted to the regulatory authorities.

(B) Customer Credit Risk Case-Shennan Power Default Event in 2008

In March 2008, Shennan Electric Power Company, through its wholly-owned subsidiary, Shennan Energy (Singapore) Company, traded structured products of crude oil futures options with Jierun (Singapore) Private Company, a wholly-owned subsidiary of Goldman Sachs Group. After the signing of the above agreement, from March to June, 2008 10, due to the high price of crude oil futures, Shennan Electric Power Company was able to obtain income from Jierun Company every month, amounting to 2.4 million US dollars. Since June 5438+065438+ 10, 2008, the price of crude oil futures has fallen sharply. Shennan Electric Power Company will pay1930,000 US dollars to Jierun Company only in June 5438+065438+ 10, and may have to pay huge fees in the future.

On June 5438+065438+ 10, 2008, Shennan Electric Power Company announced the termination of the agreement signed with Jierun Company and the sale of the core assets of its wholly-owned subsidiary, Shennan Energy (Singapore) Company. Although Jierun Company asked Shennan Electric Power Company to pay a loss of 79.96 million US dollars and interest of 3.73 million US dollars, because Shennan Electric Power Company has hollowed out overseas assets, even if Jierun Company wins the case overseas through judicial channels, there is no asset to dispose of. In addition, foreign judicial judgments can only be executed in China after they have been reconfirmed by Chinese courts, and it is difficult to execute the judgments.

Three. Operational risk case

(1) Cases of operational risks of the Exchange

1. Violation risk case-manipulating the settlement price of American options in 2000

P-Tech option contract is one of several small option contracts listed on NYFE, and its settlement price and non-settlement price are set by NYFE. In the settlement committee, three members are responsible for calculating and publishing the settlement prices of three option contracts, but no mutual review mechanism has been established. One of them, isler, is both a member of the NYFE Reconciliation Committee and the chairman of the First Western Company. Eisler is not only responsible for calculating the settlement price of P-Tech option contracts, but also holds a large number of P-Tech option contracts through FirstWest. Under the background of the above conflicts of interest, isler Company did not follow the NYFE settlement price calculation principle, but artificially input false implied volatility when calculating the settlement price of option contract, which made the option settlement price change in the direction of FirstWest Company, seriously overestimating the rights and interests of FirstWest Company in the exchange.

On May 15, 2000, isler entrusted other members to use the preset parameter P-Tech option contract settlement price. However, after the member noticed that the calculation result was abnormal, he recalculated it with the correct implied volatility, and the scandal that the settlement price of P-Tech option contract was manipulated was exposed.

After the settlement price of the P-Tech option contract returned to normal, FirstWest declared bankruptcy because it could not increase the margin of more than 6 million dollars. Klein, its brokerage company, could not bear the loss and declared bankruptcy.

According to the provisions of the Commodity Exchange Law of the United States, when the exchange fails to implement laws, CFTC rules and exchange regulations, if the trading subject suffers heavy losses, the exchange shall be responsible for it. Klein, the brokerage company, filed a lawsuit against NYFE accordingly. Because NYFE failed to maintain a fair settlement price, it did indirectly lead to the bankruptcy of Klein Company, but the court finally ruled that Klein Company participated in the market as a settlement member, which was not within the trading scope stipulated in the Commodity Exchange Law, and Klein Company had no right to claim losses from NYFE. Although the exchange was exempted, institutions such as the Futures Association expressed their support for Klein. The scandal also had a negative impact on the reputation of the exchange.

After the above scandal was exposed, CFTC investigated the details of the scandal, analyzed the causes of the case in depth, and issued a report on risk management of exchanges, clearing houses and clearing members.

First, it is suggested that clearing members strengthen their understanding of the special risks of holding positions. In addition to the risk of market price changes, option prices are also affected by the expected volatility of futures prices, that is, implied volatility. In addition, the market with poor liquidity will bring greater risks. Usually, it is assumed that the position can be closed on the same day in the formulation of the margin standard, but in the market with poor liquidity and high position of a single customer, it is impossible to close the position at the current disk price.

Second, it is suggested that exchanges and clearing houses strengthen the supervision of clearing members' funds and understand the risk exposure of their positions. There are two methods to measure option risk, namely, futures equivalence algorithm and theoretical price algorithm. The former algorithm is relatively simple, but in the process of transforming deep imaginary options into flat options, its delta changes greatly, resulting in a large algorithm error. Therefore, CFTC suggests that exchanges and clearing houses calculate the theoretical value of options in order to better measure the risk of options in stress tests.

Third, other aspects, including brokerage companies to ensure adequate capital, exchanges and clearing houses to maintain the accuracy of settlement prices, and to conduct regular audits of the risks of settlement members.

2. Abnormal trading risk case-Baosteel's warrants were seriously hyped in 2006.

The warrant of Baosteel JTB 1, the first stock option listed in China, has been heated by speculators, which has aroused widespread concern in society. The "Baosteel JTB 1" warrant was listed and traded in August 2005, and the exercise price was 4.5 yuan. At the beginning of listing, warrants were heated by speculators. By the beginning of August 2006, the value of warrants was almost zero, but due to the speculation of funds, the price rose sharply again. Then, on August 23rd, 2006, on the last trading day of "Baosteel JTB 1" warrants, the "Baosteel JTB 1" warrants, which almost became waste paper, plummeted by 85.78%, and the turnover rate was as high as 1 164.77%, setting a record for the highest transaction volume.

In view of the above risks, SSE restricted the intraday trading authority of an account suspected of speculation on August 5, 2006, and issued the expiration risk warning of Baosteel JTB 1 warrants on August 6, 2006.

3. Emergency Risk Case -MF Global Financial Bankruptcy 20 1 1.

MF Global formally filed for bankruptcy with the court on 2011031for misappropriating huge customer funds.

After MF Global filed for bankruptcy, CME immediately announced the suspension of its clearing membership and said that it would assist customers to transfer their trading positions. For customers who have found new guarantors, CME Clearing House will move the positions according to the previous settlement price if the customers require to move the positions. At the same time, CME lowered the margin requirements of some accounts to weaken the impact of MF Global's financial bankruptcy on the futures market. On June 1 65438+1October1day, CME further allowed customers whose previous accounts had no losses to cancel Man's guarantee relationship, and their accounts could be transferred to other settlement members.

(B) Customer's operational risk cases

1. Internal control risk case-2005 State Reserve Copper Incident

Liu is the director of the import and export department of the State Material Reserve Control Center (hereinafter referred to as the State Reserve Control Center), and also the orderer of the trading account of the State Reserve Control Center on the London Metal Exchange (LME). In the process of international copper price rising from165438+ 1360 USD/ton in May, 1999 to 3057 USD/ton in March, 2004, Liu gained some profits through copper arbitrage at home and abroad.

With the implementation of macro-control measures in early 2004, domestic demand dropped sharply, and Liu began to bearish on international copper prices, holding short orders of 200,000-300,000 tons of copper by directly establishing short futures positions and selling call options. However, the price of LME copper futures rose slightly from $3,057/ton in March 2004 to $365,438+$0.33/ton at the end of 2004, and began to accelerate, reaching $3,865/ton in September 2005, $4,575/ton in June 2005 and $8,790 in May 2006.

The price of LME copper futures soared, resulting in huge losses in the trading account operated by Liu. The State Reserve Control Center once refused to bear the above losses on the grounds that "Liu is not an employee and his behavior belongs to personal behavior" and "Liu provided forged trading authorization". After consultation with the relevant departments of China Municipal Government, many brokers such as Shengheng Futures and British Standard Bank finally agreed to bear half of the loss of credit line.

2. Fraud Risk Case-1874 Privileged Fraud Event

/kloc-In the late 20th century, an embryonic form of agricultural futures options trading called ex-gratia rights rose and prevailed in Chicago, mainly agricultural futures options. Due to the lack of specialized regulatory agencies, preferential rights transactions are very chaotic. A large number of speculators appear, lure customers to participate in the transaction, and then run away with the defrauded royalties and continue the same fraud elsewhere.

1874, Illinois legislation prohibited so-called preferential trading, but the Illinois ban did not achieve the expected results, and traders still chose to conduct preferential trading in other parts of the United States. This is the first of three bans in the history of American options, which belongs to the regional option trading ban.

3. Suitability risk case-Cao incident in 2004

In 2004, when the crude oil price was bearish, Cao, as the buyer, signed a structured option product based on the crude oil price with Goldman Sachs Singapore Jierun Company to hedge its crude oil inventory.

The extended trinomial consists of a trinomial part and an extended part. The trinomial part consists of three option contracts, including a put option with an exercise price of $33/barrel, a put option with an exercise price of $365,438+0/barrel and a call option with an exercise price of $36/barrel. The comprehensive effects of the above three schemes are as follows: when the crude oil price is lower than $33/barrel, the income of CAO is $33/barrel minus the crude oil price, and the upper limit of the income is $2/barrel; When the crude oil price is higher than $36/barrel, the loss of CAO is the crude oil price minus $36/barrel, and there is no upper limit for the loss; When the price of crude oil is 33-36 USD/barrel, Cao has no profit or loss. The deferred part is option contracts, that is, Jierun Company has the right to decide whether to postpone the trinomial part after the trinomial part expires.

At the end of 2003, the price of crude oil was at a low level, and Cao made a slight profit by signing the extension trinomial, which was equivalent to holding a short position of 2 million barrels of crude oil. At the beginning of 2004, the price of crude oil rose, and CAO lost $5.8 million at the end of the first quarter. In order to avoid the disk loss turning into actual loss, Cao chose to postpone the expiration date of the contract and expand his position, and with the increase of crude oil price in 2004, the scale of his position continued to expand. After four changes, Cao held a short position of 52 million barrels of crude oil at the end of the third quarter of 2004. In the end, due to the high crude oil price, Cao's capital chain was broken, and his position was gradually closed, with a cumulative loss of 554 million US dollars, and he filed for bankruptcy protection on June 29, 2004.