Prudent risk management is at the heart of Frontclear’s governance and management framework. Frontclear is managed with the goal of maintaining a single-A equivalent counterparty rating or better for its guarantees. Currently, Frontclear is not externally rated. All Frontclear guarantees are counter-guaranteed by KfW (a AAA-rated German government owned financial institution) on a first demand basis, subject to certain terms and conditions. The diagram below illustrates the capital protection afforded to guarantee beneficiaries.
Frontclear’s risk management engine is centered on the basis of its economic capital model which calculates the amount of capital required for a given transaction. In order to actively manage Frontclear’s exposures consistent with the rating objective for its senior unsecured guarantees to beneficiaries, the economic capital model is supplemented by a Monte Carlo simulation based on Moody’s CDOROM v2.8 and S&P’s CDO Evaluator 6.0 models for default and cross-country correlation. Next to the simulation with the Monte Carlo model, Frontclear applies regular stress testing based on both historical and forward-looking idiosyncratic and market driven stress and worst case scenarios to determine the appropriateness of key controls and evaluate and inform the risk appetite of Frontclear.