Eurex Clearing
1. Introduction
This circular contains information with respect to the service offering of Eurex Clearing AG (Eurex Clearing) and introduces amendments to the Clearing Conditions of Eurex Clearing AG (Clearing Conditions), the FCM Regulations of Eurex Clearing AG (FCM Regulations) and the FCM Default Rules of Eurex Clearing AG (FCM Default Rules) regarding the following topic:
The amendments to the Clearing Conditions, FCM Regulations and FCM Default Rules regarding the above topic are subject to a consultation process (Consultation); the Consultation will end on 1 December 2020 (Consultation Period). The planned effective date of these amendments is 30 December 2020, depending on the outcome of the Consultation which will be communicated in a separate Eurex Clearing circular.
2. Required action
The amendments to the Clearing Conditions, FCM Regulations and FCM Default Rules are subject to a Consultation which will end with the expiry of 1 December 2020.
Eurex Clearing herewith invites all Affected Customers to submit comments on the proposed changes and amendments within the Consultation Period.
3. Details
The proposed mechanism to return to a matched book is intended to be used by Eurex Clearing in the context of the termination of a Clearing Member, after every standard Default Management Process (DMP) tool has failed, including hedging transactions, independent sale transactions and one or more mandatory auction(s), along with the incentive mechanism already in place (juniorisation of Default Fund contribution and penalties).
The currently available option to cash-settle the entire Liquidation Group is too broad and should be complemented by a more granular tear-up mechanism. The proposed changes to the Clearing Conditions, the FCM Regulations and the FCM Default Rules seek to provide for this possibility for both Exchange Traded Derivatives (ETDs) and OTC Transactions. This proposed change is to be considered in light of the upcoming EU Regulation on the recovery and resolution of central counterparties.
The measures Eurex Clearing intends to apply to restore a matched book differ between (i) Exchange Traded Derivatives (ETD), i.e. Eurex Transactions, and (ii) Over-the-counter (OTC) Interest Rate Derivative Transactions and OTC Currency Transactions, due to the different structure of these products.
Both processes have been designed in close co-operation with the EMIR Risk Committee in a manner that respects the two following principles:
Measures intended for ETDs:
For ETDs, Eurex Clearing intends to terminate and cash settle open Transactions established between Eurex Clearing and (non-defaulted) Clearing-Members which are opposite to the terminated Transactions established between Eurex Clearing and the defaulted Clearing Member up to a number and size which is sufficient to cover all of the terminated Transactions of the defaulting Clearing Member which could not be replaced by an Independent Trade or Auction (so-called partial tear-up or PTU).
A PTU is distributed between all Clearing Members on a pro rata basis relating to the open interest (number of contracts) in the opposite direction from the terminated contracts, considering all positions across all accounts (house and client). In case rounding is required, Eurex Clearing shall use best efforts to find a fair and proportionate distribution of the remaining pro-rata share between the relevant Clearing Members.
With respect to the determination of the cash settlement amount of the relevant Transaction, Eurex Clearing will, if reasonable bids are received during a partially successful auction, use such auction prices. If Eurex Clearing did not receive any bids with respect to the relevant Transaction Type, the cash settlement will be calculated on basis of the last available settlement price determined by Eurex Clearing.
Measures intended for OTC Interest Rate Derivative Transactions and OTC Currency Transactions:
With respect to OTC Interest Rate Derivative Transactions and OTC Currency Transactions, Eurex Clearing assessed that the impact on the affected Clearing Member arising from a cash settlement based on the same principles as applied with respect to ETDs is neither transparent nor predictable and entails significant market risk for such Clearing Members.
First and foremost, due to the changing structure of OTC transactions driven by post trade events (in particular: compression), it is expected that Eurex Clearing would be required to cash settle a very high number of Transactions to establish a matched book.
Therefore, the proposed amendments to the Clearing Conditions foresee a three-step approach to return Eurex Clearing to a matched book:
i) establish additional OTC Hedging Transactions,
ii) conduct one additional OTC Auction of the (additionally) hedged portfolio, and
iii) if this auction fails again, as a matter of last resort, establish new Transactions between Eurex Clearing and those Clearing Members, which had been invited to the OTC Auction.
(i) Firstly, Eurex Clearing is entitled to enter into mandatory OTC Hedging Transactions with non-defaulted Clearing Members which have open positions in the affected product and currency in a three-months period before the Termination of the defaulted Clearing Member. Such newly established OTC Hedging Transactions are booked into the Clearing Members’ accounts (house and client) pro-rata based on the risk exposure towards the CCP, measured by the three-months average Initial Margin Requirement (IMR) in the affected product and currency. Furthermore, it provides flexibility to Eurex Clearing to consider further segregation per maturity buckets to better reflect the liquidity of the currency per tenor, as well as the risk structure of the portfolio. Transactions will be executed at the last available end of day marked-to-market value, as determined by Eurex Clearing.
(ii) Once the portfolio of Eurex Clearing is (additionally) hedged by the mandatory OTC Hedging Transactions, Eurex Clearing will initiate one final OTC Auction. Due to the mandatory OTC Hedging Transactions, the portfolio of the defaulted Clearing Member is virtually risk-free and Eurex Clearing is confident that the chances for a successful auction are significantly increased.
(iii) Finally, if the final OTC Auction ultimately fails, Eurex Clearing shall be entitled, as a matter of last resort, to transfer a share of the portfolio of the defaulting Clearing Member to all Clearing Members which qualified as a Mandatory Participant of the final OTC Auction and which had been invited to the OTC Auction. Eurex Clearing is entitled to establish mandatory Transactions with other (non-defaulting) Clearing Members. The share of the portfolio received by such (non-defaulting) Clearing Member will be in proportion of the its three-months average IMR in the affected product and currency. The mandatory Transactions will be concluded at the last available settlement price.
To reflect the changes, the following provisions will be amended as outlined in the attachment:
Consultation with respect to the amendments to the Clearing Conditions, FCM Regulations and FCM Default Rules
Pursuant to Chapter I Part 1 Number 17 of the Clearing Conditions, the proposed changes and amendments to the Clearing Conditions are subject to a Consultation which will end with the expiry of
1 December 2020.
Eurex Clearing herewith invites all Affected Customers to submit comments on the proposed changes and amendments within the Consultation Period.
During the Consultation Period, comments on proposed changes or amendments shall be only submitted through a web-based commenting service for which a registration form is available on the Eurex Clearing website www.eurex.com/ec-en/ under the following link:
The form has to be duly signed and returned to Eurex Clearing via e-mail to SpecialProvisions@eurexclearing.com, in order to obtain a User ID and Password together with a link for accessing the web-based commenting service.
To the extent that Eurex Clearing decides to implement any comments received during the Consultation, the so-amended version of the Clearing Conditions will be published after the Consultation.
The currently envisaged effective date of the changes is 30 December 2020. However, after the Consultation Period, Eurex Clearing will issue a separate circular to announce the concrete date on which the proposed changes (as the case may be, implementing comments received during the Consultation) will come into effect.
This announcement will be made with at least 15 Business Days’ notice (Regular Notification Period). However, if Eurex Clearing should receive a request for a Prolonged Notification Period from more than two Affected Customers during the Consultation Period, a Prolonged Notification Period as set out in the Clearing Conditions will be applied and Eurex Clearing will notify all affected parties accordingly.
Publication of amendments to the Clearing Conditions, FCM Regulations and FCM Default Rules
As of the effective date, the full versions of the amended Clearing Conditions, FCM Regulations and the FCM Default Rules will be available for download on the Eurex Clearing website under the following link:
Rules & Regs > Rules and Regulations
The changes and amendments to the Clearing Conditions, FCM Regulations and the FCM Default Rules published by this circular are deemed accepted by each affected contractual party of Eurex Clearing AG, unless the respective contractual party objects by written notice to Eurex Clearing AG within the first ten (10) Business Days after publication. Any ordinary right of Eurex Clearing AG to terminate the respective contract (including the FCM Clearing Agreement, if applicable) shall remain unaffected.
Unless the context requires otherwise, terms used and not otherwise defined in this circular shall have the meaning ascribed to them in the Clearing Conditions, the FCM Regulations or the FCM Default Rules, as applicable.
Attachments:
Further information
Recipients: | All Clearing Members, Basic Clearing Members, Disclosed Direct Clients and FCM Clearing Members of Eurex Clearing AG and vendors |
Target groups: | Front Office/Trading, Middle + Back Office, IT/System Administration, Auditing/Security Coordination |
Contact: | client.services@eurexclearing.com |
Web: | www.eurex.com/ec-en/ |
Authorised by: | Dmitrij Senko |
