Prisma: Update of ETD Liquidity Add-On Parameters, effective 28 June 2021

1.    Introduction

As part of a regular review of concentration risk handling in the risk methodology, Eurex Clearing has recalibrated the Liquidity Add-on for ETD products with a focus on its growth towards concentrated positions as well as observable tradable volumes in the market.

Model parameters affected comprise Market Capacities of all Liquidation Groups. The recalibration aims to improve the coverage of concentration risks and helps the Prisma methodology to scale better to the necessary coverage levels for large positions. In addition, Eurex Clearing reviewed the netting benefits granted by the model. 

Production start: 28 June 2021

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2.  Required action

No specific actions are required by clients.

3.  Details of the initiative

Eurex Clearing has a prudent risk framework in place to mitigate counterparty credit risks. In particular, concentration risks are covered as part of this framework. Next to Concentration Risk limits, Eurex Clearing’s Prisma methodology comprises a dedicated Liquidity Add-On accounting for this type of risk.

In general, the Liquidity Add-On is designed to capture the potential additional costs when liquidating portfolios, where the key features are:

• The Liquidity Add-On depends on the relative size of positions as compared to observed tradable volumes,
• The Liquidity Add-On depends on the current level of market risk of the respective products.

The Liquidity Add-On’s scaling properties towards large and potentially concentrated positions are mainly governed by a linear Liquidity Factor function, which translates position sizes into a scaling factor in the Add-On.

As part of a regular review of concentration risk handling in the risk methodology, Eurex Clearing has recalibrated the Market Capacity parameters with a focus on its growth towards concentrated positions as well as observable tradable volumes in the market. The recalibration is an update of observable trading volumes for listed products based on an updated set of market data. The Liquidity Add-on provides offsets for hedged portfolios. These netting benefits were reviewed to improve netting logic consistency.

The Liquidity parameter set of all ETD products are addressed in this recalibration process except for MSCI derivatives, which will be revisited in a separated process.

All Liquidation Groups are affected.

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 or FCM Clearing Conditions of Eurex Clearing AG, as applicable.

Further information