Amendments to the Clearing Conditions of Eurex Clearing - Consultation

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 (Clearing Conditions), the Default Management Auction Rules (DM Auction Rules) and the FCM Default Rules of Eurex Clearing (FCM Default Rules) regarding the following topics:

A.    Introduction of Hedging Auctions as a tool to improve the hedging process during a Default Management Process (DMP),

B.    Adaptation to the Default Fund waterfall due to the introduction of Hedging Auctions and implementation of further general amendments to increase clarity and readability, and

C.    Minor amendments regarding references to Eurex Clearing’s website. 

The amendments to the Clearing Conditions and the DM Auction Rules regarding the above topics are subject to a consultation process (Consultation); the Consultation will end upon expiry of 22 July 2021 (Consultation Period). The planned effective date of these amendments is 17 August 2021, depending on the outcome of the Consultation which will be communicated in a separate Eurex Clearing circular. 

The amendments to the FCM Default Rules will become effective as of 17 August 2021.

Learn more about Eurex topics! To help Clearing Members keep up with all Eurex updates, all support information is now available via via Eurex Support and on the go via the personalized Eurex App.

2.  Required action

The amendments to the Clearing Conditions and the DM Auction Rules are subject to a Consultation which will end with the expiry of 22 July 2021.

Eurex Clearing herewith invites all Affected Customers to submit comments on the proposed changes and amendments within the Consultation Period.

3.  Details of the initiative

A.  Introduction of Hedging Auctions as a tool to improve the hedging process during a Default Management Process

In case of the occurrence of a Termination with respect to a Clearing Member or a FCM Clearing Member, Eurex Clearing initiates its DMP to rebalance itself. 

A DMP is generally composed of several steps: the preliminary measures, hedging, independent sales, mandatory (liquidation) auctions and post-liquidation processes. According to the current process, the hedging phase relies on standard trading practices, and voluntary counterparties are selected by Eurex Clearing on discretional basis, based on recommendations of the relevant Default Management Committee (DMC). 

The proposed changes seek to achieve a more balanced DMP with a more transparent and efficient hedging phase by introducing Hedging Auctions.

Purpose of such Hedging Auctions is to establish hedging transactions between Eurex Clearing and the winner of the Hedging Auction to enable Eurex Clearing to hedge the effects of the portfolio of the terminated Clearing Member or FCM Clearing Member. Such Hedging Auctions are conducted on Liquidation Group basis and will comprise of one or several (identical) Hedging Auction Unit(s), and each (invited) Hedging Auction Participant will be obliged to provide a bid and an ask price for a minimum number of auction units.

The respective amendments relate to three essential pillars of the Hedging Auction, i.e. (i) the selection of Hedging Auction Participants, (ii) the incentive system, and (iii) the price validity. 

(i)    Selection of Hedging Auction Participants

The amendments foresee two ways how a Clearing Member or FCM Clearing Member may become Hedging Auction Participant: (i) voluntary participation or (ii) selection by Eurex Clearing.

Generally, it is foreseen that Clearing Members and FCM Clearing Members become Hedging Auction Participants on a voluntary basis due to the strong incentives a participation in Hedging Auctions offers.

Hedging Auction Participants benefit from the following incentives:

(a)     potential commercial profit, if winning the Hedging Auction, 
(b)     potential seniorization of parts of the Contributions for the winning Hedging Auction Participant, and
(c)     the overall support of CCP-liquidation efforts to ensure financial market stability.

If the number of Clearing Members and FCM Clearing Members volunteering as Hedging Auction Participants is too small in a given Liquidation Group to ensure a successful hedging, Eurex Clearing is entitled to appoint Clearing Members or FCM Clearing Members as Hedging Auction Participants.

Eurex Clearing will only select Clearing Members or FCM Clearing Members having a significant size with an appropriate capability from an operational and risk management perspective to clear the specific volumes in potential hedging transactions. Eurex Clearing will rank such Clearing Members or FCM Clearing Members based on their respective cleared volumes in Own Transactions in the last three months in the relevant Liquidation Group (whereby Clearing Members or FCM Clearing Members with higher cleared volumes will be ranked first).

All Hedging Auction Participants will receive on a regular basis liquidity surveys to provide indicative prices and maximum tradable sizes of potential hedging transactions.

During a DMP, if a Hedging Auction is triggered, Eurex Clearing will invite all or some of the relevant Hedging Auction Participants to participate in the auction. The number of participants will be a trade-off between price discovery, fairness, and limitation of information leakage. The selection itself will be primarily based on the answer of the liquidity surveys for the products composing the hedging portfolio.

A candidate can outsource its participation to one of its clients.

(ii)    Incentive System

With respect to already existing portfolio auctions, Eurex Clearing sets incentives only by setting consequences for bad behaviour (i.e. for providing invalid bids). In such case, the Clearing Member’s Default Fund Contribution is juniorized.

The introduction of Hedging Auction comes hand in hand with incentives for winning the auction and providing invalid bids.

With the amendments, Eurex Clearing introduces a new realization level in its Default Fund waterfall. Now, the Contributions of a (non-defaulting) Clearing Member or FCM Clearing Member can be assigned to one of the three following realization levels:

(a)   the “Juniorized” Contributions: if a Hedging Auction Participant submits an invalid bid or does not submit a bid at all, its Default Fund Contributions will be partly or fully juniorized.

However, each non-bidding Hedging Auction Participant shall have the option to partly or fully remedy the juniorization of its Default Fund Contribution, by providing the winning bid in a portfolio auction to which it was invited by Eurex Clearing as Mandatory Participant. In such case, its Contribution will become “standard” Contribution again.

(b)   the “Standard” Contributions: if a Hedging Auction Participant did provide valid bids, but did not win any Hedging Auction, its Contribution is neither Juniorized nor Seniorized; or

(c)   the “Seniorized” Contributions: if a Hedging Auction Participant did provide a winning bid in a Hedging Auction, its Default Fund Contribution will be partly or fully seniorized.

(iii)    Price Validity

As described under point (ii), Hedging Auction Participants who failed to provide a valid bid will face juniorization of their Default Fund Contributions. Therefore, a pre-defined formula for evaluating price validity is introduced and designed to offer transparency, predictability and ensure fairness. Price validity will be based on dynamic maximum bid/ask spread that Eurex Clearing will determine for each Hedging Auction.

The maximum bid/ask spread will be determined as the sum of two components:

(a)    a fixed parameter, determined by Eurex Clearing and the DMC prior to the auction, which will be  communicated to all Hedging Auction Participants prior to the Hedging Auction together with the portfolio composition, which will allow participants to provide prices that guarantee no juniorization, and;

(b)    a dynamic component, equal to the difference between the worse winning bid (if Eurex Clearing trades on the bid) and the worse winning ask (if Eurex Clearing trades on the ask); this component can only be calculated after the auction result is available to Eurex Clearing; its purpose is to ensure that the maximum bid-ask spread adapts to quickly changing market conditions and reduces reliance on individual expert opinion for its definition.

As far as the auction format is concerned, Hedging Auctions will be multi-unit, pay your price, and two-way pricing. All Hedging Auction participants will have the same minimum requirement and will be allowed to bid for a larger portion than the requirement. The Hedging Auction participants shall have the ability to show an “all or nothing” price, meaning Eurex Clearing will either trade on the whole portfolio with the participant, if it wins, or not trade at all with this participant.

To reflect the changes, the following rules and regulations of Eurex Clearing will be amended as outlined in the attachments:

• Number 7.5.2 of the Clearing Conditions,
• Number 4.2 of the FCM Default Rules, and 
• the DM Auction Rules.

B.  Adaptation to the Default Fund waterfall due to the introduction of Hedging Auctions and implementation of further general amendments

The introduction of Mandatory Hedging Auctions requires amendments to the description of the Default Fund waterfall, by introducing a “seniorized” Default Fund Contribution segment. When implementing the “seniorized” Contribution segment into the current Default Fund waterfall, Eurex Clearing further tried to increase the clarity and readability of these complex provisions. For the avoidance of doubt, all such amendments (besides the introduction of the “seniorized” Contribution segment) do not foresee any changes of content, the overall order of priority of the realization of the Contributions to the Default Fund remains unchanged. 

For the sake of completeness and clarity, please find below a summary of the full (new) Default Fund waterfall of Eurex Clearing:

1)    Default Fund Contribution of the Defaulted Clearing Member 
a.    From the segments where losses remain (so-called Liquidation Group Ratio)
b.    From segments where no losses remain (so-called spill-over)

2)    In case of a defaulting Basic Clearing Member, Further Contributions for such defaulted Basic Clearing Member (assessments) provided by Clearing Agent
a.    From the segments where losses remain (so-called Liquidation Group Ratio)
b.    From segments where no losses remain or from segments not affected at all (so-called spill-over)

3)    Dedicated Amount of Eurex Clearing (skin in the game)
a.    From the segments where losses remain (so-called Liquidation Group Ratio)
b.    From segments where no losses remain or from segments not affected at all (so-called spill-over)

4)    “Juniorized” Default Fund Contribution of non-defaulted Clearing Members/any BCM Contributions of the defaulted Clearing Agent
a.    From segments where losses remain (so-called Liquidation Group Ratio)
b.    From segments where no losses remain or from segments not affected at all (so-called spill-over)

5)    “Standard” Default Fund Contribution of non-defaulted Clearing Members
a.    From segments where losses remain (so-called Liquidation Group Ratio)
b.    From segments where no losses remain or from segments not affected at all (so-called spill-over)

6)    “Seniorized” Default Fund Contribution of non-defaulted Clearing Members (NEW)
a.    From segments where losses remain (so-called Liquidation Group Ratio)
b.    From segments where no losses remain or from segments not affected at all (so-called spill-over)

7)    “Juniorized” Further Contribution (assessments) (non-defaulted Clearing Members)
a.    From segments where losses remain (so-called Liquidation Group Ratio) – here no spill-over applies

8)    “Standard” Further Contributions (assessments) (non-defaulted Clearing Members) and Further Dedicated Amount by Eurex Clearing (- further skin in the game - 300 Mio euro maximum)
a.    From segments where losses remain (so-called Liquidation Group Ratio) – here no spill over applies.

In addition, Eurex Clearing also applies the following general rules with respect to the realization of Default Fund Contributions:

• A so-called “segment” corresponds to the portion of the Contribution or Dedicated Amount which is reserved for a specific Liquidation Group. For further details, please refer to the following link on the Eurex Clearing website www.eurex.com/ec-en/ > Services > Risk parameters
• Generally, all resources available for realization (including Contributions, Further Contributions, Dedicated Amount and the Further Dedicated Amount) on each sub-level of the afore-mentioned Default Fund waterfall shall be entirely consumed before Eurex Clearing moves on to the next sub-level. 
• At any sub-level “a.” as per above with respect to the Default Fund Contributions of a Clearing Member or FCM Clearing Member, the available resources are distributed to the segment in proportion of the applicable margin requirement of the relevant Clearing Member or FCM Clearing Member (so-called Liquidation Group-Ratio) at the time of termination. 
• For the pre-funded resources (levels 1 to 6), a spill-over applies at each sub-level “b.”. Where spill-over applies, remaining resources are distributed to the Liquidation Groups in proportion to the uncovered losses in each Liquidation Group, and reciprocally, the uncovered losses are distributed to each “payer” in proportion to its remaining resources in this level.

To reflect the changes, the following rules and regulations of Eurex Clearing will be amended as outlined in the attachments:

• Chapter I Part 1 Number 6 of the Clearing Conditions and
• Number 3 of the FCM Default Rules.

C.    Minor amendments regarding references to Eurex Clearing’s website

Further, Eurex Clearing made some editorial changes with respect to references to the website of Eurex Clearing and deleted the hyperlinks. 

To reflect the changes, the following rule books of Eurex Clearing will be amended as outlined in the attachments:

• the Clearing Conditions and
• the DM Auction Rules.

Consultation with respect to the amendments to the Clearing Conditions and the DM Auction 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 22 July 2021.

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 only be submitted through a web-based commenting service for which a registration form is available on the Eurex Clearing website under the following link:

Find > Forms > Data Forms Subject > Clearing Derivatives > Consultation Form

The form has to be duly signed and returned to Eurex Clearing via e-mail to SpecialProvisions@eurex.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 to the Clearing Conditions and the DM Auction Rules is 17 August 2021. 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 FCM Default Rules

As of the effective date, the full versions of the amended 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 FCM Default Rules published by this circular are deemed accepted by each affected contractual party of Eurex Clearing, unless the respective contractual party objects by written notice to Eurex Clearing within the first ten (10) Business Days after publication. Any ordinary right of Eurex Clearing 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 DM Auction Rules or the FCM Default Rules, as applicable.

Attachments:

1. Amended sections of the Clearing Conditions
2. Amended sections of the DM Auction Rules
3. Amended sections of the FCM Default Rules

Further information