Prisma: Update of MSCI Derivatives Liquidity Add-On Parameters effective 22 July 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 MSCI Derivatives with a focus on its growth towards concentrated positions as well as observable tradable volumes in the market. 

The affected model parameters comprise Market Capacities of MSCI Derivatives in the Listed Equity (Index) Derivatives Liquidation Group (PEQ01). 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. The present circular concludes the recalibration process for MSCI Derivatives, as already communicated with Eurex Clearing circular 039/21. 

The Listed Equity (Index) Derivatives Liquidation Group (PEQ01) will be affected.

Production start: 22 July 2021

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2.  Required action

No specific actions are required by clients.

3.  Details

Eurex Clearing has 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 based on an updated set of market data for MSCI Derivatives.

The Liquidity parameter set for MSCI Derivatives is addressed in this recalibration process, which completes the recalibration announced in Eurex Clearing circular 039/21.

The Listed Equity (Index) Derivatives Liquidation Group (PEQ01) will be 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