Eurex Clearing will enhance the tail modelling in the Initial Margin methodology for both ETD and OTC derivatives as of 3 July 2023. This model change simplifies the Initial Margin methodology, increases transparency and reduces the cyclicality the current model can exhibit in some cases, as recently observed especially for Fixed Income derivatives where market events last year have resulted in significant margin increases.
The main elements of this model change are switching off the Subsampling technique as well as the Robust VaR technique in the FHS VaR model component. Please see section 3 for more details on the initiative.
The start dates in simulation and production, respectively, and products in scope are as follows:
ETD except PFI01
05 April 2023
OTC + ETD PFI01
17 May 2023
ETD & OTC
03 July 2023
For ETD derivatives, the functionality to switch off Subsampling has been introduced as part of Prisma Release 11.1. For details, please refer to Eurex Clearing Circular 020/22 as well as to the dedicated Support page for Prisma Release 11.1 under the following link: Support > Initiatives & Releases > Prisma Releases > Prisma Release 11.1. The activation of Subsampling switch-off in Member Simulation has been announced as part of Eurex Clearing Circular 085/22.
For OTC derivatives, Subsampling will be switched off with EurexOTC Clear Release 15.0. For details, please refer to Eurex Clearing Circular 010/23 as well as to the dedicated Support page under the following link: Support > Initiatives & Releases > EurexOTC Clear Releases > EurexOTC Clear Release 15.0.
2. Required action
We kindly ask all Clearing Members to make sure that relevant changes are reflected in their internal processes as per the Eurex Clearing Prisma Release Notes Release 11.1 and Prisma Report Reference Manual, published in the Member Section of Deutsche Börse Group under the following link:
Member Section > Resources > Eurex Clearing Documents > Eurex Clearing Prisma > Release Documents > Documents & Circulars > Documents Release 11.1.
3. Details of the initiative
Enhancing the tail modelling in the Initial Margin model for ETD & OTC derivatives simplifies and improves the Initial Margin methodology. One major element of this model change consists in switching off the Subsampling technique, which increases the number of available observations for the Value-at-Risk computations (one large sample instead of multiple smaller subsamples). In turn, this allows to switch off the Robust VaR technique in the FHS VaR component (and reduce its effect in the CBA component).
While the Subsampling technique aimed to enhance statistical properties of the model, extensive analyses show that the planned model change reduces model complexity without negatively impacting the model performance. Furthermore, this model change also increases transparency and reduces the cyclicality the current model can exhibit in some cases, as recently observed especially for Fixed Income derivatives. Therefore, the change can result in a significant decrease of margin requirements.
Eurex Clearing will provide Members with the possibility to calculate impacts on margining using the Cloud Prisma Margin Estimator, where an additional environment will be set up with the updated configuration. This functionality is expected to be available starting end of April 2023 (following the annual update of the Stress Period VaR and Event Risk parameters). Members will be informed about the availability of this functionality via Newsflash.
Furthermore, Members will be able to assess the model change via the Margin Calculator as part of Member Simulation (it will not be backward compatible). In addition, Members for whom significant impacts on margin requirements are expected will be informed in advance.
Members have the possibility to test the new configuration of the Initial Margin model in Member Simulation. Following last year’s introduction of a dedicated Liquidation Group without Subsampling in Prisma simulation environment, the new configuration will generally be available for testing in Prisma simulation starting 5 April 2023. Note that for Listed Fixed Income derivatives (PFI01), the new configuration will not be activated in Member Simulation until 17 May 2023 to align with OTC IRS, ensuring consistent treatment of cross-margining portfolios.
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.
All Clearing Members, ISA Direct Clearing Members, Disclosed Direct Clients of Eurex Clearing AG and vendors
Front Office/Trading, Middle + Backoffice, IT/System Administration, Auditing/Security Coordination
Eurex Clearing Readiness Newsflash from 4 October 2022
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Support > Initiatives & Releases > EurexOTC Clear Releases > EurexOTC Clear Release 15.0