Eurex | Eurex Clearing
10 years ago, Eurex was the first major derivatives exchange to switch its margining method to a new portfolio-based model. The so called Eurex Clearing Prisma is a huge success, which has served as a blueprint for other clearing houses. How did this model perform in the recent, highly volatile markets? Is it ready for future risk management? Read more about this in our interview with Eurex Clearing’s Chief Risk Officer Dmitrij Senko.
Dmitrij, what has been the most groundbreaking aspect about Prisma back in 2013?
Two aspects – it was the first true approach to quantify risk on portfolio level. The preceding Risk-Based Margining model already offered some portfolio offsets, but Prisma addressed them systematically as an integral part of the model for the first time. This type of model was not new. It was known to the risk management community since the 1990s – but it was somewhat new to CCPs back then. That’s one aspect.
The other one is that, for the first time, Prisma Initial Margin includes concentration risks that quantify potential losses from concentrated positions. That was something completely new. And even today, not every CCP includes concentration-related risks in core calculations. Both aspects are of great importance to us as Eurex Clearing is covering the broad range of asset classes. After all, only a portfolio approach including the assessment of risk concentrations can adequately capture economic risk and account for any efficiencies through risk netting to the market in the form of reduced margins.
Not to forget, we can calculate all this on a near real-time basis.
How did Prisma help Eurex Clearing to cope with volatile markets during recent crisis-driven years?
Very well I dare say. The effort we put into developing and testing the model for different market conditions really paid off during recent crisis years. When the crises started, first time in spring 2020 and other market turbulences followed in 2022, we did not have to adjust the model. Thanks to the built-in mechanisms, Prisma can adjust itself to new market conditions and correctly reflect the changed risk situation – unlike some other models that must be recalibrated or adjusted manually.
What is the key feature to allow the model to adapt automatically?
Prisma is based at its core on the consideration of prevailing market volatility. This allows the model to constantly adapt. So, in times of stressed markets, the model recognizes the volatility in the market and adjusts margins accordingly. When the markets calm down, it adjusts as well, but it doesn't go too far down. That's another important model component. It keeps the model from reducing margins too low during calm market phases.
How have clients dealt with higher margins during the recent crises? Have you received much criticism?
In fact, market participants usually don't like increasing margins because these may create liquidity pressure. There was some criticism directed at CCPs during the recent crises. Ultimately, however, all these discussions have helped the industry and regulatory community to better understand that this is an intended feature of margins, to be reflective of the changes in market conditions. The discussion, including from the regulatory side, is now much more balanced and for example covers the aspects of further enhancing transparency of margins and improving preparedness of market participants to market shocks. Also, there is increasing attention to the margin practices between members and clients and in uncleared space.
How have margin requirements evolved since December 2019, i.e., from just before the crisis until today?
This varies from product to product. Overall, margins have risen from EUR 60 billion before the crisis to EUR 140 billion at peak times. Various aspects come into play – on the one hand, reaction of margins to increased volatility. On the other hand, we also see growth effects, e.g., due to the increase in volume in OTC clearing.
And how exactly do portfolio margining effects come into play?
They are a key characteristic of our model as offsets across products are systematically captured in the simulation-based portfolio approach. All products are split into several liquidation groups, to apply portfolio view only within groups of products where offsets are reliable and economically justifiable. Thanks to this approach, the model – unlike its predecessor – considers the risk-reducing effects of well-diversified portfolios. These are accurately captured and reflected in the margins. However, there are also limits to the amount of portfolio offsets that can be granted in European legislation under EMIR 27.4. This also needs to be considered.
How does portfolio margining support Eurex Clearing’s business strategy?
It is central to Eurex Clearing’s business strategy. As multi-asset class CCP with a clear objective to provide risk management services for a suite of products and clearing participants we need to quantify the risk of different portfolios adequately. That is our key task. If we would not be able to quantify the risk properly at any time, we would not be fulfilling our mandate as independent risk manager for the markets.
Which role do regulators play in your ecosystem?
Regulators play a big role, increasingly since the financial crisis in 2008 when central clearing via a central counterparty performed well compared to bilateral markets and therefore gained importance in regulatory agenda thereafter. We are strong partners in the journey to make financial markets more robust.
Since then, several regulations have evolved. In Europe, the European Market Infrastructure Regulation, EMIR, is the most important regulation for CCPs. In the U.S., it is a set of regulations issued by the CFTC and SEC. There have been several adaptions to EMIR since it first came into force in 2014. Currently, EMIR 3.0 is being discussed. The second and more recent regulation is the CCP Recovery and Resolution Regulation, which came into force around a year ago.
10 years is a long-time span for innovations. What is the challenge for the future?
Even though Prisma was introduced 10 years ago it is still very adequate. It is based on long-standing industry experience and the available academic knowledge around quantitative risk management. We are currently observing that some other CCPs are just now moving or planning to move to similar models. This demonstrates it once again: Our model is future prove and well accepted by the industry.
Is there still room for innovation?
Yes, innovation is key for our solutions to remain relevant for market participants. However, the mechanics of risk calculation, the core of Prisma, is still state of the art. Improvements here would be rather incremental, not groundbreaking. But latest developments in technology may help to streamline and further improve risk management processes across businesses and make them more convenient for clearing members and clients. That is what we are focusing on going forward.