We have implemented a Default Management Process (DMP) to handle the default of one or more of our Clearing Members.
Both the DMP and the margin methodology Eurex Clearing Prisma are based on a Liquidation Group set-up. A Liquidation Group (LG) contains products with similar risk characteristics which can be liquidated simultaneously in time.
For each LG a dedicated holding period has been defined, which illustrates the time that we need to finalize the DMP for a portfolio in such LG. Identical holding periods are used as input factors for the margin calculation, to ensure that given margin offsets persist within the DMP.
Which trigger events may lead to a default
We have defined two kinds of trigger events, which may lead to the default of a Clearing Member.
Overview of the Default Management Process
Goal of the DMP is to re-balance the CCP. Therefore, Eurex Clearing establishes new transactions with its Clearing Members which replace those transactions that have been terminated with the defaulted Clearing Member.
In addition, Eurex Clearing might have to sell or buy bonds, which were underlying terminated Special Repo or GC Pooling transactions, if the defaulted Clearing Member was active in the Bond Liquidation Group.
The DMP is conducted in case of the default of a Clearing Member of Eurex Clearing. In case a Clearing Member’s client (Disclosed or undisclosed direct client and indirect client defaults, the handling of such default is not the responsibility of Eurex Clearing, but the responsibility of the client’s Clearing Member.
The role of the DMP-Coordinator
According to the Clearing Conditions, every Clearing Member is obliged to nominate towards Eurex Clearing one of its employees to serve as a DMP-Coordinator, and one as a DMP-Coordinator-Deputy. The DMP-Coordinator is contacted by Eurex Clearing in case of a default situation, with respect to all DMP-related matters. It is the responsibility of the DMP-Coordinator to distribute all DMP-related information to the relevant persons within the Clearing Member institution. Each Clearing Member has to appoint a DMP-Coordinator and DMP-Coordinator-Deputy in the Eurex Clearing Member Section.
For the purposes of executing Default Management Auctions (during real event or fire drill), Eurex Clearing recommends to Clearing Members to appoint staff in the Eurex Clearing Prisma Auction Tool. The tool allows Clearing Members to assign two different roles: Business Manager and Bidder, for each Liquidation Group cleared. Once assigned, the selected person(s) will be able to receive notifications, download portfolios, and enter prices directly in the tool during an auction.
A detailed functional description of the Default Management Process is provided in Chapter 18 of the Procedures Manual which can be found in the Member Section (registered users only).