Risk management

Default Management Process

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.

Risk parameters

Overview of Liquidation Groups and respective holding periods.

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.

  • The commencement of insolvency proceedings over a Clearing Member’s estate results in an automatic termination of all transactions between Eurex Clearing and such Clearing Member and the initiation of the DMP.
  • In addition, certain non-automatic termination events (including a failure to pay or to deliver margin, a failure to comply with the Clearing Conditions, or an opening of reorganization or restructuring proceedings) have been defined, upon which a default does not occur automatically, but is actively declared by Eurex Clearing.
  • In case of any non-automatic termination event, Eurex Clearing may grant a grace period to remedy the respective breach or failure, before declaring a Clearing Member to be in default.

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.

Client Asset Protection

To ensure the default of a Clearing Member has the least possible impact on financial markets, Eurex Clearing allows for client porting wherever possible. Learn more about the segregation models as well as the applicable timelines and pre-requisites for client porting.

The role of the DMP-Coordinator

With respect to the Default Management Process (DMP), Eurex Clearing foresees according to the Clearing Conditions Chapter I, Part 1, 7.5 (4) of Eurex Clearing, that each Clearing Member shall appoint at least one employee as coordinator (“DMP Coordinator”) and another of its employees as a deputy (“DMP-deputy”). 

Both the DMP Coordinator and the DMP-deputy serve as Central contacts for all general matters related to the DMP of an institution (circular and e-mails about fire drill, real event, Default Fund utilization etc. that is relevant for the respective institution). Then the DMP-Coordinator and the DMP-deputy are to distribute all DMP-related information to the relevant persons within the Clearing Member institution to facilitate the DMP process. 

DMP Coordinator Role Assignments in Eurex Member Section - Key Principles:

  • A Clearing Member must nominate at least one DMP Coordinator and one DMP-deputy.
  • It is the responsibility of the Clearing Member to inform Eurex Clearing of changes to role assignments through the Member Section.
  • An individual can carry 1 to n Liquidation Group Assignments per Role. Assignments of Liquidation Groups can be split amongst individuals.

Eurex Clearing Auction Tool (ECAT) - Auctions, Business Managers, Bidders

For the purposes of Execution of Default Management Auctions (during real event or fire drill), Eurex Clearing recommends to Clearing Members to appoint staff in the Eurex Clearing Auction Tool (ECAT).

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, (e.g. auction invites), download portfolios, and enter prices directly in the tool during an auction.