Risk mitigation actions

As the Default Fund is a mutualizing mechanism, it is an essential function of a CCP to mitigate any unfavorable constellations to protect the clearing community. At first, the reasons behind any irregularity are thoroughly analyzed. If the root cause is found to be a member-/portfolio-specific situation, member-specific actions are pursued. This approach ensures that members cover their idiosyncratic risk. However, if the market environment changes in general, it may be sensible to have measures across all members.

Member-specific mitigating actions apply as soon as a single Clearer Group consumes a large part of the Default Fund. The most relevant threshold is defined in order to prevent breaches in the “cover-2” requirement and is set at 45% of the current Default Fund requirement. Whenever a single Clearer Group’s credit exposure (i.e. stress shortage/surplus metric) is breaching a so-called early warning threshold, which is set at 40% of the current Default Fund requirement, the group’s members are made aware of this fact and informed about possible mitigating actions in case they would breach the 45% Default Fund threshold. As soon as the 45% Default Fund threshold is actually breached by a single Clearer Group, the exposure needs to be covered by additional collateral in order to remedy the breach.

General mitigating actions may apply in case multiple Clearer Groups stand out in stress testing. In this case, the root cause will likely be a structural or general market change, which requires a strengthening of the CCP’s overall Default Fund. Reasonable measures for this situation are an ad hoc recalibration of the Default Fund requirement or of the dynamic component.