Risk management

Credit, concentration & wrong way risk

To safeguard the overall integrity of the Clearing House and to protect the mutualizing Default Fund, Eurex Clearing conducts an internal credit assessment of all counterparties and performs continuous monitoring of credit, concentration and wrong-way risks. This enables us to guarantee fulfilment of all obligations towards counterparties even under extreme market conditions. Therefore, it is essential for us to monitor all risks arising from the trading portfolios of counterparties and from the collateral deposited to secure such portfolios.

From a Clearing House perspective, a counterparty is a general term for Clearing Member and disclosed/undisclosed client. A counterparty's portfolio is understood to contain all its clearing activities such as

  • Derivatives transactions,
  • Cash Market transactions,
  • Special Repo transactions, GC Pooling transactions and GC transactions,
  • Pure cash positions.

The collateral deposited by a counterparty is aggregated in a so-called collateral pool, which contains all instruments to fulfil the counterparty’s

  • Margin requirement,
  • Default Fund contribution, and
  • Company capital requirement (if applicable).

As most of the limits defined refer to notional exposure, Eurex Clearing determines this by taking into consideration both the counterparty’s portfolio and collateral pool. The value of the various product classes is calculated as follows:

Product Class

Calculation Method

Cash

Nominal value

Equities

Market price x number of shares

Bonds/Repos

Market price x notional

Futures

Position size x multiplier x underlying price

Options

Position size x multiplier x underlying price x delta


There are three relevant types of risk:

  • Credit risk is defined as the potential loss one party may suffer if the counterparty fails to fulfil the contractual obligations arising from its transactions.
  • Concentration risk is defined as the potential loss which Eurex Clearing may suffer during the Default Management Process, due to an insufficient diversification with respect to the counterparty’s collateral pool and transactions.
  • Wrong-way risk is defined as the potential loss which Eurex Clearing may suffer during the Default Management Process, due to an unfavorable interrelatedness between the counterparty’s creditworthiness, the value of its collateral pool and the value of its portfolio.

To map these risks, all counterparties, countries and supranational organizations are classified into one of multiple, pre-defined classifications according to a general five-color scheme consisting of five categories - green, yellow, orange, red and not accepted.

For the risk classification "not accepted” all limits are set to 0.