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
The collateral deposited by a counterparty is aggregated in a so-called collateral pool, which contains all instruments to fulfil the counterparty’s
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:
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.
As a central counterparty, Eurex Clearing is exposed to credit risk because it guarantees to fulfil all obligations towards non-defaulting counterparties - even under extreme market conditions. Therefore, monitoring all risks arising from the trading portfolios of counterparties and from the collateral deposited to secure such portfolios is an integral part of our risk management framework. To comply with our high standards, we conduct an internal credit assessment of all counterparties, and we guarantee continuous monitoring of credit risks. The assessment is triggered as follows:
Based on these assessments, each counterparty is assigned to one of several pre-defined classifications. Eurex Clearing informs all counterparties about their classification and any changes thereof. Furthermore, credit risk limits may be set as a control mechanism. The purpose of the limits is to reduce the risk of losses because of a counterparty’s default. Depending on the portfolio, credit risk limits can be defined as maximum margin requirement and/or as maximum notional exposure arising from transactions conducted by the counterparty.
The Clearing Member classification also informs the applicable concentration and wrong-way risk limits for the respective counterparty, explained more in detail in the sections below.
Eurex Clearing considers a portfolio or collateral pool to be concentrated if the exposure of positions exceeds the aggregated market capacity during the anticipated liquidation period.
If a counterparty defaults, Eurex Clearing applies its default management process to minimize market impact. We collect margin collateral from counterparties to cover risk and maintain a mutualized Default Fund as well as dedicated own resources for additional losses. The adequacy of these financial resources is continuously assessed.
Margin collateral and contributions to the Default Fund can be cash or non-cash collateral. Liquidating large positions in case of a default may cause losses if there is low liquidity. To prevent this, Eurex Clearing sets concentration risk limits for all counterparties, applicable per Clearing Member.
In addition to the counterparty classification, Eurex Clearing applies country and supranational organization classifications, both of which are considered as input parameters for the definition of concentration risk limits. The classifications follow the same color scheme outlined in the general section. Details about the current classifications can be found in the Member Section.
Please note that the country-specific type limit includes sovereign, local government and agency issuer of the country.
Table 1: Current concentration risk limits for margin and Default Fund collateral per aggregation level, product type and type selection including country
Aggregation Level | Product Type | Type Selection | Margin and Default Fund collateral in EUR or equivalent |
Issue (ISIN) | Bond | All bond types | 25% of issued capital |
Equity | Stocks | 1% of free float | |
Issuer | Bond and Equity | Corporates incl. Banks | 2bn or |
Hungary | 1bn | ||
Italy | 3bn | ||
Malta | 1bn | ||
Poland | 2bn | ||
Portugal | 2bn | ||
Slovakia | 2bn | ||
Slovenia | 2bn | ||
Spain | 3bn | ||
Diversification | Equity | Stocks | 30% of collateral pool |
For listed fixed income derivatives, the concentration limits are not applicable, i.e. the exposures of these instruments are not taken into consideration while assessing the general concentration limits as outlined in the tables above. For listed fixed income derivatives, a separate concentration monitoring and early warning system is in place. Clearing Members are proactively contacted in case the share of open interest for an individual instrument exceeds 30%.
For more details about the booking of Supplementary Margin related to listed fixed income derivatives please refer to the Support section.
The complete set of concentration risk limits is available in the Member Section under the following path: Resources > Eurex Clearing > Documentation & Files > Risk Parameters.
If a counterparty defaults, the value of certain instruments may drop when liquidated because they are tied to the counterparty’s credit quality. This is known as wrong-way risk.
To avoid wrong-way risk, Eurex Clearing generally does not allow counterparties to deposit own issues or issues of closely linked entities as collateral. Moreover, counterparties are not entitled to use such instruments as collateral for repo transactions.
In case Clearing Members enter positions, where they are exposed to the performance of their own stock (e.g. derivatives on their own stock) or other instruments issued by themselves or entities belonging to the same legal group, these positions are collateralized based on the assumption that the underlying becomes worthless in a default scenario. Resources which have already been provided to secure these positions (i.e. dedicated Total Margin Requirement on single position level as well as derived Default Fund contributions) are deducted before the final Supplementary Margin for the own issue positions is calculated. A daily monitoring process ensures a tight control of any own issue position. For a more efficient collateral management process on the Clearing Member side, the Supplementary Margins are charged weekly based on the largest excess (i.e. loss given default minus already provided resources) over the previous week. For more details related to the booking of Supplementary Margin related to own issues please refer to the Support section.
By defining dedicated wrong-way risk limits, Eurex Clearing is taking additional steps to minimize such risk. These limits are applicable to a counterparty’s collateral pool and the counterparty’s notional exposure. In this context, Eurex Clearing sets limits that consider the home country of the counterparty and the home country of the issuers within the counterparty’s collateral pool and portfolio.
The complete set of wrong-way risk limits is available in the Member Section under the following path: Resources > Eurex Clearing > Documentation & Files > Risk Parameters.
The same handling for listed fixed income derivatives as outlined above for concentration limits applies to wrong-way risk limits, i.e. the exposures of these instruments are not taken into consideration while assessing the general wrong-way risk limits.
