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Default Management Process

Default Management Process

Overview of Liquidation Groups and respective holding periods.

 
We have implemented a Default Management Process (DMP) to handle the default of one or more of our Clearing Members.

Both the Default Management Process 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 Liquidation Group a dedicated holding period has been defined, which illustrates the time that we need to finalize the Default Management Process for a portfolio in such Liquidation Group. Identical holding periods are used as input factors for the margin calculation, to ensure that given margin offsets persist within the Default Management Process.

 

Watch Thomas Laux, Chief Risk Officer, Eurex Clearing share his thoughts on the first global Central Counterparty (CCP) fire drill. Conducted on a regular basis, fire drills are a crucial exercise for members and CCPs alike. Learn more about the set-up of this fire drill, the various measures taken and the key features of a successful default management process (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.

  • 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 Default Management Process.
  • 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 Default Management Process is it to re-balance the CCP. To do so, 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 Default Management Process is conducted in case of the default of a Clearing Member of Eurex Clearing. In case a Clearing Member’s client (Non-Clearing Member, Registered Customer or other client) defaults, the handling of such default is not the responsibility of Eurex Clearing, but the responsibility of the client’s Clearing Member.

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

Per Clearing Conditions, every Clearing Member is obliged to nominate towards Eurex Clearing one of its employees to serve as DMP-Coordinator, and one of its employees as 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 in the responsibility of the DMP-Coordinator to distribute all DMP-related information to the relevant persons within their organization. Each Clearing Member can nominate a DMP-Coordinator and DMP-Coordinator-Deputy in the Eurex Clearing Member Section.

A detailed functional description of the Default Management Process is provided as Chapter 11 of the Procedures Manual which can be found in the Member Section (registered users only).