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Default management process
Default management process
As on one of the world’s leading Clearing Houses, we play an important role in the global effort to maintain stability in financial markets. We recognize our responsibility to help mitigate systemic risks should the default of one or more Clearing Member occur. We manage stress situations effectively, not least because we have robust procedures in place to deal with a Clearing Member default and are prepared to act when the need arises.
When a Clearing Member goes into default, one of our priciple objectives is to protect customers and minimize harm to clients and their positions. With our Client Asset Protection service, we provide segregation and timely portability of client positions and collateral (both cash and securities). Our service allows Clearing Members and their clients to choose between different, optional protection solutions - depending on the level of protection they require.
Aware that each default scenario is unique, we maintain flexibility in our procedures in order to accommodate the individual factors of each default. Our procedures provide an adaptable framework that is applied depending on the circumstances of the scenario at hand. Despite the individual nature of every situation, the legal triggers that set a given Clearing Member into default are the same regardless of product or market cleared.
Our default management process is comprised of set procedures, designed to facilitate the orderly liquidation process of large and complex portfolios. The Eurex Clearing Prisma margin approach considers the expected duration of the default management process in its methodology so as to reflect actual risk throughout an actual default situation.
The following briefly describes key components of the default management process, which comes into effect for remaining positions now maintained by the Clearing House, after Eurex Clearing has successfully completed the porting of open positions to a new, solvent Clearing Member (under certain client asset protection models):
- Default management committees: Each default managment committee (DMC) consists of representatives of Clearing Members with sufficient trading and risk expertise in products belonging to the respective Liquidation Group(s) for which the default management committee is convened. They assist Eurex Clearing with regards to any relevant matter of the default management process, especially hedging and auctioning. The default management committees will be convened in case of a Clearing Member default situation and for regular default simulations.
- Hedging: The purpose of hedging within the default management process is to enable the Clearing House to reduce the risk of a Liquidation Group and therefore reduce the risk for Eurex Clearing. Furthermore, it reduces the portfolio sensitivity to market moves and stabilizes it for auctions.
- Independent sale: In order to grant sufficient flexibility during a default situation, Liquidation Groups can be sold independently, i.e., positions of the defaulted Clearing Member are then closed by the Clearing House and subsequently opened in the position account of the Clearing Member that overtook the position.
- Auction process: The Liquidation Group-specific auction process is the main component of the default management process. An auction enables Eurex Clearing to rapidly transfer risk in bulk to willing absorbers establishing a fair market price for the particualr portfolio. Auctions are mandatory for those Clearing Members active in the Liquidation Group affected by the default.
- Residual Settlement: If an auction results in remaining positions, Eurex Clearing charges any losses resulting from such positions to parties who didn’t participate in the auction, or such parties agree to enter into respective transactions with Eurex Clearing (residual settlement). In case no Clearing Member participated in a particular auction, Eurex Clearing terminates corresponding transactions with Clearing Members not participating in the auction.
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