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Auction process for Equities Derivatives Liquidation Group

Auction process for Equities Derivatives Liquidation Group (LG)

In the Equities Liquidation Group, Eurex Clearing conducts multi-unit auctions, and accepts the highest economically reasonable price per auction unit as winning price for such auction unit.


Determination of auction units

Eurex Clearing sub-divides the defaulted Clearing Member’s portfolio into an undisclosed number of identical smaller portfolios (so called auction units), and informs each Clearing Member of the minimum number of auction units such Clearing Member has to provide a price for. Any rest resulting from the sub-division of the initial portfolio is liquidated by Eurex Clearing via an independent sale. The allocation of minimum numbers of auction units across Clearing Members depends on each Clearing Member’s relative size in the Equities Liquidation Group, compared to the overall size of all other Clearing Members. The sum of all Clearing Members’ minimum numbers of auction units is higher than the number of auction units actually available, to ensure competitive bidding.

A Clearing Member is exempted from participation in an equities derivatives auction, if the Clearing Member has not conducted any transaction in the Equities Liquidation Group within the last three months prior to the default.

Determination of auction prices

At the beginning of the auction, Eurex Clearing discloses a portfolio which reflects the size of one auction unit to all auction participants. The portfolio disclosed by Eurex Clearing is either the actual auction portfolio or the inverse of the actual auction portfolio. Auction participants have to provide Eurex Clearing with both bid-prices and ask-prices for their minimum number of auction units, whereas Eurex Clearing defines the maximum permissible spread between these two prices. For the avoidance of doubt, a negative bid price indicates an amount to be paid by Eurex Clearing to the winning auction participant, whereas a negative ask-price indicates an amount to be paid by the winning auction participant to Eurex Clearing.

When defining the maximum permissible spread, Eurex Clearing either follows the recommendation of the relevant Default Management Committee, or requests a recommendation for a maximum spread from all auction participants and defines the average of such recommendations as maximum spread. Any price, which adheres to the maximum permissible spread, qualifies as economically reasonable.

If a Clearing Member has to provide prices for more than one auction unit, it is in the discretion of the Clearing Member whether it provides the same price for all respective auction units, or whether it provides different prices for different auction units. Clearing Members are also welcome to provide bids for more auction units than indicated as their minimum requirement by Eurex Clearing. Please click here for a sample file of an auction portfolio in the Equities Liquidation Group.

Equities derivatives can be either options or futures. The value of an option, the option premium, has to be considered by Clearing Members when pricing a portfolio. Meanwhile, all futures position have a value of zero at the beginning of each business day. The relevant cash flow of a futures position is the variation margin resulting from such position at the end of the auction day. When pricing futures positions in a default management auction, it is essential that Clearing Members do not price in the face value of the futures positions. Rather, Clearing Members have to price-in their expectation of how these positions develop during the auction day.

It is possible that an auction portfolio contains equities derivatives, which are denominated in different currencies. Eurex Clearing encourages all Clearing Members to take into account currency conventions and potential conversion rates when pricing an equities derivatives portfolio.

Unfulfilled bidding obligations

If a Clearing Member fails to provide prices for the minimum number of auction units indicated by Eurex Clearing, such Clearing Member is subject to a monetary fine and its clearing fund contribution is juniorized, i.e. its clearing fund contribution is utilized prior to that of all other Clearing Members who complied with their bidding obligation. The exact fine depends on the relative size of the non-bidding Clearing Member compared to all other Clearing Members (EUR 500,000 per 1 percent slice of the overall auction portfolio for which the Clearing Member had to provide a price but failed to do so), and is capped at EUR 5 million.

If in any auction some, but not all, auction units are successfully auctioned, Eurex Clearing has a claim towards the Clearing Member(s) who failed to comply with their bidding obligation(s) to compensate Eurex Clearing for all losses resulting from those positions for which Eurex Clearing was not able to re-balance itself (for their respective pro rata share as applicable). To avoid this claim, Clearing Members can enter into the respective transactions with Eurex Clearing even after the auction is finalized. If Eurex Clearing holds a respective claim towards a Clearing Member, the monetary fine for non-bidding is not applicable for such Clearing Member.