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Auction process for Fixed Income Liquidation Group

Auction process for Fixed Income Liquidation Group (LG)

For interest rate swaps each Clearing Member can chose which currencies it wants to be active in, and consequently has to participate only in those auctions, which relate to the Clearing Member’s chosen currencies.

With respect to the Fixed Income Liquidation Group, Eurex Clearing conducts one single unit auction for each currency comprised in the defaulted Clearing Member’s portfolio. Eurex Clearing discloses the auction portfolio to all auction participants, each auction participant provides one price for the entire portfolio and the highest price wins.

If margin offsets were granted between the defaulted Clearing Member’s interest rate swaps and its listed fixed income derivatives (cross margining), the relevant products will be liquidated simultaneously.

The auction format and procedure described here applies either for a portfolio containing interest rate swaps and listed fixed income derivatives, or for a portfolio containing only interest rate swaps. If a defaulted Clearing Member’s portfolio contains listed fixed income derivatives only, Eurex Clearing conducts a multi-unit auction (the auction format used for the Equities Derivatives Liquidation Group) to allow for the broadest possible range of auction participants. 

A positive price indicates an amount to be paid by the winning auction participant to Eurex Clearing. A negative price indicates an amount to be paid by Eurex Clearing to the winning auction participant. Please click here for a sample file, to evaluate the format of an auction portfolio in the Fixed Income Liquidation Group. It is not possible to provide a price for just parts of the portfolio.

 

Exemption from bidding obligation

A Clearing Member is exempted from its bidding obligation if, in the last three months prior to the default, the Clearing Member (i) conducted less than 10 transactions, or (ii) has an average initial margin requirement of less than 0.5 percent of the average initial margin requirement of all Clearing Members and an average notional amount of less than 0.5 percent of the average notional amount of all Clearing Members, in each case in the relevant currency.

If a Clearing Member, who is obliged to participate in an auction for the Fixed Income Liquidation Group, fails to do so such failure results in a monetary fine. The exact fine depends on the relative size of the non-bidding Clearing Member compared to all other Clearing Members (in terms of clearing fund contribution), but is in any case capped at EUR 5 million.

Determination of auction prices

To incentivize competitive bidding, a method defining the order in which non-defaulted Clearing Members' clearing fund contributions would be utilized has been established. Depending on the relative quality of a Clearing Member’s price, such Clearing Members’ clearing fund contribution is either juniorized or seniorized. All juniorized contributions will be utilized before any seniorized contributions are used, whereas on each “level” contributions are used on a pro rata basis across all relevant Clearing Members.

To determine the relative quality of Clearing Members’ prices, Eurex Clearing classifies each Clearing Member’s auction price as “sufficient”, as “medium” or as “insufficient”. A price is “sufficient” if the difference between the winning auction price and this price is less than 0.5 times the initial margin requirement for the auction portfolio. A price is “insufficient” if the difference between the winning auction price and this price is more than 1.5 times the initial margin requirement for the auction portfolio, and a price is “medium” if it is anywhere between these thresholds. Clearing fund contributions of Clearing Members who submitted “sufficient” bids are seniorized, clearing fund contributions of Clearing Members who submitted “insufficient” bids are juniorized, and clearing fund contributions of Clearing Members who submitted “medium” bids are partly juniorized and partly seniorized.

Listed fixed income derivatives can be either options or futures. All futures and future style options (i.e. all listed derivatives in the Fixed Income Liquidation Group) have a value of zero at the beginning of each business day. The relevant cash flow relating to these products is the variation margin resulting at the end of the auction day. As such, when pricing futures positions or future style option positions in a default management auction, it is essential that Clearing Members do not price-in the face value of such positions. Rather, the price provided by a Clearing Member, needs to reflect the Clearing Member’s expectation of variation margin payments that will become due for the respective positions at the end of the auction day.