During the last week of April, Eurex Clearing, LCH Swapclear and CME have simulated the default of a major participant – based on the Brexit market conditions as of 24 June 2016.
At Eurex Clearing, the defaulted member’s portfolio represented one of the largest clearing members with open positions in listed equity (index) derivatives, pending cash equity settlements, as well as open interest rate swaps and listed fixed income derivatives transactions.
During the fire drill, the equity derivatives portfolio was sold completely by the third day, the swaps auctions were successfully finalized on day four and five. Of the 52 auction participants, only one member failed.
This result shows the high level of commitment and proficiency which market participants have achieved after several years of regularly drilling the process as part of mandatory auction participation“, said Thomas Laux, Chief Risk Officer at Eurex Clearing.
The exercise also proved Eurex Clearing’s timeframes to be adequate and realistic.
All processes worked as expected in the assumed timeline, and our CCP was rebalanced in time“, Laux added. „This means that they are easily manageable by members, even under extreme circumstances.
The fire drill demonstrated the advantages of hedged auctions in the default management process.
This is the most critical element of the entire process as the transfer of risk happens during hedging and not in the auctions“, commented Thomas Laux. „Once hedged, the positions can be auctioned in order to ultimately achieve a matched book.
Market participants have voiced strong concerns regarding non-hedged auctions. Since hedging requires skilled internal staff, Eurex Clearing has traders within the team in addition to calling in Default Management Committees.
Eurex’ risk management and the reliability of the default management process attract volume, especially on the OTC side. Since the start of the year, the notional outstanding in EurexOTC Clear grew by 90 percent, and reached nearly 1.6 trillion Euro in July.
On the trading side, equity derivatives volumes went down on a year-on-year basis due to an ongoing low volatility environment. However, the volumes in Eurex’ fixed income segment noted a growth of 19.3 percent compared to July 2016.