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Risk Management

The Margining system is a fundamental risk management tool adopted by Euronext Clearing.

Each member must pay Margins to cover the theoretical costs of liquidation, which Euronext Clearing would incur in the event of a Member’s default in order to close the open position.

Calculation of margins

Margins are calculated using efficient, reliable and accurate systems: the FIRE (Fixed Income Risk Engine) methodology for Italian, Spanish, Irish and Portuguese Bonds, the MVP methodology (Method for Porfolio Valuation) for corporate Bonds and bonds issued by different countries from the above-mentioned, the VaR based methodology for Equity Derivatives products and for Equity Cash products, the MMEL methodology (Margins for Electricity Market) for Energy Derivatives and the MMeG methodology (Margins for Wheat Market) for Wheat Derivatives

Bonds

Fire (Fixed Income Risk Engine) is a VaR based methodology relying on the portfolio’s cashflow mapping on the sovereign reference curve’s tenors. The adopted risk measure is a mid-vol scaled Expected Shortfall floored with an unscaled Expected Shortfall. A set of risk addons are also applied to capture other peculiar behaviors, such as idiosyncratic and concentration. 

MVP determines the overall risk exposure for integrated portfolios by grouping into five classes of corporate bonds according to their time to expiry.

A single initial margin is then computed considering the FIRE additional margins, the MVP additional margins and the mar-to-market margins. 

Equity Derivatives and Cash Equity

Euronext Clearing has developed a new VaR-based margin methodology for the Equity and Equity Derivatives Sections, replacing the SPAN margin methodology.

The adopted risk measure is the historical simulation Expected Shortfall.

The historical simulation modelling approach is a standard, fairly simple market practice which allows to infer risk factor volatility and correlation from past dates, including relevant market stress events.

A set of risk addons are also applied to capture other peculiar behaviours, such as liquidity, concentration and wrong-way risk.

 

Agricultural Commodities

Euronext Clearing has developed a new VaR-based margin methodology for the Agricultural Commodities Derivatives section.

The adopted risk measure is the historical simulation Expected Shortfall.

The historical simulation modelling approach is a standard, fairly simple market practice which allows to infer risk factor volatility and correlation from past dates, including relevant market stress events.

A set of risk addons are also applied to capture other peculiar behaviours, such as liquidity and concentration.

Margins

Aim of Initial Margin

Initial Margin is called on a daily basis to cover the theoretical costs of liquidation, which Euronext Clearing would incur in the event of a Member’s default, in order to close the open positions in the worst possible market scenario

Intraday Margin

Intraday margins are called by Euronext Clearing in case of sudden sharp price variations or in the case of a Member’s excessive overall risk exposure. Intraday Margin is calculated with the same methodology as the Initial Margin

Collateral

Initial Margins can be placed in cash (Euro) or in Euro denominated Government Bonds, traded on MTS markets and issued by low credit and market risk Countries. BTPItalia (Italian Governement Bond linked to italian inflation) traded on markets other than MTS are also accepted. Government bonds are marked to market daily, using prices or quotations made available by info providers. The bonds deposited as collateral are grouped in classes of haircut based on their duration. Intraday Margins can be placed in cash (Euro) or in Euro denominated Government Bonds, traded on MTS markets and issued by low credit and market risk Countries. Collateral value posted in securities used to cover Initial Margins is determined on the basis of concentration limits.

Default Fund

Default Funds are managed by Euronext Clearing as an additional protection aimed at covering risks associated with sharp price/interest rate movements.

The Default Fund amounts are calculated as a result of periodic stress tests. The contribution to the Default Fund of each Direct Member is adjusted at least on a monthly basis proportionally to the average Initial Margin paid in the previous month.

The Default Fund contribution quota must be deposited in cash (Euro).

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