Eurex | Eurex Clearing
Pioneering CCP Transparency Series
Eurex is committed to facilitate industry discussions on margin procyclicality and margin performance. In this latest part of the Pioneering Transparency series, several disclosures are provided:
Product level backtesting
The first disclosure builds upon the preceding Part 7 of the series, where product-level backtesting results were published along with backtesting and procyclicality metrics. Eurex presents updated results as of 30th June 2022 as well as:
In terms of backtesting, the Prisma margin model achieves an effective confidence level beyond the target confidence level of 99% and 99.5% for listed and OTC instruments, respectively. An overview of backtesting and procyclicality metrics aggregated by asset class and on the 3-year window is provided in the table below. The attached data set allows the reader to navigate through the key performance indicators (KPIs) for each individual product and each lookback period.
Average of KPIs across asset class on the 3Y window
1-day MRIM increase
5-day MRIM increase
10-day MRIM increase
Listed Equity Index Derivatives
Listed Fixed Income Derivatives
Listed FX Derivatives
Product level margin simulation
The second disclosure in this part of the series consists of a completely novel approach to margin simulation. Eurex already offers a publicly available estimator for hypothetical portfolios for both current and historical valuation dates. This, however, does not address questions about how margins may evolve in the future. First, the future is uncertain, and so is market volatility and consequently margins. However, what the CCP can do is provide additional transparency on how will margins behave subject to a given certain market scenario.
Eurex Clearing Prisma model re-calculates the margins based on new data as it arrives. A simple approach to margin simulation would answer the question of ‘how will margin change if the market moves by x %’. This is a valid question but only part of the story, as typically, market scenarios play out over several days or weeks, and thus how margin changes over a longer period than a day is often more useful. For that reason, Eurex has designed entire market data scenarios which are played out over a period of 5 to 6 months. A market participant can then observe how margins would evolve over that period given a specific scenario.
The calculation is performed for two reference dates: 30th November 2021 to simulate impacts where the baseline is a calm market environment and 30th June 2022 to simulate impacts during periods of higher volatility. The simulated scenarios include:
How is the historical replay achieved? The base assumption is that the relative returns of prices of futures contracts on each consecutive day following the respective reference date are the same as the relative returns of the historical period being replayed. These returns are then sequentially applied to the price of the front futures contracts at the reference date, thus creating a simulated price and return time series into the future. For each date into the future from the reference date, Market Risk Initial Margin is calculated.
The replay of historical returns allows the reader to better study margin behavior from multiple dimensions:
Contents of enhanced transparency publication
The bulk of this publication is a package of materials in a zip file. The package contains:
Key Performance Indicators (KPI) of the performance of the margin model
The remainder of this publication explains the KPIs used for backtesting and to measure procyclicality.
Backtesting is an ex-post check whether the model predictions are in line with the realized data. The following metrics are calculated:
Procyclicality is the tendency of a variable to move in line with the cycle. Under this definition, the procyclicality of the margin model due to changing market conditions is analyzed and measured with the following metrics: