Hedging is an important component of the Default Management Process, aiming to stabilize the defaulted Clearing Member’s portfolio to enable a portfolio based liquidation. Hedging can be conducted either by closing out certain concentrations within the defaulted Clearing Member’s portfolio, or by Eurex Clearing entering into additional, one-sided transactions, which are added to the defaulted Clearing Member’s portfolio and will in the following be liquidated jointly. Eurex Clearing can also execute hedging in form of Hedging Auctions on Liquidation Group level.
When defining hedging strategies, Eurex Clearing’s internal qualified traders are supported by the expertise provided by each Liquidation Group’s Default Management Committee (DMC).
The final decision of what hedging transactions are executed remains with the Executive Board of Eurex Clearing. The DMC member is not liable for the economic success of the strategies proposed.
Defining the instruments
Eurex Clearing does not define any hedging thresholds to be met, as hedging requirements will largely depend on detailed portfolio specifics and market conditions. In fact, it might even be possible to liquidate certain portfolios without any hedging being conducted.
Hedging Auctions are conducted on Liquidation Group (LG) level. This additional hedging channel supports the CCP to mitigate the market risk for the positions inherited from the defaulted Clearing Member.
Who has to participate in a Hedging Auction
Large market makers with adequate operational and risk capabilities are targeted participants. A formalized two-step approach insures a pool of suitable hedging auction counterparties:
A limited number of participants will be preselected based on product activity, risk capacity and support to the Default Management Process (including i. a. results of liquidity surveys). Upon a Clearing Member default, auction participants are informed about their mandatory participation requirement in consultation with the Default Management Committee.
The Maximum Hedging Spread Value, as defined in the Clearing Conditions 7.5.2 (2) (vi), is as follow:
We encourage all Clearing Members to opt-in for participation in Hedging Auctions. Please see here further details.
For any questions and for opting-in for participation please contact the Default Management Team.