Margins are a fundamental risk management tool adopted by Euronext Clearing.
Each Clearing Member must post margins to cover the theoretical costs which Euronext Clearing would incur in the event of the CM’s default and the clearing of its open position.
Margins are calculated using efficient, reliable and accurate systems: VaR-like margin methodologies for Italian, Spanish, Irish and Portuguese government bonds (FIRE), equities and equity derivatives, agricultural commodity derivatives; SPAN-like margin methodology for corporate bonds and government bonds other than the abovementioned (MVP)
In June 2022 Euronext Clearing replaced its longstanding SPAN-like margin methodology with a new dynamic (i.e. auto-updating) VaR-like margin methodology based on portfolio margining for Italian, Spanish, Irish and Portuguese government bonds.
Under the new VaR-like margin methodology, the adopted risk measure is an historical simulation Expected Shortfall based on cash flow mapping procedure on sovereign zero curves. The historical simulation approach is a standard, fairly simple market practice which allows to infer risk factors’ volatilities and correlations from past dates, including relevant market stress periods. EWMA volatility scaling is also applied to risk factors’ returns.
As a further enhancement compared to the previously adopted methodology, a set of margin add-ons were introduced to tackle portfolio-specific risks different from the mid price risk tackled by the core risk measure, namely idiosyncratic, liquidity, concentration, settlement and repo risks.
Corporate bonds and bonds issued by different countries from the above-mentioned are still margined employing the same SPAN-like margin methodology.
Under the SPAN-like margin methodology risk parameters are updated at discrete time intervals and margining is based on grouping bonds according to their time to maturity.
A total margin is called on a CM’s bonds portfolio summing VaR margins, SPAN margins and mark-to-market margins (which is independent by the adopted modelling choice).
In October 2023 Euronext Clearing replaced its longstanding SPAN-like margin methodology with a new dynamic (i.e. auto-updating) VaR-like margin methodology based on portfolio margining.
The adopted risk measure is an historical simulation Expected Shortfall. The historical simulation approach is a standard, fairly simple market practice which allows to infer risk factors’ volatilities and correlations from past dates, including relevant market stress periods. EWMA volatility scaling is also applied to risk factors’ returns.
As a further enhancement compared to the previously adopted methodology, a set of margin add-ons were introduced to tackle portfolio-specific risks different from the mid price risk tackled by the core risk measure, namely liquidity, concentration, settlement and wrong-way risks.
Euronext Clearing employs a dynamic (i.e. auto-updating) VaR-like margin methodology based on portfolio margining.
The adopted risk measure is an historical simulation Expected Shortfall. The historical simulation approach is a standard, fairly simple market practice which allows to infer risk factors’ volatilities and correlations from past dates, including relevant market stress periods. EWMA volatility scaling is also applied to risk factors’ returns.
A set of margin add-ons are aimed at tackling portfolio-specific risks different from the mid price risk tackled by the core risk measure, namely liquidity, concentration and settlement risks.
Margins are called on a daily basis to cover the theoretical costs which Euronext Clearing would incur in the event of the CM’s default and the clearing of its open positions.
Intraday margins are called by Euronext Clearing in order to protect itself from the increased risk brought by significant intraday market price variations and/or CMs’ portfolio variations. Intraday margins are calculated the same way as end of day margins.
Margins can be posted in cash or in liquid government bonds issued by sovereigns with low credit risk. Posted government bonds are marked to market on a daily basis, using prices or quotes made available by info providers, and are grouped in classes of duration, each associated to a given haircut. Multiple concentration limits apply to the posting of non-cash collateral.
Default Funds are an additional, mutualistic layer of protection aimed at protecting the CCP from extreme but plausible risks, not captured by margins.
Default Funds’ amounts are calculated on the basis of daily stress tests. The contribution to each Default Fund of each CM is adjusted at least on a monthly basis, proportionally to the average value of margins posted in the previous month.
Default Funds’ contribution quotas can be posted in cash (EUR) only.