Margin breaches quadrupled at Eurex in 2020

Eurex Clearing disclosed 3,227 initial margin (IM) breaches for 2020, up from just 781 in 2019 and the highest calendar-year total since public disclosure began.

The rolling 12-month tally of margin breaches was highest for the equity derivatives service as of end-December, at 1,782. This compares with just 324 in 2019. Breaches at the fixed-income derivatives service totalled 869, up from 316 the prior year, and those linked to the over-the-counter interest rate swaps service 250, compared with 26.

 

The largest single IM shortfall over 2020 at the central counterparty (CCP) was €665 million ($786 million) in size. This occurred at the fixed-income derivatives service in Q1. The peak breach at the equity derivatives service in 2020 was €510 million, and at the OTC swaps venue €246 million.

Total required IM held by Eurex as of end-2020 amounted to €49.7 billion, up 14% on the year prior.

 

What is it?

A margin breach occurs when the collateral in a clearing member’s account falls short of the amount needed to cover its marked-to-market exposure. This implies the clearing member has not posted enough cash and securities to the central counterparty to make up for any losses in the event of its collapse. If a breach isn’t covered quickly by a clearing member, it risks being labelled as in default.

Clearing houses subscribing to disclosure rules set by international standard-setters the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions (CPMI-Iosco) must disclose quarterly the number of times in the past 12 months that these shortfalls occur. They must also report the average and peak size of these uncovered exposures. 

Why it matters

Quarterly disclosures show that the majority of breaches and peak shortfalls at Eurex occurred in Q1 2020, at the very start of the coronavirus crisis. This makes sense considering the composition of the IM model at the CCP.

The Prisma model used to manage derivatives positions consists of forward-looking and backward-looking components. The former relies on a value-at-risk measure, 75% of which is calculated using historical data and 25% using stress scenarios. The backward-looking component gathers up variation margin, premium margins and current liquidating margin requirements to set an additional amount of IM.

Since historical VAR drives the model, it’s no surprise Eurex was caught out when the unprecedented volatility unleashed by the coronavirus took hold of the market. Nor is it strange that IM breaches dropped off from Q2 onwards. Once the Prisma model factored in the Q1 data, client IM was re-sized to account for the wild markets just passed. In addition, markets overall calmed after the initial downturn in March, which made breaches far less likely.

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