Eurex Clearing maintains one joint Default Fund to cover potential losses exceeding what has been collateralized by margin requirements. The Default Fund mutualizes such losses and therefore requires careful and prudent management to protect the clearing community from potential spill-over effects. In case, increased stress losses are detected, the reasons are thoroughly analyzed to identify if the root cause can be traced back to individual Clearing Members and their portfolio structures or if the market environment has changed:
Member-specific mitigating actions are taken as soon as a Clearing Member’s Default Fund consumption, as determined by Stress Testing, would lead to unbalanced utilizations. Eurex Clearing wants to avoid concentrations in the Default Fund and, hence, defines different thresholds to start reducing the excessive stress losses (SLOM) of one Clearing Member to be absorbed by the mutualized Default Fund, by calling additional “Supplementary Margins”. This approach ensures that members cover their idiosyncratic risk.
The most relevant threshold to prevent breaches of the regulatory “cover-2” requirement is set at 90% of the current Default Fund (including Eurex Clearing's Total Dedicated Amount that is divided between the First Skin in the Game and the Second Skin in the Game). As soon as the largest two Clearing Member Groups’ Default Fund consumption exceeds this threshold supplementary margin is charged to those Clearing Member Groups, whose Default Fund consumption is higher than 45% of the current Default Fund size.
To avoid sudden supplementary margin calls, a so-called early warning threshold is set at 40% of the current Default Fund to inform affected Clearing Members and make them aware of possible mitigating actions.
| Threshold | Mitigating actions |
| 40% of current Default Fund | Early warning threshold, where the respective Clearing Member is notified of its SLOM and advised to comply with the thresholds. |
90% of current Default Fund for two Clearer Groups combined and 45% of current Default Fund for single Clearing Group | Additional collateral (supplementary margin) is required to cover the higher exposure. |
Besides these idiosyncratic actions, general mitigating actions may apply in case of structural or general market change, which require a strengthening of the CCP’s overall Default Fund. Reasonable measures for this situation are an ad hoc recalibration of the Default Fund requirement or of the dynamic component.
