Advanced Risk Protection

Eurex Clearing`s pre-trade risk controls are closely tied to the growing trend of direct market access and the potential risk arising from algorithmic trading tools. The tools offer members flexibility in setting intelligent limits that reflect their risk profiles.

Eurex Clearing offers a pre-trade risk management service for Eurex Exchanges business including Eurex Trade Entry services that enable Clearing Members to define individual risk limits for themselves or their associated NCMs. In addition, any member can define its own risk limits, down to the trader subgroup level, for added control. However, when both a CM and an NCM set limits, the more restrictive limits will apply. The limits are based on actual calculations and result in various pre-trade actions without latency impact. Limits are evaluated against corresponding risk figures conveyed in real-time via the Enhanced Risk Solution (see also section 5.6.2) and any breach of a set limit can result in the restriction of further trading activity, as pre-defined by the Clearing Member or their associated NCMs.

The Advanced Risk Protection functionality is also supported within Eurex Exchange’s T7 and can warn, slow or stop a participant if a pre-defined risk limit is exceeded, but the data setting (entry of all limits) has to be done in the Risk Monitoring Maintenance window of the @X-tract Clearing GUI.

Defining Limits

All members can select from four pre-defined measures (metrics). Each represents a different aggregate of risk values, described below:

Name Abbreviation Based on …

Total exposure TMR Total margin requirement

Profit and loss CULI Premium margin + current

liquidating margin 8 + variation margin + option premium

Cash flow CASH Variation margin + option

premium

Market risk NDM Additional margin + futures

spread margin

Available Actions

This functionality encourages members to set risk limits in advance to proactively safeguard trading activities. Members specify which of three actions will be implemented when a breach of each level or risk limits occurs.

Level 1

(Alert only limit)

An alert message is broadcast to both the NCM and its respective CM

Level 2

(Slow down limit)

The system automatically slows down a member’s order/quote entry and order/quote modification by enforcing a minimum delay of between 250 and 5,000 milliseconds (member configurable) between non-delete transactions in any single product. (Slow down limit)

Level 3 (Full stop limit)

The member’s trading state is set to “Halt” which means all open orders and quotes are deleted and all further trading and clearing functions are prevented.

8 _{Current liquidating margin is not calculated for derivatives but in case a CM holds clearing licenses for different markets, current}

liquidating margin is calculated for bonds, equities, repos and securities lending transactions and will be calculated for this CM and is automatically included in the aggregate risk value CULI.

The following graphic shows an example for the three levels:

Figure 5-8: Advanced Risk Protection Levels

Changing limits and timelines for settings in the Advanced Risk Protection service are based on the same data that is distributed via the Enhanced Risk Interface. This enables members to implement additional risk monitoring metrics that are more complex as well as tailor-made based on the same data source. Members can set risk limits using the @X-tract Clearing GUI. When members use the GUI to enter and/or change risk limits, the new limits become valid as of the next business day. Changes to other parameters (delay; Order/Quote Delete) are effective immediately.

Limits may be set using the Risk Monitoring Maintenance window.

Figure 5-9: Risk Monitoring Maintenance window - @X-tract

Only users of the Enhanced Risk Solution (see chapter 5.6.2) can make intraday changes to their risk limits. Changes initiated via this interface are effective only for the current day and will be overwritten with limits defined in the @X-tract Clearing GUI valid as of the next business day. If this override is not desired, the respective limit change must also be done via the @X-tract Clearing GUI.

Release of a Member

The release process is strictly manual and can only be carried out by the member which set the respective limit. It requires four-eye principle confirmation. If several action levels are triggered for one limit type, releasing a trigger causes the automatic release of all action level limits of the same type. Releases may also be executed using the Risk Monitoring Maintenance window (see Figure 5-9: Risk Monitoring Maintenance window).

Step 1

Selection of triggered limit

The maintenance member may select any triggered limit

Step 2 Release

Press the Release button

Step 3 Confirmation

Confirmation that all limits of the selected type be released

During the release process, the following points should be kept in mind: • Release of individual limits of one type is not possible.

• Both the Clearing Member’s and the Non-Clearing Member’s currently triggered limits must be released separately by the respective limit owner.

• A member set to HALT for exceeding a level 3 limit can only be re-activated through the release process using the Limit Maintenance tab of the Risk Monitoring Maintenance window. An attempt to reactivate a member through any other window is rejected with an error message. Furthermore, release processing is triggered automatically following the deletion of a triggered limit. If the release is not successful, the limit is not deleted.