Eurex passes global fire drill

During the last week of April, Eurex Clearing, LCH
Swapclear and CME simulated the default of a major participant – based on
the Brexit market conditions as of 24 June 2016.

At Eurex Clearing, the defaulted member’s portfolio represented one of the
largest clearing members with open positions in listed equity (index)
derivatives, pending cash equity settlements, as well as open interest rate
swaps and listed fixed income derivatives transactions.

During the fire drill, the equity derivatives portfolio was sold completely
by the third day, the swaps auctions were successfully finalized on day four
and five. Of the 52 auction participants, only one member failed. “This result
shows the high level of commitment and proficiency which market
participants have achieved after several years of regularly drilling the process as part
of mandatory auction participation“, says Thomas Laux, Chief Risk Officer at
Eurex Clearing.

The exercise also proved Eurex Clearing’s timeframes to be adequate and
realistic. „All processes worked as expected in the assumed timeline, and
our CCP was rebalanced in time“, Laux added. „This means that they are easily
manageable by members, even under extreme circumstances.“

The fire drill demonstrated the advantages of hedged auctions in the
default management process. „This is the most critical element of the entire
process as the transfer of risk happens during hedging and not in the auctions“, says
Thomas Laux. „Once hedged, the positions can be auctioned in order to
ultimately achieve a matched book.“

Market participants have voiced strong concerns regarding non-hedged
auctions. Since hedging requires skilled internal staff, Eurex Clearing has traders
within the team in addition to calling in Default Management Committees.