Membership

Overview

EuroCCP offers two membership categories: General Clearing Participants (GCPs) and Direct Clearing Participants (DCPs). GCPs clear trades for themselves and for firms that are not EuroCCP members (Trading Participants or TPs). DCPs clear only for themselves.

The following entities are eligible to become a Clearing Participant, provided approval is obtained from the Risk Committee of EuroCCP in each case:

  1. Credit Institutions and banks established in a jurisdiction that is a member of the Financial Action Task Force (FATF);
  2. Investment firms established in a jurisdiction that is a member of the FATF;
  3. Legal entities whose members or shareholders have unlimited joint and several liability for their debts and obligations, provided that such members or shareholders are institutions or firms mentioned under (a) and/or (b) above; and
  4. Legal entities in a jurisdiction that is a member of the FATF and whose principal or sole object is the clearing of financial instruments.

RISK MANAGEMENT AND FINANCIALS

In order to assess an applicant’s credit worthiness, EuroCCP requires applicants to provide certain financial information as part of their application process.  EuroCCP reviews current information on an ongoing basis throughout a firm’s membership.

Financial information required by EuroCCP includes but is not limited to financial statements, information on a firm’s executives and other general compliance information.

Types and Eligibility

EuroCCP offers two membership categories: General Clearing Participants (GCPs) and Direct Clearing Participants (DCPs). GCPs clear trades for themselves and for firms that are not EuroCCP members (Trading Participants or TPs). DCPs clear only for themselves.

The following entities are eligible to become a Clearing Participant, provided approval is obtained from the credit and risk committees of EuroCCP in each case:

  1. Credit Institutions and banks established in a jurisdiction that is a member of the Financial Action Task Force (FATF);
  2. investment firms established in a jurisdiction that is a member of the FATF;
  3. legal entities whose members or shareholders have unlimited joint and several liability for their debts and obligations, provided that such members or shareholders are institutions or firms mentioned under (a) and/or (b) above; and
  4. legal entities in a jurisdiction that is a member of the FATF and whose principal or sole object is the clearing of financial instruments.

Risk Management and Financials

EuroCCP’s Risk Management processes and systems are overseen by the Risk Management Department based on policies and procedures established by the Managing Board and overseen by the Supervisory Board.

INTRODUCTION

EuroCCP’s activities in the post-trade clearing space expose the company to the following financial risks:

  1. Credit risk
  2. Liquidity risk
  3. Market risk
  4. Operational risk
Risk Management Framework

The oversight of the day to day risk management process is undertaken by the EuroCCP Risk Management Department. Its objectives are to monitor, manage and control EuroCCP’s risk exposures according to methodologies, policies, procedures and parameters as defined by the Board. EuroCCP’s Head of Risk Management has a functional reporting line to the Supervisory Board.

1. CREDIT RISK

EuroCCP is exposed to credit risk as a result of a Clearing Participant’s failure to comply with a financial or contractual obligation.

Credit risk to EuroCCP arises from its commitment to guarantee the settlement obligations on behalf of all Participants’ securities transactions. In the event of a Participant’s default, EuroCCP is required to deliver cash or securities to the other Participants without receiving that cash or those securities from the defaulting Participant. As guarantor, EuroCCP is obligated to buy those deliverables or sell the receivables in the market.

EuroCCP mitigates these risks through membership requirements that all Clearing Participants must meet, prudent and careful monitoring of the credit exposures it faces in relation to each Clearing Participant, and through collection of collateral from each Clearing Participant. See Market Risk Section for further details.

Failed trades

EuroCCP’s exposure against Clearing Participants increases in case a trade fails to settle. To mitigate these risks, EuroCCP charges a fail fee to discourage late settlements. This fee covers not only the cost for EuroCCP but it is also meant to work as a deterrent as required by Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps. In the event that a trade still fails to settle after a certain period of time, EuroCCP will start a buy-in process for which the costs are carried by the failing Clearing Participant. For more detail, refer to EuroCCP’s Regulation Buy-in.

2. LIQUIDITY RISK

EuroCCP is faced with liquidity risk where EuroCCP is lacking liquidity and is unable to meet its payment obligations at any point in time, without incurring unacceptable costs or losses.

EuroCCP continuously manages the liquidity obligations which are covered through ample committed and uncommitted liquidity facilities. These facilities are primarily allocated to intraday settlement requirements.

A credit facility with DNB is in place for the provision of emergency liquidity due to unforeseen circumstances. To this end EuroCCP has access to Target 2 as ancillary system.

3. MARKET RISK

Market risk arises when the price of a security changes after trade execution, creating the potential of a loss to EuroCCP when the trade is replaced at prevailing market prices in the event of a Clearing Participant default.  A CCP mitigates market risk by calculating the amount of margin it requires to cover such potential losses and collecting sufficient collateral from each Clearing Participant.

The current EuroCCP market risk framework consists of three layers:

i. Collateral: EuroCCP requires Clearing Participants to deposit collateral  in order to meet the margin requirements on the open positions. EuroCCP accepts cash and securities as collateral.

ii. Clearing fund: in the unlikely event that a Clearing Participant goes into default and the collateral given by the Clearing Participant is not enough to cover the liquidation cost of its portfolio, the clearing fund provides an additional significant buffer.  All Clearing Participants contribute to the clearing fund.

ii. EuroCCP’s own capital: When the clearing fund is exhausted, the rest of EuroCCP’s capital will be called upon.

Layer i provides assurance that the portfolio of the Clearing Participant can be liquidated in case of a default under normal or mildly extreme circumstances without additional costs to the other Clearing Participants. Layer ii provides assurance that in extreme circumstances, there will still be enough funds to cover for a potential default. Finally, layer iii provides protection in case the other layers of protection fail; however the scheme is designed not to have to call upon layer iii.

To calculate the amount of margin to be held by a Clearing Participant, EuroCCP uses a risk management methodology called Correlation Haircut (CoH). CoH calculates the market risk of a Clearing Participant’s equity positions on an intraday and end of day basis. CoH calculates the maximum theoretical loss of the portfolio and is based upon a 99.7% confidence level (three standard deviations) and assumes a three day time horizon, thereby taking into account the correlation between the components of the portfolio. In 2012 EMCF (a predecessor of EuroCCP) made an adjustment to the parameters to bring the actual outcomes of the calculation closer to the stated confidence level of 99.7%. On average this resulted in a margin reduction for the clearing participants.

Clearing Participants must deposit a percentage (currently 43%) of their required collateral directly with EuroCCP. The remaining collateral may be held either in an account at a commercial institution and pledged to EuroCCP or it may be directly deposited with EuroCCP as well. When cash collateral is deposited in an account on the books of EuroCCP, EuroCCP will invest it in accordance with the Regulation EuroCCP Investment Policy.

Intraday risk management

Intraday, EuroCCP recalculates the margin requirement every three to five minutes, using the most up to date positions and prices. EuroCCP has the authority and the operational ability to demand additional collateral at any time, whenever there is a significant intraday margin deficit.

EuroCCP provides a real time cleared trade feed to its Clearing Participants to enable them to also perform intra day or real time risk management in respect of their clients.

Clearing Fund

All Clearing Participants are required to maintain sufficient contribution in the EuroCCP Clearing Fund where the amounts and percentages of the respective contribution per Clearing Participant are stipulated in the Regulation Clearing Fund. On a daily basis, stress tests are performed where portfolios are tested under various scenarios. These stress tests can go as far as anticipating a market move of up to 20% across the whole portfolio of equities. The results of the stress tests are used to affirm that the EuroCCP risk framework is adequate at all times. The outcome of these stress tests is reported monthly to EuroCCP’s regulators.

Foreign exchange risk

The foreign exchange risk run by EuroCCP in the case of a defaulting Clearing Participant is mitigated by charging margin on foreign exchange exposures. Accordingly, these exposures are included in the calculation of the margin requirement.

The only other foreign exchange risk EuroCCP runs is having to pay non-settlement related invoices in other currencies than the euro. This risk is fairly insignificant for EuroCCP’s business and it has therefore been decided not to be hedged until further notice.

4. OPERATIONAL RISK

Operational risk is dealt with by EuroCCP’s Business Control Department. It initiates and coordinates the implementation of risk-reducing, mitigating actions as decided by the Managing Board. Key risk indicators are used to monitor this process.

TRACE

The TRACE tool enables participants to keep track of house and clients’ margin levels from minute to minute. In addition, TRACE gives Clearing Participants the opportunity to be alerted if a user defined intraday exposure limit is exceeded.

How TRACE improves Clearing Participants’ daily business:
  • Perform intraday credit controls at both Clearing Participant and trading participant level.
  • Set alerts and receive a web pop up, e-mail or SMS alert if a limit is breached so that immediate action can be taken.

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TRACE Brochure

Version February 2014

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TRACE User Set-up Form

Version April 2014

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TRACE Terms and Conditions

Version September 2018

More information can be obtained from EuroCCP Relationship Managers, who can also arrange an online demonstration using live positions at the request of Clearing Participants.

Applying

APPLYING FOR MEMBERSHIP

Clearing Participants are invited to complete the account setup package to confirm their clearing, settlement and netting arrangements. The package includes the number of executing brokers a Clearing Participant will clear for in each market, as well as the structure of the netting accounts. Additionally, EuroCCP requires information on a Clearing Participant’s securities and cash settlement instructions. In order to ensure that the static data is set up properly in our systems, EuroCCP may request that a Clearing Participant arrange to receive settlement messages and other types of output before going live.

Contact a EuroCCP Relationship Manager to initiate the application process. Your Relationship Manager will provide the forms and information you need to complete your application. Completed applications are reviewed by EuroCCP and submitted to EuroCCP’s Risk Committee for approval. Our staff will contact you when your application is approved to discuss the set-up process.

Setting Up

Once a company has been approved for membership, EuroCCP staff will assist in setting up the members account(s). A Clearing Participant will be requested to provide information on its executing broker(s), netting account standing settlement instructions (SSI’s), cash agent banks and collateral preferences.

ACCOUNT STRUCTURE

EuroCCP maintains a principal to principal relationship with Clearing Participants, as is customary for CCPs both in common and civil law jurisdictions. The clearing rules do not create a contractual relationship between EuroCCP and the underlying clients of the Clearing Participant.

Consequently, from a legal perspective, the designation of position and collateral accounts in the books of EuroCCP as segregated omnibus or individual client accounts only supports administrative segregation and does not identify or record ownership.

Options for Clearing Participants and their clients

EMIR requires, at a minimum, segregation for proprietary (House) and third-party (Client) business in different accounts.  This means a client account can contain the position of multiple clients.

Clearing Participants and their clients will have the option to maintain this setup, where client positions are commingled in the same omnibus account, or to fully segregate a client account away from other client accounts.

Some clients of a Clearing Participant may choose to have an individually segregated account, while others may choose to remain in an omnibus account.

Individual client account

In this option, the client account will be fully segregated and contain the positions of only a specific client. The main additional cost of this option is that the segregated client account will be margined and settled separately from the Clearing Participant’s other accounts and will therefore not benefit from any cross client netting opportunities at margin or settlement level. A segregated individual position account will also require posting of sufficient collateral in (a) segregated collateral account(s). In the event of a Clearing Participant default (an enforcement event under the pledge), any unused collateral remaining after completion of the default procedures will remain in this account.

Omnibus client account

In this option, the client account will be fully segregated from the house account, but the positions of the non-segregated clients are commingled. This is the minimum level of segregation required under EMIR.

This option is likely to be more economical both in terms of total margin called, settlement costs and number of collateral accounts required. The account will have a single margin call and will therefore benefit from margin netting across all clients within the account.

It will also be possible to settle on a net basis across all clients if desired and facilitated by the Clearing Participant.

TESTING

The EuroCCP testing environment is available daily between 08.00  and 13.00 CET at no charge. Clearing Participants can access the testing environment via the trading platform.

Test data received from the various trading platforms will be processed until 13.00 CET. Shortly after, EuroCCP will run the UAT batch.  The test output will then be sent to Clearing Participants around 14.00 CET via (S)FTP and/or email.

EuroCCP can create settlement obligation entries in the testing environment on request.

As part of the on-boarding process, applicants will be invited to speak to the EuroCCP Operations team in order to discuss testing options and testing arrangements.