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CCP (Central Counterparties)

Risk Management in Central Counterparties

What Is a CCP?

The Central Counterparty (CCP), BME Clearing, acts as the buyer of the seller and the seller of the buyer in any trade traded on the exchange, bilaterally, adjustments in corporate events, fails, etc.

BME Clearingputs itself before both counterparties, performing registration, central counterparty, clearing and settlement functions.

When interposed, several risks affect the CCP. The main one would be the counterparty risk, also called credit risk.

But as said above, there are also other risks, as for example liquidity risk, operational risk, legal risk or even market risk, because in case of a Client or Member default, would be the CCP the one in charge of the defaulting portfolio, incurring in market risk.

The main purpose of BME CLEARING is to eliminate the counterparty risk and to ensure the transactions are completed successfully.

Mechanisms of the CCP

The counterparty risk is fully transferred to BME Clearing. So, how its safeguard itself?

In order to perform its duty, BME Clearing establish solvency requirements for Members based on their category in the CCP, BME Clearing require the posting of margins, applies Variation Margin in Futures and xRolling contracts, sets Risk and Margin Call Limits, performs stress tests for margin calculation and follows the Default Waterfall in case of default.

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Margins

Margins are defined as amounts required from Members or Clients, registered in the corresponding Margin Accounts, to cover the risk of default on the obligations undertaken by Members and Clients.

The Central Counterparty puts itself (in its proprietary account) between both counterparties of a trade, so it is necessary to cover the potential cost of a default of any of the counterparties. Among BME CLEARING functions is to calculate and require margins, and where applicable, to custody the collateral posted. 

Margins posted by Member or Clients in favour BME CLEARING, shall only be liable vis-à-vis BME CLEARING, and only for obligations resulting from such Trades vis-à-vis BME CLEARING, or obligations deriving from holding Member status of BME CLEARING.

Although legally margins are posted in the name of the account holder in BME CLEARING (or in the name of the Member on behalf of its Clients in accounts under a Principal to Principal model), operationally margins are posted through the Clearing Member.

Our two segregation models are further explained in “Client Asset Protection Under EMIR”, but basically in a Client Account under Agency model, the holder of the margins is the Client, while under a Principal to Principal model the holder of the margins would be the Member on its own name and on behalf of its Client.

Margins are called at Collateral Account level in BME CLEARING and shall cover the required Initial Margin reflected in the corresponding Margin Account.

In BME CLEARING, margins may be posted both in cash and securities:

  • In cash: 

BME CLEARING is connected to the TARGET2 – European Central Bank platform. Specifically, BME CLEARING holds its own account in TARGET2 – BCE.

All cash related concepts may be settled through direct credit or debit instructed by BME CLEARING to the TARGET2 to: 

  • The TARGET2 own account of the Clearing Member, if the Clearing Member is the account holder.
  • The TARGET2 account of a “Payment Agent” with which the Clearing Member has reached an agreement. The Clearing Member would use the account of the Payment Agent to perform all its cash settlements in BME CLEARING.

BME CLEARING may establish alternative (and extraordinay) cash payment methods to TARGET2, for example in case of failure of TARGET2 platform, as Fund Trasfer Orders. 

  • In securities:
    • Via securities pledged in the CSDs IBERCLEAR or EUROCLEAR BANK SA/NV 
    • Via transfer of ownership, by transfer of securities done by the Clearing Member to BME CLEARING’s securities account in IBERCLEAR or in EUROCLEAR.

Although margins could be posted in securities, a minimum level of cash margins is established at Clearing Member level. Obviously, if margins were to be used, it would always be better and quicker to have them in cash rather than in securities.

At least, the total amount of Default Fund contributions required by BME CLEARING to each Clearing Member, in all segments, must be posted in cash (in Euro), so the that the CCP ensures a minimum cash margin posted.

Additionally, at a CCP level, BME CLEARING will also assess that, as a minimum, 30% of the total amount of margins required by the CCP in respect of all concepts and in all Segments has been posted in cash, in Euros.

If this amount falls below 30%, Clearing Members whose cash collateral is not at least 30% in cash (Euro) in respect to their margins required by BME CLEARING for all concepts and in all Segments, will be given five business days to recalibrate their collateral to attain this threshold.

When margins are posted in favour of BME CLEARING, is important to remark where are these margins posted.

If are cash margins, BME CLEARING does not hold any money in commercial banks. Meaning, all cash money posted is held in an account of BME CLEARING in TARGET2 –European Central Bank.

That means that cash margins are kept without depositary risk and are totally segregated in an account in the European Central Bank, with the security that this means.

In case of securities, both via pledge or via transfer of ownership, the posting is made in a securities account of BME CLEARING in IBERCLEAR or EUROCLEAR.

Related information
Frequently asked questions

Las Cámaras de Contrapartida Central (Central Counterparties en inglés, CCPs), también llamadas Entidades de Contrapartida Central (ECCs) o “Clearing Houses”, surgen como “apéndices” de los contratos de futuros en el siglo XIX en EE.UU con el desarrollo a gran escala de los mercados de materias primas.

En dichos mercados, existen numerosos riesgos de distinta naturaleza (estacionalidad, malas cosechas, almacenamiento…) y por ellos surgieron los mercados organizados de futuros, para dar seguridad tanto a productores como a los compradores.

Para encontrar los antecesores a los actuales mercado organizados de derivados, hay que ir hasta Chicago y remontarse a 1848, año en el que nació el Chicago Board of Trade (CBOT), donde se negociaban esencialmente productos agrícolas, como es el caso del trigo, maíz y soja, subyacentes de sus primeros contratos de futuros.

Los contratos a plazo suponen un buen instrumento para gestionar fundamentalmente el riesgo de mercado, de precio, ya que permiten fijar hoy el precio de compra-venta en una fecha futura.

Sin embargo existen muchos otros riesgos, entre ellos, el riesgo de contrapartida o riesgo de crédito, es decir, el riesgo de incumplimiento de una de las contrapartidas de la operación.

Por ello, los mercados organizados de derivados, empezaron a comprometerse a asumir las obligaciones de cualquiera de las dos partes de una transacción si hay una de ellas incumple.

Incorporaron una nueva función, la de asegurar el buen fin de todas y cada una de las operaciones del mercado.

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