Prisma: Update of ETD Liquidity Add-On Parameters effective 3 July 2023

1.   Introduction

As part of a regular review of concentration risk handling in the risk methodology, Eurex Clearing has recalibrated the Liquidity Add-on for ETD products. The affected model parameters comprise Market Capacities and Liquidity Factors across all Prisma Liquidation Groups in the ETD space. The recalibration follows standard calibration methodology. 

Production start: 3 July 2023

Eurex Clearing will provide the possibility to calculate impacts on margining using Cloud PME, where an additional environment will be set up with the updated parameters.

2.    Required action

No specific actions are required by clients. The recalibration is a regular update and does not encompass changes to the model. 

3.    Details of the initiative

Eurex Clearing has a prudent risk framework in place to mitigate counterparty credit risks. In particular, concentration risks are covered as part of this framework. Next to Concentration Risk limits, Eurex Clearing’s Prisma methodology comprises a dedicated Liquidity Add-On accounting for this type of risk.

In general, the Liquidity Add-On is designed to capture the potential additional costs when liquidating large and concentrated portfolios, where the key features are:

• The Liquidity Add-On depends on the relative size of positions as compared to observed tradable volumes, with the latter defined as the Market Capacity parameter of the Add-On. 
• The Liquidity Add-On depends on the current level of market risk of each respective product.

The Liquidity Add-On’s scaling properties are mainly governed by a linear Liquidity Factor function, which translates position sizes into a scaling factor of the market risk. As part of a regular review of concentration risk handling in the risk methodology, Eurex Clearing has recalibrated the Market Capacity parameters with a focus on the observable tradable volumes in the market, as well as availability of underlying cash market liquidity pools. The current update entails the expansion of products relying on underlying cash market liquidity pools to enhance the liquidity profile of those products.

The recalibration of the Liquidity Factor gradient was carried out with the input received from Liquidity Surveys that were conducted separately for each Asset Class.

All Prisma ETD Liquidation Groups will be affected.

Unless the context requires otherwise, terms used and not otherwise defined in this circular shall have the meaning ascribed to them in the Clearing Conditions or FCM Clearing Conditions of Eurex Clearing AG, as applicable.

Further information