Prisma Risk Management: Introduction for Bonds and Repos

1.   Introduction   

With this circular, Eurex Clearing announces the migration of the most liquid Bonds and Repos to the portfolio-based Risk Management methodology (Prisma) in a phased approach as of 18 November 2024, pending regulatory approval.

Timeline: 

Simulation start: 10 September 2024
Production start: 18 November 2024, pending regulatory approval

The margining of fixed income securities currently follows the Risk Based Margining methodology (RBM). By migrating the most liquid Bonds and Repos to Prisma, a further harmonization of the margin methodology in the entire fixed income securities space is achieved, which will clear the path to offer improved portfolio-based margin offsets to Clearing Members and their clients. This is expected to further reduce the cost to centrally clear and manage Euro interest rate risks, as well as funding and financing requirements at Eurex Clearing. 

The migration of Bonds and Repos to Prisma is planned in following phases:

Phase 1 (from July 2024)

Analytics and impact assessments for portfolios including Bonds and Repos will be made available on request.

Phase 2 Simulation: (10 September 2024)

Bonds and Repos in scope for the migration will still be margined using RBM in Simulation. Like Phase 1, Clearing Members will be able to make use of analytics and impact assessments on request. To switch their portfolio to Prisma, Clearing Members can opt-in when they have applied all required changes. 

Phase 3 Production Optional (18 November 2024)

In Production, all Bonds and Repos in scope of the migration will also still be margined with the RBM method. Clearing Members can switch their portfolio to Prisma at any point in time but latest with Phase 4. This will be the same approach as for Simulation. Details on how to opt-in for the switch will be published well in advance.

Phase 4 Production Mandatory (to be announced)

RBM method will no longer be available for Repos and Bonds in scope. The switch to Prisma becomes mandatory. Details when the mandatory switch will go live will be published and announces well in advance.

The following liquid Bonds denominated in euro are in scope for the switch to Prisma:

• Fixed coupon, bullet Bonds issued by governments of Germany, France, Italy, and Spain
• Supranationals (AAA and AA rated)

Learn now more about Prisma Release 14.0 on our dedicated initiative page under the following link: Support > Initiatives & Releases > Prisma Releases > Prisma Release 14.0. Circulars, timeline and much more information will be available there for you.

2.   Required action

During Phase 3 of the phased introduction, Prisma and the RBM will be offered in parallel, allowing Clearing Members a smooth migration to the new risk method at their own pace. At a later stage (Phase 4), which will be communicated well in advance, it is envisaged to discontinue the optional use of RBM for Bonds and Repos and make Prisma mandatory for Bonds and Repos. The migration of Bonds and Repos to Prisma requires Clearing Members and Vendors to consider/implement the following changes: 

• Existing margin reports that cover products under Prisma will be changed and new reports will be introduced.
• An additional TE File (Transparency Enabler File) containing only the Bonds and Repos in Scope will be introduced, the current TE File will not change.
• If applicable, Clearing Members and Vendors need to adjust their reconciliation processes accordingly.

Furthermore, Clearing Members who want to benefit from Bond and Repo portfolio margining during the optionality phase will be able to request the switch to Prisma for their portfolio of Bonds and Repos. It will only be possible to switch once without the option to move back to RBM. There will be a separate announcement and communication on how Clearing Members are able to request the switch, After the switch during the optionality phase no separate registration will be required to benefit from bond portfolio margining.

Updated documentation including a Report Reference Manual with details about the envisaged report changes and the new TE File will be made available in the Member Section of Deutsche Börse Group as part of the Prisma Release 14.0 communication.

3.    Benefits

Introduction of Prisma methodology for Bonds will generate a number of tangible benefits to Cash Bond, Repo and Derivatives Clearing participants, i.e.

• Standardization of risk methodology across Bonds, over the counter (OTC) interest rate swaps and exchange traded derivatives clearing
• Improved reflection of Bond portfolio offsets
• Daily recalibration of Bond risk factors.

Following the implementation, Eurex Clearing will have delivered a key pillar for the future development of margin netting/cross product margining between Bonds and Derivatives.

Future planned extensions will focus on:

• Increasing the scope of eligible securities under Prisma margining,
• Establishing margin netting between Bonds migrated to Prisma and Money Market/Fixed Income Futures and Options, and
• Implementing cross margining between combined Money Market/Fixed Income Futures and Options and Prisma Bonds, Repos, and OTC IRS.

Relevant information with regards to these aforementioned extensions will be provided over time.

For more information on Eurex Clearing’s Prisma model, please refer to the Eurex Clearing website www.eurex.com/ec/en/ under the following link: 

Services > Margining > Eurex Clearing Prisma

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