ICE Clear Europe operates separate Product Risk Committees for Credit Default Swaps (CDS) and Futures and Options (F&O) products.
The Futures and Options Product Risk Committee covers ICE's exchange traded Energy markets (including ICE Endex, ICE Futures Europe and ICE Futures US) and the Financials and Softs futures and options contracts traded on ICE Futures Europe. The CDS Product Risk Committee covers OTC CDS products. In addition ICE Clear Europe also has a Client Risk Committee comprising both Clearing Member and customer representatives as well as independent Board Members.
In their advisory role to the President of ICE Clear Europe, the two Product Risk Committees play a key role in ensuring that the Clearing House maintains and implements procedures, processes and controls that are designed to:
The ICE Clear Europe Product Risk Committees and Client Risk Committee currently comprise:
Lines of Defense
|1. Membership Criteria||Ensures that each Clearing Member has sufficient financial resources, operational capabilities and risk management experience.|
|2. Variation Margin Requirement||All open positions are marked-to-market on a daily basis. P&L is paid/received and settled overnight, in cash, in the currency of the contract.|
|3. Intra-day Risk Monitoring & Margin Call Execution||Clearing Members positions are monitored intra-day, with additional collateral called intra-day where Variation Margin losses and/or Original (or Initial) Margin requirement increases breach predefined thresholds.|
|4. Margin Requirement||Clearing Members are required to post OM in respect of open positions. OM is designed to be sufficient to cover the potential cost of a Clearing Member default under normal market conditions.|
5. ICE's Initial Contribution
|ICE has contributed an amount of its own funds, i.e. "skin-in-the-game", which is available prior to the Clearing Members' mutualised funds.|
6. Default Insurance
|ICE has arranged for an amount of default insurance that can be used to cover losses above the defaulting CLearing Member's funds and ICE's Initial Contribution (subject to specific provisions in Part 9 and 11 of the Clearing Rules).|
7. CM GuarantyFund
|Should a defaulting Clearing Member's OM and Guaranty Fund contribution be insufficient to cover the cost of closing-out their positions in extreme market conditions, ICE Clear Europe operates separate CDS and F&O Guaranty Funds to cope with losses in excess of OM.|
|8. Powers of Assessment||In extreme situations, where a Clearing Member default exhausts one of the Guaranty Funds, the remaining Clearing Members can be called for additional funds under Powers of Assessment PoA is limited to a set multiple of a Clearing Member's current Guaranty Fund contribution.|
|9. CCP Recovery Mechanism||Rules have been developed in order to deal with a default, or series of defaults, which threatens to exhaust all Clearing House financial resources to ensure it remains solvent and can continue to operate.|
Margin Period of Risk
|Energy||Filtered Historical Simulation||99%||500** days||1 or 2-days*|
|Financials & Softs||Parametric VaR||99%||60, 250** and 525 days||2-day|
|Financials & Softs||Historical Simulation||99%||100, 250 and 525 days||2-day|
|CDS||Stress Scenarios-Based Risk Measure and Monte Carlo Simulation||99.5%||01/04/2007 and 250 days||5-day for House. 7-day for Client|
* 1-day MPOR applies to Oil, US Gas and Power, Coal, US Emissions, NGL, Petrochemicals; 2-day MPOR applies to EU Gas and Power, EU Emissions, and Freight contracts
**Incorporating Anti-Procyclicality measures
All risk models used by ICE Clear Europe are reviewed and subject to a formal model governance process that requires independent validation. The suitability of all models is reviewed on an annual basis. Any material change to an existing model and all new models are subject to independent model validation.
Parameters used within the models are reviewed and set by the ICE Clear Europe Clearing Risk Department in accordance with policies and procedures approved by all the appropriate Risk Committees. Total initial margin information is available on the Financial Resources section of our website.
Futures & Options Initial Margin
Initial margin is a returnable deposit based on a Member’s open positions. It is calibrated to be sufficient to cover the expected cost of closing out a defaulting Member’s position in normal market conditions to a 99% confidence interval. Model performance is monitored daily via both portfolio and contract level back-testing. For Futures and Options products, initial margin requirement is calculated using ICE Risk Model.
Clearing Members may be required to provide additional margin to cover concentration risk, illiquid positions, credit risk or wrong way risk. Changes to ICE Risk Model margin parameters are notified via email to market participants as Circulars.
F&O Margin Rates
The ICE Risk Model comprises the following components:
The CDS initial margin methodology provides portfolio risk coverage for Index, Single Name and Western European Sovereign CDS products equivalent to, at least, a 5-day (7-day for client positions) 99.5% Value-at-Risk measure. The model performance is monitored via portfolio and contract level back-testing.
Further information on the ICE CDS margin calculation
The estimation of the model parameters are reviewed at least on monthly basis in cooperation with the Risk Working Group. The Spread Response requirement is based on a methodology that uses a combination of two margin approaches: a stress-based Value at Risk measure and a risk measure based on Monte Carlo simulations.
In order to ensure that ICE Clear Europe has sufficient capital as one of the world's leading multi-asset clearing houses, ICE Clear Europe has established a mutualised guaranty fund which is based on stress testing results as required by EMIR Articles 42 and 43. The Futures and Options (F&O) Guaranty Fund consists of two segments: an Energy Segment and a Financials & Softs Segment. Each Segment is calibrated to be sufficient to cover the potential cost of the simultaneous default of the two Clearing Member groups to which the Clearing House has the largest exposure to, under extreme but plausible scenarios. The total size of the F&O Guaranty Fund is likewise calibrated to ensure the sum of the two segments is also sufficient.
The contribution of each Clearing Member to the F&O Guaranty Fund is recalculated bimonthly and determined by each Clearing Member's relative share of intraday Initial Margin and relative share of uncollateralised stress exposures over the preceding two months, with a minimum Clearing Member contribution of USD 1 million.
In addition, ICE provides an amount of its own funds, the F&O Initial Contribution, which sits in front of Clearing Members' obligations. Powers of Assessment can be used by ICE Clear Europe in addition to the F&O Guaranty Fund and are limited to twice the non-defaulting Clearing Members’ F&O Guaranty Fund requirements immediately preceding an event of default in respect of a single F&O Clearing Member default (see Rule 909(c) (Powers of Assessment: F&O).
The adequacy of the F&O Guaranty Fund is monitored on a daily basis by ICE Clear Europe’s Clearing Risk Department and the level of both the Energy and Financials & Softs segments are reviewed by the F&O Product Risk Committee at each Committee Meeting.
The combined F&O Guaranty Fund requirement and ICE’s F&O Initial Contribution is shown in the financial resources section of ICE Clear Europe’s Regulation page.
Futures and Options Guaranty Fund – Application of F&O Guaranty Fund assets in the event of a default. The order in which the F&O Guaranty Fund assets are applied in the event of a Clearing Member default is as follows:
ICE Clear Europe has established a separate Guaranty Fund for the CDS Clearing Service that is sufficient to absorb the greatest combined uncollateralised loss resulting from the simultaneous default of two Clearing Members during periods of extreme market conditions where initial margin held in respect of the defaulting Clearing Member’s positions proves to be insufficient, as required by EMIR Articles 42 and 43.
The CDS Guaranty Fund is allocated between Clearing Members on a pro-rata basis corresponding to the uncollateralised stress exposures (generated using scenarios set up specifically for Guaranty Fund allocation) of each individual Clearing Member. The CDS Guaranty Fund is covered in Euros with additional requirements in US Dollars in relation to Sovereign Single Name and CDX Indices. Further information on the asset restrictions and parameters can be found in the CDS Guaranty Fund section.
As of July 2017, the CDS Guaranty Fund and ICE's CDS Initial Contribution sits ahead of the non-defaulting Members contribution. The minimum Clearing Member contribution is €15 million. The CDS Guaranty Fund requirement is shown in the financial resources section of ICE Clear Europe’s Regulation page.
The allocation of assets following the default of a CDS Clearing Member is consistent with that set out above.
Portfolio level initial margin is back-tested against the actual one-day or two-day* price changes to ensure that initial margin requirements are performing within the stated risk parameters.
*One or two day for energy products, depending on the corresponding Margin Period of Risk
Further details of back-testing results of both CDS and F&O Clearing Member portfolios are contained within ICE Clear Europe’s CPMI-IOSCO Public Quantitative Disclosure Standards for CCPs. Please see Section 6.5 of the Aggregated Data File which can be found under the Quantitative Disclosures section of ICE Clear Europe’s Regulation page.
In the event of a Clearing Member default, the primary responsibility of the Clearing House is to contain the cost of closing out the Defaulter’s position to an amount less than the margin and guaranty fund contribution of the Defaulter.
This protects both the non-defaulting Clearing Members and the Clearing House from losses and by extension the markets that the Clearing House provides clearing services to.
ICE Clear Europe has extensive powers under the Clearing Rules (Part 9: Default Rules) that allow it to perform this function. This includes details on events that could constitute an Event of Default.
The Clearing House will, on a best endeavours basis and subject to Part 9 of the Clearing Rules, assist clients of the Defaulter in the transfer of their positions to an alternative Member. For further information on porting of client positions, please see the “Disclosure Statement pursuant to Article 39(7) of EMIR” and “Customer Protection Framework"
In stressed or volatile market conditions, an initial margin model could drive rapid or over reactive increases in margin requirements. This added procyclicality causes a potential liquidity burden for Clearing Members.
ICE Clear Europe assesses procyclicality using percentage changes in initial margin over a 5-day window and the threshold condition is applied to the 95th percentile expected shortfall level of the percentage changes over a rolling 250 day window. R-A-G triggers an amber warning if the expected shortfall exceeds 50%, and red if it goes beyond 100%. This is calculated for the top benchmark products per market.
ICE Risk Model is a margin calculation tool that supports the calculation of original margin amounts for products cleared by ICE Clear Europe, based upon the ICE Risk Model specification.
All market participants and users, as well as others with an interest in understanding how ICE Clear Europe margins its products, are welcome to download and use the ICE Risk Model software. The software license can be found here and users are required to accept the terms of the license as part of the installation process. Users are not charged for use or download of the software, but there are limitations to using the software in commercial applications.
ICE Risk Model utilises the Microsoft.NET Framework, version 3.5. Users must install this program prior to installing ICE Risk Model. Download Microsoft .NET here