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Risk Management

ICE Clear Europe provides central counterparty clearing and risk management for interest rate, equity index, agricultural and energy derivatives under the Futures & Options clearing service.

Risk Governance

ICE Clear Europe has several committees supporting its risk management decisions. In addition to the Board of Directors, these include the:

  • Board Risk Committee - a committee of the Board of Directors comprised of Non-Executive Directors, with the majority being Independent Non-Executive Directors;
  • Client Risk Committee - an advisory Board level risk committee, comprised of representatives of Clearing Members, Clients and Independent Non-Executive Directors;
  • F&O Product Risk Committee - an advisory committee constituted under the President’s authority and comprised of appointees nominated by the Futures & Options Clearing Members, Clients and an Independent Non-Executive Director, who acts as Chair.

Risk Waterfall

ICE Clear Europe’s risk management framework is structured to ensure robust clearing arrangements, minimizing risks to the Clearing House and its Clearing Members. Under such framework, ICE Clear Europe has developed a comprehensive tiered waterfall approach to risk management. These tiers are as follows:

Lines of Defense

1. Membership CriteriaEnsures that each Clearing Member has sufficient financial resources, operational capabilities and risk management experience.
2. Variation Margin RequirementAll 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 ExecutionClearing Members positions are monitored intra-day, with additional collateral called intra-day where Variation Margin losses and/or Initial Margin requirement increases breach predefined thresholds.
4. Margin RequirementClearing Members are required to post Initial Margin in respect of open positions. Initial Margin 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. Guaranty Fund

Should a defaulting Clearing Member's Initial Margin and Guaranty Fund contribution be insufficient to cover the cost of closing-out their positions in extreme market conditions, ICE Clear Europe has established the Futures & Options Guaranty Fund to cope with the excess losses.
8. Powers of AssessmentIn extreme situations, where a Clearing Member default exhausts the Guaranty Fund, the non-defaulting Clearing Members can be called for additional funds under Powers of Assessment. The Power of Assessment is limited to a set multiple of a Clearing Member's current Guaranty Fund contribution.
9. CCP Recovery MechanismRules 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 Overview

Initial Margin Models

ICE Clear Europe operates different models in order to calibrate its margin requirements. These models are dependent on the products cleared and are summarised as follows:

Market
Margin Model
Confidence Interval
Look-back Period
Margin Period of Risk
EnergyFiltered Historical Simulation99%500** days1 or 2-days*
Financials & SoftsParametric VaR99%60, 250** and 525 days2-day
Financials & SoftsHistorical Simulation99%100, 250 and 525 days2-day

ICE Clear Europe aims to reduce the model procyclicality, without compromising the model performance, by adding stress observations to the volatility calculation of each risk factor. In particular, a weighted average of 25% stress volatility and 75% current volatility is used in the parameterization of the models. The stress volatility is defined as the maximum 250-day volatility calculated on a rolling basis over the entire available history of the risk factor return series.***

All risk models used by ICE Clear Europe are reviewed and subject to a formal model governance process. Model performance is monitored daily, with the suitability of all models independently 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 in accordance with policies and procedures approved by the appropriate committees.

* 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.

*** This corresponds to option (b) of Delegated Regulation (EU) No 153/2013, Article 28, as incorporated into UK law with modifications at the end of the Brexit transition period by virtue of the European Union (Withdrawal ) Act 2018.

Futures & Options Initial Margin

Initial Margin is a returnable deposit based on a Member’s open positions.

The Initial Margin requirement is currently calculated using ICE Risk Model 1 (IRM 1). IRM 1 comprises the following components:

Clear Europe Risk Management

ICE Clear Europe will start migrating to ICE Risk Model 2 (IRM 2) in 2025. For information about ICE’s new risk model, please see here.

Total Initial Margin information is available in the Financial Resources section of ICE Clear Europe’s Regulation webpage.

Changes to margin parameters are notified via Circulars to the market participants.

F&O Margin Rates

IRM 1 Margins

Additional Margin Requirements

Clearing Members may be required to provide additional margin for risks not covered by the Initial Margin, as detailed below:

  • Concentration Risk - An amount calibrated to cover risk on portfolios/positions which are significant relative to market liquidity and may incur additional cost to liquidate.
  • Wrong-Way Risk - An amount calibrated to cover risk where the portfolio of instruments may be directly related to the deterioration of the credit quality of the Clearing Member holding the portfolio.
  • Credit Risk - An amount to cover risk where an assessment of the counterparty creditworthiness of the Clearing Member supports collateralisation beyond the Initial Margin calibration.
  • Delivery Risk - Payment or settlement risks that may arise during the delivery process of physically settled products.

Margin may also be collected for additional risks not captured in the above categories in accordance with the Clearing Rules and applicable regulations.

Intraday Margin

ICEU calculates both Initial Margin and Variation Margin on a near real-time basis intraday. ICEU sets intraday exposure limits for the Intraday Initial Margin + Intraday Variation Margin, i.e. the Intraday Margin. Exposure limits are based on the maximum difference between the Intraday Margin and total haircut value of collateral for an account, i.e. the Intraday Shortfall.

In particular, intraday exposure limits are set at the:

  • Individual margin account level, as a percentage of the total haircut value of collateral, where the percentage depends on whether the account is margined on a gross or net basis.
  • Clearing Member level, based on the aggregate Intraday Shortfall of all of its accounts, and assessed against ICE Clear Europe’s contribution to the default waterfall, the total haircut value of loss-making accounts, the Clearing Member’s capital, and its pre-funded requirements.

Margin Calls

An Intraday Margin call will be made if either the individual account limit and one Clearing Member Limit are in breach; or if a set of Clearing Member Limits are in breach.

The Intraday Margin call window is from 07:30-20:00 London Time on business days.

All Intraday Margin calls are subject to a minimum materiality threshold of USD 1 million (per account).

Please see the Finance Procedures for further details on the scheduling of margin calls.

Futures & Options Guaranty Fund

ICE Clear Europe has established a mutualised Guaranty Fund which is based on stress testing results, in compliance with the applicable regulations. The Futures & Options Guaranty Fund consists of two Segments: an Energy Segment and a Financials & Softs Segment. The Guaranty Fund 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 under extreme but plausible market conditions.

The contribution of each Clearing Member to the Futures & Options Guaranty Fund is recalculated periodically and is determined by each Clearing Member's relative share of intraday Initial Margin and uncollateralised stress exposures over the preceding two months. A minimum Clearing Member contribution of USD 1 million applies.

The adequacy of the Futures & Options Guaranty Fund is monitored on a daily basis by ICE Clear Europe and the level of both the Energy and Financials & Softs segments are reviewed by the appropriate risk committees regularly.

ICEU Risk Management F&O Initial Contribution

The order in which the Futures & Options Guaranty Fund assets are applied in the event of a Clearing Member default is as follows:

  1. The Defaulter’s Initial Margin, including any additional margin and excess collateral.
  2. The full amount the Defaulter has contributed to the Futures & Options Guaranty Fund. This includes both the Energy and Financials & Softs Segment contributions regardless of the product set in which the Defaulter’s losses originated.
  3. ICE’s Futures & Options Initial Contribution. ICE’s initial contribution to both the Energy and Financials & Softs Segments will be consumed prior to the application of any non-defaulting Clearing Member’s contributions.*
  4. ICE has put in place a default insurance policy, whereby the proceeds of any claim made under it may be applied to cover losses in accordance with Parts 9 and 11 of the Clearing Rules.
  5. Non-defaulting Members’ contributions and any pari passu contributions ICE may have made at the time of the default. Where the loss relates to the Financials & Softs contracts, the Clearing Member’s Guaranty Fund contributions to the Financials & Softs Segment will be exhausted prior to the application of the Clearing Member’s contributions to the Energy Segment, and vice-versa. Losses will be distributed as set out in Part 9 of the Clearing Rules.
  6. Powers of Assessment can be used by ICE Clear Europe in addition to the Futures & Options Guaranty Fund and are limited to a set number of the non-defaulting Clearing Members’ contributions to the Guaranty Fund immediately preceding an Event of Default, in accordance with Part 9 of the Clearing Rules. Where losses relate to Financials & Softs contracts, the assessment contributions relating to the Financials & Softs Segment will be applied and exhausted prior to assessment contributions relating to the Energy Segment, and vice-versa.

* The combined Futures & Options Guaranty Fund requirement and ICE’s Futures & Options Initial Contribution is available in the Financial Resources section of ICE Clear Europe’s Regulation webpage.

Testing and Reviews

Procyclicality

In stressed or volatile market conditions, margin models could drive increases in margin requirements.

ICE Clear Europe assesses procyclicality using percentage changes in margin requirements over a 5-day (short-term) and 30-day (long-term) windows. Threshold conditions are applied to the 95th expected shortfall level of the percentage changes over a rolling 250-day window. The monitoring triggers an amber warning if the expected shortfall exceeds 50% and a red warning if it goes beyond 100% for the short-term metric. For the long-term metrics these thresholds are respectively 125% and 250%. These metrics are calculated for top benchmark products per market on a daily basis.

Back-testing

Initial margin requirements are back-tested against the price changes to ensure that requirements are performing within the stated risk parameters. Back-testing exercises are performed on a daily basis and cover a number of different parameters and portfolio configurations.

Further details of back-testing results of the 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 available under the Quantitative Disclosures section of ICE Clear Europe’s Regulation webpage.

Default Management

In case of an Event of Default being declared in relation to a Clearing Member, ICEU’s first Default Management objective is to take timely action to return the Clearing House, as soon as is reasonably practicable, to a matched book while aiming to contain both losses and liquidity pressures.

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 Part 9 of the Clearing 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 Clearing Member. For further information on porting of client positions, please see ICE Clear Europe’s Client Clearing webpage.

IRM 1 Margin Calculation Tool

ICE Risk Model is a margin calculation tool that supports the calculation of Initial 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. Users are reminded that they are required to accept the terms of the software 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.

Note this tool does not support ICE Risk Model 2 (IRM 2). For IRM 2 please use ICE Clearing Analytics (ICA). ICA is a web-based tool that supports both IRM 1 and IRM 2.

ICE Risk Model and User Guide

  • An overview of ICE Risk Model methodology, including assumptions and limitations
  • Downloading the ICE Risk Model software
  • Using the ICE Risk Model applications once downloaded
  • Using ICE Risk Model in batch mode
  • An overview of the ICE Risk Model margin reports
  • A description of Net Liquidating Value (NLV) for premium paid up-front options

Technical Requirements

  • 64-bit operating system from Windows 7 or Windows Server 2008 onwards

Download v1.7.1.6

Release date 26 April, 2022

ICE Risk Model 1 (IRM 1) Array Files and Margin Rates

Download IRM 1 Array files for Energy
Download ICE Risk Model Array files for Financials & Soft Commodities
ICE Risk Model 1 (IRM 1) Margin Rates: Energy
Margin Rates: Financials & Soft Commodities

ICE Risk Model 2 (IRM 2) Files

Simulation Arrays