ICE Clear Netherlands operates ICNL's Risk Committee, comprising both Clearing Member and Client representatives as well as an Independent Board member. In their advisory role to the Board of ICE Clear Netherlands, the ICNL Risk Committee plays a key role in ensuring that the Clearing House maintains and implements procedures, processes and controls that are designed to:
The ICNL Risk Committee currently comprises of one Independent, Non-Executive, Board member (Chair), one Clearing Member participant and one Client participant.
1. Clearing Member 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 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 Margin requirement increases breach predefined threshold.
4. Original Margin Requirement
Clearing Members are required to post Original Margin in respect of open positions. Original 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. Guaranty Fund
Should a defaulting Clearing Member's Original Margin and Guaranty Fund contribution be insufficient to cover the cost of closing-out their positions in extreme market conditions, ICE Clear Netherlands operates a Guaranty Fund to cope with losses in excess of Original Margin.
7. Powers of Assessment
In extreme situations, where a Clearing Member default exhausts the Guaranty Fund, the remaining Clearing Members can be called for additional funds under Powers of Assessment. Powers of Assessment is limited to a set multiple of a Clearing Member's current Guaranty Fund contribution.
8. CCP Recovery Mechanism
Rules have been developed in order to deal with the exhaustion of all Clearing House financial resources to ensure it remains solvent and can continue to operate.
|Market||Margin Model||Confidence Interval||Look-Back Period||Margin Period of Risk|
|Financials & Softs||Parametric VaR||99%||60, 250* and 525 days||2-day|
|Financials & Softs||Historical Simulation||99%||100, 250 and 525 days||2-day|
* Incorporating Anti-Procyclicality measures
All risk models used by ICE Clear Netherlands 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 Netherlands Risk Department in accordance with policies agreed by the ICNL Risk Committee.
Original Margin is a returnable deposit based on a Clearing Member's open positions. It is calibrated to be sufficient to cover the expected cost of closing out a defaulting Clearing 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, Original Margin requirement is calculated using the ICE Risk Model. The ICE Risk Model comprises the following components:
In order to ensure that ICE Clear Netherlands has sufficient capital, ICE Clear Netherlands has established a mutualised guaranty fund which is based on stress testing results as required by EMIR Articles 42 and 43. 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 to, under extreme but plausible scenarios.
The contribution of each Clearing Member to the Guaranty Fund is recalculated on a monthly basis and determined by each Clearing Member's relative share of intraday Original Margin, relative share of uncollateralised stress exposures and relative share of the average risk-weighted volume transacted over the preceding two months. ICE Clear Netherlands applies minimum Guaranty Fund Contribution of EUR 1.5 million, respectively EUR 3 million for Clearing Members which provide clearing services to its Eligible Persons pursuant to the Clearing Membership Agreement to which such Clearing Member is a party.
In addition, ICE provides an amount of its own funds, the Clearing House Initial Contribution, which sits in front of the Clearing Members' obligations. Powers of Assessment can be used by ICE Clear Netherlands in addition to the Guaranty Fund and are limited to twice the non-defaulting Clearing Members' Guaranty Fund requirements immediately preceding an event of default in respect of a single Clearing Member default (see Rule 909(b) (Powers of Assessment: F&O).
The adequacy of the Guaranty Fund is monitored on a daily basis by ICE Clear Netherlands' Risk Department and is reviewed by the ICNL Risk Committee.
1. Defaulting Clearing Member’s Original Margin
2. Defaulting Clearing Member’s Guaranty Fund Contribution
3. ICE’s Initial Contribution (EUR 1,875mn)
4. Non-Defaulting Clearing Members’ Guaranty Fund Contributions
5. Powers of Assessment
(2x Guaranty Fund Contributions for a single Clearing Member default)
The Guaranty Fund — Application of Guaranty Fund assets in the event of a default
The order in which the Guaranty Fund assets are applied in the event of a Clearing Member default is as follows:
Portfolio level Original Margin will be back-tested against the actual two-day price changes to ensure that Original Margin requirements are performing within the stated risk parameters. Back testing results will also be presented to the ICNL Risk Committee. Further details of back testing results of Clearing Member portfolios will be contained within ICE Clear Netherlands CPMI-IOSCO Public Quantitative Disclosure Standards for CCPs.
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 Netherlands 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 where it is able to identify individual client positions and it does not compromise its duty to contain the Defaulter’s losses, 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 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.
ICNL assesses procyclicality using percentage changes in Original 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 Netherlands, based upon the ICE Risk Model specification.
All market participants and users, as well as others with an interest in understanding how ICE Clear Netherlands margins its products, are welcome to download and use the ICE Risk Model software. Users are not charged for use or download of the software, but there are limitations to using the software in commercial applications.