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Collateral Valuation

COLLATERAL VALUATION

BME CLEARING measures in real time the credit quality, market liquidity and price volatility of each asset accepted as collateral.

BME CLEARING system updates in near to real time, every 15 minutes, the prices of assets accepted as collateral: last price for equities provided by SIBE, bid-ask average provided by SENAF for Spanish sovereign debt, and bid-ask average calculated based on bid and ask price data per issue provided by Reuters or Bloomberg for non-Spanish sovereign debt.

HAIRCUTS

BME CLEARING procedures for applying haircuts to collateral are as follows:

Fixed-income securities

The haircut applied is the result of multiplying the maximum modified duration for each residual maturity by a change in the IRR of sovereign debt at stress test levels, calculated as the maximum 2-day fluctuation in the IRR for that residual maturity over the past 10 years.

There is also a minimum haircut, equal to that of the ECB for the related maturity term and the margin intervals for borrower positions in that term within the Fixed Income Securities Contract Group, especially for Spanish sovereign debt.

In exceptional circumstances, BME CLEARING may decide to increase any of the haircuts in order to align them with those applied by other European Clearing Houses to sovereign debt within the same term or maturity in accordance with the Circular on Valuation of Securities posted as Margins.

Equity securities

To address stress conditions, the minimum haircut is 25%, well above the margin intervals on shares and the maximum 2-day fluctuation registered over the past 10 years of shares included in the IBEX-35. If the margin interval of a given share exceeds 25%, the haircut will be the same as the margin interval.

Haircuts are calculated for the same close-out period as margin intervals – 2 days, the determination of which is explained in the response to Article 41 – and with reference to stress test levels so as to limit pro-cyclical effects. 

Haircuts will be determined tanking into consideration price return volatility or interest rate volatility, as appropriate, and: 

  • The type of asset and level of credit risk associated with the financial instrument: BME CLEARING monitors on an ongoing basis the credit ratings of the issuers of assets accepted as collateral, the risk premium of sovereign debt accepted as collateral, and potential turbulences generated by corporate events and published price-sensitive information which might in some way affect the prices of the securities.
     
  • The maturity of the asset: haircuts change (decrease) when the securities move from one residual maturity to another as they approach their maturity date.
     
  • The liquidity of the underlying market, including bid/ask spreads, increasing the haircut accordingly if liquidity diminishes.
     
  • The foreign exchange risk, adding an additional haircut to allow for currency exchange rate fluctuations for UK and EEUU collateral accepted.
     
  • Wrong-way risk: haircuts applied by BME CLEARING are determined at stress test levels and increased if the risk premium rises immediately upon or after default by a participant, so as to mitigate wrong-way risk.

 

 

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