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Liquidity Risk Control

LIQUIDITY RISK CONTROL

BME CLEARING must have a minimum of 30% of all collateral posted in the form of cash

If this amount falls below 30%, Clearing Members whose cash collateral is not at least 30% in cash (Euro) in respect to their margins required by BME CLEARING for all concepts and in all Contract Groups, will be given five business days to recalibrate their collateral to attain this threshold.

A liquid financial resources control is performed daily, both during the day and at the end of the trading session. As the CCP's Equity is stable, only those margins posted in cash will give rise to any daily deviations

Following EMIR Regulation, Article 44 of Regulation (EU) 648/2012, on a daily basis BME CLEARING quantifies both intra-day and at the end-of-day the status of its liquid resources and, consequently its potential liquidity needs under various scenarios which include: (a) normal circumstances; and (b) stressed circumstances. 

(a)   Normal Market circumstances 

BME CLEARING estimates in real time the liquidity needs for the upcoming Multilateral TARGET 2 – Banco de España Settlement. 

For every Clearing Member the “liquidity need” for the next multilateral settlement is calculated.

Sovereign Debt accepted in the Posting of Margins Circulars of the CCP reduces the liquidity need.

According to Article 44 of Regulation (EU) 648/2012, despite of analyzing each Clearing Member separately, BME CLEARING assesses the impact of the default of the two Clearing Members with the highest liquidity needs.

The resulting liquidity need will be compared to the liquidity needs prefunded by BME CLEARING: 25 million euros that will compound BME CLEARING equity plus the 50% of posted cash margins by the rest of Members.

The resulting liquidity needs will be compared to a portion of the pre-funded BME CLEARING’s liquid resources: €25 million of BME CLEARING‘s Equity plus 50% of the cash collateral posted by the other Members.

If the CCP’s allocated resources would not cover the liquidity needs, an apportionment among the affected Members would be performed in order to see which part of the liquidity shortfall corresponds to each of them.

Members in such situation having equities posted as collateral with the CCP must immediately replace them by cash in Euro until the liquidity shortfall is over.

In case the end-of-day calculation shows that there is a positive final liquidity need for BME CLEARING due to either the two largest Clearing Members or just by one single Clearing Member separately, the part corresponding to the debit due to an increase of the required initial margin will be separated from that of the variation margin and premiums debit, provided that such measure ensures the multilateral settlement.

For those Clearing Members belonging to a same company group, their amounts of risk will be added together in order to measure the global liquidity risk of the CCP.

The above calculations will also be done at a Payment Agent level.

(b)   Stress Test Situation 

At the end of each trading session, BME CLEARING calculates the potential liquidity shortfall arising from the default of the two Clearing Members to which the CCP has the greatest exposure under Stress Test conditions and according to Article 44.1 of Regulation (EU) 648/2012.

For each Group of Contracts and for all the accounts cleared by a Clearing Member, the registered loss in value of the position under Stress Test circumstances for each scenario is calculated, according to Appendix I of the Default Fund Stress Test Circular. Losses are added by scenario. 

The worst case scenario is selected for each Group of Contracts, which corresponds to the one generating the highest loss.

Losses are added for all Contract Groups, giving as a result the Stress Test Debit Forecast.

The CCP calculates the “liquidity need” for every Clearing Member if, once released the multilateral settlement for the upcoming session, a stress test situation occurs.

The two Clearing Members that match one of the following criteria are chosen:

  1. The two Members with the highest debits under a stress test situation
  2. The two Members with the largest liquidity shortfall under a stress test situation. 

Under each criterion, the two Members’ liquidity shortfall will be compared to BME CLEARING’s pre-funded liquidity resources, which are €25 million plus the 50% of posted cash margins by the rest of the Members. If such liquid resources do not cover the liquidity needs, an apportionment among the affected Members shall be performed.

If some of these Members with liquidity needs unresolved have also equities posted as collateral with the CCP must replace them, by cash in Euro or sovereign debt, until the liquidity shortfall is over and within the next business day at the most.

As well as is stated in normal market circumstances, for those Clearing Members belonging to a same company group, their amounts of risk will be added together in order to measure the global liquidity risk of the CCP

 

 

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