Concentration Risk

A portfolio is concentrated if it has a position with an exposure above a certain level, therefore with a higher concentration risk in that position.

The same effect of concentration will arise if the collateral posted in securities to cover the required margin also is concentrated in certain securities. There would be concentration risk in the collateral posted.

The main purpose of BME CLEARING is to eliminate the counterparty risk and to ensure the transactions are completed successfully.

If any counterparty defaults, BME CLEARING will try first to close its positions and will try to transfer the positions of its clients to another Member, being able to execute, in whole or in part, the collateral posted in securities.

If the position or the collateral is concentrated, the process is more complicated. Is more complicated to unwind a large position.

In order to prevent this concentration risk, regarding the Collateral posted, BME CLEARING will apply Concentration Limits further explained in the section “Accepted Collateral” inside “Collateral Management”.

Whenever any Position Account registers a position which can be considered as a “large position” (which may be more difficult to close-out), BME CLEARING will increase the Initial Margin intervals for that position on a specified percentage. This is fully detailed in the Circular “Additional Margins for Large Positions” of each Segment.

In order to determine whether it is or not a large position, the Average Daily Volume will be used.