Risk
Management

Margins

Definition of Margin

Margins are defined as amounts required from Members or Clients, registered in the corresponding Margin Accounts, to cover the risk of default on the obligations undertaken by Members and Clients.

The Central Counterparty puts itself (in its proprietary account) between both counterparties of a trade, so it is necessary to cover the potential cost of a default of any of the counterparties. Among BME CLEARING functions is to calculate and require margins, and where applicable, to custody the collateral posted. 

Margins posted by Member or Clients in favour BME CLEARING, shall only be liable vis-à-vis BME CLEARING, and only for obligations resulting from such Trades vis-à-vis BME CLEARING, or obligations deriving from holding Member status of BME CLEARING.

How are posted?

Although legally margins are posted in the name of the account holder in BME CLEARING (or in the name of the Member on behalf of its Clients in accounts under a Principal to Principal model), operationally margins are posted through the Clearing Member.

Our two segregation models are further explained in “Client Asset Protection Under EMIR”, but basically in a Client Account under Agency model, the holder of the margins is the Client, while under a Principal to Principal model the holder of the margins would be the Member on its own name and on behalf of its Client.

Margins are called at Collateral Account level in BME CLEARING and shall cover the required Initial Margin reflected in the corresponding Margin Account.

In BME CLEARING, margins may be posted both in cash and securities:

  • In cash

BME CLEARING is connected to the TARGET2 – European Central Bank platform. Specifically, BME CLEARING holds its own account in TARGET2 – BCE.

All cash related concepts may be settled through direct credit or debit instructed by BME CLEARING to the TARGET2 to:

    • the TARGET2 own account of the Clearing Member, if the Clearing Member is the account holder
    • the TARGET2 account of a “Payment Agent” with which the Clearing Member has reached an agreement. The Clearing Member would use the account of the Payment Agent to perform all its cash settlements in BME CLEARING

BME CLEARING may establish alternative (and extraordinay) cash payment methods to TARGET2, for example in case of failure of TARGET2 platform, as Fund Trasfer Orders. 

  • In securities:
    • Via securities pledged in the CSDs IBERCLEAR, CLEARSTREAM BANKING (LUXEMBOURG) S.A. (henceforth CLEARSTREAM) or EUROCLEAR BANK SA/NV (henceforth EUROCLEAR)
    • Via transfer of ownership, by transfer of securities done by the Clearing Member to BME CLEARING’s securities account in IBERCLEAR, CLEARSTREAM or in EUROCLEAR

Although margins could be posted in securities, a minimum level of cash margins is established at Clearing Member level. Obviously, if margins were to be used, it would always be better and quicker to have them in cash rather than in securities.

At least, the total amount of Default Fund contributions required by BME CLEARING to each Clearing Member, in all segments, must be posted in cash (in Euro), so the that the CCP ensures a minimum cash margin posted.

Additionally, at a CCP level, BME CLEARING will also assess that, as a minimum, 30% of the total amount of margins required by the CCP in respect of all concepts and in all Segments has been posted in cash, in Euros.

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 Segments, will be given five business days to recalibrate their collateral to attain this threshold.

Where are these margins kept? The security of ECB + CSDs

When margins are posted in favour of BME CLEARING, is important to remark where are these margins posted.

If are cash margins, BME CLEARING does not hold any money in commercial banks. Meaning, all cash money posted is held in an account of BME CLEARING in TARGET2 –European Central Bank.

That means that cash margins are kept without depositary risk and are totally segregated in an account in the European Central Bank, with the security that this means.

In case of securities, both via pledge or via transfer of ownership, the posting is made in a securities account of BME CLEARING in IBERCLEAR, CLEARSTREAM or EUROCLEAR.

 
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