Margins are requested by BME Clearing to ensure that the member is able to cover the settlements resulting from its trading activity at MEFF.

The margins to be posted by members and the risk calculations are determined for each segment. BME Clearing currently has five segments: the financial derivatives segment, equity, Repos, IRS and the energy segment.

Margins are managed under the “cross default” principle for members and the "no contamination" principle between segments.

This means that if a member defaults, in accordance with the “cross default” principle, it does so in all segments and the cost of the overall close must be covered by the member's individual guarantees, regardless the segment the default corresponds to.

Nevertheless, BME Clearing's specific margins and those posted collectively by the members for each segment follow the principle of "no contamination", meaning that if a clearing member is only active in the financial segment, it will not be exposed to potential losses as a result of the default of another clearing member in the energy segment and vice versa.

Types of margins

There are four basic components to the system of margins: initial margins, individual member's margins, BME Clearing marginsand a contribution to the default fund by the members.

Initial Margin

This is calculated for each account. The initial margin is posted in BME Clearing for all the open accounts in the central register. Regarding the client’s accounts in the second-tier register, the clients post the required margin in the Member. This margin covers the risk of each position under extreme but plausible conditions.

How to calculate the initial margin:

There are 3 margin classes:

  • Electricity, close to expiry.
  • Electricity, Short term base/peak (daily contracts and weekly and monthly theoretical cascade)
    • base
    • peak
  • Electricity, Rest of contracts base/peak (annual, quarterly and monthly contracts)
    • base
    • peak

There are various intervals in each margin class. Generally, the closer the expiry is, the greater the initial margin due to upper price volatility will be.

Theoretical cascade

Contracts where the delivery period lies totally or partially within the delivery period of another contract, with opposing sign positions, will be given offsetting priority, and the spread margin will be 0.

On the basis of the theoretical cascade process defined in the BME Clearing´s Rule Book, Theoretical cascade or any instruction substituting this, and in accordance with the rules defined in this Instruction, contracts are broken down into smaller parts (contracts with a shorter delivery period), and the identical contracts arising from this process with an opposing sign are offset, and the result is the offset position (delta purchased or delta sold) with a spread margin of 0.

Unlike the actual cascade, the theoretical cascade will be carried out for contracts in delivery and for contracts moving to front:

The theoretical cascade is calculated in the same way as for electricity.

List of contracts:

  • Monthly contracts will be broken down into day-ahead contracts.
  • Weekly contracts will be broken down into day-ahead contracts.

Intra-Commodity Spread

Different opposing contracts within a margin class are offset: for example, a long March contract with a short quarterly contract. To this end, the offset hours are calculated and the initial margin offset within the same margin class is applied to them, and the non-offset hours are calculated and the full margin is applied to them.

The intra-commodity spread within the same margin class, which is applied within each margin class, is the maximum between a fixed amount and the price difference of the contracts.

If there is more than one pair of contracts to be offset, priority is given to the pair of contracts with the same expiry date. In this case, the contract types with the higher multiplier are first offset. If there are contracts with a different expiry date, priority is given to the expiry pair having the closest expiry dates to each other, since they are the most correlated. If there is more than one pair and the distance between contracts of the same pair is the same between pairs, the expiry date, which is furthest, is first dealt.

Inter-Commodity Spread

There is also offset within different margin classes. The margin credit or discount is calculated taking the minimum fluctuation of each group as a reference.

A monthly review is conducted of price volatilities, and parameters are established for the margin calculation. They are published in the Circular "Parameters to use for the calculation of the initial margin".

Cash Adjustment

Contracts, which do not have a daily variation margin (swaps), are also subject to mark to market adjustment margin. In other words, these contracts have not had a daily variation margin but the market value of these contracts has varied with regard to the price that was originally contracted. For this reason, this variation margin is not settled in cash but is taken into account, to a greater or lesser extent, when calculating the initial margin

Individual Fund

This is only requested to clearing members. It consists of various items depending on the type of member and its solvency, consumption of limit risk and extraordinary situations arising (in this case the margin is called extraordinary margin). This type of margin only covers obligations from the clearing member, and can never be used to cover another member’s default. 

Default Fund

Each clearing member must contribute with a fixed amount to the energy contract group default fund: this will depend on the type of Member. The amount is yet to be determined.

This is a joint liability guarantee. It will be used only to cover the default of another clearing member in case all other margins from the clearing member plus the BME Clearing´s margins are not sufficient to cover the obligation.

On a monthly basis, BME Clearing will do a stress test, comparing the risk in stress test situations for each clearing member with the energy contract group default fund. In accordance with the corresponding Circular an additional individual margin will be requested to the Clearing Member, if necessary.

BME Clearing Margin

Margin posted by the Clearing House, greater or equal to the biggest contribution to the default fund by any clearing member in the energy contract group. The amount is set by Circular. 

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