## _cr11271 - Executive Summary ## Source details **Canonical URL:** [_cr11271 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11271.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11271.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11271.pdf.json) --- ### Overview and context - Assessment undertaken in the context of the IMF’s Financial Sector Assessment Program (FSAP) Update for Germany, January 17-February 3, 2011. - Assessor: Elias Kazarian of the IMF’s Monetary and Capital Markets Department. - Assessment methodology: CPSS/IOSCO Recommendations for Central Counterparties (RCCPs); Eurex conducted a comprehensive self-assessment following the RCCPs (published 2004). - Information sources: Eurex management and staff, BaFin, Deutsche Bundesbank, and major participants; supplementary materials provided by German authorities and Eurex. ### Institutional and market structure — key points - Eurex provides central counterparty (CCP) services for several stock exchanges and over-the-counter (OTC) transactions; offers fully automated, electronic, straight-through post-trade services for cash instruments and derivatives (equities, bonds, repo, energy products). - Ownership: Eurex Clearing AG (Eurex) is a wholly owned subsidiary of Eurex Frankfurt AG, which in turn is jointly owned by Deutsche Börse AG and SIX Swiss Exchange. - Licensing and supervision: Eurex is licensed as a credit institution and is regulated and supervised by BaFin. Eurex is also subject to Bundesbank oversight. BaFin and Bundesbank statutory mandates are exercised under banking supervisory capacity (German Banking Act) with formal and extensive cooperation. ### Key statistics of Eurex, 2006–2010 (as reported) - Number of transactions (millions) - Equities: 73.48 109.98 129.15 94.23 96.45 - Debt instruments: 0.009 0.089 0.115 0.085 0.097 - Derivatives: 1,526.75 1,899.80 2,165.04 1,687.16 1,896.92 - Total: 1,600.24 2,009.87 2,294.31 1,781.48 1,993.47 - Value of transactions (EUR billions): 108,039.4 127,156.4 116,757.3 80,525.9 99,838.9 - Average daily value of transactions (EUR billions): 423.7 504.6 459.7 317.0 390.0 - Peak value of transactions (EUR billions): 945.2 1,287.1 1,110.3 802.3 841.1 - Number of clearing members: 119 118 109 117 128 - Foreign clearing members: 66 66 60 65 75 - Clearing fund (EUR millions): 752 895 1,392 1,259 912 ### Main findings — summary by RCCP topic - Legal framework (Rec. 1) - Eurex observes the CPSS-IOSCO RCCPs. - Legal basis: sound, transparent, enforceable; supports enforcement of transactions, netting procedures, protection of customer assets, and delivery versus payment (DVP) with finality. - Adequate rules for participant default, effective use of collateral, enforceability of rules. - Implementation of settlement finality and collateral directives provides solid protection in Germany and other EEA countries. - Note: legal uncertainty for client’s assets portability exists; addressed by legislative proposals. - Recommendation: relevant authorities should require Eurex to prior consult the authorities for any material changes to its clearing conditions. - Participation requirements (Rec. 2) - Access and exit criteria well defined and publicly disclosed. - Participant requirements for financial resources and operational reliability defined by membership category and service types. - All members must be regulated entities and must have a minimum capital requirement. - Eurex reviews external credit ratings and assesses operational capability of applicants. - Financial risk management (Rec. 3–6) - Comprehensive risk management framework at Eurex and DBG (Deutsche Börse Group) levels. - Real-time monitoring of participant exposure and intraday margin calls. - Risk mitigation tools: high capital requirements, margin requirements, clearing fund contributions. - Margins verified via back testing and stress testing; Eurex can require additional financial resources/margins for unusual trading activity. - Stress testing policies, assumptions, scenarios discussed with market participants and regulator; mitigating actions available on Eurex website. - Default procedures clearly stated and published. - Accepted collateral: cash, government, and covered bonds; emphasis on highly liquid collateral. - Custody and investment risks (Rec. 7) - Securities and cash held in national and international central securities depositories (CSDs). - Cash collateral placed according to Eurex Treasury and Credit Policy; standards for approving market counterparts and treasury limits. - Some non-euro currencies deposited in private banks, generally via repos. - USD investments executed through repo transactions with triparty agents Bank of New York Mellon and JP Morgan Chase. - Operational risk (Rec. 8) - Business continuity arrangements developed at DBG level covering sites, networks, control centers, and business sites. - Group Risk Management (GRM) defines objectives and monitors the overall DBG risk profile, including Business Continuity Management (BCM) policy. - Contingency plans and backup facilities regularly tested with market participants and relevant parties. - Money settlements (Rec. 9) - Uses both central bank money and private settlement banks for cash processing (margins and settlement). - Central bank money used for EUR and CHF and for settlement in euro area and Swiss markets. - Private settlement banks (and two ICSDs, Clearstream Banking and Euroclear Bank) used for GBP, USD, and global Eurobond settlement. - Physical deliveries (Rec. 10) - Deliveries carried out in book-entry form (immobilized or dematerialized); delivery obligations fulfilled via book transfer. - Eurex Clearing Conditions define responsibilities to deliver and receive securities. - Delivery process supported by DVP and receive versus payment (DvP/RvP) settlement eliminating principal risk; simultaneous booking provided by chosen CSD functionality. - Risks in links between CCPs (Rec. 11) - Eurex has one link with European Commodity Clearing AG (ECC) in Germany. - Contractual relation extended by Eurex as counterpart of ECC and the clearing member. - Specific rules and risk methodology for linked CCPs to minimize risk that obligations cannot be performed timely. - Both Eurex and ECC regulated and supervised by BaFin and designated payment systems under Article 10 of Settlement Finality Directive 98/26/EC. - Efficiency (Rec. 12) - Regular reviews of pricing, service, and capacity levels; periodic benchmarking with comparable CCPs. - Provides rebates for participants exceeding specified transaction-volume thresholds. - Ongoing profit and loss analysis provided to Eurex Executive Board. - Pricing: Eurex reports no cross-subsidization between clearing activities and other DBG services, but applies higher prices to clear OTC transactions than exchange-traded transactions; potential that non-traded clearing fees may be subsidizing traded transaction clearing costs. - Governance (Rec. 13) - Governance arrangements and board composition clear and publicly available. - Supervisory board includes representatives from Deutsche Börse, market participants, and regulators (regulators as observers). - Recommendation: Eurex should increase the number of independent board members to account for interests of small and medium-sized clearing members. - Recommendation: BaFin may explore defining explicit public interest objectives for Eurex. - Transparency (Rec. 14) - Rules, procedures, and policies disclosed to clearing members and market participants on the Eurex website. - Published items include governance issues, participant rights and obligations, risk-handling procedures, and fees. - Eurex completed a comprehensive self-assessment following the RCCPs methodology. - Regulation and oversight (Rec. 15) - Eurex is regulated and supervised by multiple authorities: BaFin (primary in Germany, cooperating with Deutsche Bundesbank), FINMA/SNB (Switzerland), designated ROCH by the UK FSA, and recognized as a Multilateral Clearing Organization by the CFTC and overseen by the SEC in the United States. - Eurex licensed as a credit institution and subject to the banking act; does not have a specific regime for CCP activities. - BaFin has not defined a specific regulatory regime that covers Eurex CCP business but has used overall risk management provisions to require Eurex to meet CPSS/IOSCO recommendations. - The Bundesbank does not have the legal basis to oversee Eurex as a financial market infrastructure. - Authorities provisionally evaluated draft CPSS/IOSCO Principles (expected to be finalized by end-2011); concluded impact on Eurex depends on final outcomes, but expected not to be significant and Eurex should be able to adjust as needed. - Recommended actions for BaFin and Bundesbank included recruitment of additional staff and providing Bundesbank with legal mandate to oversee Eurex as a CCP. ### Stress testing, financial resources, liquidity, and availability - Stress testing procedures and objectives - Daily stress testing with extreme but plausible market conditions; can run intraday when needed. - Coverage objective: obligations backed in at least 999 out of 1,000 events with margin and financial resources. - Scenarios: worst historical observations per product group, largest moves per product group, and executive management’s expectations of worst potential future price movements. - Stress test analysis shows current resources sufficient to cover simultaneous defaults of the five clearing members with the largest exposure. - Stress testing policy and scenarios available to regulator; utilization of financial resources presented anonymously quarterly to Eurex Risk Committee. - As of December 2010, Eurex financial resources - EUR 1.5 billion in clearing Fund after taking into account haircuts. - EUR 44 billion in collaterals held by Eurex. - EUR 5.5 million in reserve fund. - EUR 110 million in equity capital. - Collateral availability and replenishment - Collaterals held on pledged accounts at eligible CSDs in the EEA, immediately accessible. - Eurex may request non-defaulting clearing members to replenish the clearing fund if resources insufficient. - Eurex has access to intraday credit facility of the Eurosystem; cash margins largely placed overnight and classified as immediately available. ### Default procedures, enforceability, and portability - Default powers and sequence - Default circumstances clearly stated; Eurex can control, manage, close positions, transfer customer positions to another clearing member, liquidate defaulting member’s assets and collateral. - Eurex accepts only proprietary assets pledged (no customer assets) due to German law requirements on effective pledges. - Default sequence: transfer positions to another clearing member; close out and settle open positions; auction process for CSD products; assignment of remaining positions pro rata to non-defaulting clearing members. - Legal enforceability and portability issues - Settlement Finality Directive and German insolvency law provide legal protection for enforceability within the EEA. - German insolvency law does not fully support portability of customer positions and collateral—close-out netting may transform customer positions into a single payment obligation, preventing transfer. - Parliamentary amendment under discussion to allow CCP transfer of customer positions and collateral; EMIR draft regulation would include provisions to provide legal basis for transfer. - Internal procedures and testing - Detailed internal operational business procedures for clearing member default; procedures reviewed at least yearly; at least once a year a default scenario is tested in simulation environments. - Default procedures published in Eurex conditions and on Eurex website. ### Custody, investment policy, concentration limits - Custody and monitoring - Securities pledged are deposited with CSDs and international CSDs supervised by authorities; participant securities held in dedicated accounts in participant name but pledged to Eurex; withdrawal only with Eurex consent. - Settlement accounts: ICSDs (Euroclear, Clearstream Banking Luxembourg) and CSDs (Clearstream Banking Frankfurt and Euroclear UK & Ireland). - Custodian monitoring: daily external rating monitoring via Bloomberg; annual credit reviews; assessments against CPSS/IOSCO recommendation 12. - Investment policy and counterparties - Eurex Treasury and Credit Policy: investments preferably in bilateral or triparty repo; triparty agents: Clearstream Banking S.A., Bank of New York Mellon, JP Morgan Chase. - Eligibility for repo collateral: minimum rating AA- / Aa3; since financial crisis only sovereign bonds eligible. - Eligible counterparts require external rating >= ‘A-’ (Fitch/S&P) and ‘A3’ (Moody’s), lowest rating applies; exceptions require Eurex Executive Board approval. - Restriction: Eurex not allowed to invest its own capital or margin in securities of itself or its parent company. - Concentration limits - Investments conducted under counterparty limits approved by Credit Section; Eurex concentration risk limited by Large Exposure Rules of the Capital Requirements Directive (Eurex licensed as a bank). ### Operational risk management, business continuity, capacity and availability - Operational risk governance and outsourcing - Eurex risk management governed by Eurex units and Deutsche Börse Group (GRM); GRM monitors group-wide risk profile. - IT outsourcing: Eurex IT outsourced to Deutsche Börse Systems AG; some functions hosted by SIX Group; contracts monitored per German Banking Act and BaFin MaRisk. - Business continuity and IT resilience - DBG Business Continuity Management (BCM) policy defines roles and principles. - General Recovery Time Objective (RTO): four hours. - IT architecture: two geographically separated IT processing sites; systems clustered and load balanced with continuous full data synchronization (real-time mirroring); redundancy across data centers with automatic failover. - BCPs reviewed six-monthly and tested at least annually; annual simulation exercises with market participants. - Capacity and performance - Capacity plans for key systems are in place and regularly monitored and reported to management. - Stress tests in respect to loaded trades are executed in a performance test environment. - Eurex can process 80 percent above peak processing volume. - Availability/internal metric referenced: 99.95 percent. - Controls and audits - Operational reliability reviewed by senior management; processes audited periodically based on risk rating. - Internal Audit submits reports to executive board; external audit of BCP carried out yearly. ### Money settlement arrangements and settlement bank risk (Recommendation 9) - Use of central bank money and private settlement banks - Central bank money via TARGET-2 and Swiss SIX payment systems used for EUR and CHF. - For GBP and USD cash payments, and Eurobond settlements, private settlement banks including the ICSDs Clearstream Banking and Euroclear Bank are used. - Barclays Bank used to settle GBP-denominated transactions; Citibank and JPMorgan used for USD transactions. - Intra-day confirmations of credit provided by settlement agents in all currencies. - Assessment and policy observations - Observed: Eurex relies on a few banks for FX-denominated settlements, exposing it to settlement risk. - Eurex applied for an account with the Federal Reserve Bank of New York in 2008 but no positive access decision has been taken since then. - Recommendation: Eurex may consider settling in central bank money and/or increasing the number of settlement agent banks for FX currencies. ### Cost-effectiveness, pricing, member consultation (Recommendation 12) - Pricing and cost control - Budgets reviewed and approved by management; FAC issues monthly financial reports following IFRS commercial format. - Eurex charges 30 cents to clear a traded transaction and 45 cents to clear a non-traded transaction. - Eurex provides rebates to participants when transaction volumes exceed specified thresholds. - Observation: Eurex applies higher prices to clear OTC transactions compared to exchange-traded transactions; policy aims to promote migration of OTC transactions to exchanges but preferential treatment for traded transactions cannot be excluded. - Recommendation: Eurex should make public its differentiated price policy regarding clearing non-traded transactions. ### Governance, disclosure, and regulatory oversight (Recommendations 13–15) - Governance and board composition - Executive Board composed of six members. - Supervisory Board has 12 full members and 1 member from BaFin and Bundesbank each as observers. - Supervisory Board members elected for three-year terms. - Recommendation: increase the number of independent board members to represent small and medium-sized clearing members. - Disclosure and transparency - Eurex discloses rules, procedures, and policy on its website in German and English; risk methodologies and parameters are disclosed periodically. - Internal audits against IOSCO Recommendations performed in 2004, 2005, and 2008; the 2008 assessment was made available to the public. - Regulation and oversight issues and recommended actions - Observed: Eurex is regulated and supervised as a bank; no special regulatory regime covers Eurex CCP business. - Partly Observed: The Bundesbank does not have legal basis to oversee Eurex as a financial market infrastructure. - Recommended actions for BaFin and Bundesbank: - Provide Bundesbank with the legal mandate to oversee Eurex as a CCP and involve Bundesbank staff in onsite inspections. - BaFin should define and disclose its objectives and policies with regard to CCP activities. - BaFin should either issue a new regulatory regime dedicated to CCP activities or further develop specific CCP rules and requirements in the Banking Law. - BaFin should request Eurex to consult BaFin for any material changes of its clearing conditions. - BaFin and the Bundesbank should recruit additional staff to regulate and oversee clearing activities more effectively. ### Select exact numeric and governance facts cited - 99.95 percent. - Eurex can process 80 percent above peak processing volume. - Settlement bank rating thresholds: ‘A-’ (Fitch/Standard & Poor's) and ‘A3’ (Moody's). - Clearing fee examples: 30 cents (traded transaction), 45 cents (non-traded transaction). - Advisory committee market coverage: more than 80 percent of the traded volume market share in the respective type of product. - Executive Board composition: six members. - Supervisory Board composition: 12 full members, and 1 member from BaFin and Bundesbank each as observers. - Internal audit IOSCO reviews performed in 2004, 2005, and 2008. - BaFin staff for clearing and settlement oversight: six staff. - Bundesbank oversight staff: 11 staff (of which 5 oversee clearing and settlement activities). - Supervision Guideline date: 21st of February 2008. - Legal/designation references: Settlement Finality Directive 98/26/EC; Article 10 of the Settlement Finality Directive 98/26/EC; Article 25A (BaFin usage); Section 32 of the Banking Law; MaRisk; Pillar 3 of Basel II. *Source: _cr11271 - Executive Summary.* ### Executive Summary ...................................................................................................... ### _cr11271 - Executive Summary ### Overview and context - Assessment undertaken in the context of the IMF’s Financial Sector Assessment Program (FSAP) Update for Germany, January 17-February 3, 2011. - Assessor: Elias Kazarian of the IMF’s Monetary and Capital Markets Department. - Assessment methodology: CPSS/IOSCO Recommendations for Central Counterparties (RCCPs); Eurex conducted a comprehensive self-assessment following the RCCPs (published 2004). - Information sources: Eurex management and staff, BaFin, Deutsche Bundesbank, and major participants; supplementary materials provided by German authorities and Eurex. ### Institutional and market structure — key points - Eurex provides central counterparty (CCP) services for several stock exchanges and over-the-counter (OTC) transactions; offers fully automated, electronic, straight-through post-trade services for cash instruments and derivatives (equities, bonds, repo, energy products). - Ownership: Eurex Clearing AG (Eurex) is a wholly owned subsidiary of Eurex Frankfurt AG, which in turn is jointly owned by Deutsche Börse AG and SIX Swiss Exchange. - Licensing and supervision: Eurex is licensed as a credit institution and is regulated and supervised by BaFin. Eurex is also subject to Bundesbank oversight. BaFin and Bundesbank statutory mandates are exercised under banking supervisory capacity (German Banking Act) with formal and extensive cooperation. ### Key statistics of Eurex, 2006–2010 (as reported) - 1. Number of transactions (millions) - 1.1 Equities: 73.48 109.98 129.15 94.23 96.45 - 1.2 Debt instruments: 0.009 0.089 0.115 0.085 0.097 - 1.3 Derivatives: 1,526.75 1,899.80 2,165.04 1,687.16 1,896.92 - Total: 1,600.24 2,009.87 2,294.31 1,781.48 1,993.47 - 2. Value of transactions (EUR billions): 108,039.4 127,156.4 116,757.3 80,525.9 99,838.9 - 3. Average daily value of transactions (EUR billions): 423.7 504.6 459.7 317.0 390.0 - 4. Peak value of transactions (EUR billions): 945.2 1,287.1 1,110.3 802.3 841.1 - 5. Number of clearing members: 119 118 109 117 128 - 5.1 Foreign clearing members: 66 66 60 65 75 - 6. Clearing fund (EUR millions): 752 895 1,392 1,259 912 ### Main findings — summary by RCCP topic - Legal framework (Rec. 1) - Eurex observes the CPSS-IOSCO RCCPs. - Legal basis: sound, transparent, enforceable; supports enforcement of transactions, netting procedures, protection of customer assets, and delivery versus payment (DVP) with finality. - Adequate rules for participant default, effective use of collateral, enforceability of rules. - Implementation of settlement finality and collateral directives provides solid protection in Germany and other EEA countries. - Note: legal uncertainty for client’s assets portability exists; addressed by legislative proposals. - Participation requirements (Rec. 2) - Access and exit criteria well defined and publicly disclosed. - Participant requirements for financial resources and operational reliability defined by membership category and service types. - All members must be regulated entities and must have a minimum capital requirement. - Eurex reviews external credit ratings and assesses operational capability of applicants. - Financial risk management (Rec. 3–6) - Comprehensive risk management framework at Eurex and DBG (Deutsche Börse Group) levels. - Real-time monitoring of participant exposure and intraday margin calls. - Risk mitigation tools: high capital requirements, margin requirements, clearing fund contributions. - Margins verified via back testing and stress testing; Eurex can require additional financial resources/margins for unusual trading activity. - Stress testing policies, assumptions, scenarios discussed with market participants and regulator; mitigating actions available on Eurex website. - Default procedures clearly stated and published. - Accepted collateral: cash, government, and covered bonds; emphasis on highly liquid collateral. - Custody and investment risks (Rec. 7) - Securities and cash held in national and international central securities depositories (CSDs). - Cash collateral placed according to Eurex Treasury and Credit Policy; standards for approving market counterparts and treasury limits. - Some non-euro currencies deposited in private banks, generally via repos. - USD investments executed through repo transactions with triparty agents Bank of New York Mellon and JP Morgan Chase. - Operational risk (Rec. 8) - Business continuity arrangements developed at DBG level covering sites, networks, control centers, and business sites. - Group Risk Management (GRM) defines objectives and monitors the overall DBG risk profile, including Business Continuity Management (BCM) policy. - Contingency plans and backup facilities regularly tested with market participants and relevant parties. - Money settlements (Rec. 9) - Uses both central bank money and private settlement banks for cash processing (margins and settlement). - Central bank money used for EUR and CHF and for settlement in euro area and Swiss markets. - Private settlement banks (and two ICSDs, Clearstream Banking and Euroclear Bank) used for GBP, USD, and global Eurobond settlement. - Physical deliveries (Rec. 10) - Deliveries carried out in book-entry form (immobilized or dematerialized); delivery obligations fulfilled via book transfer. - Eurex Clearing Conditions define responsibilities to deliver and receive securities. - Delivery process supported by DVP and receive versus payment (DvP/RvP) settlement eliminating principal risk; simultaneous booking provided by chosen CSD functionality. - Risks in links between CCPs (Rec. 11) - Eurex has one link with European Commodity Clearing AG (ECC) in Germany. - Contractual relation extended by Eurex as counterpart of ECC and the clearing member. - Specific rules and risk methodology for linked CCPs to minimize risk that obligations cannot be performed timely. - Both Eurex and ECC regulated and supervised by BaFin and designated payment systems under Article 10 of Settlement Finality Directive 98/26/EC. - Efficiency (Rec. 12) - Regular reviews of pricing, service, and capacity levels; periodic benchmarking with comparable CCPs. - Provides rebates for participants exceeding specified transaction-volume thresholds. - Ongoing profit and loss analysis provided to Eurex Executive Board. - Pricing: Eurex reports no cross-subsidization between clearing activities and other DBG services, but applies higher prices to clear OTC transactions than exchange-traded transactions; potential that non-traded clearing fees may be subsidizing traded transaction clearing costs. - Governance (Rec. 13) - Governance arrangements and board composition clear and publicly available. - Supervisory board includes representatives from Deutsche Börse, market participants, and regulators (regulators as observers). - Transparency (Rec. 14) - Rules, procedures, and policies disclosed to clearing members and market participants on the Eurex website. - Published items include governance issues, participant rights and obligations, risk-handling procedures, and fees. - Eurex completed a comprehensive self-assessment following the RCCPs methodology. - Regulation and oversight (Rec. 15) - Eurex is regulated and supervised by multiple authorities: BaFin (primary in Germany, cooperating with Deutsche Bundesbank), FINMA/SNB (Switzerland), designated ROCH by the UK FSA, and recognized as a Multilateral Clearing Organization by the CFTC and overseen by the SEC in the United States. - Eurex licensed as a credit institution and subject to the banking act; does not have a specific regime for CCP activities. - BaFin has not defined a specific regulatory regime that covers Eurex CCP business but has used overall risk management provisions to require Eurex to meet CPSS/IOSCO recommendations. - The Bundesbank does not have the legal basis to oversee Eurex as a financial market infrastructure. - Authorities provisionally evaluated draft CPSS/IOSCO Principles (expected to be finalized by end-2011); concluded impact on Eurex depends on final outcomes, but expected not to be significant and Eurex should be able to adjust as needed. *Source: Executive Summary, Detailed assessment materials and key statistics contained in the assessed document.* ### chapter 1 no. 12) enabling Eurex clearing AG (hereafter “Eurex”) to perform its ### _cr11271 - chapter 1 no. 12) enabling Eurex clearing AG (hereafter “Eurex”) to perform its ### Legal framework, enforceability, and cross-border activity - Eurex is regulated as a credit institution and subject to the Banking Act; Section 32 of the Banking Act provides the legal basis for Eurex to act as a CCP. - Eurex’s license currently allows only the CCP function; provision of additional functions requires regulator approval. - Eurex operations are governed by a clearing agreement between Eurex and its participants and by Clearing Conditions (e.g., Chapter I, parts 7–9). - Timing of assumption of liability: Eurex becomes the legal counterparty at the time of confirmation of the selling and assumes locked-in trades at the level of the trading platform (Clearing Conditions, Chapter 1.2.1). - Netting arrangements: netting is based on set-off pursuant to Section 387 of the Civil Code and defined in the Clearing Conditions. - Protection of CCP interest in collateral: implemented via Directive 98/26/EC (Settlement Finality Directive) and Directive 2002/47/EC (Collateral Directive) – amended by Directive 2009/44/EC, transposed into German law (mainly Insolvency Code). - Finality of transfers: - Securities: finality achieved when securities are transferred in the CSD (Clearing Condition, Chapter 1.1.5). - EUR and CHF funds: finality at the time defined by central banks’ cash transfer systems—TARGET-2 and the Swiss payment system. - USD and GBP: Eurex uses private banks that provide intra-day confirmations of credit. - Enforceability: rules and regulations form the contract signed by participants; EU legislation provides legal protection in the EEA (Finality and Collateral Directives). - Clearing links: legal basis provided by Clearing Conditions (Chapter I, number 9.4); clearing link agreements contain specific default rules including close-out netting. - Cross-border: significant number of participants domiciled in other EEA states; Finality Directive harmonizes rights and obligations; no remote participants outside the EEA at present—legal opinion on conflict of law prepared if such applicants arise. All clearing members submit to German jurisdiction upon signing Eurex clearing agreement. ### Assessment and recommendation on legal changes - Assessment: Observed — banking law and other legislations provide a sound, transparent, and enforceable legal basis for each aspect of Eurex activities. - Comment/recommendation: Eurex can change its clearing conditions without prior consultation or approval by the relevant regulator (though in practice it consults). It is recommended that the relevant authorities should require Eurex to prior consult the authorities for any material changes to its clearing conditions to ensure higher legal safety, public interest consideration, and impartiality vis-à-vis participants. ### Participation requirements, admission, monitoring, suspension and access - Membership categories: General Clearing Member (GCM), Direct Clearing Member (DCM), Non-Clearing Member (NCM). All members must be regulated entities and meet minimum capital requirements (highest for GCM). Capital requirement depends on products (highest for repo and derivatives; lowest for equities). External credit ratings reviewed prior to approval. - Operational capability requirements: proof of technical and functional connection, appropriate technical equipment (back-office facilities), sufficiently qualified back office personnel; testing prior to membership activation (Clearing Conditions, Chapter I, number 2). - OTC derivatives default management: participants obliged to support default management; Market Committee (exclusively clearing members) involved; Committee should arrange auctions and pro-rata transfers; members required to participate in auctions and pro-rata transfers if required. Eurex monitors close of contract and transfers; may close a contract if not concluded within an adequate period. Pro rata transfer basis: net outstanding nominal in respective opposite transactions, valuation based on previous business day daily evaluation price plus/minus a spread. - Monitoring compliance: - Initial checks by Member Services & Admission Unit: minimum liable equity capital and fulfillment of minimum clearing fund requirement. - Liable equity capital monitored yearly via externally approved annual report figures. - Additional monitoring: (a) Continuous intraday and overnight monitoring of payment and margin obligations; (b) Monitoring of share prices and credit spreads where available. - Calibration: dynamic component for liable equity capital = 10 percent of a clearing member’s 30 days and 250 days average total margin requirement. Dynamic clearing Fund Component = 2 percent of a clearing member’s 30 days and 250 days average total margin requirement. Liable equity requirement and clearing fund requirement determined by the highest single amount of specified components. - Shortfall remedy: after end-of-quarter determination, weekly checks; clearing member has five days to fill shortfall; failure to do so triggers immediate cash debit via pre-authorized direct debit. - Suspension and termination: - Termination grounds include incorrect/incomplete information, violation of essential provisions, objection to amendment, measures under banking law or insolvency proceedings, or equivalent measures under domicile law. Eurex notifies in writing and Clearing Conditions continue to apply for closing out transactions. - Right to terminate if subject to special supervisory measures (“Moratorium”). - Suspension allowed when reasonable suspicion exists; suspension period should not exceed six months; Eurex may demand information during suspension. - Open and fair access: - Participation requirements are objective, publicly disclosed in Clearing Conditions and available on Eurex website; do not limit access on grounds other than risks. - Eurex reserves discretionary right to deny membership; denial can be challenged with the German antitrust authority (Kartellamt), not BaFin or Bundesbank. ### Measurement of exposures, risk models, intraday monitoring, and margining - Risk framework: comprehensive, reviewed regularly, aligned with industry benchmarks and international standards; covers admission capital, margining and collateral, intraday monitoring, and default procedures. Pre-trade risk services and real-time risk data services available. - Exposure measurement: - Two risk models: Risk Based Margining (RBM) for listed derivatives, equities, fixed income; Conditional Value at Risk (CVaR) with historical simulation for CDS. Calculations are event-driven as updates of position or pricing data are available. - RBM: continuous intraday calculation; automated intraday margin call triggered when risk threshold breached. - CDS exposure: measured at least once a day, can be intraday when new price or position data available; incorporation of price and position information in real time. - Risk mitigation tools: - High capital requirements for GCMs and DCMs; end-of-day margining, intraday margining, clearing fund, pre-margining for CDS (collateral required before acceptance of new transaction). - Intraday margin monitoring procedure for all listed OTC derivatives, equities, and fixed income allows intraday margin call at any time. - Eurex can demand additional financial resources/margin if unusual trading activity or stress testing indicate unexpected exposure. ### Margin models, parameters, collateral eligibility, and haircuts - Margin design objective: cover all financial obligations, occurred losses, and potential future losses for at least 99 percent of all cases over an appropriate liquidation time horizon. Models and validation referenced in Recommendations 3 and 5. - Time-to-liquidate assumptions: range from one to more than 20 days depending on product characteristics and position size; risk-reducing effects of position combinations considered. Consistency validated via daily back testing against real profit and losses over assumed longer horizons. CDS liquidity and liquidation horizons verified via DTCC central trade repository volume analysis. - Model validation: detailed risk model validation procedure with back testing and daily stress testing; parameters and assumptions validated daily, weekly, monthly, or quarterly depending on parameter type. - Intraday margin calls: - Eurex contractually may demand higher or supplementary margin at any time (Chapter III, number 3.2, paragraph 1 Clearing Conditions). Supplementary margin to be transferred immediately to TARGET2 account, SECB-Account, euroSIC Account, SIC Account of Eurex Clearing AG, or pledged securities account with Clearstream Banking AG or SegaIntersettle AG. - Automated intraday margin calls issued when temporary under-coverage of 10 percent of total margin requirement is breached (smaller threshold may apply depending on risk assessment). - Assets accepted as margins and related haircuts: - Accepted: highly liquid, high credit quality securities (bonds and equities) and cash (EUR, CHF, USD, GBP). Issuer cannot be the clearing member; admissible portion of bonds or free float of equities limited. EUR bond collateral must be eligible and of liquidity classes I–IV of ESCB; CHF bond collateral eligible as SNB repo; equity collateral must not exceed 30 percent of the margin requirement. - Collateral composition: on average around 15 percent cash (around 90 percent in EUR) and 85 percent securities (nearly 100 percent bonds). - Securities prices evaluated at least daily. Haircuts applied to securities and to non-EUR cash collaterals calculated on a confidence level of 99.9 percent. ### Stress testing, financial resources, liquidity, and availability - Stress testing: - Daily stress testing with extreme but plausible market conditions; can run intraday when needed. Coverage objective: obligations backed in at least 999 out of 1,000 events with margin and financial resources. - Scenarios: worst historical observations per product group, largest moves per product group, and executive management’s expectations of worst potential future price movements. Stress scenarios use dynamic parameters linked to underlying product volatility; tests performed daily and included in daily and monthly reporting to management; scenarios and parameters reviewed at least quarterly. - Stress test analysis shows current resources sufficient to cover simultaneous defaults of the five clearing members with the largest exposure. - Stress testing policy and scenarios available to regulator; utilization of financial resources presented anonymously quarterly to Eurex Risk Committee (composed exclusively of clearing members). - As of December 2010, Eurex financial resources: - EUR 1.5 billion in clearing Fund after taking into account haircuts. - EUR 44 billion in collaterals held by Eurex. - EUR 5.5 million in reserve fund. - EUR 110 million in equity capital. - Collateral eligibility: cash, government and governmental agency bonds, selected bank and corporate bonds, and high liquid equities; eligibility defined by credit, market, and liquidity risk levels. - Replenishment: Eurex may request non-defaulting clearing members to replenish the clearing fund if resources insufficient. - Immediate availability: collaterals held on pledged accounts at eligible CSDs in the EEA, immediately accessible; cash collaterals transferred to Eurex accounts and immediately available; accounts prohibit use for Eurex operating losses. Eurex has access to intraday credit facility of the Eurosystem; cash margins largely placed overnight and classified as immediately available. ### Default procedures, enforceability, and portability - Definition and procedures: - Default circumstances clearly stated (Clearing Conditions, Chapter I, part 7). Eurex can control, manage, close positions, transfer customer positions to another clearing member, liquidate defaulting member’s assets and collateral. Eurex accepts only proprietary assets pledged (no customer assets) due to German law requirements on effective pledges. - Default sequence: transfer positions (especially client positions) to another clearing member within set period; close out and settle open positions; for CSD products use auction process to liquidate; right to assign remaining positions pro rata to non-defaulting clearing members. - (Legal) enforceability: - Settlement Finality Directive and German insolvency law provide legal protection for enforceability within the EEA. - German insolvency law secures pledged securities to intermediaries; client securities segregated and can be enforced against intermediaries. However, where client consents to intermediary use of securities as pledge for intermediary exposures, client may not receive securities back if intermediary defaults. - German insolvency law does not fully support portability of customer positions and collateral—close-out netting may transform customer positions into a single payment obligation, preventing transfer. Parliamentary amendment under discussion to allow CCP transfer of customer positions and collateral; EMIR draft regulation would include provisions to provide legal basis for transfer. - Internal default plans and testing: - Detailed internal operational business procedures for clearing member default, documenting triggers, roles, responsibilities, and processes (cash settlement, trading, collateral liquidation, close derivatives positions). Procedures reviewed at least yearly or as needed; at least once a year a default scenario is tested in simulation environments. Default procedures subject to Internal Auditing reviews. - Transparency: - Default procedures are published in Eurex conditions and on Eurex website; important notices posted publicly. ### Custody, investment policy, concentration limits - Custody and monitoring: - Securities pledged are deposited with CSDs and international CSDs supervised by authorities (e.g., Clearstream Banking AG Frankfurt, SegaInterSettle AG). Participant securities held in dedicated accounts in participant name but pledged to Eurex; withdrawal only with Eurex consent. - Settlement accounts: ICSDs (Euroclear, Clearstream Banking Luxembourg) and CSDs (Clearstream Banking Frankfurt and Euroclear UK & Ireland). Securities purchased in Eurex repo held in Clearstream Banking (EUR), Credit Suisse (CHF), Bank of New York Mellon and JPMorgan Chase Bank (USD). Eurex has separate accounts for pledged securities as collateral. - Custodian monitoring: (a) Daily external rating monitoring via Bloomberg reporting; (b) Annual credit reviews using annual reports, Bankscope, Fitch/S&P/Moody’s, press, web; (c) Assessment against CPSS/IOSCO recommendation 12 for accounting and safekeeping/internal control procedures. Major events or sudden rating changes trigger reassessment. - Investment policy and counterparties: - Eurex Treasury and Credit Policy: investments preferably in bilateral or triparty repo; triparty agents: Clearstream Banking S.A., Bank of New York Mellon, JP Morgan Chase. Residual balances uncollateralized with commercial banks under credit limits approved by Credit Section. Credit and treasury policies reviewed annually. - Eligibility for repo collateral: minimum rating AA- / Aa3; since financial crisis only sovereign bonds eligible. Eligible counterparts require external rating >= ‘A-’ (Fitch/S&P) and ‘A3’ (Moody’s), lowest rating applies; exceptions require Eurex Executive Board approval. - Monitoring of market counterparts: (a) Daily external rating monitoring; (b) Monthly reporting via “Monthly Credit Report” to Executive Board, Treasury, Group Risk Management; (c) Annual credit assessments or event-driven reassessments. Negative changes can trigger reduction or cancellation of treasury limits. - Restriction: Eurex not allowed to invest its own capital or margin in securities of itself or its parent company. - Concentration limits: - Investments conducted under counterparty limits approved by Credit Section; assessment includes Deutsche Börse Group total exposure to avoid concentration. Investments of own liquidity and received cash collateral diversified across counterparts. Eurex concentration risk limited by Large Exposure Rules of the Capital Requirements Directive (Eurex licensed as a bank). ### Operational risk management, business continuity, and availability - Operational risk governance: - Eurex risk management governed by Eurex units (Risk Design Unit; Clearing and Risk Operations Unit) and Deutsche Börse Group (GRM). GRM monitors group-wide risk profile and reports to executive management; quantification uses Value at Risk methodology and internal/external operational risk events and scenarios. - IT outsourcing: Eurex IT outsourced to Deutsche Börse Systems AG; some functions hosted by SIX Group; contracts contain automatic prolongation and flexible cancellation rights; outsourcing monitored per German Banking Act and BaFin MaRisk with risk classification and annual review for material services; outsourcing coordinator (function outsourced to Clearstream Banking AG) presents monitoring results to Executive Management Board. Business owners remain responsible for outsourced service quality. - Business continuity and contingency: - DBG Business Continuity Management (BCM) policy defines roles and principles for operational resilience covering systems, workspace, suppliers, and staff loss. GRM coordinates and monitors preparedness. - General Recovery Time Objective (RTO): four hours (systems, workspace, staff, supplier unavailability), with potentially quicker recovery depending on incident. - IT architecture: two geographically separated IT processing sites; systems clustered and load balanced with continuous full data synchronization (real-time mirroring); redundancy across data centers with automatic failover; data centers operated remotely as “dark rooms”; alternate fully equipped office facilities for critical staff networked to both data centers. - BCP testing and review: BCPs reviewed six-monthly and tested at least annually; annual simulation exercises with market participants; validation criteria include functional effectiveness, execution ability, and recovery time. Some BCM arrangements used daily (clustered systems, shift roster, remote operations). - Controls and audits: - Operational reliability reviewed by senior management; processes audited periodically based on risk rating (high annually; medium and low every two or three years). Internal Audit submits reports to executive board. External audit of BCP carried out yearly; year-end audit includes risk management systems assessment per Banking Act sections referenced. - Availability and scalability: - No single complete Eurex system failure in 2010. One event with delayed availability due to missing input data; no financial transaction data lost. On average the system was available for [text ends]. *IMF staff report content unit: _cr11271 - chapter 1 no. 12) enabling Eurex clearing AG (hereafter “Eurex”) to perform its* ### 99.95 percent. ### _cr11271 - 99.95 percent. ### Capacity and performance - Capacity plans for key systems are in place and regularly monitored and reported to management. - Stress tests in respect to loaded trades are executed in a performance test environment. - Eurex can process 80 percent above peak processing volume. - Availability/internal metric referenced: 99.95 percent. ### Recommendation 9 — Money settlement arrangements and settlement bank risk - Use of central bank money: - Eurex uses both central bank money and private settlement bank for cash processing (margin and settlement). - Central bank money via TARGET-2 and Swiss SIX payment systems is used for EUR and CHF and for settlement in the German and Swiss markets. - For GBP and USD cash payments, and Eurobond settlements, private settlement banks including the ICSDs Clearstream Banking and Euroclear Bank are used. - Finality of transfers: - Finality for EUR and CHF is achieved in TARGET-2 and the Swiss payment system SIC and is protected by the Settlement Finality Directive and by the Swiss Banking Law. - Barclays Bank is used to settle GBP-denominated transactions; finality is achieved intraday. - For USD transactions, Citibank and JPMorgan are used; confirmation of settlement is provided intraday. - In all currencies, intra-day confirmations of credit are provided by the settlement agent. - Criteria for selection of settlement banks: - Eligible agents must have an external credit rating equal or above ‘A-’ by Fitch/Standard & Poor's and ‘A3’ by Moody's, whereas the lowest rating applies. - The Credit Section monitors these agents regularly and undertakes an annual credit review. - Monitoring distribution of exposures among settlement banks: - Clearstream relies on two private agent banks for USD settlement; Eurex monitors exposures and tries to avoid concentration. - For GBP transactions amounts are currently considerably low and only one settlement agent bank is used. - Assessment and policy observations: - Observed: Eurex relies on a few banks for FX-denominated settlements, exposing it to settlement risk. - Access to central bank account would enhance settlement integrity; Eurex applied for an account with the Federal Reserve Bank of New York in 2008 but no positive access decision has been taken since then. - Many fixed income portfolios are held in ICSDs (Clearstream Luxembourg and Euroclear Bank Brussels); contracts based on these securities (Eurex Bonds and Eurex Repo) are settled in commercial bank money. - To further reduce settlement risk Eurex may consider settling in central bank money and/or increasing the number of settlement agent banks for FX currencies. ### Recommendation 10 — Physical deliveries - CCP obligations for physical delivery: - Eurex deliveries of securities are carried out in book-entry form (immobilized or dematerialized) and delivery obligations are fulfilled via book transfer. - Eurex Conditions clearly define responsibilities to deliver and receive securities from participants. - DvP mitigation of principal risk: - Eurex enters into trades and becomes buyer to the seller and seller to the buyer. - Eurex delivers securities to the buyer after receipt from the seller. - Process supported by DvP/RvP settlement eliminating principal risk; simultaneous booking provided by chosen CSD settlement system; all relevant CSDs settle on DVP. - Liquidity, storage and delivery risks: - Money settlement for deliveries is covered by DvP/RvP and by Eurex RBM. - Storage risks do not occur as securities are held in safe custody in CSDs and delivered when received. - All risks affecting deliveries are assessed by risk management in real time. - Assessment: Observed. ### Recommendation 11 — Links with other CCPs - Current links: - Eurex has one link with European Commodity Clearing AG (ECC), a subsidiary of European Energy Exchange (EEX), supervised by BaFin and designated as a payment system under Article 10 of the Settlement Finality Directive 98/26/EC. - Eurex has a sub-CCP relationship with ECC; contractual relationships extend Eurex as counterpart to ECC and the clearing member. - Legal and operational risk management: - Clearing Link Agreement defines rights and obligations; German jurisdiction applies. - Risks are evaluated prior to link (due diligence and specific link methodology) and evaluated daily once operational. - Oversight: - Both Eurex and ECC are regulated and supervised by BaFin; both are designated systems under Article 10 of Settlement Finality Directive 98/26/EC. - Assessment: Observed. ### Recommendation 12 — Cost-effectiveness and pricing - Procedures to control risks and pricing: - Budgets reviewed and approved by management; FAC issues monthly financial reports following IFRS commercial format; forecasts and a rolling forecast are produced and revised periodically. - Eurex states prices of clearing activities may be part of other services and claims no cross-subsidiary between Eurex and other DBG entities. - Eurex charges 30 cents to clear a traded transaction and 45 cents to clear a non-traded transaction. - Rationale: trading in the order book generates positive external effect for transparent price formation and market quality. - Discussions with market participants revealed that preferential treatment may occur for clearing traded products. - Regular review of service levels: - Pricing levels repeatedly reviewed; periodic benchmarking with comparable CCPs in other European countries. - Eurex provides rebates to participants when transaction volumes exceed specified thresholds. - Ongoing profit and loss analysis provided to the Executive Board. - Member consultation: - Advisory groups: Committee for Derivative Clearing, Committee for Equity Clearing, Committee for Fixed Income Clearing. - Member meetings held regularly; committees cover more than 80 percent of the traded volume market share in respective product types. - Meetings quarterly for derivatives and cash products; periodic surveys conducted. - Assessment and comments: - Observed: Eurex applies higher prices to clear OTC transactions compared to exchange-traded transactions; policy aims to promote movement of OTC transactions to exchanges but preferential treatment for traded transactions cannot be excluded. ### Recommendation 13 — Governance - Structure and transparency: - Eurex established in 1990; wholly owned subsidiary of Eurex Frankfurt AG, owned by Eurex Zurich AG; jointly operated by Deutsche Börse AG and SIX Swiss Exchange. - Licensed as a credit institution under BaFin supervision and fulfils Pillar 3 of Basel II. - Governance arrangements and board composition are publicly available via the Eurex website. - Segregation and reporting: - Clear separation of reporting lines; Risk Management Unit reports directly to the Board of Eurex and the Board of DBG; reporting monthly and ad-hoc as necessary. - Internal audit reports delivered directly to executive management. - Management qualification and incentives: - Banking Law requires Executive Management Board to prove theoretical and practical knowledge and leadership experience; Section 32 of the Banking Law requires evidence of professional qualification to BaFin. - MaRisk rules complement organizational standards. - Remuneration and incentive setting follow standardized risk-averse rules. - Board composition: - Executive Board composed of six members; same members serve on boards of Eurex Zürich AG and Eurex Frankfurt AG. - Supervisory Board has 12 full members and 1 member from BaFin and Bundesbank each as observers. - Majority are managers from Deutsche Börse; others represent major participants (Deutsche Bank, Credit Suisse, UBS, Pictet & Cie). - Supervisory Board members elected for three-year terms. - Public interest objectives: - No legal requirement for explicit public interest objectives; Eurex is established as a credit institution with function restricted to CCP service. - Eurex’s stated main public objective on its website: to serve Europe and global marketplace by offering efficient and sound clearing facility that reduce the risk and enhance the efficiency of the derivative markets. - BaFin and Bundesbank representatives present as observers on the Supervisory Board. - Eurex issues documentation and newsletters to increase public awareness; claims pricing policy aims to move OTC derivatives to exchanges to increase transparency and efficiency—this objective serves public interest. - Assessment and recommendations: - Observed: governance arrangements are clear and transparent and publicly available. - Eurex should increase the number of independent board members to account for interests of small and medium-sized clearing members. - BaFin may explore defining explicit public interest objectives for Eurex to facilitate prompt, efficient, and sound clearing. ### Recommendation 14 — Disclosure and transparency to participants - Disclosure of risk management information: - Eurex discloses rules, procedures, and policy on its website covering governance, risk handling, participant rights and obligations, and costs. - Legal basis “Clearing Conditions” available online. - Eurex discloses risk methodologies (Risk Based Margining—scenario based matrix approach and historical simulation), risk parameters, and detailed risk scenario calculations; parameters, margin, and haircuts distributed periodically. - Quantitative information disclosed within DBG’s annual report, revaluated statistics, and settlement performance. - Accessibility: - All relevant information is made public via the Eurex website in German and English. - RCCP key questions: - Internal audits against IOSCO Recommendations performed in 2004, 2005, and 2008. The 2008 assessment was made available to the public. - A review of answers to key questions is being performed for the first time and will be reviewed and published annually from here on. - Assessment: Observed. ### Recommendation 15 — Regulation and oversight - Regulatory and supervisory framework: - Eurex is regulated and supervised by BaFin (Germany) which cooperates with Deutsche Bundesbank. - Also subject to oversight by FINMA/SNB, the FSA as a recognized overseas clearing house (ROCH), the U.S. CFTC as a Multilateral Clearing Organization (MCO), and the U.S. SEC. - Licensed as a credit institution and subject to the Banking Act, CRD requirements, large exposures and million euro loan reporting, and liquidity regulation. - Banking Act does not contain CCP-specific issues; BaFin uses overall risk management provision (Article 25A) to require compliance with CPSS/IOSCO recommendations. - Eurex’s ROCH authorization governed by United Kingdom law (Financial Services and Markets Acts 2000); U.S. business governed by United States law (Securities Exchange Act) with temporary exemptions for CDS clearing; Swiss business governed by Swiss law (Financial Market Supervision Act). - Regulator staffing and reporting: - BaFin has six staff involved in regulating and overseeing clearing and settlement activities and can rely on additional banking supervisory staff. - Bundesbank has 11 staff dealing with payment, clearing and securities settlement systems oversight (of which 5 oversee clearing and settlement activities). - BaFin regulator staff (but not Bundesbank oversight staff) may accompany banking supervisory staff for onsite inspection. - Eurex reports to BaFin and Bundesbank on regular cadences (yearly, half-yearly, quarterly, monthly, or weekly) and on ad hoc basis; some organizational changes require reporting or approval. - Specific external regulator reporting: FSA (advance notice of governing law changes; weekly stress and back testing; monthly financial resource reports; annual reports), CFTC (material changes to MCO status information), SEC (advance notice of rule/procedure/membership agreement changes; bi-weekly stress and back testing; monthly disciplinary actions; participant defaults; material rule changes and outages). - Cooperation and mandate issues: - Domestic cooperation guideline exists between BaFin and Deutsche Bundesbank (“Supervision Guideline” of 21st of February 2008) and supports CEBS targets. - BaFin and Bundesbank actively involved in developing ESCB/CESR and CPSS/IOSCO recommendations and review Eurex self-assessments against these recommendations. - BaFin and Bundesbank have lead in supervision and have formal MOUs with other regulators. - Assessment and recommended actions: - Partly Observed: Eurex is regulated and supervised as a bank; no special regulatory regime covers Eurex CCP business. - The Bundesbank does not have legal basis to oversee Eurex as a financial market infrastructure. - Current staff at BaFin and Bundesbank not entirely sufficient to effectively carry out regulation and oversight of clearing activities; recommendation to recruit additional staff. - The Bundesbank should be provided with the legal mandate to oversee Eurex as a CCP and Bundesbank staff should participate in onsite inspections as a complement to BaFin. - For full compliance BaFin should: - (a) Define and disclose its objectives and policies with regard to CCPs activities. - (b) Either issue new regulatory regimes dedicated to CCPs activities or further develop, in the Banking Law, special rules and requirements for CCPs activities. - (c) Request Eurex to consult BaFin for any material changes of its clearing conditions. ### Select exact numeric and governance facts cited - 99.95 percent. - Eurex can process 80 percent above peak processing volume. - Settlement bank rating thresholds: ‘A-’ (Fitch/Standard & Poor's) and ‘A3’ (Moody's). - Clearing fee examples: 30 cents (traded transaction), 45 cents (non-traded transaction). - Advisory committee market coverage: more than 80 percent of the traded volume market share in the respective type of product. - Executive Board composition: six members. - Supervisory Board composition: 12 full members, and 1 member from BaFin and Bundesbank each as observers. - Internal audit IOSCO reviews performed in 2004, 2005, and 2008. - BaFin staff for clearing and settlement oversight: six staff. - Bundesbank oversight staff: 11 staff (of which 5 oversee clearing and settlement activities). - Supervision Guideline date: 21st of February 2008. - Legal/designation references: Settlement Finality Directive 98/26/EC; Article 10 of the Settlement Finality Directive 98/26/EC; Article 25A (BaFin usage); Section 32 of the Banking Law; MaRisk; Pillar 3 of Basel II. *Source: _cr11271 - 99.95 percent.* ### 1. Central counterparties should ### _cr11271 - 1. Central counterparties should ### Legal basis - Eurex is regulated as a credit institution with a single purpose to provide clearing activity. - The banking law and other legislations provide a sound, transparent, and enforceable legal basis for each aspect of its activities. - Eurex can change its clearing conditions without prior consultation or approval by the relevant regulator and overseer, although Eurex does so in practice. - Recommendation: the relevant authorities should require Eurex to consult the authorities prior to deciding on any material changes of its clearing conditions to achieve a higher degree of legal safety, better ensure that the public interest is taken into account, and increase impartiality vis-à-vis its participants. ### Participation requirement - A CCP should require participants to have sufficient financial resources and robust operational capacity; requirements should be objective, publicly disclosed, permit fair and open access, and be monitored on an on-going basis. - Eurex requirements: membership type–based financial and technical requirements; full members must be regulated by relevant authorities, meet adequate minimum capital, contribute to the clearing fund, have qualified staff, meet minimum technical capability including network communication, and establish appropriate settlement arrangements. ### Measurement and management of credit exposures - A CCP should measure its credit exposure to its participants at least once a day and limit exposure through margin requirements and other risk control mechanisms so operation is not disrupted in normal market conditions. - Eurex has a comprehensive and adequate risk management framework at the Eurex entity and DBG levels, reviewed regularly. - Eurex employs capital requirement, margin requirement, contribution to clearing fund, intraday risk controls, and other risk control mechanisms. ### Margin requirements - If a CCP relies on margins, requirements should cover potential exposures in normal market conditions; models and parameters should be risk-based and reviewed regularly. - Eurex relies on initial and variation margin requirements; margins are met through cash and eligible securities deposited in regulated entities. - The margin model and parameters are regularly validated internally and by the authorities; parameters and assumptions are validated in daily, weekly, monthly or quarterly reviews depending on parameter type. - Market participants are informed on assumptions, parameters, and scenarios; assessment details (e.g., parameters; margin; and haircuts) are publicly distributed periodically. ### Financial resources - A CCP should maintain sufficient financial resources to withstand, at a minimum, the default of a participant to which it has the largest exposure in extreme but plausible market conditions. - Eurex has defined financial resources needed to withstand the default of three participants with the largest exposures in extreme, but plausible market conditions. - Eurex performs daily stress testing with extreme, but plausible market conditions, and can run tests on an intraday basis when needed. - Eurex has access to an intraday credit facility of the Eurosystem in line with the TARGET2 Guideline. - As a credit institution, Eurex is eligible to receive emergency liquidity assistance from the Bundesbank. - Cash margins placed by clearing members are almost all invested overnight and are thus classified as immediately available. ### Default procedures - A CCP’s default procedures should be clearly stated, enable timely action to contain losses and liquidity pressure, and allow the CCP to continue meeting obligations; key aspects should be publicly available. - Eurex default rules in its clearing conditions allow transfer of customers’ positions to another clearing member, close out, settlement of defaulting member’s open positions, and assignment of remaining positions pro rata to non-defaulting clearing members. - German legislative framework provides a high degree of assurance on enforceability of default procedures. - Current legal basis to separate customers’ collaterals from those of the clearing member is not entirely robust; uncertainty exists whether German insolvency law fully supports transfer of customer positions and collateral. - Insolvency Act provides for close-out netting of customer positions, transforming positions into a single payment obligation and potentially preventing transfer to another clearing member. - Bundestag currently discusses an amendment to the Insolvency Act that would allow the CCP to transfer customer positions and collateral in case of insolvency of the original clearing member. - The draft EMIR would provide for transfer of customer positions and collateral including insolvency law support and would be directly applicable in Germany. ### Custody and investment risk - A CCP should hold assets to minimize risk of loss or delay in access; assets invested should have minimal credit, market and liquidity risks. - Securities pledged to Eurex by participants are deposited only with CSDs and ICSDs supervised by national authorities; withdrawals require consent of Eurex clearing AG. - Regulations in Germany and Switzerland provide an appropriate legal environment to ensure access to pledged securities in case of clearing member insolvency. - Eurex has processes and specialized staff to monitor custodian banks, including daily monitoring and periodical review; assessments reference recommendation 12 criteria: accounting practices, safekeeping/internal control procedures, regulation, and strong financial position. ### Operational risk - A CCP should identify operational risk sources and minimize them through appropriate systems, controls and procedures; systems should be reliable, secure, and scalable; business continuity plans should allow timely recovery. - Eurex risk management framework is governed by policies and procedures at Eurex and DBG levels; DBG has developed and implemented a comprehensive BCM policy defining organizational roles and guiding principles to ensure operational resilience. - Eurex tests its contingency plan, IT infrastructure, and communication network with the majority of its participants on an annual basis. - Business continuity: two geographically separated IT processing sites; systems clustered between two data centers and load balanced in normal operation mode with continuous full data synchronization (real-time data mirroring). ### Money settlements - A CCP should employ settlement arrangements that eliminate or strictly limit settlement bank risks; funds transfers to a CCP should be final when effected. - Eurex relies on a few banks for settlement of foreign exchange denominated transactions, exposing it to settlement risk. - Access to central bank accounts would enhance settlement integrity; in 2008 Eurex applied for an account with the Federal Reserve Bank of New York but no positive access decision has been taken since then. - Eurex uses central bank money for collection of margins, settlement of German equities, and settlement of bonds and repos. - Most banks hold fixed income portfolios in the ICSDs (Clearstream Luxembourg and Euroclear Bank Brussels); contracts based on these fixed income securities are settled in commercial bank money in those ICSDs, applying to bond and repo transactions on Eurex Bonds and Eurex Repo. - Recommendation: to further reduce settlement risk, Eurex may consider settling in central bank money and/or increasing the number of settlement agent banks for FX currencies. ### Physical deliveries - A CCP should clearly state obligations for physical deliveries and identify and manage risks from these obligations. - Eurex deliveries of securities are carried out in book-entry form (immobilized or dematerialized) via book transfer; Eurex rules clearly define responsibilities to deliver and receive securities. - Eurex settles on a DVP basis in CSD or ICSD; all delivery risks are assessed by risk management in real-time. ### Risks in links between CCPs - CCPs establishing links should evaluate risks and ensure prudent ongoing risk management and have cooperation frameworks among regulators and overseers. - Eurex currently has one link with the ECC. - A clearing link agreement between Eurex and ECC defines rights and obligations. - Eurex has specific rules and procedures for linked CCPs; risks are evaluated before entering a link (including due diligence) according to a specific link methodology and evaluated daily once operational. ### Efficiency - While maintaining safety and security, CCPs should be cost-effective in meeting participants’ requirements. - Eurex procedures control operational costs; budgets reviewed and approved by management; pricing levels repeatedly reviewed. - Eurex performs periodic benchmarking with comparable CCPs in other European countries. - Eurex provides rebates when participant transaction volumes exceed specified thresholds. - Ongoing profit and loss analysis is conducted and provided to the Executive Board. - Eurex applies higher prices to clear OTC transactions compared to exchange-traded transactions to promote migration of OTC transactions to the exchange. - Observation: this policy may result in preferential treatment of exchange-traded transactions over clearing of OTC transactions. - Recommendation: Eurex should make public its differentiated price policy regarding clearing non-traded transactions as part of the policy to encourage movement to the exchange. ### Governance - Governance arrangements should be clear, transparent, fulfill public interest requirements, and support owners’ and participants’ objectives, promoting effective risk management. - Eurex governance arrangements are clear, transparent, and publicly available via the Eurex website; they reflect public interest requirements and support owners’ and participants’ objectives. - Recommendation: Eurex should increase the number of independent board members taking into account interests of small and medium-sized clearing members. - Recommendation: BaFin may explore defining an explicit public interest objective to Eurex, such as to facilitate prompt, efficient, and sound clearing of securities transactions. ### Transparency - A CCP should provide participants sufficient information to identify and evaluate costs and risks of using its services. - Eurex discloses rules, procedures, and policies on its website, covering governance, risk handling procedures, participant rights and obligations, and costs. - Eurex discloses risk methodologies used (RBM; scenario based matrix approach; and historical simulation), risk parameters, and detailed risk scenario calculations. ### Regulation and oversight - A CCP should be subject to transparent and effective regulation and oversight, with cooperation among central banks and securities regulators. - Observation: Eurex is regulated and supervised as a bank; no special regulatory regime covers Eurex’s CCP business. - BaFin’s and Bundesbank’s mandates to regulate, supervise and oversee Eurex are based on Eurex’s banking status. - The Bundesbank does not have the legal basis to oversee Eurex as financial market infrastructure. - Recommendation actions: - The Bundesbank should be provided with the legal mandate to oversee Eurex as a CCP; Bundesbank staff should participate in onsite inspections of Eurex as a complement to BaFin’s regulatory responsibility. - BaFin should define and disclose its objectives and policies regarding CCP activities. - BaFin should either issue a new regulatory regime dedicated to CCP activities or further develop specific CCP rules and requirements in the Banking Law. - BaFin should request Eurex to consult BaFin for any material changes of its clearing conditions. - BaFin and the Bundesbank should recruit additional staff to carry out regulation and oversight of clearing activities more effectively. - Aggregate compliance grading includes Observed (O) and Partly observed (PO) for Recommendation 15. ### Actions to Improve Compliance (selected recommendations) - Recommendation 1 (Legal risk): - Require Eurex to consult authorities in advance for any material changes of its clearing conditions to increase legal safety, ensure public interest consideration, and impartiality vis-à-vis participants. - Recommendation 15 (Regulation and oversight): - BaFin should clearly define and disclose its objectives and policies with regard to CCP activities. - BaFin should issue a new regulatory regime dedicated to CCP activities, or further develop specific CCP rules in the Banking Law. - BaFin should request Eurex to consult BaFin for any material changes of its clearing conditions. - The Bundesbank should be provided with legal mandate to oversee Eurex as a CCP and participate in onsite inspections. - BaFin and the Bundesbank should recruit additional staff to regulate and oversee clearing activities more effectively. ### Further Recommended Actions (selected) - Recommendation 6 (Default procedures): - The legal basis to ensure portability of a customer’s collaterals is not entirely robust; potential risk exists that customer holdings cannot be ported. An amendment of Article 104a of the Insolvency Act to eliminate this potential risk is currently under discussion in Bundestag. - Recommendation 9 (Money settlements): - Eurex may consider settling in central bank money and/or increasing the number of settlement agent banks for FX currencies to reduce settlement risk. - Recommendation 12 (Efficiency): - Eurex should make public its differentiated price policy regarding clearing non-traded transactions as part of policy to encourage movement of these transactions to the exchange. - Recommendation 13 (Governance): - Eurex should increase the number of independent board members considering small and medium-size clearing members’ interests. - BaFin should explore defining an explicit public interest objective for Eurex, such as facilitating prompt, efficient, and sound clearing of securities transactions. ### Authorities’ response to the assessment - On Recommendation 13: IMF suggests increasing number of independent board members to account for interests of small and medium-sized members. - Authority response: Eurex notes that in Germany, supervisory board members are elected by shareholders only and Eurex cannot influence their decision. *Source: _cr11271 - 1. Central counterparties should* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11271.pdf_