Cross Margining at Eurex Clearing is provided by Eurex Clearing's innovative Prisma [1] [2] (Portfolio RISk MAnagement) portfolio margining risk management system which calculates Risk and Margin on a portfolio basis segmented by pre defined Liquidation Groups each comprising of closely correlated products within each group. For example, the Fixed Income Liquidation Group now comprises of OTC IRS, Zero Coupon Inflation Swaps (ZCIS) and Fixed Income and Money Market Futures and Options (ETD) products. From an operational point of view, for the cross margining of a portfolio OTC IRS and ETD, there is no physical movement of Futures to OTC IRS, the Prisma Margin Optimiser automatically calculates the minimum margin (see diagram below) for a portfolio of OTC IRS and IRS, if there are no offsets betweem ETD and OTC IRS within the portfolio, margin will default to ETD being margined on a 2 day risk horizon and OTC IRS being margined on a 5 day risk horizon.

  

The benefits of cross margining for both the Buy Side and the Sell Side can be seen by analysing the Initial Margin requirement of a relative value, DV01 neutral, Euribor Strip versus Schatz© Bond Futures, or 'Term TED' trade. By clearing both products through Eurex Clearing and generating cross margining savings, results in a 68% reduction in Initial Margin requirements compared to clearing both products on two separate CCPs.

Similarly, cross margining benefits for the Sell Side and Buy Side between Euro listed derivative products and Euro OTC IRS can be seen by analysing (see below) Euribor Strips or Fixed Income Futures versus Euro OTC IRS - Euro Asset Swaps or Invoice Spreads (synthetic asset swaps can be created using Swap Futures and Bond Futures with similar cross margining benefits [3])  - cross margining savings generated were between 62% and 70%, depending on the maturity of the asset swap, compared to clearing both products on separate CCPs [5] - the additional benefit for the Sell Side is the reduced capital regulatory requirements due to the netting of exposures:     

 

What generates the highest cross margin savings for the Buy Side and Sell Side? - cross currency cross margining or cross product cross margining? The analysis below of the various cross currency margin savings of various tenors between USD Payer OTC IRS and EUR Receiver OTC IRS and that of cross product margin savings between various tenor EUR Receiver OTC IRS and Eurex Schatz©, Bobl©, Bund© and Buxl© Fixed Income Futures clearly show that cross product cross margin savings far outweigh that of cross currency cross margin savings: 

In the new capital constrained world of Basel III, Leverage Ratio and RWA, there are significant benefits for the Sell Side of clearing Euribor, Euro Fixed Income Futures and Euro OTC IRS through one CCP. An analysis (see below) was carried out of a Euro OTC IRS portfolio fully hedged with Euribor and Eurex Fixed Income Futures comparing Initial Margin, Default Fund contribution[6], EAD, RWA and Capital and Funding costs to clearing all three products through Eurex Clearing to that of clearing through three separate CCPs. The analysis showed that, by clearing all three products through Eurex Clearing, the Sell Side benefitted from a 69% reduction in Initial Margin requirements, a 77% reduction in Default Fund contributions, a 69% reduction in TE RWA and a 72% reduction in Funding Costs:

   

On Monday 3 August EurexOTC Clear expanded its OTC IRS Product List with the launch of the clearing of ZCIS [4] for the Euro Consumer Price Index, HICPxT, French Consumer Price Index, FRCPIx, and the UK Retail Price Index, UKRPI. ZCIS will be cleared within the the Fixed Income Liquidation Group with OTC IRS and Fixed Income and Money Market Futures and Options giving the Buy Side and Sell Side alike superior portfolio margining benefits compared to a silo'd CCP IRS offering  across the three asset classes of OTC IRS, ZCIS and Euro listed derivative products. Below are examples of the Initial Margin savings of EUR and GBP real rate portfolios of various tenors of ZCIS and OTC IRS:        

In conclusion, 'the proof is in the pudding' - four actual Banks' propietary Euro Fixed Income Futures and Euro OTC IRS portfolios were analysed (for one bank propietary OTC IRS and listed derivative portfolio, Bank 1, the analysis was carried out in two scenarios, 1) without Euribor and 2) with Euribor) , comparing the costs of clearing Euro listed derivative products and OTC IRS on separate CCPs to that of clearing all products on Eurex Clearing. The analysis by Oliver Wyman (see below) showed that by clearing all Euro listed derivative products and OTC IRS through Eurex Clearing generated between 40% and 59% cost savings for the Sell Side in terms of lower initial margin requirements, lower default fund contributions and lower capital regulatory requirements through the netting of exposures.

Footnotes:

[1] 'Eurex Clearing Prisma: Portfolio Risk Management':

http://www.eurexclearing.com/blob/294792/9c0910e525ecde02b50cf0dd3574cc35/data/eurex_clearing_prisma_brochure.pdf

[2]  'Eurex Clearing Prisma':

http://www.eurexclearing.com/clearing-en/risk-management/eurex-clearing-prisma/Eurex-Clearing-Prisma/151086

[3]  LinkedIn Pulse, 'Creating Synthetic Euro Asset Swaps - Eurex Bond Futures versus Eurex Swap Futures':

https://www.linkedin.com/pulse/creating-synthetic-euro-asset-swaps-eurex-bond-futures-baldwin?trk=mp-reader-card
 

[4]  LinkedIn Pulse, 'EurexOTC Clear: Inflation Swap Clearing - Margin & Capital Efficiencies for the Buy Side & Sell Side':

 https://www.linkedin.com/pulse/eurexotc-clear-inflation-swap-clearing-margin-capital-byron-baldwin?trk=mp-reader-card

[5]  LinkedIn Pulse, 'Euro IRS vs Eurex Bond Futures - Euro Asset Swaps - Execution, Capital & Margin Efficiencies': 

https://www.linkedin.com/pulse/euro-irs-vs-eurex-bond-futures-asset-swaps-margin-byron-baldwin?trk=mp-reader-card

 [6] Eurex Clearing offers Default Fund efficiency and cost savings with an integrated Default Fund structure across asset classes segmented by Liquidation Groups benefitting from portfolio diversification effects within each liquidation group - the Fixed Income Liquidation Group comprises now of ZCIS, OTC IRS and Fixed Income and Money Market listed derivative products. Such a structure results in a Default Fund contribution of 7% of Initial Margin requirements compared to 10% of Initial Margin requirement under a silo'd CCP Default Fund structure.