Cross Margining of Listed Derivatives and OTC IRS & CCP Cleared IRS Switches - An Analysis


With the mandatory OTC Clearing timetable now finalised for Europe by ESMA, focus will now feature on the efficiencies of each CCP IRS offering and CCP IRS Switches will undoubtedly increase as Banks seek to minimise capital and funding costs via reduced initial margin requirements, default fund contributions and capital regulatory requirements.

CCP IRS Switches

Cross Margining[1] at Eurex Clearing of OTC and listed derivative products can potentially provide significant margin savings - see the table below for the various cross margin savings between OTC and Listed Derivative Products - across the products within the Fixed Income Liquidation Group i.e. OTC IRS, ZCIS, Fixed Income & Money Market Futures and Options and Deliverable Swap Futures. Eurex Clearing's PRISMA cross margin optimiser automatically calculates the minimum initial margin requirement for a portfolio of OTC and ETD products, if there are no offsets, the initial margin requirement defaults to a 2 day risk horizon for ETD products and a 5 day risk horizon for OTC products.

CCP IRS Switches can also benefit from reduced default fund contributions - 7pct of initial margin requirement for default fund contributions at Eurex Clearing as a result of an integrated default fund across asset classes segmented by liquidation groups benefitting from portfolio diversification compared to that of 10pct of initial margin requirement default fund contribution for a silo'd CCP default fund structure.    

Maximum Cross Margin Efficiency between different Fixed Income Products - OTC & Listed Derivative Products

In December 2015, OpenGamma launched a Cross CCP IRS Initial Margin Calculator[2] service which allows both the Buy Side and Sell Side alike to quantify the actual benefits of clearing Euro OTC IRS and Listed Derivative Products across CCPs in two distinct scenarios:

  • Two CCP scenario - OTC IRS at LCH SwapClear and ETD at Eurex Clearing; and
  • One CCP scenario - OTC IRS and ETD both cleared at Eurex Clearing.

The DV01 example below gives an analysis of the two scenarios - in the first scenario the OTC IRS cleared at LCH SwapClear create EUR172million of initial margin and the ETD cleared at Eurex Clearing create EUR77million of intial margin a total of EUR249million compared to a total of EUR182million of intial margin for clearing OTC IRS and ETD with the benefit of cross margining, a total saving of 27% - the saving DOES NOT include the lower Default Fund contribution OR the lower capital regulatory requirement as a result of the netting of exposures in the ONE CCP scenario.

The Eurex Clearing PRISMA cross margining optimiser determines the optimum amount of ETD exposure to move across from the 2 day horizon ETD netting set to move across to hedge the OTC exposure in the 5 day horizon OTC IRS netting set and thereby reducing the overall initial margin requirement across both netting sets.

Alternatively, the OpenGamma Cross CCP IRS Margin Calculator can be used to optimise the margin savings of a CCP IRS Switch by identifying specific OTC IRS positions to be switched (see diagram below). Using the identical OTC IRS and ETD portfolio as in the example above, switching some (but not all) the OTC IRS exposure in the 5 year and 30 year maturities generates a higher margin saving of 38%.

Looking forward to the new world of mandated OTC Clearing in Europe, the Sell Side and Buy Side alike will undoubtedly transact more and more CCP IRS Switches as they seek to minimise their margin, funding and capital regulatory requirements across CCPs.

Links and Footnotes:

[1] See below for an outline of Cross Margining at Eurex Clearing:

'Cross Margining at Eurex Clearing - Generating Margin, Default Fund & Capital Efficiencies':

[2] To find out more about the OpenGamma Cross CCP IRS IM calculator service, please email Ken Wong at OpenGamma at or call him on +44 (0) 20 3725 3376.

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