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ECC Margining

26.08.2019 Version 1.8.6 Contact

European Commodity Clearing AG

Risk Controlling & Compliance

Phone: +49 341 24680-530

E-mail: [email protected]

ECC Margining Version 1.8.6 © ECC AG – part of eex group

Table of Contents

1. Introduction 4

1.1 Overview of Margin Types 4

1.2 Regulatory Requirements 6

2. Calculation of Margin Parameters 7

2.1 Calculation of Single Margin Parameters 7

2.1.1 Margin Parameter 7

2.1.2 Procyclicality and Period of Stress Buffer 7

2.1.3 Expiry Month Factor 8

2.2 Calculation of Spread-Margin Parameters 8

2.3 Conservative Corrections 10

3. Calculation of Spot Margin 11

3.1 Daily Exposures 12

3.2 Algorithm to Compute the Initial Spot Margin 13

3.2.1 Special Holiday Adjustment 15

3.2.2 Consideration of delivery risk in the exposure generation 15

3.2.3 Example for exposure aggregation 16

3.3 Current Exposure Spot Market 17

3.4 Pre-Auction Margin 18

3.5 Computation of Spotmargin during the change of Clearing Member 18

4. Financial Resources 19

4.1 Default Waterfall 19

ECC Margining Release 1.8.6 © ECC AG – part of eex group

5. Margin Reports 21

6. SPAN Calculation 22

6.1 Combined Commodity 22

6.2 Scan Risk 22

6.3 Volatility Scan Range 23

6.4 Short-Option Minimum (SOM) 23

6.5 Spreads 23

6.5.1 Perfect Spreads 23

6.5.2 Regular Spreads 24

6.6 SPAN Initial Margin 24

6.7 Delivery Margin 24

6.8 Premium Margin and Additional Collateral 26

6.9 80% Margin CAP 27

6.10 Concentration Risk Margin 28

6.10.1 Concentration risk margin on account level 28

6.10.2 Concentration risk margin on clearing member level 28

6.10.3 Caps and floors 29

6.11 Stresstest Supplementary Margin 29

7. Sample Calculations with PC SPAN® 31

7.1 Prerequisites 31

7.2 Loading SPAN® Parameters 32

7.3 Building-Portfolio 32

7.4 Calculating SPAN® Initial Margin Requirements 34

7.5 Checking Margin Requirements 35


1. Introduction

This document provides the documentation of ECC's margining system both for derivatives and spot

markets. The current values of used calculation parameters, if not set in this document, can be found

in the risk parameter file on http://www.ecc.de/en/risk-management/margining.

1.1 Overview of Margin Types

Margining at ECC distinguishes between derivatives and spot markets: For derivatives markets, ECC

employs a statistical approach that calculates potential changes in the value of a trading member’s

portfolio over a time horizon that is needed to liquidate the portfolio using SPAN®.1

For spot markets, the counterparty risk comprises the payment obligation from concluded

transactions that have not been settled. ECC uses an in house model based on the time-series of a

members trading behavior to calculate the margin requirement. ECC clears spot markets for

commodities on which mainly non-financial market participants are active. Settlement cycles between

the non-financial market participants and their Clearing Member are usually longer than between

ECC and the Clearing Members. On some spot markets (power, natural gas) trading and clearing

takes place 24/7 including times where settlement of payments is not possible due to TARGET II

closure. ECC measures credit exposure on spot markets2 near to real time on a 24/7 basis using the

Current Exposure Spot Market. This Current Exposure Spot Market has to be covered with collateral

at all times. In order to avoid frequent margin calls due to collateral shortfalls and to cover exposures

that might arise from trading activities during TARGET II closure times ECC has established an

additional margin component, the Spot Initial Margin. This Spot Initial Margin is an additional buffer. It

is designed to cover exposure from potential spot transactions in the future.

1 'SPAN® ' is a registered trademark of Chicago Mercantile Exchange Inc. Chicago Mercantile Exchange Inc.

assumes no liability in connection with the use of SPAN® by any person or entity

2 Non-storable commodities (e.g. gas and power transactions) have current exposure only; storable commodities

(e.g. EUA certificates) also have potential future exposure

http://www.ecc.de/en/risk-management/margining


The parameters of both methods are calibrated to cover ECC's exposure with a confidence level of

99%. The following table gives an overview of the different margin types:

Exposure Type

Margin Type Description

Cu

rre

nt

Ex

po

su

re

Variation Margin Mark-to-market value (change) of all open positions in futures using the latest market prices received from the markets

Premium Margin ECC's options are Premium Style (i.e. no daily Variation Margin is calculated). Therefore Premium Margin has to be deposited for net short positions. For net long positions, credits from Premium Margin are used to offset other margin requirements

Current Exposure Spot Market3 (CESM)

The net value (payment amount) of all concluded transactions on the spot markets during the day that have not been settled

Po

ten

tia

l F

utu

re E

xp

os

ure

SPAN® Initial Margin SPAN® Initial Margin covers the risk in open positions in futures and options

Supplementary Initial Margin (MCAP)

Covers the difference between the allowed 80% margin reduction and the current margin reduction if the latter is higher

Delivery Margin Delivery Margin covers the risk in positions in physically settled futures during the delivery period

Initial Margin Spot Market (IMSM)

The IMSM is called for expected spot in the future and serves as a buffer to reduce intraday margin calls.

Margin requirements on spot markets and margin parameters for derivatives are adjusted on each

business day thus allowing ECC to quickly adopt its risk management to new market conditions.

Stress testing according to EMIR Article 42, where the default of one or more clearing members

under extreme but plausible market scenarios is simulated, is performed daily. Its results are used to

determine the default fund ECC maintains to cover counterparty risk in extreme market conditions.

ECC performs daily back testing for single and spread margin parameters as well as portfolio margin

and spot margin. Daily historical stress testing is used to assess the adequacy of margins. ECC

performs an annual validation of methods, models, and model assumptions.

3 Non-storable commodities (e.g. gas and power transactions) have current exposure only; storable commodities

(e.g. EUA certificates) also have potential future exposure


1.2 Regulatory Requirements

ESMA Article 24 requires that for the calculation of initial margins the CCP shall at least respect the

following confidence intervals:

(a) For OTC derivatives, 99.5 %;

(b) For financial instruments other than OTC derivatives, 99 %.

ESMA Article 25 requires that a CCP shall ensure that initial margins cover at least with the

confidence interval defined the exposures resulting from historical volatility calculated based on data

covering at least the latest 12 months.

A CCP shall ensure that the data used for calculating historical volatility capture a full range of market

conditions, including periods of stress.

ESMA Article 26 requires that the liquidation period shall be at least two business days for financial

instruments other than OTC derivatives.

According to ESMA Article 28 a CCP shall ensure that its policy for selecting and revising the

confidence interval, the liquidation period and the look back period deliver forward looking, stable and

prudent margin requirements that limit procyclicality to the extent that the soundness and financial

security of the CCP is not negatively affected. This shall include avoiding when possible disruptive or

big step changes in margin requirements and establishing transparent and predictable procedures for

adjusting margin requirements in response to changing market conditions. In doing so, the CCP shall

employ at least one of the following options:

(a) Applying a margin buffer at least equal to 25 % of the calculated margins which it allows to be

temporarily exhausted in periods when calculated margin requirements are rising significantly

(b) Assigning at least 25 % weight to stressed observations in the look back period calculated in

accordance with ESMA Article 26

(c) Ensuring that its margin requirements are not lower than those that would be calculated using

volatility estimated over a 10 year historical look back period.


2. Calculation of Margin Parameters

2.1 Calculation of Single Margin Parameters

2.1.1 Margin Parameter

Single margin parameters are the result of a filtered historical simulation over the past 255 days with

non-zero returns. The single margin parameter (without buffer) is given by a multiple of a contract's

returns' standard deviation4

𝑀𝑋(𝑡) = 𝑅𝑋(𝑡) ⋅ 𝜎𝑋(𝑡) ⋅ 𝑝𝑋(𝑡) ⋅ √2.

The standard deviation of futures daily returns is computed as an exponentially weighted moving

average (EWMA)5 of the last 255 daily relative non-zero returns from the observed daily settlement

prices. For options all relative changes of the implied volatility are used. ECC uses the concept of

constant maturities, i.e. the returns and margin parameters are calculated for time buckets with a

fixed time to expiry. The use of an exponentially weighted average allows for quicker reaction of the

margin parameters to changes in market volatility than the equally weighted estimator for the

empirical standard deviation.

𝑅𝑋 is calculated as a quantile of the volatility normalized returns: 𝑅𝑋 = (|𝑞(𝑋𝜏/𝜎𝑋(𝜏 − 1))𝛼| +

|𝑞(𝑋𝜏/𝜎𝑋(𝜏 − 1))1−𝛼|)/2, where 𝛼 = 0.99 and 𝑞(𝑋𝜏)𝛼 is the empirical 𝛼-quantile of 𝑋 using data from

the past 255 days with non-zero returns. There is both a lower and an upper cut-off, 𝑅max and 𝑅min,

for the calculated values of 𝑅𝑋. For time series with less than 100 values, 𝑅𝑋 is set 𝑅𝑋 = 𝑅max. The

factor √2 is used for scaling to a liquidation period of 2 days. For contracts with less than 30 values

the volatility is linearly interpolated between the calculated volatility and the maximal volatility found in

the contract class where the time series have more than 30 values.

2.1.2 Procyclicality and Period of Stress Buffer

ESMA allows for three different methods to prevent procyclical margining.

1. Applying a 25% weight for stress volatility,

2. Using all available data,

3. Applying a 25% buffer which can be temporarily exhausted.

ECC has decided to adopt the buffer-method in the following way:

ECC first calculates the minimal and maximal volatility 𝜎min and 𝜎max of a contract's return time series

using all available data up to the day for which margin is calculated.

4 Always valid for day 𝑡.

5 Under the assumption that the mean return is zero, the implemented formula is

𝜎𝑋(𝜏) = √ ∑ (𝑋𝑘2 𝜆𝜏−𝑘)

𝜏

𝑘=max{𝜏−255,1}

/ ∑ 𝜆𝜏−𝑘

𝜏

𝑘=max{𝜏−255,1}

.

ECC uses 𝜆 = 0.99. Zeros and missing values are not taken into account.


ECC then calculates a stressed volatility by adding a weighted stress part into the calculation

𝜎𝑋𝑆 =

255−𝑤

255𝜎𝑋 +

𝑤

255𝜎max,

where the weight is currently set6 𝑤 = 5.

Below a threshold of 𝜎crit = 𝜎min + 𝑎 ⋅ (𝜎max − 𝜎min), the margin parameter is increased by 25%. The

value of 𝑎 is currently set to 0.2. Above the threshold 𝜎crit, the buffer of 25% is linearly reduced to

zero:

𝑏𝑋 = {

0.25 𝜎𝑋 ≤ 𝜎crit

0.25 ⋅ (1 −𝜎𝑋 − 𝜎crit

𝜎max − 𝜎crit) else

.

ECC now calculates the final single margin parameter by taking the maximum of the requirements of

the stressed volatility and the buffer method:

ℳ𝑋 = 𝑅𝑋 ⋅ 𝜎𝑋 ⋅ √2 ⋅ (1 + max {𝑏𝑋;𝑤

255

𝜎max − 𝜎𝑋

𝜎𝑋 }) ⋅ 𝑝𝑋

with 𝑝𝑋 being the contract's current settlement price.

2.1.3 Expiry Month Factor

To cover the increased price risk and / or delivery risk in positions in physically settled futures during

the delivery period, a delivery margin is called. Price risk results from the fact that there is no

variation margin payment during the delivery. Delivery risk results only in areas where ECC’s

nomination has no priority and therefore ECC could be imbalanced in the default of a trading

participant. To cover the delivery risk, the single margin parameter is adjusted by the expiry month

factor (EMF). The EMF is set as follows:

- For delivery areas where ECC’s nomination has priority or with single sided nomination the

EMF is set for natural gas and power futures separately. The current values can be found in

the risk parameter file on the website.

- For delivery areas where ECC’s nomination has no priority the EMF is derived depending on

the maximum number of calendar days between last successful settlement and suspension

by a TSO following default to deliver (this takes into account local holidays and weekends).

The EMF is subject to annual validation.

2.2 Calculation of Spread-Margin Parameters

Spread-Margin parameters are calculated in the form of credit 𝐶𝑃 for selected bivariate portfolios with

spread positions, i.e. one asset being held long and the other being held short. These portfolios are

not assigned a gross margin, i.e., the sum of the margin requirements for the individual contracts, but

a net portfolio margin. ECC's approach to calculate the net margin for such portfolios is similar to the

6 This equals a stress period of one week which has been observed in the Fukushima Event


approach for single margins. The margin is seen as the 99%-quantile of a volatility-normalized

historical simulation7 of the absolute portfolio returns in € over the past 255 days with non-zero

returns of both contracts.

The portfolio is constructed for day8 𝑡. Its absolute returns (with respect to the current price level and

denoted in €) are a time series indexed by 𝜏:

𝑃𝜏(𝑡) = 𝑎(𝑡)𝑋𝜏 𝑝𝑋(𝑡) − 𝑏(𝑡)𝑌𝜏 𝑝𝑌(𝑡),

where 𝑋𝜏, 𝑌𝜏 are the returns on day 𝜏, 𝑎(𝑡), 𝑏(𝑡) are the position sizes and 𝑝𝑋(𝑡), 𝑝𝑌(𝑡) are the prices

on day 𝑡. The times 𝜏 are defined such that both time series (𝑋𝜏, 𝑌𝜏) are non-zero for each 𝜏,9 as

shown in the following table:

Target-2 days 1 2 3 4 5 6 7 8

𝑝𝑋 (€) 30 26.4 26.4 26.93 28.28 28.28 31.11 32.67

𝑋 0.1 -0.12 0 0.02 0.05 0 0.1 0.05

𝑝𝑌 (€) 25 25 22.75 23.89 26.28 29.17 26.25 22.31

𝑌 0.11 0 -0.09 0.05 0.1 0.11 -0.1 -0.15

𝝉 1 2 3 4 5

The time series comprises the past 255 𝜏-values before 𝑡. In the following 𝑎(𝑡) and 𝑏(𝑡) are set to

equal the margin parameters of 𝑌 and 𝑋, respectively.

Standard deviations and correlations are computed using exponentially weighted averages, i.e.,

EWMA. The gross margin for the portfolio is the sum of the individual assets' margin requirements

�̃�𝑃(𝑡) = 𝑎(𝑡)𝑀𝑋(𝑡) + 𝑏(𝑡)𝑀𝑌(𝑡),

where the margins 𝑀𝑋 and 𝑀𝑌 are calculated as shown in chapter 2.1, i.e. as the product of the

EWMA standard deviation and a dynamically adjusted risk multiplier. The risk multiplier also has to

be computed for the portfolio itself, yielding the net margin 𝑀𝑃(𝑡) = 𝑅𝑃(𝑡) ⋅ 𝜎𝑃(𝑡). Here, the portfolio's

standard deviation can be expressed by the assets' correlation coefficient 𝜌 obtained by statistical

averaging10 over 𝜏

𝜎𝑃(𝑡) = √(𝑎(𝑡) 𝜎𝑋(𝑡) 𝑝𝑋(𝑡))2 + (𝑏 (𝑡)𝜎𝑌(𝑡) 𝑝𝑌(𝑡))2 − 2𝜌(𝑡)(𝑎(𝑡) ⋅ 𝑏(𝑡))(𝜎𝑋(𝑡)𝑝𝑋(𝑡) ⋅ 𝜎𝑌(𝑡)𝑝𝑌(𝑡)).

When calculating the net margin, a conservative correction is applied to the correlation coefficient,

such that 𝜎𝑃(𝑡) → 𝜎𝑃corr(𝑡) and thus 𝑀𝑃(𝑡) = 𝑅𝑃(𝑡) ⋅ 𝜎𝑃

corr(𝑡). Details are explained in the next section.

Like for the single margin parameters, the risk multiplier is given as

𝑅𝑃(𝑡) = (|𝑞(𝑃𝜏(𝑡)/𝜎𝑃(𝜏 − 1))𝛼| + |𝑞(𝑃𝜏(𝑡)/𝜎𝑃(𝜏 − 1))1−𝛼|)/2,

7 Also known as "filtered historical simulation".

8 Under the assumption that both contracts are quoted on 𝑡. If this is not the case, the most recent credit is taken.

9 Given the individual time series 𝑋𝑡 and 𝑌𝑡, only values are taken into account where both time series are

simultaneously non-zero. This can lead to time series being different from those used for the calculation of the

single margin parameters of 𝑋 and 𝑌.

10 The statistical averaging is again exponentially weighted.


where again 𝛼 = 0.99, and 𝑞(𝑋𝜏)𝛼 denotes the empirical 𝛼-quantile of 𝑋𝜏, i.e., with respect to the

time-index 𝜏. However, the conservative correction of the correlation coefficient is not applied when

the risk multiplier is calculated.

Finally, the credit is given by the ratio of gross to net margin – both without margin buffer –

𝐶𝑃 = 1 −𝑀𝑃

�̃�𝑃

.

SPAN® calculates the gross margin ℳ̃𝑃 based on the single margin parameters ℳ𝑋, ℳ𝑌, which

already include the margin buffer 𝑏𝑋 , 𝑏𝑌, and subtracts 𝐶𝑃 ⋅ ℳ̃𝑃 leaving the net margin requirement

also including the required margin buffer:

ℳ𝑃 = ℳ�̃�(1 − 𝐶𝑃).

2.3 Conservative Corrections

To account for statistical uncertainty in the estimation of volatility for short time series in particular,

ECC has implemented a bootstrapping method to apply conservative corrections to the correlation

coefficients that are used to calculate the net portfolio standard deviation and hence the margin

credit.

Drawing from a sample of 100,000 time series with defined correlation, the 10% quantile of the

observed EWMA-correlations are determined. These values are stored with respect to length of the

time series and underlying correlation coefficient.

In the determination of the net margin, the standard deviation is obtained using the corrected

correlation coefficient, thereby increasing 𝜎𝑃, yielding a larger net margin and accordingly a smaller

margin credit.

Given the length 𝑁 of the time series and the sample correlation coefficient 𝜌 to be corrected, two

time series, 𝑥𝑡 and 𝑦𝑡, of length 𝑁 with independent Gaussian random numbers (zero mean and unit

standard deviation) are constructed. From these a third time series is constructed as

𝑧𝑡 = 𝜌 𝑥𝑡 + √1 − 𝜌2 𝑦𝑡,

such that the time series 𝑥𝑡 and 𝑧𝑡 are correlated with Pearson-coefficient 𝜌.

In the next step the sample correlation 𝑟 of 𝑥𝑡 and 𝑧𝑡 is computed using exponentially weighted

moving averages (EWMA). Repeating this for 100,000 samples of 𝑥𝑡 and 𝑧𝑡 produces a distribution of

sample correlations. ECC measures the 10% quantile, 𝑞0.1, of this distribution.

Sample correlations between the pre-recorded values are linearly interpolated, i.e., given a sample

correlation 𝜌 and both the next lower and the next higher value for which data is stored in the look-up

table 𝜌< ≤ 𝜌 < 𝜌>, and 𝑟<, 𝑟> being the corrected values 𝑞0.1 for 𝜌< and 𝜌>, respectively, the

corrected value for 𝜌 is

𝑟 = 𝑟< +𝑟> − 𝑟<

𝜌> − 𝜌< (𝜌 − 𝜌<).


3. Calculation of Spot Margin

Spot markets for commodities such as power or natural gas are different from derivatives markets for

a number of reasons:

- On power and natural gas spot markets transactions are concluded 24 hours a day, 7 days a

week. Due to this 24/7 trading for power and gas credit exposures on the spot markets can

arise 24/7. The credit exposures from those transactions are measured on near-to-real time

basis with the Current Exposure Spot Market (CESM) as described in chapter 3.3 Current

Exposure Spot Market

- A delivery versus payment (DVP) standard cannot be employed to limit counterparty exposures

as delivery of power and natural gas takes place shortly after trading and those commodities

are not storable

For these reasons ECC has introduced the concept of Spot Initial Margin (IMSM) which is based on an

in-house developed margin model. The IMSM is a margin which is called for expected transactions i.e.

before any transactions are concluded and before any credit exposure has arisen. It serves as a buffer

to reduce the number of margin calls during the day and to ensure that credit exposure (measured with

the CESM) on days where margin calls are not possible (e.g. weekends) i.e. the potential exposure

from expected transactions will be covered with a high degree of confidence.

The calculation of IMSM is based on a statistic of the daily total exposures. The daily exposure11 at day

t comprises all spot transactions that have been concluded between the accounting cut-off of the

previous ECC business day and the latest point in time where a trading participant in default would be

suspended from trading. The following graphic gives an overview of the total exposure:

The IMSM model for non-storable commodities is based on the historical daily exposures of a trading

participants during a look-back period of 1 year.

11 In EUR, used EOD FX rates can be found at http://www.eurexchange.com/exchange-en/market-data/clearing-

data/risk-parameters/Haircut-and-adjusted-exchange-rate

Total Exposure of day t

t - 1 t t + 1

16:00 8:00 16:00 12:00 8:00

Accounting cut-off

Payment Payment Accounting cut-off

Latest possibility

for suspension


Exposures from different commodities are netted. The Spot Initial Margin is called with admission of a

new Trading Participant and is only returned when the trading admission is terminated and all pending

payments with the Trading Participant have been settled. For emission certificates12 and other storable

commodities no Spot Initial Margin is calculated as there is no 24/7 trading but only CESM is calculated.

The certificates can be used in the default of a counterparty (similar to securities) to remediate the loss,

only the price-change risk has therefore to be covered.

3.1 Daily Exposures

In the following a detailed mathematical description of the variables used in the calculation of the spot

margin is given. The latest parameterization can be found in the ECC risk parameter file.

i. ECC is using several calendars:

a. Calendar days 𝐷cal. This is the full calendar. All other sets are subsets of 𝐷cal.

b. Working days 𝐷work. This is the calendar of all working days (Monday to Friday).

c. ECC days 𝐷ECC = 𝐷Business_Dates .

When counting days in a calendar, e.g. 𝑡 + 1 in 𝐷ECC, it is implied that both 𝑡 and 𝑡 + 1 are

elements of 𝐷ECC, and 𝑡 + 1 is the day after 𝑡 in that calendar13.

ii. Exposure:

𝐸𝑖,𝑔,𝑤𝑜𝑟𝑘(𝑡) = ∑ 𝑃𝑖(𝑠)𝑄𝑖(𝑠)

𝑠∈𝑆

| 𝑆 = [(𝑡 − 1)16:00; (𝑡 + 1)12:00]; 𝑡 counted in 𝐷𝑤𝑜𝑟𝑘

𝐸𝑖 ,𝑤𝑜𝑟𝑘(𝑡) = {∑ 𝐸𝑖,𝑔,𝑤𝑜𝑟𝑘(t) 𝑀𝑃𝑔,(𝐵𝑢𝑦;𝑆𝑒𝑙𝑙)

𝑛

𝑔=1

},

where 𝑡 is counting ECC days (respectively working days) and the index set 𝑆 contains

timestamps14, and 𝑃𝑖(𝑠) is the price paid by NCM 𝑖 for that trade in Product g at datetime 𝑠 and

12 Currently including all EUA, EUAA and CER contracts

13 A more precise definition is achieved by imposing an order on the calendar such that 𝑡𝑗 > 𝑡𝑖 for all 𝑗 > 𝑖. Then

our notation of 𝑡 + 1 corresponds to 𝑡𝑖+1 if 𝑡 corresponds to 𝑡𝑖. The simplified notation is used for convenience.

14 Here, for convenience the timestamp is assumed to be a unique identifier of a member’s trade, although in

ECC’s settlement instructions there is a unique primary key for each trade, because, e.g., all trades belonging to

an auction are settled simultaneously. The subscript indicates the CET time at that particular day.


𝑄𝑖(𝑠) the quantity bought (𝑄 > 0) or sold (𝑄 < 0) while specific margin parameter (MP) is given

for each Product g.

iii. Spot margin: 𝑀𝑖(𝑡 + 1) is the spot margin called at ECC day 𝑡 + 1. The margin 𝑀𝑖(𝑡 + 1) is

constructed to be the actual margin available at day 𝑡 + 1.

iv. Outlier: An outlier is counted, when the available margin 𝑀𝑖(𝑡) < 𝐸𝑖,𝐸𝐶𝐶(𝑡) and 𝑡 is an ECC

day15, 𝑡 ∈ 𝐷ECC. The probability 𝑝out is the empirical probability (frequency) over all days in a

certain test window (at ECC a business year with 250 days) and all trading participants 𝑖.

3.2 Algorithm to Compute the Initial Spot Margin

Each ECC day 𝑡 ∈ 𝐷ECC, a Trading Participant’s margin requirement16 for 𝑡 + 1 ∈ 𝐷ECC is given by

𝑀𝑖(𝑡 + 1) = max {𝜇 (𝐸𝑖,𝑤𝑜𝑟𝑘(𝑠))𝑆

+ 𝛼 𝜎 (𝐸𝑖,𝑤𝑜𝑟𝑘(𝑠))𝑆

; 𝛽 max𝑠′∈𝑆′

{𝐸𝑖,𝑤𝑜𝑟𝑘(𝑠′)}; 𝑀min; 𝑀min,first ∙ 𝐼{𝑡+1<𝑡0+29}}

+𝑀min ,additional17

where 𝑖 denotes the NCM and 𝛼, 𝛽, 𝑀min, 𝑀min,first, 𝑀min,additional are parameters obtainable from the

risk file from the ECC website.

The exposure is only used in the statistical component (mean plus multiple of standard deviation) if it

is larger than the minimum margin 𝑀min, otherwise it is replaced by a missing value and hence ignored.

The index set 𝑆 is given by

𝑆 = [𝑡 − 250 + 1; 𝑡] counted in 𝐷work.

The standard deviation is calculated using an exponentially weighting algorithm with 𝜆 = 0.99 to provide

a faster adaption to recent changes in trading behavior:

15 By construction an outlier at a calendar weekend is preceded by an outlier at a calendar working day.

Furthermore, on calendar weekends, ECC has no means of reacting to the outlier, e.g., by intra-day margin calls,

such that these outliers cannot be counted against ECC’s margin methodology.

16 The Initial Margin Spot Market is rounded up to the next full ten thousand euros (EUR 10,000).

17 Where 𝐼 designates the indicator function


𝜎 (𝐸𝑖,𝑤𝑜𝑟𝑘(𝑠))𝑆

= √ ∑ ((𝐸𝑖,𝑤𝑜𝑟𝑘(𝑠) − 𝜇(𝐸𝑖,𝑤𝑜𝑟𝑘)𝑆

)2 𝜆𝑡−𝑠+1)

𝑠 ⋲ 𝑆

/ ∑ 𝜆𝑡−𝑠+1

𝑠 ⋲ 𝑆

.

To reduce the statistical error for short time series a safety add-on18 is calculated and applied to the

standard deviation depending on the number of exposures greater than 𝑀min.

Number of exposures Safety Add On I

1 n/a

2 1.64

3 1.51

4 1.44

5 1.39

… …

100 1.09

… …

250 1.069

A list of all add-ons can be found in the ECC Risk Parameter file http://www.ecc.de/ecc-en/risk-

management/margining.

The look-back index set for the maximum-part is similarly given as 𝑆′ = [𝑡 − 𝑑; 𝑡] counted in 𝐷work

where 𝑑 is currently set to 20. In contrast to the statistical component all exposures in 𝑆´ are used.

The component 𝑀min,first is only applied if the admission date 𝑡0 of Trading Participant 𝑖 is closer than

30 days to the calculation date 𝑡.

Since the exposure on calculation day t is not known completely, ECC calculates 𝐸𝑖(𝑡) from all trades

after (t − 1)16:00 and concluded and registered until the calculation point of time to improve the forecast

18 The security add-on (or better to say security factor for the standard deviation) is a conservative adjustment to the calculated standard deviation to cope with possible estimation errors when working with small data samples. It is obtained by calculating 𝑛 (exponentially weighted and unbiased) standard deviations of a 𝑘-sample of standard normal distributed random variables via bootstrapping and taking the 90% percentile of the values. This procedure is repeated for 𝑘 = 1 to 𝑘 = 255 with 𝑛 = 100,000 to get a security factor for every possible sample size of exposure values.

http://www.ecc.de/ecc-en/risk-management/margining



of the model. This “incomplete” exposure is often referred to as “T0-Exposure” since it includes the

most updated trades on calculation day t = 0.

3.2.1 Special Holiday Adjustment

This methodology covers exposures for periods with a maximum duration of three days considering

the regularly occurring risk on weekends. However, on Easter and Christmas holidays the exposure

can increase up to five days.

To cover this risk, ECC Risk Controlling amends the current methodology by increasing IMSM on

special days where the margin needs to cover a longer period due to extra non-ECC business days.

Hereby, the exposure on the calculation day (“T0-Exposure”) will be replaced by the following

conservative estimation of possible exposures on dates prior the holiday period:

𝐸𝑡0= 𝜂 × 𝜇(�̂�𝑠)

𝑆+ max

𝑠′∈𝑆′{�̂�(𝑠′)}

where 𝜂 is 2 for a five day period or 1 for a four day period respectively. 𝜇(�̂�𝑠)𝑆 designates the mean

of all exposures for single days19 of the last calendar year which are greater than the minimal margin

𝑀min.

3.2.2 Consideration of delivery risk in the exposure generation

For markets where ECC faces a delivery risk, i.e. where ECC’s physical nomination can be cancelled

by the network operator (i.e. even an accepted nomination is not firm) the delivery risk is included in

the exposure generation by taking a relative portion20 of the financial exposure.

Example:

For the UK market, sellers are facing a curtailment risk by the TSO. In order to cover the potential

payments of imbalances, 30% of the financial exposure is taken into account.

Exposureold = −GBP 1,000

Exposurenew = −GBP 1,000 ⋅ −0.3

= GBP 300

19 Tuesday, Wednesday, Thursday

20 which can be found in the ECC Risk Parameter File


3.2.3 Example for exposure aggregation

Consider the following example of one week’s trading: Day and time indicate when a trade has been

concluded. The trade value is the traded quantity times the price. All trades up until the booking cut are

included in next day’s payment amount. ECC’s exposure towards the trading participant contains all

trades between the last booking cut and the next morning (12:00 CET). This quantity is the basis of

ECC’s Spot Margin.

ECC 4pm Booking Cut Latest possibility for suspension 11:45 am

Day Time Trade Value (k€) Exposure PaymentAmount

Mo 22:00 -56.00 0.00

Tue

12:00

165.00 12:00 233.00

16:00 98.00

21:00 -110.00

Wed

12:00

63.00 275.00 13:00 29.00

16:00 108.00

20:00 36.00

Thu

12:00 226.00

27.00 13:00 112.00

16:00 34.00

19:00 44.00

Fri

12:00 783.00

182.00 13:00 190.00

16:00 122.00

22:00 346.00

Sat

12:00 55.00

14:00 -3.00

21:00 -31.00

Sun

13:00 4.00

15:00 86.00

21:00 -30.00

Mo

12:00

737.00 356.00 13:00 192.00

16:00 28.00


21:00 90.00

Tue 12 :00 647.00

In order to better illustrate the IMSM algorithm and how the exposures are processed by the daily

margin calculation ECC provides an IMSM calculator as an excel version. The current version can be

downloaded on the ECC website http://www.ecc.de/ecc-en/risk-management/margining.

3.3 Current Exposure Spot Market

During an ECC business day ECC’s current, i.e. intraday, risk will be reflected in the “Current Exposure

Spot Market” (CESM):

For all spot products, the CESM is the net payment amount of all yet unpaid transactions. The net

payment amount per product will be multiplied with a margin parameter to also reflect

an increased risk for market areas where ECC faces a curtailment risk (e.g. by trading on a

non-virtual balancing point or by a local limit implementation of the TSO) or currency risk

the risk from storable products (like EUA or CER) where the CESM is the price change risk and

not the full payment amount.

The CESM is calculated as

∑ {PA𝑖 ∙ MP𝑖

𝑑𝑒𝑏𝑖𝑡 if PA𝑖 > 0

PA𝑖 ∙ MP𝑖𝑐𝑟𝑒𝑑𝑖𝑡 if PA𝑖 < 0

𝑛

𝑖=1

where

𝑖 Commodity, e.g. POWER 50HZ, NATGAS TTF

PA𝑖 Outstanding payments resulting from trading Commodity 𝑖

MP𝑖𝑑𝑒𝑏𝑖𝑡 Margin Parameter for Commodity 𝑖 in case there is an outstanding payment

MP𝑖𝑐𝑟𝑒𝑑𝑖𝑡 Margin Parameter for Commodity 𝑖 in case there is an outstanding payout

For standard products and markets the margin parameters are set to 1 to determine the net payment

amount. A list of adjusted margin parameters for affected market areas can be found in the ECC risk

parameter file.

The CESM is floored at 0, so no credit will be granted to other margin classes.

This margin is uploaded intraday into the EUREX Clearing system and is updated every 10 minutes. It

is reported in EUREX’s reports so Clearing Members can detect accumulating exposure on the spot

market intraday.

The margin will be reduced, as soon as the corresponding payments for the next business day have

been instructed in the payment system at the end of the business day (currently 18:00 CET). If financial



settlement is deferred (e.g. due to non-TARGET2 holidays in the corresponding market), the CESM

additionally includes these deferred payments.

3.4 Pre-Auction Margin

The Pre-Auction Margin21 (PAMA) reflects the financial limit set by the Clearing Member per auction

and Non-Clearing Member. The margin is used only for auction markets (𝐴𝑀) having a longer repetition

cycle and trading systems that provide a financial limit. The collateralization of the limit is used to

prevent Clearing Members from unexpected margin calls caused by the auction.

𝐿𝑖𝑚𝑖𝑡𝑁𝐶𝑀/𝐴𝑀 = 𝑃𝐴𝑀𝐴𝑁𝐶𝑀

PAMA is released to the Clearing Members accounts after the financial settlement of payments related

to the auction at the next business day.

3.5 Computation of Spotmargin during the change of Clearing Member

Considering the ECC booking cuts at 16:00 CE(S)T an ECC business days and the time of the transfer

on the “Transfer Day” (TD) at 00:00 CE(S)T, it must be taken into consideration that the NCM has the

possibility to trade in the time between booking cut and time of effective Clearing Member change while

creating additional exposure at the old CM. This exposure is settled the day after the TD and remains

as exposure for the old CM until this point in time.

To reduce the possible remaining exposures during that period, the change of the CM is effectively

possible only on days not following a weekend or holiday period of relevant currencies. To cover

possible exposure of the remaining period at the old CM the Initial Margin Spot Market (IMSM) is split

between the old and the new CM at the day before the TD. The old CM keeps 20% of IMSM

requirement and ECC pledges 80% of IMSM requirement from the new CM until the remaining

exposure is settled. The Current Exposure Spot Market (CESM) relevant for transactions between

16:00CE(S)T and 00:00 CE(S)T at the TD will be considered for the old CM in that time.

21 The Pre-Auction Margin is used for Guarantees of Origin at POWENEXT only


4. Financial Resources

According to EMIR Article 42 a CCP shall maintain a pre-funded default fund to cover losses that

exceed the losses to be covered by margin arising from the default of a clearing member. The CCP

shall establish a minimum amount below which the size of the default fund is not to fall under any

circumstances. A CCP shall establish the minimum size of contributions to the default fund and the

criteria to calculate the contributions of the single clearing members. The contributions shall be

proportional to the exposures of each clearing member.

According to EMIR Article 43 a CCP shall maintain sufficient pre-funded available financial resources

to cover potential losses that exceed the losses to be covered by margin requirements and the

default fund. The margin requirement, the default fund and the other financial resources combined

shall at all times enable the CCP to withstand the default of at least the two clearing members to

which it has the largest exposures under extreme but plausible market conditions.

The financial resources of ECC are therefore comprised of:

𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠

= 𝑚𝑎𝑟𝑔𝑖𝑛 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 + 𝑑𝑒𝑓𝑎𝑢𝑙𝑡 𝑓𝑢𝑛𝑑 + 𝐸𝐶𝐶 𝑑𝑒𝑑𝑖𝑐𝑎𝑡𝑒𝑑 𝑜𝑤𝑛 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠

+ 𝑜𝑡ℎ𝑒𝑟 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠

4.1 Default Waterfall

Calling margins is ECC's first mechanism to protect itself against the risks from a clearing member’s

default. The margin requirement is the capital equivalent of the available collateral (including haircut,

capped at the margin requirement as per the current margin method) at the time of the stress

calculation. As a first (conservative) approximation it is assumed that, in a stress case, excess

collateral would largely be reclaimed prior to default as for banks insolvency is largely triggered by

illiquidity, such that this conservative assessment of the margin requirement is plausible.

The default fund covers losses exceeding the losses to be covered by margins. The clearing

members contribute to the default fund in proportion to their exposure, which is equivalent to the

margin provided. The default fund has to be replenished up to its contribution at the time of a default.

The default fund has sufficient resources to cover losses arising out of a default of the two clearing

member to whom ECC has the largest exposure to. The total volume of the default fund is

determined by ECC based on daily stress tests. The stress tests simulate the default of one or more

clearing members under the assumption of extreme but plausible market conditions as defined in the

ECC Stress Test Framework.

Moreover, ECC holds dedicated own resources to cover potential losses exceeding the ones covered

by the margin requirements and the default fund contributions of the defaulting clearing member.

Dedicated own resources are freely available and amount to 25% of the capital requirements defined

under §16 EMIR. If ECC’s dedicated own resources should fall below the limit required by EMIR,

ECC will reinstate sufficient capital within one month at the latest.

The combined resources of margins, default fund and dedicated own resources are sufficient to

cover losses arising out of a default of the two clearing members to whom ECC has the largest

exposure to under market definitions defined in the ECC Stress Test Framework.


ECC may hold additional financial resources (other financial resources) to cover potential losses

exceeding the resources described above. Other financial resources are defined as the part of the

ECC's own capital not needed to comply with the minimum requirements under supervisory

legislation (solvency ratios, liquidity ratios).

The sequence of usage of the financial resource in the default waterfall is stipulated as follows:

Only if the loss from the default of a member exceeds its individual margins, individual default fund

contribution and ECC dedicated own resources, the default fund contribution of other non-defaulting

members will be used. Individual margins of non-defaulting members are never used to cover any

losses of defaulting members. ECC does not use any powers of assessment or tear up of existing

contracts.

1. ) Indiviual Margins, excess collateral or other amounts due to the defaulting member

2. ) Default fund contribution of defaulting member

3.) ECC dedicated own resources

4.) Default fund contribution of non-defaulting members

5.) ECC other financial resources


5. Margin Reports

Margin Requirements are reported end-of-day in Eurex® report CC050.

Report Name Content Availability

CC050 Margin Overview End-of-Day overview of all calculated ECC

Margin Requirements.

Daily before the start of new ECC

business day via Eurex®

Chapter 7 describes the detail reports that can be created using PC SPAN®.

Within margin reports the following abbreviations are used: Shortcut Margin

SPAN SPAN® Initial Margin

IMSM Spot Margin (CESM Buffer)

UKPF Delivery Margin for delivery instructions of expired UK Power Futures

Product Families: F5BM, F5PM, F6BM

HUPF Delivery Margin for delivery instructions of expired Hungarian Power Futures

Product Families: F8BM, F8PM, F8B1-F8BM

NLPF Delivery Margin for delivery instructions of expired NL Power Futures

Product Families: F4B1-F4B5

AMPO Additional Margin for financial Power contracts expiring before the final

settlementprice is determined. The margin is equal to the SPAN margin of the

contract. The margin will be released on the next payment day after the final

settlement price was calculated.

AMCO Additional Margin for a coal contract expiring on a EEX holiday where the final

settlementprice is not determined. The margin is equal to the SPAN margin of the

contract. The margin will be released on the next payment day after the final

settlementprice was calculated.

AMEM Additional Margin for emisson contracts, which is called for the buy- side only in

order to cover the time period between contract expiry and delivery. The margin is

equal to the SPAN margin of the contract. The margin will be released with the

payment of the delivery day.

NLGF Delivery Margin for delivery instructions of expired TTF Natural Gas Futures

Product Families: G4W1-G4W5

NBPF Delivery Margin for delivery instructions of expired NBP Natural Gas Futures

Product Families: G9BM

CEGF Delivery Margin for delivery instructions of expired CEGH Natural Gas Futures

Product Families: G7BM

DMEM Delivery Margin Emissions Certificates and storable commodities

CESM Current Exposure Spot Market

CONR Concentration Risk Margin


6. SPAN Calculation

ECC uses the standard SPAN®22 methodology to account for portfolio effects on derivatives markets.

The methodology allows ECC to optimally align margin requirements with risk, thereby realizing

efficient margining. ECC updates SPAN® risk parameters daily which are available on ECC’s

homepage for download. ECC recognizes the diversification effect in large portfolios by granting

margin credits of up to 99% for opposing positions in highly correlated products.

6.1 Combined Commodity

Products (futures and options) with the same underlying, load profile, delivery period and maturity

form a combined commodity, e.g. all power futures of the same delivery area and delivery period with

the same maturity including all option series of the same maturity form a combined commodity23.

6.2 Scan Risk

SPAN® uses a configurable range of price and volatility movements to calculate the worst-case loss

of a combined commodity. SPAN® comes with 16 pre-defined scenarios of combinations of price and

volatility movements over an assumed liquidation period; at ECC these are used without further

customization. The scenarios are so-called scan points, each of which is characterized by a price

change (multiple of price scan range), volatility change (multiple of volatility scan range) and the

weight attached to the scan point. In the case of futures, the worst-case loss is determined by the

price scan range only. To comply with standard methods, ECC bases this price scan range on the

single margin parameter defined before.

𝑃𝑟𝑖𝑐𝑒 𝑆𝑐𝑎𝑛 𝑅𝑎𝑛𝑔𝑒 = ℳ𝑋 ⋅ 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑉𝑜𝑙𝑢𝑚𝑒

For simplicity, the term price scan range is also referred to as scan range. For options, ECC sets the

price scan range to the price scan range of the underlying, uses a look-ahead period according to the

assumed liquidation period (i.e. the time to maturity is decreased by the liquidation period) and an

adequate volatility scan range. In SPAN® Options are priced using the Black76-model24. The value of

the volatility scan range, the appropriateness of the 16 scenarios and the inclusion of interest-rate-

risk are determined by Risk Controlling and are subject to at least annual validation.

22 SPAN® being short for The Standard Portfolio Analysis of Risk system is a methodology that calculates margin

requirements by analyzing the "what-ifs" of different market scenarios. Developed and implemented in 1988 by

Chicago Mercantile Exchange (CME), SPAN was the first system ever to calculate margin requirements

exclusively on the basis of overall portfolio risk at both clearing and customer level. In the years since its inception,

SPAN has become the industry standard for portfolio risk assessment.

23 Due to technical constraints at the Clearing Members' vendors a combined commodity across two exchanges

is not possible; the same effect is achieved by setting the intercommodity spreads to 1.

24 Black, Fischer. The pricing of commodity contracts, Journal of Financial Economics 3 167-179 (1976)

http://www.ecc.de/en/risk-management/reports-files/margin-parameter-files


These scenarios are applied to all products of each portfolio. The scenario with the greatest loss is

called active scenario and is considered for the calculation of the SPAN® Initial Margin. The scan risk

is calculated by multiplying the active scenario loss by the net position. The scan risk of a combined

commodity is calculated by summing over the respective scan risks of the constituent product

families.

6.3 Volatility Scan Range

The volatility scan range is the expected change of the implied volatility of an option over the

assumed liquidation period. It is expressed as percentage change from the current implied volatility of

the option. The volatility scan range is determined from analyzing the daily changes in implied

volatility across all existing liquid25 options with the same underlying (across all maturities and

strikes). The maximum day-to-day change (rounded up to the next 10%) is then used as volatility

scan range for all options.

6.4 Short-Option Minimum (SOM)

For short options that are deep out of the money, the theoretical risk calculated can be near to zero.

In market situations where the underlying price changes significantly these options may move into-

the-money and may generate large losses for holders of short positions in these options. Therefore a

minimum margin requirement for net short positions in options is implemented, called short option

minimum. If the short option minimum of a combined commodity exceeds the scan risk after

spreading, it constitutes the SPAN® Initial Margin of the combined commodity. The short-option

minimum is subject to annual validation.

6.5 Spreads

A spread contains offsetting positions in correlated instruments. Due to ECC’s product portfolio

offering arbitrage-free prices for futures in months/quarters/years, ECC uses not only correlation to

form regular spreads but also arbitrage-free prices to form so-called perfect spreads. Both kinds of

spreads allow ECC to reduce margin requirements without compromising risk coverage. Contracts in

delivery are not included in spreading.

6.5.1 Perfect Spreads

Opposing positions with the same underlying and completely overlapping delivery periods, which

differ only in delivery profile or delivery period, are called perfect spreads. Such positions are nearly

risk free – i.e. the daily variation margin of all positions in a perfect spread is zero – because the

25 Liquid Options are all options that have been traded at least once


settlement prices are arbitrage free. To account for differences from rounding effects the margin

credit is set to 99%. Thus, the intercommodity credit for each position in a perfect spread is

𝐼𝑛𝑡𝑒𝑟𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝐶𝑟𝑒𝑑𝑖𝑡 = 𝑆𝑐𝑎𝑛 𝑅𝑖𝑠𝑘 ⋅ 0.99

Perfect spreads can contain different combined commodities.

Perfect spreads are obtained by decomposing all products in subproducts, such as years in

seasons/quarters/months, seasons in quarters and months, quarters in months, base in peak and

offpeak. The decomposition is implemented using a Chomsky-type-2 algorithm.

6.5.2 Regular Spreads

Regular spreads exploit the correlation between time series to reduce the margin requirement. The

granted margin reduction is calculated in SPAN using the credit as introduced in section2.2.

Credits less than 0.01% are deleted, and the maximum applied margin credit is 99%.

If a portfolio consists of two opposing positions 𝑋 and 𝑌, the intercommodity credit for each of both

positions is given by

𝐼𝑛𝑡𝑒𝑟𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝐶𝑟𝑒𝑑𝑖𝑡 = min (𝑆𝑐𝑎𝑛 𝑅𝑖𝑠𝑘𝑋, 𝑆𝑐𝑎𝑛 𝑅𝑖𝑠𝑘𝑌) ⋅ 𝑀𝑎𝑟𝑔𝑖𝑛 𝐶𝑟𝑒𝑑𝑖𝑡

Extraction of regular spreads from portfolio data using the margin credits given in the span-file is

done by the SPAN®-software.

6.6 SPAN Initial Margin

To summarize, the SPAN® initial margin is calculated per combined commodity in the following steps:

1. Calculation of the overall scan risk for each combined commodity.

2. The scan risk is then reduced by the intercommodity credits to reflect the reduced risk in

portfolios with opposing positions. This process is called spreading. Perfect spreads are applied

first. Then ordinary spreads are applied to the portfolio in descending order of intercommodity

credit. If necessary, the short option minimum is applied afterwards.

3. The resulting amount per portfolio is called SPAN® initial margin.

6.7 Delivery Margin

Delivery Margin (DM) is called for positions in physically-settled power and natural gas futures during

the delivery period on the day after the expiry of the contract and for net short positions in storable

commodities two business days before expiry of the contract.

The Delivery Margin for power and natural gas futures is given by26:

DM Power / Natural Gas = Scan Range Front_Month ×Expiry Month Factor × ∣Net Position∣

The Expiry Month Factor is set as introduced in section 2.1. It should be noted that the reduction in

Contract Volume over the delivery month is not considered in the calculation of the Delivery Margin.

26 The Scan Range of the last trading day before the expiry date is used


For power and natural gas futures for which positions are kept in the EUREX® system during delivery,

the Delivery Margin is reported under the future’s respective Margin Class (e.g. HUPF for Hungarian

Power Futures).

The Delivery Margin for storable commodities is given by:

DM Storable Commodities = Last Spot Price *(1+HC Storable Commodities)* Volume * ∣Net Short Position∣

Each holder of an open short position in storable commodities such as emission rights or guarantees

of origin is obliged to pre-deliver the respective commodities to ECC's storable commodities account

before the settlement day of the position. In case of a shortage of holdings ECC will demand

securities in the form of a Delivery Margin. ECC calculates the Delivery Margin two business days

before expiry of the contract and adjusts the Delivery Margin on a daily basis until expiry of the

contract. ECC will mark-to-market the exposure from the net short balances intraday and add a

haircut for potential fluctuations in market value. The current value of this haircut can be found in the

risk parameter file on the website. The Delivery Margin for storable commodities is reported under

the Margin Class DMEM.


Example (using the parameters as of 01.01.2014)

Power and Natural Gas Future Delivery Margin:

Contract F8BM 201207

Net Position 10

Scan Range 4017.60 €

Expiry Month Factor 2.5

Delivery Margin 10 * 4017.60 * 2.5 = 100,440.00 €

Emission Certificates Future Delivery Margin:

Last Spot Price 12 €/t

Net Short Position 10

Contract Size 1000 t

Delivery Margin 12 *1.3 * 10 * 1000 = 156,000.00 €

6.8 Premium Margin and Additional Collateral

At ECC, options are not subject to variation margin. Instead a premium margin is defined as the

product of net position, contract size, and current option settlement price. For short options, the

premium margin is called daily: for long options, the premium is credited to the member's account but

not paid out.

EMIR Article 46 (2) allows the acceptance of the underlying of a derivative or the financial instrument

that gives rise to a risk to be used as collateral (additional collateral). Currently, ECC accepts EUA as

collateral, which is applied similar to premium margin i.e. an additional collateral amount reduces the

margin requirement. Different models are offered which have to be selected by the Clearing Member:

# Formula per selected Model incl. Risk Management Limits

1 := Min ( Available Collateral Value ; 0)

2 := Min ( Available Collateral Value ; x % * ReqBASE ; y € ; ReqIMSM )

3 := Min ( Available Collateral Value ; x % * ReqBASE ; y € ; ReqIMSM + ReqSPAN )

4 := Min ( Available Collateral Value ; x % * ReqBASE ; y € ; ReqIMSM + ReqSPAN + ReqPREM )

5 := Min ( Available Collateral Value ; x % * ReqBASE ; y € ; ReqIMSM + ReqSPANcapped )

6 := Min ( Available Collateral Value ; x % * ReqBASE ; y € ; ReqSPANcapped )

Where:

ReqBASE

:= ReqIMSM

+ ReqSPAN


ReqSPANcapped

:= Min ( Min ( PiecesAvailable

; Net Short Future Position ) * ( Value * (1 – Haircut ) ) ;

ReqSPAN

)

Concentration limits on ECC level according to the current concentration risk policy apply to limit the

maximum share of EUA that can be used as collateral.

6.9 80% Margin CAP

ECC calculates margin on a gross basis for each Clearing Member (i.e. without taking into account

netting effects between different clients). Regular Spreads are calculated only for opposing positions

(i.e. long vs. short) and the margin reduction is based on the historical behavior of the regular

spreads. If the margin reduction after all those measures still exceeds the 80% cap set by RTS 153

Article 27 (4), a supplementary margin is calculated. According to RTS 153 Article 27 (4), “where

portfolio margining covers multiple instruments, the amount of margin reductions shall be no greater

than 80 % of the difference between the sum of the margins for each product calculated on an

individual basis and the margin calculated based on a combined estimation of the exposure for the

combined portfolio”.

ECC has a two-step approach: In the first step, margins are calculated on a gross basis and on a net

basis for each Clearing Member. The difference between the gross and net margin is the highest

possible margin reduction for each Clearing Member. In the second step the supplementary margin is

calculated using the current initial margin, the gross margin and the net margin for each Clearing

Member (CM). If the margin reduction granted by the current initial margin exceeds 80% of the

highest possible margin reduction, the supplementary margin ensures coverage of this

exceedance.Step 1: The gross margin is the SPAN® Initial Margin without spreading except for

Perfect Spreads. Perfect Spreads are applied to risk-free positions and therefore a 100% margin

reduction is allowed. The gross margin of a Clearing Member is the sum of the gross margins of its

accounts (proprietary and Non Clearing Members accounts):

𝐺𝑟𝑜𝑠𝑠𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀 = ∑ 𝐺𝑟𝑜𝑠𝑠𝑀𝑎𝑟𝑔𝑖𝑛𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠

The net margin is calculated similarly to the regular SPAN® Initial Margin but Margin Credits are

granted for opposing and concurrent positions and there is a netting of all positions on Clearing

Member level (non-segregated collateral). The net margin represents the portfolio VaR of a Clearing

Member.

Step 2: The difference between the gross and net margin is expected to be the highest possible

margin reduction of a Clearing Member. ECC now calculates the lower margin limit for each Clearing

Member:

𝐿𝑜𝑤𝑒𝑟 𝑀𝑎𝑟𝑔𝑖𝑛 𝐿𝑖𝑚𝑖𝑡𝐶𝑀 = 𝐺𝑟𝑜𝑠𝑠𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀 – (𝐺𝑟𝑜𝑠𝑠𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀 − 𝑁𝑒𝑡𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀) ⋅ 0.8

= 0.2 𝐺𝑟𝑜𝑠𝑠𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀 + 0.8 𝑁𝑒𝑡𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀

If the current initial margin of a Clearing Member is less than the lower margin limit, a supplementary

margin is calculated at the end of each day to ensure that the 80% limit is observed:

𝑆𝑢𝑝𝑝𝑙𝑒𝑚𝑒𝑛𝑡𝑎𝑟𝑦𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀 = max{𝐿𝑜𝑤𝑒𝑟 𝑀𝑎𝑟𝑔𝑖𝑛 𝐿𝑖𝑚𝑖𝑡𝐶𝑀 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀; 0}

The supplementary margin is introduced as additional minimum requirement for the default fund.


6.10 Concentration Risk Margin

SPAN initial margin 𝐼𝑀𝑆𝑃𝐴𝑁 basically considers a liquidation period of two days according to ESMA

Article 26. However the real liquidation period in narrow markets could exceed this regulatory minimum

requirement. If the effective liquidation period 𝑙 of an existing position is greater than two days an

additional concentration risk margin is required

𝐶𝑜𝑛𝑐𝑒𝑛𝑡𝑟𝑎𝑡𝑖𝑜𝑛 𝑅𝑖𝑠𝑘 𝑀𝑎𝑟𝑔𝑖𝑛 ∶= 𝐼𝑀𝑆𝑃𝐴𝑁 ⋅ max (√𝑙

2− 1; 0).

6.10.1 Concentration risk margin on account level

Let 𝑂𝐼𝐴𝐶𝐶𝑖 be the net open interest size (“net quantity times contract value”) of a specific commodity27

𝐶𝐶𝑖 within an account (A). The liquidation period for this specific position is given as

𝑙𝐴𝐶𝐶𝑖 =

𝑂𝐼𝐴𝐶𝐶𝑖

𝑀𝐶𝐶𝐶𝑖

with the assumed daily market capacity 𝑀𝐶𝐶𝐶𝑖.28

The liquidation period on account level is the open interest weighted liquidation period over all

positions 𝐶𝐶𝑖, 𝑖 = 1, … , 𝑛

𝑙𝐴 =∑ 𝑙𝐴

𝐶𝐶𝑖 ⋅ 𝑂𝐼𝐴𝐶𝐶𝑖𝑛

𝑖=1

∑ 𝑂𝐼𝐴𝐶𝐶𝑖𝑛

𝑖=1

.

The concentration risk margin on account level is defined as

𝐶𝑂𝑁𝑅𝐴 = min (√𝑙𝐴

2− 1; 0) ⋅ 𝐼𝑀𝑆𝑃𝐴𝑁,𝐴

with the SPAN Initial Margin 𝐼𝑀𝑆𝑃𝐴𝑁,𝐴 of the account.

6.10.2 Concentration risk margin on clearing member level

The aggregation of positional volumes of accounts can create concentration on Clearing Member

level (cluster effect through small but similar positions of accounts of a CM). To consider this risk

analogous calculations are needed on CM level based on the net position of the CM. The final margin

requirement on CM level considers the collected concentration risk margin of all accounts and a

fraction of the initial margin buffer (“𝐼𝑀𝐵𝑢𝑓𝑓𝑒𝑟 = ∑ 𝐼𝑀𝑆𝑃𝐴𝑁,𝐴𝐴 𝑜𝑓 𝐶𝑀 − 𝑁𝑒𝑡𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑀”)

𝐶𝑂𝑁𝑅𝐶𝑀 = max {min (√𝑙𝐶𝑀

2− 1; 0) ⋅ ∑ 𝐼𝑀𝑆𝑃𝐴𝑁,𝐴

𝐴 𝑜𝑓 𝐶𝑀

− ∑ 𝐶𝑂𝑁𝑅𝐴

𝐴 𝑜𝑓 𝐶𝑀

− 𝛼 ⋅ 𝐼𝑀𝐵𝑢𝑓𝑓𝑒𝑟}.

27 Here products (futures and options) with the same underlying (same market) form a commodity, e.g. all German

power contracts form the commodity “German Power”.

28 The used market capacities are provided at ECC’s website (https://www.ecc.de/ecc-en/risk-management/margining/concentration-risk-margin).

https://www.ecc.de/ecc-en/risk-management/margining/concentration-risk-margin

https://www.ecc.de/ecc-en/risk-management/margining/concentration-risk-margin


𝛼 ∈ [0,1] is initially set to 50%.

6.10.3 Caps and floors

To consider the time needed to identify a default and design the close out strategy the calculation of

the liquidation period 𝑙𝐴𝐶𝐶𝑖/𝑙𝐶𝑀

𝐶𝐶𝑖 takes an additional add-on of 0.3 days into account.

On account level the final liquidation period 𝑙𝐴 is capped at 3 days as ECC’s default management

procedure ends after 3 days. On Clearing Member level the concentration risk margin is capped at

50% of the total SPAN initial margin requirement (∑ 𝐼𝑀𝑆𝑃𝐴𝑁,𝐴𝐴 𝑜𝑓 𝐶𝑀 ).

ECC validates the adequacy and, if necessary, adjusts the caps and floors on a regular basis.

6.11 Stresstest Supplementary Margin

According to EMIR Article 42 ECC is required to maintain a pre-funded default fund to cover the losses

that exceed the losses to be covered by margin requirements. The volume of the default fund and the

individual contributions of ECC's clearing members are determined based on the daily stress testing

results. ECC calculates the default fund contribution for the following month the first ECC business day

of the following month (calibration day).

The total Default Fund will be capped at an appropriate amount equal to a percentage of the Total

Initial Margin Requirement (SPAN and IMSM). The exact amount is published under

https://www.ecc.de/ecc-en/risk-management/stress-testing/default-fund or in the ECC Risk Parameter

list (https://www.ecc.de/blob/14902/b5e79479f510626689fb08a3e653931c/risk-parameters-pdf-

data.pdf).

In the case that the financial resources in the default fund plus ECC’s Dedicated Own Resources are

not sufficient to cover the daily stress test ECC calls an Intraday Supplementary Margin from the two

Clearing Members that produce the largest combined stress testing result. The called Intraday

Supplementary Margin will be referred to the Margin Class “SSMA” and is released at the end of the

same business day. The Margin Class “SSMA” will be visible in the CI050 report for the PP-account of

the respective Clearing Members.

In any case if the capped total Default Fund cannot cover the stress test result additional requirements

will be covered by an EoD Supplementary Margin referred to the Margin Class “SSMB”. ECC calculates

the potential combined shortfalls for all combinations of simultaneous defaults of two Clearing

Members. The combined shortfall that exceeds the default fund is allocated to the two Clearing

Members according to their share of the combined shortfall. As there might be various market and

default scenarios that produce a combined shortfall that exceeds the total Default Fund the maximum

allocation across all market and default scenarios is then used to determine the EoD Supplementary

Margin for a Clearing Member.

https://www.ecc.de/ecc-en/risk-management/stress-testing/default-fund

https://www.ecc.de/blob/14902/b5e79479f510626689fb08a3e653931c/risk-parameters-pdf-data.pdf

https://www.ecc.de/blob/14902/b5e79479f510626689fb08a3e653931c/risk-parameters-pdf-data.pdf


The Margin Class “SSMB” will be visible in the CC050 report for the PP-account of the respective

Clearing Members. It will further be considered as additional margin securities in the stress test of the

following days to lower the existing shortfalls.

Should the EoD Supplementary Margin be called from more than 25% of all Clearing Members or

should the Total Initial Margin Requirement change significantly the parameters to calculate the

default fund contribution will be reviewed.

The EoD Supplementary Margin is released in the frame of the monthly default fund adjustment if the

stress test is equal or lower than the capped default fund, which is recalibrated based on the total

initial magin requirement (SPAN and IMSM) in the frame of the monthly default fund adjustment.


7. Sample Calculations with PC SPAN®

7.1 Prerequisites

To calculate SPAN Initial Margin, the following requirements have to be fulfilled:

1) The PC SPAN® tool can be downloaded from CME free of charge. This can be accomplished

in the following way:

a. Go to https://login.cmegroup.com/ and create a new account b. Login and navigate to Portfolio&Risk/CoreMarginCalculator/Download

Center/Software c. Choose the Version of PC SPAN suiting your needs (in general the latest version)

2) Download and install the newest PC SPAN® Orgmaster, which is available on the CME

public Span FTP site, (ftp://ftp.cmegroup.com/pub/span/util/ ; no login required)

3) The current SPAN® parameter file can be obtained from:

a. ECC’s FTP site (ftps.ecc.de, login required)

b. ECC’s website (http://www.ecc.de/en/risk-management/reports-files, no login required)

c. CME’s FTP site (ftp://ftp.cmegroup.com/span/data/ecc/; no login required)

It should be noted that only the SPAN® parameter file on ECC’s FTP site contains the full set

of settlement prices.

4) A position file in the SPAN® format or the user can enter positions manually

The example files are available on ECC’s website (http://www.ecc.de/en/risk-

management/margining) as of 4th July 2012 (which has been generated on 3rd July 2012)

ftp://ftp.cmegroup.com/pub/span/util/

http://www.ecc.de/en/risk-management/reports-files

ftp://ftp.cmegroup.com/span/data/ecc/




7.2 Loading SPAN® Parameters

The first step is to load parameter files into PC SPAN® via “File > Load File(s)”.

Detailed information concerning products and exchanges can be viewed by expanding the relevant

exchange path.

7.3 Building-Portfolio

Portfolios can be loaded via “File → Open Portfolio”. Select the specific SPAN® position file or enter

the positions manually. Click on “File → New Portfolio” and enter details of your account. The options

(“Qualified Institutional Buyer” and “Normal for GSCIER”) are not used for ECC margin calculation

and should be left unchanged. Please double check that Euro is used as your portfolio currency or

otherwise select Euro as your portfolio currency. By adjusting the entries for native and conversion

currency to “EUR” on the “Tools – Preferences – Calculation Parameters” tab, no change for portfolio

currency will be necessary.


By selecting the “Positions” tab, you can choose the specific products and type in the actual position

size. In the example the ECC Test Positions (2012-07-03) contain five positions of F1BQ with

settlement date Oct 2012:

By checking the boxes “Contracts with Positions” and “All Positions for Selected Exchange Complex”

you get a complete overview of all current positions.


7.4 Calculating SPAN® Initial Margin Requirements

Choose “Calculate Portfolio(s) Requirement” from File Menu either for all portfolios or just for one

specific portfolio by selecting a portfolio and right clicking and then selecting “calculate requirements”.

The different components of the SPAN® Initial Margin and the Net Option Value (for portfolios with

option positions) are shown in a popup window:

They can also be accessed by selecting the specified portfolio under the “Performance Bond

Requirement” tab.


7.5 Checking Margin Requirements

A detailed margin calculation can be viewed, printed and exported by selecting the tab “Reports“. The

Scan Risk can be obtained within “Scan Tiers” section which shows the result from the 16 scenarios:

The report “Inter Tiers“ shows “Inter Commodity Credit“ per Combined Commodity (in the “Intercomm

Credit” column):


“Original Delta” and “Remaining Delta” denote position sizes before and after spreading.

In summary, the SPAN® Initial Margin Requirement (without Available Net Option) consists of all

“Scan Risks” less the sum of all “Intercommodity Credits”, except the lines denoted with “Overall” in

the column “Tier#”.

ECC Margining€¦ · ECC has decided to adopt the buffer-method in the following way: ECC first...

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