the fundamental significance of the clearing house in on and off exchange financial derivatives...

The fundamental significance of the clearing house in on and off exchangefinancial derivatives trading

Simona Simon, Eurex Frankfurt AG

6th International Belgrade Stock Exchange Conference Belgrade, November 15 – 16, 2007

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Overview

Structure and Positioning of Eurex

The Eurex Clearing House - Provider of safe and effective post-trade processing

Wrap up - The significance of the clearing house in trading derivatives

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Eurex Ownership Structure

Eurex is a public company and is owned in equal parts by Deutsche Börse AG and SWX Eurex operates the Eurex Exchanges, Eurex Clearing and the ECN Eurex Bonds and Eurex Repo

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Eurex is well-positioned as market leader in European financial derivatives

Traded contracts 2006 of options and futures in mio.

ForeignExchange

Commodity

Short TermInterest Rate

Index Derivatives

Long TermInterest Rate

Individual Equity

EUROPE YoY

43%

47%

19%

11%

20%

45%

25

190

406

629

761

Total 28%2,765

754

308

487

730

= Volumes are too big to display them proportionally= Eurex’s share of traded contracts

• Turnover is mainly based on EUR denominated financial derivatives, e.g.

EuroStoxx 50DAXBundBoblSchatz

• Expansion of product suite into new asset classes and regions:

RussiaVolatilityCredit

2005-2006 growth rates

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Information Trading Clearing Settlement Custody

– Streaming data feeds

– Physical terminals

– Indices

– Operate open electronic order books

– Connectivity to international trading members

– Verification of trade-related information

– Central counterparty (CCP)

– Risk Mgmt.

– Delivery of securities

– Financing services

– Securities lending & borrowing

– Physical custody of securities

– Related services, e.g. tax, corporate actions, income

InformationServices

FWB EurexClearingHouse

Clearstream Banking(Frankfurt and Luxemburg)

Eurex

IT services and software development (DB Systems)

Cash and Fixed Income market as well as Derivatives market instruments are subject to the value chain of Group Deutsche Börse (GDB)

Value Chain

6

Overview




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Eurex Clearing AG is the central counterparty for different trading locations

Effective risk & collateral management

Reduction of cross border settlements

Market Participants

Eurex D/ZH

Derivatives

CBF

Eurex Bonds

Bonds

SIS

Eurex Clearing AG

Trading

Clearing

SettlementCBL

Xetra / FWB

Equities

Eurex Repo

Repos

Many Markets – One Clearing House

FWB = Frankfurter Wertpapierbörse CBF = Clearstream Banking Frankfurt SIS = SegaIntersettleISE = Irish Stock Exchange CBL = Clearstream Banking Luxembourg EB = Euroclear Bank

Xetra / ISE

Equities

EB Crest

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A Central Clearing House - Provider of safe and effective post-trade processing

Clearing denotes all activities from the time a transaction is made until it

is finally settled

Main activities in clearing are – Reporting / monitoring– Risk margining – Netting of trades to single positions– Tax handling– Failure handling

Clearing in its wider sense involves the management of post-trading,

pre-settlement credit exposures, to ensure that trades are settled in

accordance with market rules, even if a buyer or seller becomes

insolvent prior to settlement

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Benefits of the Clearing House

The offsetting of risk positions reduces the total collateral requirements for risk management. Possibility to combine the pledging of collateral for different trading platforms

Eurex Clearing AG takes the counterparty risk for each trade executed on a trading platform supported by the CCP. The CCP thus represents the contractual partner of every trade at the moment of execution.

Members can instruct post trades transactions for delivery processing via a single but flexible interface. This is available directly after trade execution. Thus, posting is possible already on the trading day

Settlement Netting significantly reduces the settlement volume. The number of delivery instructions and the risk of fails are both

reduced.

Protects against counterparty risk

Protects against counterparty risk

Guarantees

Post-trade anonymity

Guarantees

Post-trade anonymity

Provides efficient calculation/ allocation of collateral

Provides efficient calculation/ allocation of collateral

Extends trade management/delivery process

Extends trade management/delivery process

Reduces settlement instructions/ increases settlement efficiency

Reduces settlement instructions/ increases settlement efficiency

Due to CSD Netting and the reallocation of trades within each (I)CSD, the number of cross-border settlements is minimized. CSD Netting does not require any member activity.

Reduces cross-border settlements (CSD Netting)

Reduces cross-border settlements (CSD Netting)

Order book anonymity (pre-trade) is extended to the subsequent processes up to settlement (post-trade anonymity) in order to have a fair and non-discriminatory trading and settlement.

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Clearing Functions and Duties – Example Eurex Clearing

Contractual counterpart in all trades

Automatic posting of trades, premium and fees in the members accounts

Daily valuation of positions based on settlement prices

Determination of margins

Determination of members collateral (stocks and shares)

Notification by random selection and allocation of counterparts at exercise

Delivery instructions for supported CSDs

11

Overview




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Wrap up – The significance of a clearing house in on- and off-exchange financial derivatives trading

Trading derivatives via exchange mitigates risk exposure

– Elimination of counterparty risk• Central counterparty guarantees trade (via order book or block trading) • Standardized contracts enable to close position with a third party at any

time

– Transparency• Price and volume information• Open order book• Daily valuation

– Efficient capital allocation• Netting• Cross margining

– Low transaction costs

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CONTACT

Simona SimonVice PresidentEurex Sales

T +49 (0) 69 211 18218F +49 (0) 69 211 618218Mob +49 (0) 172 61 99705 E-mail [email protected]

For further information please go to

www.eurexchange.com

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Disclaimer© Eurex 2007Deutsche Börse AG (DBAG), Clearstream Banking AG (Clearstream), Eurex Bonds GmbH (Eurex Bonds), Eurex Repo GmbH (Eurex Repo), Eurex Clearing AG (Eurex Clearing) and Eurex Frankfurt AG are public companies and are registered under German law. Eurex Zürich AG is a public company and is registered under Swiss law. Clearstream Banking S.A. (Clearstream) is a public company and is registered under Luxembourg law. The administrating and operating institution of the Frankfurt Stock Exchange (FSE) is DBAG. The administrating and operating institution of Eurex Deutschland is Eurex Frankfurt AG (Eurex). Eurex Deutschland and Eurex Zürich AG are in the following referred to as the “Eurex Exchanges”.

All intellectual property, proprietary and other rights and interests in this publication and the subject matter hereof (other than certain trademarks and service marks listed below) are owned by DBAG and its affiliates and subsidiaries including, without limitation, all patent, registered design, copyright, trademark and service mark rights. While reasonable care has been taken in the preparation of this publication to provide details that are accurate and not misleading at the time of publication DBAG, Eurex, Eurex Bonds, Eurex Repo, the Eurex Exchanges, Eurex Clearing, Clearstream and FSE and their respective servants and agents (a) do not make any representations or warranties regarding the information contained herein, whether express or implied, including without limitation any implied warranty of merchantability or fitness for a particular purpose or any warranty with respect to the accuracy, correctness, quality, completeness or timeliness of such information, and (b) shall not be responsible or liable for any third party’s use of any information contained herein under any circumstances, including, without limitation, in connection with actual trading or otherwise or for any errors or omissions contained in this publication.

This publication is published for information only and shall not constitute investment advice. This brochure is not intended for solicitation purposes but only for use as general information. All descriptions, examples and calculations contained in this publication are for illustrative purposes only.

Eurex offers services directly to members of the Eurex Exchanges. Those who desire to trade any products available on the Eurex market or who desire to offer and sell any such products to others, should consider legal and regulatory requirements of those jurisdictions relevant to them, as well as the risks associated with such products, before doing so.

Eurex derivatives (other than DAX® Futures contracts, Dow Jones STOXX 50® Index Futures contracts, Dow Jones EURO STOXX 50® Index Futures contracts, Dow Jones STOXX® 600 Banking Sector Futures contracts, Dow Jones EURO STOXX® Banking Sector Futures contract, Dow Jones Global Titans 50SM Index Futures contracts, Dow Jones Italy Titans 30SM Index Futures contracts, MDAX® Futures contracts, Eurex interest rate derivatives, and Eurex iTraxx® credit derivatives) are currently not available for offer, sale or trading in the United States or by United States persons.

Trademarks and Service MarksBuxl®, DAX®, Eurex®, Eurex Bonds®, Eurex Repo®, Euro GC Pooling®, Eurex Strategy WizardSM, FDAX®, iNAV®, MDAX®, ODAX®, SDAX®, StatistiX®, TecDAX®, VDAX-NEW®, Xetra® and XTF Exchange Traded Funds® are registered trademarks of DBAG.

Xemac® is a registered trademark of Clearstream Banking AG. Vestima® is a registered trademark of Clearstream International S.A.

RDXxt® is a registered trademark of Wiener Börse AG (Vienna Stock Exchange).

iTraxx® is a registered trademark of International Index Company Limited (IIC) and has been licensed for the use by Eurex. IIC does not approve, endorse or recommend Eurex or iTraxx® Europe 5-year Index Futures, Europe iTraxx® Hi Vol 5-year Index Futures and Europe iTraxx® Crossover 5-year Index Futures.

Eurex is solely responsible for the creation of the Eurex iTraxx® Credit Futures Contract, its trading and market surveillance. ISDA® neither sponsors nor endorses the product’s use. ISDA® is a registered trademark of the International Swaps and Derivatives Association, Inc.

SMI®, SMIM® and VSMI® are registered trademarks of SWX Swiss Exchange.

STOXX®, Dow Jones STOXX® 600 Index, Dow Jones STOXX® Mid 200 Index, Dow Jones STOXX® TMI Index, VSTOXX® Index and Dow Jones EURO STOXX®/STOXX® 600 Sector Indexes as well as the Dow Jones EURO STOXX 50® Index and the Dow Jones STOXX 50® Index are service marks of STOXX Ltd. and/or Dow Jones & Company, Inc.

Dow Jones, Dow Jones Global Titans 50SM Index, and Dow Jones Italy Titans 30SM Index are service marks of Dow Jones & Company, Inc. The derivatives based on these indexes are not sponsored, endorsed, sold or promoted by STOXX Ltd. or Dow Jones & Company, Inc., and neither party makes any representation regarding the advisability of trading or of investing in such products.

The names of other companies and third party products may be the trademarks or service marks of their respective owners.

Backup

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Dow Jones STOXX® 600 Sector Index

Dow Jones EURO STOXX® Select Dividend 30 Index

RDXxt® USD (Futures only)

Options/LEPOs

on 4 Russian ADRs

iTraxx® Europe Crossover 5-year Index-Futures

iTraxx® Europe Hi Vol 5-year Index-Futures

iTraxx® Europe 5-year Index-Futures

Credit

Derivatives

EXTF Derivatives

SMI®

MDAX® (Futures only)

Eurex Product Range

Options/LEPOs

on 6 Spanish shares

SMIM® (Futures only)

OMX Helsinki 25

Options on Euro-Bund Futures

DAX®

Futures on 403 equi-ties of leading Euro-pean and national indexes such as Dow Jones (EURO) STOXX 50® Index, DAX ® and SMI® and 16 Futures on all index components of the RDxt index

Options on Euro-Bobl Futures

Options/LEPOs

on 10 US shares

Options on Euro-Schatz Futures

CONF Futures

Options/LEPOs

on 11 Italian shares

Euro-Buxl® Futures

XMTCH on SMI® Futures & Options

Options/LEPOs on 26 Dutch shares

Options on Three-Month EURIBOR Futures

Euro-Bund Futures

iShares Dow Jones EURO STOXX 50® Futures & Options

VSTOXX® Futures

Dow Jones STOXX® Large, Mid ans Small 200 Index

Options/LEPOs on 11 Scandinavian shares

Three-Month EURIBOR Futures

Euro-Bobl FuturesDow Jones EURO STOXX 50® EX Futures & Options

VSMI® Futures

Dow Jones STOXX® 600 Index

Options/LEPOs on 34 Swiss shares

One-Month EONIA Futures

Euro-Schatz Futures

DAX® EX Futures & Otpions

VDAX-NEW® Futures

Dow Jones (EURO) STOXX 50® Index

Options/LEPOs on 58 German shares

Interest Rate Derivatives

Fixed Income Money MarketVolatility Index Futures

Equity Index Derivatives (Futures and Options)

Equity Derivatives

Dow Jones EURO STOXX® Sector Index Futures

Options/LEPOs

on 43 French shares

Options/LEPOs

on 11 Austrian shares

Dow Jones Global Titans 50SM Index

TecDAX®

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Contractual Relationship at Eurex Clearing

Clearing House

contractual relationship





contractual relationshipGeneral

ClearingMember

NonClearingMember

DirectClearingMember

customer customer


NonClearingMember

customer

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Requirements for Clearing Members

A financial institution located within the European Union or Switzerland needs the admission to operate custody business, credit operation and receipt of margin by customers in the form of securities and cash

Membership Types– General- Clearing- Member (GCM)

– Direct- Clearing- Member (DCM)

Necessary liable equity capital

Clearing fund contribution

Cash Clearing: an account at LZB Frankfurt or Swiss National Bank (SNB)

Settlement and pledging of Securities:– Settlement account: at Clearstream Banking Luxembourg or Frankfurt, Euroclear or

SegaIntersettle

– Pledged Securities Account: at Clearstream Banking Frankfurt or SegaIntersettle

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Customer

Trading Member

Clearing Member

Customer

Trading Member

Clearing MemberClearinghouseCCP

Exactly at the execution of an exchange trade between 2 customers at FWB, one transaction for each of the legal relationships marked from 1 - 6 is concluded. Each of those transactions has the same subject matter, but is legally independent. The Central Counterparty regulates in its General Terms and Conditions the offsetting of all payment and delivery obligations towards the Clearing Members (legal relationships 3 and 4), as well as the legal relationship between Clearing Members and their Non-Clearing Members (legal relationships 2 and 5).

(1)

(3)(2)

(4)(5)

(6)

Basic Legal Transactions pursuant to Obligational Law with the Central Counterparty

Buy Sale

Trade conclusion

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Eurex Risk Based Margining

Model is Eurex Risk Based Margining

Margin requirements are calculated on level exchange member

(NCM)/account type

Calculation is based on current market prices -intraday- or settlement

prices -close of business-

Margin requirements are only applied on the net position of a specific

series

Intraday Risk Management– Permanent online monitoring of current positions based on exchange member

(NCM)/account type level

– Alerts are triggered approx. every 10 minutes

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Defense Lines and Default Procedure

Eurex Clearing AG equity capital

Eurex reserves

Contribution to clearing fund (clearing member who is in default)

Collateral (clearing member who is in default)

Closeout of open positions (clearing member who is in default)

Contribution to clearing fund (members who are not in default)

the fundamental significance of the clearing house in on and off exchange financial derivatives...

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