ECC Prisma for Commodities

The rapidly changing geopolitical climate and recent volatile years call for more stability and integrity on the commodity markets. To meet these challenges, we are committed to future-proofing our risk management capabilities, while ensuring capital efficiency.

As part of our efforts to continue to serve as a resilient and forward-thinking clearing house, we are now transitioning to a new, more sophisticated portfolio margining model. “ECC Prisma for Commodities” is a cutting-edge Value-at-Risk (VaR) based derivatives margin model, which will leverage advanced portfolio-based risk assessment to provide a more accurate and holistic view of risk.

It has been designed to better recognise the true risk of a portfolio by accounting for the offsetting effects of different positions. For many clients, this will translate into more accurate margining and significant potential capital efficiencies through superior netting capabilities.

The core of ECC Prisma for Commodities is a risk factor-based scenario price generation, which enables the construction of correlated risk factors to generate product and portfolio P&L distributions. Products sharing the same risk factors and which will be liquidated jointly, are grouped into liquidation group splits. Liquidation group splits are an important feature of the model, as diversification benefits are only granted within these groups and not between them.

Initial margin is a forward-looking margin component that quantifies a provision for potential future losses over the liquidation period of a defaulting member’s positions. The calculation of initial margin assesses the risk for each margin account’s portfolio of derivatives contracts, considering potential hedging effects for positions within the portfolio.

Consequently, for each liquidation group split, the pure market risk component is derived at a predefined confidence level and margin period of risk (MPOR). The core market risk initial margin (MRIM) is based on two pillars. A “pure” filtered historical simulation approach and a Stress Period VaR capturing periods with extreme market conditions that can be outside of the current lookback period. The combination of volatility filtering and the consideration of stress periods ensures that margins are not decreasing to unacceptable levels and thus, reduce procyclicality, without losing the necessary reactivity in extreme situations. A dedicated Compression Model Adjustment (CMA) compensates for inaccuracies and model errors, for example when modelling implied volatility surface scenarios for options.

In addition to MRIM, additional model adjustments like Liquidity Adjustments (LA) and Portfolio-Margining Adjustments (PMA) are introduced to further enhance the risk-adequacy and stability of the model. They explicitly address potential implications of model assumptions (PMA) or types of risk beyond market risk (LA).

Technology

The new model is based on Prisma technology, originally developed by Eurex Clearing AG, and will run on Deutsche Börse Group’s Risk Management Platform R7 which is the Next-generation Risk Management Platform fostering technology leadership. The risk infrastructure, technology and data management of R7 enable scalable, consistent and fit-for-purpose risk management services, strengthening its ability to offer dependable and stable CCP services to the market with a variety of products and client types. The inherent design is to cover a broad range of risk calculations for CCPs and improve operational efficiency for cloud-based operations. Based on the Prisma methodology, the margin simulation tool is complemented by comprehensive margin replication and initial margin calculation functions.​

This move is more than a technical upgrade. The new, more flexible model will provide a platform upon which we will be able to expand our services to serve changing clients’ needs and ensure that all our customers are well-positioned to benefit from future market opportunities.

Throughout the implementation process, we will provide regular updates on upcoming milestones. The new methodology has already been validated by the regulator and technical implementation is ongoing. 

Key Benefits