ECC’s capability to effectively manage risks is based on the various lines of defense.
First Line of Defense: Clearing Member Admission Criteria:
ECC operates under a principal-to-principal system which means that participants trade through a Clearing Member who becomes the counterparty for ECC. The Clearing Member guarantees the fulfilment of all requirements that result from its clients’ trades.
ECC has strict admission criteria to ensure that Clearing Members are financially sound. They have to have robust operational processes and procedures in place to ensure reliable processing of their clients’ trades. We monitor compliance with these requirements on a regular basis.
Second Line of Defense: Margin Requirements
ECC settles changes in profit and loss on a daily basis by paying out or collecting Variation Margin, thereby preventing risk from building up over time. In the case of large Variation Margins building up during the day (e.g. because of large positions being created or due to high volatility), ECC has the right to issue an Intraday Margin call.
Margin requirements are calculated according to ECCs margin system. Margin requirements are used to cover the risk from open positions on the derivatives markets and pending payments resulting from spot market deliveries with a confidence of 99% in the case of a default of the Clearing Member.
Third Line of Defense: ECC's Dedicated Own Resources
ECC maintains sufficient freely available financial resources to cover potential losses that exceed the margins and the default fund in extreme but plausible market conditions.
Fourth Line of Defense: Default Fund
ECC has a Default Fund to cover losses that exceed the losses covered by margin requirements. The Default Fund is calibrated to cover the simultaneous default of the two clearing members to which ECC has the highest exposure under extreme but plausible market conditions. Each Clearing Member contributes to the Default Fund in proportion to its margin requirements.
Fifth Line of Defense: ECC's Other Financial Resources
ECC may hold additional financial resources to cover potential losses exceeding the resources described above.