On ECC's spot markets the Non Clearing Members are ECC's counterparties, and Clearing Members guarantee for their payments and act as their payment agents. Transferring a Non Clearing Member to a new Clearing Member, he will only guarantee for future trades of the Non Clearing Member. Also, as there are no positions on the spot markets and trades are settled within 2 days no portability is assumed for the spot market stress testing.
Historical Market Scenarios
Stressed conditions on spot markets might be caused by unusual spot prices (which affects all trading participants) or unusual trading behaviour of specific Non Clearing Members. Under normal conditions the exposure is covered by the spot margin with 99% confidence, the data basis from which ECC extracts stress events are the days where the spot margin was not sufficient to cover the individual exposure of a Non Clearing Member. The Non Clearing Members’ spot margins are divided into three groups depending on their size (small, medium, large) which reflects their different trading behaviour in stressed situations. For each group a worst case scenario shortfall is calculated as the 99.9% quantile of the historical shortfalls of all members of a group.
Hypothetical Market Scenarios
To obtain hypothetical scenarios on the spot market ECC models a shortfall based on the trading behaviour of the trading participants by shifting the volatility of their trading exposures, the maximum exposure and the look back period to create three hypothetical stress scenarios. The resulting spot margin is then interpreted as ECC’s exposure to the participants under hypothetical stressed market conditions.
Extreme prices do not necessarily lead to high exposures for all Non Clearing Members as they adapt their trading behaviour to market prices. Therefore a mathematical aggregation function is chosen to aggregate the stress losses for a Clearing Member having multiple Non Clearing Members using a correlation that is calibrated to the observed trading behaviour.
The stress test result for the spot market is defined as the maximum shortfall for the simultaneous default of the two largest Clearing Members (in terms of shortfall) under the historical and the three hypothetical scenarios.