Frequently Asked Questions
  1. Background and Regulatory Environment and Oversight
  2. Products
  3. Operational Aspects
  4. Membership
  5. Capitalisation and Financial Safeguards
  6. Risk Management and Controls
Background and Regulatory Environment and Oversight
  1. What is the current ownership structure of MEFF?

    2. MEFF AIAF SENAF Holding de Mercados Financieros SA (mF) is the sole shareholder of MEFF RF, now onwards MEFFCLEAR or CCP.
  2. What is the current legal structure of the MEFF group?

    3. MEFF AIAF SENAF Holding de Mercados Financieros SA (mF) is the sole shareholder of MEFF RF, MEFF RV, MEFF Euroservices, MEFF Services, AIAF and SENAF. The sole shareholder of mF is Bolsas y Mercados Españoles (BME). Since October 2002 BME is the sole shareholder of all exchanges and clearing and central depositary companies in Spain.
  3. Does MEFFCLEAR carry out any activities other than those strictly related to the operation of the market?

    4. No. MEFFCLEAR activities are the derivatives market and clearing (fixed income futures and options) and the CCP.
  4. Please comment on the regulatory environment with particular mention to the oversight by the regulator of the exchange, and the market participants as well as the affiliations of MEFFCLEAR with Government, Central Bank and main Regulatory bodies.

    5. MEFFCLEAR is a private company but all its activities are regulated by the CNMV (Comisión Nacional del Mercado de Valores). MEFFCLEAR is designated by law as an official derivatives exchange and clearing house and authorised to perform the CCP functions for other transactions too.
  5. What is the set of regulations governing the exchange?

    6. MEFFCLEAR activity is regulated by the Regulations ("Reglamento") and Circulars developing it. The Regulations and the Circulars must be approved by the CNMV.
  6. Please comment on organisation of the CCP, explaining key governing bodies and management.

    7. MEFFCLEAR has its own Board, a General Management and the following Departments: Market Help desk (Pool), Clearing Help desk, IT, Marketing, Sales and Financial.

Products
  1. Please describe the products existing and planned in MEFFCLEAR. What is the timing expected for the introduction of Cash and Repo market on Spanish government debt?

    • Start on September 18 with repos traded at Senaf and by Senaf participants.
    • On October 2 the CCP will start to register any repo traded by any Account Holder at the book-entry system Iberclear with a CCP status.
    • Approximately 8 to 10 weeks after MEFFCLEAR will start registering cash transactions
  2. Please comment on currently existing links and relationships with other exchanges.

    3. Currently there are no other links than the ones with Eurex and Euronext through MEFF Euroservices. In derivatives any MEFF Member may access some contracts of those two exchanges.
Operational Aspects
  1. When does novation and registration to the CCP take place?

    2. SENAF and IBERCLEAR will send transactions to MEFFCLEAR on a real time basis. MEFFCLEAR will check that both counterparties have enough Register Capacity to register the trade and will register the transaction. The process should not last more than 30 seconds.

    Once registration of a Trade with MEFFCLEAR is performed, the rights and obligations derived therefrom for the intervening parties shall be deemed automatically novated (Article 44.3 of the Regulations of MEFFCLEAR).
  2. How often have transactions traded on SENAF been denied registration within the central counterparty? And in the event of this happening, are transactions unwound?

    3. Currently, with no CCP in place, the central depositary IBERCLEAR functioning as a delivery versus payment entity may deny any settlement simply notifying both parties in the transaction as settlement is not guaranteed.

    MEFFCLEAR for Fixed Income Products has not been launched yet. For this reason it is difficult to make an estimate on "how often transactions traded on SENAF are denied registration within the MEFFCLEAR". Denying registration may happen, although it will be exceptional. MEFFCLEAR plans to notify its Members when they exceed 60% of its Registration Capacity, and MEFFCLEAR has an arrangement with SENAF so that when a Member exceeds 80% of its Register Capacity, SENAF will impede the Member's access to SENAF onwards. Therefore there is an exceptional case when MEFFCLEAR denies the register of a specific transaction that has been traded on SENAF within the specific period between MEFFCLEAR's denying communication to SENAF and the actual action of SENAF stopping the access; this can happen but its probability can be estimated as very low.

    Additionally, it is the intention that trades up to 300 million euros would never be denied registration.

    Full disclosure of the procedure will shortly be released by Circulars.

    SENAF has decided that in the event of denying registration, the transaction will be cancelled by SENAF.

Membership
  1. How many members have already registered within the CCP for Repo and Cash trading of government debt?

    2. At this first stage of joining the CCP we are working with 45 entities out of 232 Account Holders at the book-entry system Iberclear, with 27 domestic entities and 18 non domestic, 4 of which will become Clearing Members just for Clients, and the other ones either self Clearing Members or Clients. As soon as the CCP starts, we expect about 30 more entities to join. The institutions with high level of activity on Spanish Public Debt are the ones more interested to have others joining in order to have the maximum efficiency on balance sheet netting and bilateral lines management.
  2. Will all existing members of MEFFCLEAR be automatically given access to the new CCP?

    3. An existing MEFFCLEAR Member does not have automatic access to the CCP.
  3. Please comment on the number of members of the CCP and their profile (in terms of domestic/International, capitalisation)

    4. CCP participants need to have an Account at the book-entry system Iberclear. Out of 232 Account Holders there are 24 non domestic. We expect the activities of the CCP will increase the number of non domestic entities.
  4. What are the membership requirements for Repo and Cash trading? How do those requirements differ from members in the derivatives market?

    5. All entities, regardless being current members or not of MEFFCLEAR derivatives, will need to sign a new Title II agreement with MEFFCLEAR. Sole members of the CCP do not have access to the derivatives market; differences on membership:
    • Self Clearing Members on the CCP have an initial guarantee of 3 million while in derivatives is € 240,000.
    • Clearing Members for Clients need to pledge 6 million as an initial guarantee for the first five Clients, and then there is a scale. Derivatives Members do not have the previous requirement.
    • Any CCP participant needs to have an Account at the book.-entry system in Iberclear which is not the case for derivatives.
    • Clearing Members in the CCP need to have a minimum of € 100 million in equity while that is not the case for derivatives.

Capitalisation and Financial Safeguards
  1. Please describe the financial position (capitalisation, operating performance, etc.) of MEFFCLEAR. Does it benefit from third party guarantees?.

    2. As of the 31st of December, 2002 MEFFCLEAR had a Net Equity € 36.2 million and a profit after taxes of € 1.8 million. There are no third party guarantees.
  2. 2.) Please describe the safeguards for the Clearing Member and for the Clients?

    3. MEFFCLEAR CENTRAL FOCUS IS A SOUND RISK MANAGEMENT SYSTEM MINIMIZING SYSTEMIC RISK; it is based on the following:
    • Margins are requested per account with no netting among accounts which have direct counterparty to the CCP.
    • Both Clearing Members and their Clients have direct counterparty to the CCP, being the Clearing Members jointly responsible for the Clients performance.
    • Real time risk management system allowing the CCP to have margins above the risk that can be booked at any one time in the CCP (see Register Capacity in question 4 on Risk Management and Controls). This is named Register Capacity which is the maximum risk that can be booked.
    • Margins in MEFF's hands are always converted in Spanish Public Debt or Spanish stocks pledged to MEFF's benefit. There is no money in bank accounts..
    • Protection is based on full account segregation of all accounts that have direct counterparty to the CCP.
    • Liabilities of a Clearing Member are known at any point in time as Clearing Members are not responsible for other Clearing Members defaults. The CCP does not have a Default Clearing Fund.de garantía solidaria.
    • With the objective of limiting the open position that a Clearing Member would have to cover in a situation of a Margin Call, an Open Position Limit is established, being the maximum that a Clearing Member can hold 20% of the its equity.
    • Systemic risk is highly minimized with the seven previous characteristics.

    A Clearing Member will remain unaffected by the default of another, since Clearing Members are not joint-and-severally liable. This guarantee is based on the fact that:

    • Clearing Members are responsible for meeting the obligations arising from their own transactions and those of their Clients.
    • The CCP monitors in real time the risk of each Members' own or Client account, comparing the risk with the margins provided at each moment by the Clearing Member.

    The CCP is the direct counterparty of the Clients. If the Clearing Member defaults the Client is unaffected. This guarantee is based on the fact that :

    • Margins are calculated at the level of each account, being it a Client account or a Clearing Member account.
    • If a Client finds itself in the position that its Clearing Member has defaulted in respect of the CCP, the latter will transfer the Client's account to another Clearing Member and will continue holding the margin supplied by the Client.

    The risk of a Clearing Member's own position in addition to those of all its Clients must always be lower than the margins provided to the CCP. Non compliance with this principle will result in the immediate suspension of trades' registration with the CCP.

    Parameters for calculating the risk of a particular position cover at least three standard deviation of the distribution of the yield curve corresponding to the underlying bonds of the repo transaction.

    The margins posted with the CCP are covered by the protection established in Law 41/1999 of 12 November on payment and settlement systems, and in article 59.8 and 59.9 of the Spanish Securities Markets Law.

  3. Please describe the sequence of financial safeguards used in case of the default of a clearing member. In particular, to what extent are other clearing members liable for losses incurred? Are clearing members of the cash and Repo markets liable for losses in the derivatives market?

    4. In case of a Clearing Member's default, the possible losses will be covered by the different types of margins deposited by the Clearing Member. In case the mentioned margins were not enough, MEFFCLEAR is entitled to claim them from the Clearing Member and, if the previous is not enough, finally MEFFCLEAR will respond with its own Shareholders Equity.

    In no case will a Clearing Member's default affect any other Member or its Clients.

    Yes, a Clearing Member in the CCP is liable for its own losses in the derivatives market within the same exchange being MEFFCLEAR the same legal entity for clearing derivatives and the CCP; but losses in one exchange, either MEFF RF (MEFFCLEAR) or MEFF RV do not affect the other one.

    Bear in mind that the sole activity of MEFFCLEAR will be CCP as the derivatives open interest is marginal.

  4. Please comment on the history of defaults at MEFFCLEAR or at any of MEFF's exchanges. Has there ever been dispute or procedure taken against MEFF or has MEFF ever been sanctioned by the regulatory authorities?

    5. In MEFF's (RF o RV) history, we have never had a Member's default. MEFF has never been prosecuted and we have never been sanctioned by the CNMV..
  5. In order to apply for membership, an entity needs to deposit a minimum of € 3 million with MEFFCLEAR, would this amount be used by the exchange to cover up the losses generated by any particular member in the event of a default?

    6. No. The € 3 million posted by a Clearing Member ONLY cover its own default. A Member's default can NEVER be covered with the margins posted by all the other Members.
Risk Management and Controls
  1. Could you please provide an overview of open interest in MEFFCLEAR? How is open interest calculated?

    2. Open Interest in MEFFCLEAR includes all transactions registered in the CCP that have not yet been settled in Iberclear (Spanish CSD).

    Iberclear will communicate MEFFCLEAR at the end of each working day the transactions that Iberclear knows for sure that will be settled the next day at 7:00 AM. Although these transactions are not really settled until the following day, MEFFCLEAR will not calculate Margins on them but they are CCP guaranteed

    Open transactions are valued at market price.
  2. Please give us an overview of the price mechanisms of MEFFCLEAR, and how the exchange ensures the transparency of prices?

    3. MEFFCLEAR will receive during the day and at the end of the day market prices from all transactions traded in SENAF or OTC, and will update with this information the prices used in the Risk Control Applications. MEFFCLEAR will update not only the price of the actual securities traded but will update the yield curve and therefore the prices of the non liquid securities. As said this update will be carried out during the day and at the end of the day.

    MEFFCLEAR will use as sources both SENAF and information vendors.
  3. When communication is over the phone, and two members agree on a given transaction, how do members register the trade to the central counterparty? And in particular, how does the market ensure transparency of prices when a transaction is entered at after market hours (after 4 o'clock) and the members want to register it with the CCP in the following trading session? This question refers to an OTC register.

    4. In order to use the existing communications structure, MEFFCLEAR will use Iberclear as the vehicle through which MEFFCLEAR Members and Clients request to register OTC trades on the CCP.

    The planned procedure is as follows:

    • Iberclear will notify MEFFCLEAR of the OTC trades which have been reported to Iberclear that are "to be cleared in the CCP".
    • To indicate that the counterparties wish to register the OTC trade with the CCP, the Membes must notify the OTC trade to Iberclear with an specific trade Code. Your internal systems should recognised and have to input that trade as a CCP trade from the first moment.
    • Iberclear, before considering the trade as received for settlement, will consult MEFFCLEAR to check whether it accepts the trade to be registered or not. The trade will appear in the terminals of Iberclear as pending confirmation (P.CCP).
    • MEFFCLEAR, on receiving the bilateral trade from Iberclear, will check that both counterparties have enough Register Capacity available. If that proves to be true, MEFFCLEAR will register it and novate.
    • If MEFFCLEAR finds on checking that any of the two counterparties does not have sufficient Register Capacity, MEFFCLEAR will leave the trade as "pending" and will contact the counterparty that has problems with its Capacity to try to resolve the situation.
    • At the end of this process, the trade will either be "registered" or "rejected".

    Regarding the second question MEFFCLEAR is a CCP and not an Exchange. As a CCP, MEFFCLEAR is not particularly concerned about "transparency of prices". However MEFFCLEAR is interested in receiving truly market prices in order to value correctly. However, the CCP may accept to register an OTC trade which is not at "market prices". In analysing the Current Risk of this transaction the counterparty that is on the wrong side of the market (the one which is "realizing" a loss because it is not doing the trade at market prices) will have its Risk Register penalized, but if both counterparties have enough Register Capacity the trade will be registered.

    The second question relates to SENAF; please note that SENAF does not accept cross trades. All SENAF trades must be traded between a certain range.

  4. The calculation of the Register Capacity to be key to MEFFCLEAR's risk management. Please describe how the Register Capacity and "Current Risk" are calculated? How often are calculations updated?

    5. Register Capacity is a limit that the CCP places on each of its Members. Register Capacity is the sum of the General Guarantee plus Additional Register Capacity. This last concept depends on the credit rating given by rating agencies. Additional Register Capacity will be the lowest amount of a % of Shareholders Equity Credit (being 2% the maximum credit the CCP will give to AAA entities) and a General Guarantee Multiplier.

    Current Risk takes the open position (as described in Risk Management and Control 1) of each client and Member, the market prices (as described in RMC 2) and runs the Margin Algorithm and subtract the Margin Already pledged.

    Current Risk = Overall Margin on a real time basis - Margins already pledged

    Current Risk at Clearing Member level is compared against Register Capacity. MEFFCLEAR will update Current Risk calculations every time it receives a transaction and/or a market price.
  5. Please describe the margining calculation used. What is the margin requirement for major contracts? Does MEFFCLEAR perform intra-day margining?

    6. Overall Margin is the sum of Mark-to-Market margin (Variation Margin) and Initial Margin for the position. It is calculated at account level.

    The calculations are similar to other CCP calculations; Variation Margin marks to market the value of an account overall position. It compares for each Registered trade the cash net present value at the calculation date against the actual security value on the calculation date. Variation Margin can have a positive or a negative sign.

    The cash net present value at calculation date will be the present value of the final cash amount calculated using the following formula: Final Cash Amount/(1+Interest Rate (in %) * Days between the calculation date and the settlement date /360). A slightly different formula is used when there is more than a year between calculation date and settlement date.
    The actual value of the security will be the market price of the security multiplied by the nominal value of the trade. The value of the security is the clean settlement price plus the accrued coupon in the case of securities with coupon.
    The Initial margin aims to estimate the cost of closing a position (that has been marked-to-market) at market value in a date where the market may move in a wide range but not with extreme movements (defining this last case, those days with more than three sigmas movements).
    Calculation of Initial Margin is performed by applying a percentage to the actual security value of all pending registered trades (that is, all trades registered that have not been settled yet). This percentage varies depending on the residual life of the security. Assets are divided into nine Classes, according to their residual life to maturity.
    Opposite positions in one same account are netted, for their cash amount, between the different securities and Classes, taking into account the levels of priority so that calculation of the Initial Margin is as efficient as possible.
    The following table contains the terms included in each Class, as well as the margin percentage for each of the Classes:

    Period Groups
    		 From (Years) To (Years) Margin Percentage Fluctuation Percentage Ext. Margin
    1 0 0,5 25 20
    2 0,5 1,5 35 25
    3 1,5 3 60 45
    4 3 5 100 75
    5 5 7 120 90
    6 7 9 140 105
    7 9 11 160 120
    8 11 20 200 150
    9 >20   230 170


    Initial Margin can only have a positive sign. If the sum of Initial Margin plus Variation Margin is negative (due to the negative Variation Margin), the Overall Margin is considered to be zero.

    There are two documents that explain MEFFCLEAR Margin system: "Margin Calculation Method for trades registered at MEFFCLEAR" and "Example of Margin Calculation for trades registered on MEFFCLEAR". If interested please request them.
    MEFFCLEAR does not perform intra-day margining with just two exceptions. If there is a day with high volatility in the market, where there is or there may be price movements higher than three sigmas, MEFFCLEAR may call an intra-day extraordinary margin. The second exceptions relates to a Member that has exceeded or is approaching its Register Capacity. In this case the CCP will ask an extraordinary amount as General Guarantee in order to increase its Register Capacity.

  6. Please discuss the margining procedure. What are critical cut-off times? What collateral is acceptable to MEFFCLEAR and which haircuts are applied?

    7. MEFFCLEAR will accept the following assets as margins: Cash in euros, Spanish Public Debt transferred to MEFFCLEAR account in Iberclear (Spanish CSD) and pledged shares.

    Public Debt will have haircuts applied from 1.5 to 5% depending on the maturity (some illiquid Public non government Debt may have higher haircuts). Shares will have haircuts from 25% to 50%. MEFF will return to their members all the interests earned with the cash given by them for margins.

    During the register session, MEFFCLEAR will run its daily process any time it receives:
    • a new transaction to be registered
    • a new market price
    • a settlement of a previously registered trade (from Iberclear)
    • an update in a Member's Register Capacity

    MEFFCLEAR will provide its members every 10 minutes with files that contain register, settlement, and risk information.

    After the register session is closed, MEFFCLEAR will receive SENAF closing prices. MEFFCLEAR will wait for Iberclear to run their following day first settlement cycle (to be settled at 7:00 am the following day). Iberclear will notify all the registered trades that will be settled for sure on that cycle and MEFF will not take them into account for margin calculations. After receiving all this data, MEFFCLEAR will run its end-of-the-day process, in which the collateral is valued and Margins are calculated, and will send the files to its members and clients by 7:30 pm. Margins must be posted the following day by 9:00 am.

    The critical-cut-off-times are: 4:00 pm, when all transactions to be settled on a specific date must be settled by that date, and 9:00 am, when margins must be posted to MEFFCLEAR. Any failure in delivering a security at the settlement date, buying a security at the settlement date, or posting the margins, may prompt a formal declaration of default of the client or member that has failed to fulfil its duty.
  7. Will the CCP for repo and cash trading of Government Debt require new applications or will they build on the existing platforms for other MEFF markets?

    8. In other markets, MEFFCLEAR is an exchange and a Clearing House (we are meaning that in these markets MEFF has settlement and CCP's functions). MEFFCLEAR's CCP for repo and cash of Governmet Debt will not perform exchange and settlement functions. Furthermore, Government Debt, and specially repos, are a different kind of product than MEFFCLEAR's present products. If we think about the data required to register an option contract and compare it with the data needed to register a repo, we will notice that is very different. Accordingly the margin calculation system for the CCP is different to the system used by MEFFCLEAR to margin derivates products.

    For all those reasons, MEFFCLEAR has decided to develop some new applications for the CCP for repo and cash of Government Debt. On the other hand, many functions of the CCP are also present in the derivatives Clearing House, such as margins valuation, risk control or cash settlements. These applications of the existing Clearing House for derivatives have just been adapted to support some new functions.

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