Clearng Notce SIX x-clear Ltd 1.0 Overvew Changes to margn and default fund model arrangements SIX x-clear ( x-clear ) s closely montorng the CCP envronment n Europe as well as the needs of ts Members. It concluded that the current margn and default fund arrangements should be rebalanced and the margn model should be enhanced to ensure best practce standards n rsk management and the far treatment of all Members and Co-CCPs. Therefore, the followng measures wll be ntroduced: 1. Reducton of the current default fund segment for Cash Markets (equtes and bonds) by CHF 80 mllon from CHF 300 mllon to CHF 220 mllon; 2. Increase of the current margn by up to 30%, to be mposed on all Members whch partcpate n the default fund segment for Cash Markets by rasng the current basc rsk coeffcent by 0.3; 3. Introducton of a new default fund dstrbuton methodology for ndvdual default fund contrbutons; 4. Introducton of the Wrong Way Rsk (WWR) margn add-on. 2.0 Effectve date Measures 1-3: Measure 4: Frday, 28 Aprl 2017, end of day (EOD) Monday, 15 May 2017, begnnng of day (BOD) 3.0 Impact on Members Quanttatve analyses provded evdence that the vast majorty of Members wll beneft from lower ndvdual default fund contrbutons and potentally lower regulatory captal charges through ths reducton n sze of the Cash Markets default fund segment. Wth regards to the ncrease of the rsk coeffcent by up to 30% on the top of the current margn, x-clear wll compensate ( re-balance ) for the reducton n the default fund. The approprate coverage of rsks wll reman ensured. Please be sure to provde or keep avalable suffcent collateral to cover the ncrease of up to 30% n margn requrements at the latest by Frday, 28 Aprl 2017 EOD (to avod any margn calls). Wth the rebalancng of the margns and the default fund arrangements, the defaulter pays prncple wll become more mportant n case of a Member Default. At the same tme, the rsk of usage of contrbutons from non-defaultng Members ( Survvor pays prncple) dmnshes. By takng nto account the default probablty as reflected n the ratng of each Member, the new Default Fund dstrbuton wll further optmse a far rsk allocaton among all Members. Consequently, Members wth a hgher default probablty wll have to provde more default Changes to margn and default fund model arrangements 20.04.2017 HEM xcl_clearng_notce-changes_margn-e.doc 1 6
Clearng Notce SIX x-clear Ltd fund contrbutons and Members wth a lower default probablty wll beneft from a reduced requrement. In May 2017, x-clear wll ntroduce the Wrong-Way-Rsk (WWR) margn add-on. The WWR margn wll cover the rsk that occurs when the value of open postons of a clearng member s adversely correlated wth ts credt qualty. Ths s the case, n partcular, when a Member buys clearng-elgble equtes that have been ssued by tself. The WWR margn wll be mplemented as an addtonal component of the Varaton Margn. Hence the Varaton Margn wll nclude the WWR margn component n any report and MT message provded to the Members. Quanttatve analyses proved that for the vast majorty of Members, the WWR margn s very low compared to the ordnary Intal Margn requrement. All Members on whch the WWR margn s lkely to have a relevant mpact have already been drectly contacted and nformed by x-clear. By the SECOM November 2017 release, the exstng margn report RDXL090 wll be complemented wth a new feld 32H-WWR Margn. Thus, any Member whch opted for ths report wll be provded wth specfc nformaton on ts WWR margn requrements. The same change wll be avalable n webmax Professonal as of November 2017. 4.0 Changes n Clearng Terms The followng changes wll become effectve n the Clearng Terms: a. Change n default fund methodology Wth the reducton of CHF 80 mllon of the Cash Markets Default Fund Segment sze, the ndvdual calculaton for the ndvdual default fund contrbuton wll also be changed. In future, x-clear wll use the medan nstead of the average of the Intal Margn and wll now take nto account the current default probablty based on the ratng attrbuted. x-clear wll change the paragraph n secton 10.1 para. 2 of the new Clearng Terms whch wll be publshed on 28 Aprl 2017 wth the followng provsons: «The amount of the Default Fund Contrbuton payable by the Member nto the Cash Markets or Dervatves Default Fund Segment of x-clear s dependent on the membershp category (xclear ICM/x-clear GCM) and on the medan of the Intal Margn (MIM) over the last 30 Busness Days or over the last 90 Busness Days, whchever s hgher, and the credt ratng. The respectve MIM s calculated monthly on the daly EOD open amount. Changes to margn and default fund model arrangements 20.04.2017 HEM xcl_clearng_notce-changes_margn-e.doc 2 6
Clearng Notce SIX x-clear Ltd The followng mnmum contrbutons apply (wth no upper cap lmt) based on the membershp category: x-clear ICM: x-clear GCM: Swss francs (CHF) 0.5 mllon Swss francs (CHF) 5.0 mllon Optmzng Default Fund Dstrbuton The followng Mnmzaton (under constrants) of loss functon wth respect to Default Fund contrbutons wll be used for the optmzaton of the ndvdual Default Fund Contrbuton by takng nto account the Member s default probablty: Parameters N: total number of Members d: number of defaultng partes M: maxmum number of defaultng partes; n cover 2 setup M=2 c: possble combnatons of defaults, Members are non-defaultng probablty of common defaults, PD algned wth SIX credt rsk model : probablty of non-defaults : smulated profts and losses adapted to Member s rsk profle, optonalty of possble losses All Default Fund Contrbutons are rounded up to the next Swss franc (CHF) 0.1 mllon ncrement. Changes to margn and default fund model arrangements 20.04.2017 HEM xcl_clearng_notce-changes_margn-e.doc 3 6
Clearng Notce SIX x-clear Ltd b. Rsk coeffcent adjustment In secton 8.1.6 of the new Clearng Terms whch wll be publshed on 28 Aprl 2017, the followng changes wth regards to the current rsk coeffcents wll be ntroduced. Current ratng Current rsk ratng New rsk ratng Standard & Poor's Moody's FITCH coeffcent coeffcent AAA to A- Aaa to A3 AAA to A- 1 1.3 BBB+ to BBB- Baa1 to Baa3 BBB+ to BBB- 1.5 1.8 BB+ to BB- Ba1 to Ba3 BB+ to BB- 2 2.3 B+ or lower B1 or lower B+ or lower determned case by determned case by case case c. Wrong-Way Rsk add-on In secton 8.2 Varaton Margn of the new Clearng Terms whch wll be publshed on 28 Aprl 2017, the followng provsons about the Wrong-Way Rsk add-on wll be ntroduced. «8.2 Varaton margn The Total Varaton Margn cumulatve components: VM for a clearng account conssts of the followng two VM VM WWR (1) CE where: VM Varaton Margn component covers market prce fluctuatons of the current CE exposure of the clearng account WWR Wrong-Way Rsk Margn for the clearng account 8.2.1 Varaton Margn component to protect from the current exposure The Varaton Margn component covers market prce fluctuatons of the current exposure that have already been ncurred upon open postons per Securty. The Varaton Margn component to protect from the current exposure s marked to market several tmes daly, normally every 90 mnutes, on the bass of the net poston of all Outstandng Contracts of the Member per securty. The level of the Varaton Margn component protectng the current exposure depends solely on the market valuaton. Postve and negatve values (prce gans/losses) are netted out across all Securtes. Based on these values, negatve values are charged addtonally whle postve values may offset Intal Margn requrements. 8.2.2 Wrong-Way Rsk Margn The Wrong-Way Rsk Margn covers the rsk that occurs when the value of open postons of a Member s adversely correlated wth the credt qualty of that Member. Assumng such Changes to margn and default fund model arrangements 20.04.2017 HEM xcl_clearng_notce-changes_margn-e.doc 4 6
Clearng Notce SIX x-clear Ltd adverse correlatons, the portfolo VaR of the open postons of a Member s calculated as follows: 1. The process for calculatng the Wrong-Way Rsk Margn consders all open equty nstruments (ncludng ETFs), whereas postons n the bonds asset class are neglected. 2. The total portfolo of open equty postons n a clearng account s decomposed nto three sub-portfolos: a. The equty nstruments ssued by the fnancal group (or any of ts subsdares) of the Member (=> sub-portfolo of own-stocks) b. The sub-portfolo of equty nstruments ssued by other companes wthn the fnancal sector (=> sub-portfolo of fnancal stocks) c. The sub-portfolo of equty nstruments ssued by companes from non-fnancal sectors (=> sub-portfolo of non-fnancal stocks). 3. To calculate the sub-portfolo VaR under the assumpton of adverse correlatons between the open postons and the default rsk of the Member, all nstruments wthn the same subportfolo are netted to a sngle net poston for each of the three sub-portfolos. If the net poston n a sub-portfolo s long then t wll be multpled by the margn rate 1) for the respectve sub-portfolo to get the sub-portfolo VaR. If the net poston s short then the VaR of the sub-portfolo s zero. Only n the calculaton of the sub-portfolo VaR for nonfnancal nstruments wll both a net long or a net short poston be multpled by the margn rate of the sub-portfolo. 1) The margn rates for the sub-portfolos are calculated under the normalty assumpton on a 99% confdence level usng volatltes n hstorc stress perods where adverse correlatons between the own stocks and the default rsk of banks prevaled. 4. Havng computed the VaR for each sub-portfolo, the VaR of the total portfolo n the clearng account under the assumpton of adverse correlatons between the open postons and the default rsk of the Member s calculated as: VaR v ' Σv (2) WWR where: v s the vector wth the VaR values of the three sub-portfolos under the assumptons made n step 3 above. Σ s the correlaton matrx derved emprcally from hstorcal stress perods where adverse correlatons between the own stocks and the default rsk of banks prevaled. Snce the portfolo VaR calculated by the ntal margn valdaton and calbraton module (see chapter 6) partly consders perods of stressed marked condtons (ncludng bank stress) some Wrong-Way Rsk s already ncorporated n the calbrated ntal margn. Hence to avod Changes to margn and default fund model arrangements 20.04.2017 HEM xcl_clearng_notce-changes_margn-e.doc 5 6
Clearng Notce SIX x-clear Ltd a margn double charge, the calbrated ntal margn s deducted from the Wrong-Way Rsk Margn. j WWR E WWR max VaR RC IM,0 (3) where: WWR Wrong-Way Rsk Margn for clearng account VaR VaR of the total portfolo n the clearng account under the assumpton of WWR 5.0 Contact adverse correlatons between the open postons and the default rsk of the Member RC Rsk ratng coeffcent of the Member Lambda factor for credt group j (as explaned n chapter 8.3.3) j E IM Clean SECOM ntal margn for all open equty postons n the clearng account» For further assstance, please contact the Rsk Management Operatons team of x-clear at xclearops@ssclear.com, tel: +41 58 399 43 23 In ths context, SIX x-clear Ltd draws the Members attenton to clauses 7.1 lt. f., chapter 17.0 and 25.3 General Terms and Condtons of SIX x-clear Ltd stpulatng that the Member bears responsblty for the tax requrements and consequences of clearng wth x-clear pursuant to the Applcable Law and that SIX x-clear Ltd assumes no lablty for any charges or other negatve consequences arsng n conjuncton wth clearng through SIX x-clear Ltd that are a result of tax laws or ordnances ssued by tax authortes pursuant to the Applcable Law. Changes to margn and default fund model arrangements 20.04.2017 HEM xcl_clearng_notce-changes_margn-e.doc 6 6