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The Iberian Energy Clearing House

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Margining
Margins & Cash Settlements

OMIClear’s margin system is built on a multi-layered solution that allows for the mitigation of the CCP risk exposure in adverse market conditions: 

  • The first layer corresponds to the daily cash settlements due to changes in market prices  which reduce the member’s credit risk;
  • The second layer comprises the margin calls to be covered with Clearing Member’s collateral (Initial, Variation, Settlement, Non realized profit and loss and Billing Margins); Margin information is updated in the clearing system on a real time basis so OMIClear and members may immediately see the impact of their own/client trades in their margin calls and operational limits;
  • The third layer refers to the Daily Operational Limit (DOL), applicable to the Clearing Member which is determined by the difference between the member’s collateral and its responsibilities; This indicator must always show non negative values at all times and is disclosed on a real time basis in the clearing system;

OMIClear sends automatic notifications to members when the DOL indicators reach certain thresholds thus preventing members from letting the DOL reach negative values.  



Stress tests to the Operational Limits are carried out on a daily and intraday basis for each Clearing Member, namely by simulating the impact in case the market price variations reach or exceed the limits defined in OMIP rules.

To cover from Clearing Members position exposure, OMIClear calculates and collects the margins identified below and cash settles on a daily basis the P&L arising from fluctuation of market prices. Margin calls are computed on a clearing account basis.                      

Due to its relevance for margin calculation, we first highlight the main cash settlements performed by OMIClear:

  • Mark-to-Market (MtM) - Commonly named as Variation Margin the Mark-to-Market covers the profits and losses in tradable contracts which are cash settled daily. MtM is only applicable to futures contracts;
  • Delivery Settlement Value (DSV) - Covers the settlement risk that arises from open positions in contracts under delivery, due to the differences between the spot index price and the last settlement price of the contract (in case of future contracts) or the original traded price (for forwards and swaps); The DSV for positions in futures contracts are daily cash settled whilst positions in swap or forward contracts are monthly cash settled.


Regarding Margins, OMIClear calculates the following types:
  • Initial Margin (IM) - Covers the risk of having to face the estimated worst price development for closing out, in a short time period, all positions of a member in default; IM calls are covered through collateral. The OMIClear’s current initial margin model follows a portfolio margin approach, based on SPAN methodology. Several parameters are used in the calculation of the initial margin which include:
(i) Estimated price variation (range) - The range is set in order to capture the possible change in the underlying price over a two-day investment horizon with at least 99% probability. The values are calculated using two samples:

- The complete relevant historical price data
- The price data of the previous twelve months

A 25% weight is assigned to the average of the stressed observations calculated with the complete relevant historical price data and a 75% weight is assigned to the higher of the 1st or 99th percentile drawdown of the last twelve months.

(ii) Large Positions Aggravation Factor – OMIClear charges an extra margin for concentrated positions or positions in contracts with reduced liquidity

(iii) Credits between different products – OMIClear assigns a margin credit for offsetting positions between correlated contracts.

  • Variation Margin (VM) - Covers the risk of the member’s gains and losses regarding positions in contracts fulfilling delivery (if it applies to futures contracts) or both in trading and delivery (in case of forwards and swap contracts); VM calls are fulfilled with collateral;
  • Non‑realized Profit and Loss Margin (NRPLM) - Covers the intraday gains and losses in tradable contracts (an intraday Mark-to-Market concept which must be fulfilled with collateral);
  • Settlement Margin (SM) - Covers the credit risk regarding amounts - Delivery Settlement Value and Mark-to-Market - already due by the Clearing Member but which have neither been “invoiced” in the clearing system nor cash settled in the TARGET2 payment system; As the IM and VM, it is also fulfilled with collateral;
  • Billing Margin (BM) - Covers the credit risk regarding amounts already “invoiced” in the clearing system but not yet settled;
  • Extraordinary Margin (EM) - In case of exceptional market circumstances regarding price volatility or of a sudden increase in a particular member’s exposure, OMIClear may demand an extra margin to its Clearing Members;
  • Premium Margin (PM) - Covers the risk of the member’s gains and losses regarding positions in option contracts.

The various margins calculated by OMIClear and the respective methodology for the power derivatives market are defined in OMIClear’s rules in a specific Instruction  - OMIClear Instruction B10/2014 - Calculation of Margins and Settlement Values available in the Downloads are of this website