Reducing counterparty risks when trading derivatives

Asset managers can benefit from the Registered Customer status for listed Eurex derivatives. With a straightforward implementation process, investors and traders can avoid the counterparty risk of their chosen clearing broker.

In general, exchange traded derivatives are considered fail-safe as long as the exchange’s clearing house remains solvent. “However, a far greater risk lies in the clearing broker, the bank conducting the clearing of customers’ trades,” says René Reißhauer, Senior Portfolio Manager at Assenagon, in an interview with Eurex.

Technically, all derivative positions of a trader are booked on the customer account of a clearing broker such as a bank. Still, the bank as the clearing member to the exchange holds all its customers’ traded derivatives in a so-called omnibus account. If the clearing member fails, positions might be closed depending on the bank’s liquidity and customers must claim their payments based on collateral of the clearing member. Thereby, a counterparty risk emerges in form of the chosen clearing broker.

Obtaining the status of a registered customer at Eurex Clearing, all positions are not held in an account at a clearing member but with Eurex. In case of possible payment difficulties of the bank, assets can still be allocated correctly. Moreover, the asset manager has seven days to find a new clearing member to transfer his positions and conduct his future trades.

To implement this process, asset managers can often count on the help of their clearing members. After asset managers have reached an agreement with their clearing member, implementation with Eurex was straightforward, says Reißhauer. However, legal requirements may postpone the use of the new structure and experience with banks was mixed, Reißhauer adds: “Due to the higher operational efforts – instead of a single account, each portfolio now requires a separate account – a number of banks have increased their fees accordingly or refrain from offering the service altogether.”

Overall, the model seems to work for portfolio managers that aim at a reduction of counterparty risks. “Our team at Assenagon as well as our customers are extremely comfortable with this model. With relatively small efforts, we have made a major step forward in counterparty management, allowing us to offer a higher level of safety to our customers – especially in times of volatility or instability,” concludes René Reißhauer in the interview with Eurex.