On November 28, Eurex Clearing published a circular regarding amendments to it's clearing conditions to accommodate the implementation of the Second Skin in the Game (“SSITG”). Article 9 (14) of Regulation (EU) 2021/23 published in December 2020 specify that European Central Counterparties (“CCPs”) shall use an additional amount of their own pre-funded resources in a default or non-default situation, and that this SSITG shall be effective from February 12, 2023. CCPs already have a first Skin in the Game (“SITG”) requirement as per EMIR, using their own pre-funded resources in case of a default which is used after all the defaulters’ resources have been exhausted.
FIA responded on December 20. While FIA and its members have been strong advocates for an SSITG, Eurex's intention to reduce the first SITG by 28% as part of the proposed implementation is “opposed to the spirit of the new recovery and resolutions regulations and what the industry has been pushing for the past few years”, FIA response letter said. Such change results in a potential misalignment of incentives for Eurex and leaves clearing members exposed to default losses earlier in the waterfall.
Finally, the letter recommends Eurex keep the level of the first tranche SITG unchanged and seeks other additional resources to fund the SSITG. It proposes as alternative funding the use of a portion of Eurex's “Further Dedicated Amount” which is set aside once all CCPs' pre-funded resources and clearing members' default funds are exhausted. This option would allow Eurex not to put more of its own capital at risk.
You can find FIA’s letter here.
