Clearing: Risk elimination and netting

Order execution is followed by the clearing process, which involves the establishment of mutual payables, receivables and delivery details.

The CCP (Central Counterparty) enters the contracts and becomes the buyer for every seller and the seller for every buyer. This requires the deposit of securities:

a) Initial Margin: The assessment of the market risk of a member’s open positions. Designed to cover the market risk between the last variation/margin cycle before the default of the member and the close-out of the defaulting member’s position (calculated in real-time). 

b) Variation Margin: Market-to-market value of a member’s open positions. Designed to compensate for  losses incurred from the open positions of a member.

Risk management through SIX x-clear

The margin calls and fund payment form the first level of coverage. Collective security deposits are also made by the clearing banks (GCMs). The diagram shows the 'defence lines' available if a market member defaults.

SIX x clear: defence lines

Before the order is processed, netting (the settling of orders) is carried out as the last part of the clearing process. This settling of orders for exchange-based trading has the advantage of optimising the GCMs’ capital requirements.

In addition to the netting of positions within the orderbook, SIX is also capable of calculating the netting effects for each existing asset class.