Financial Safeguards

CME Clearing Europe has a robust financial safeguards package as outlined below to protect customers using its services to clear OTC derivatives and CME Europe Exchange FX and commodities Futures contracts.

To protect customers and clearing members alike, CME Clearing Europe has a strong and well-funded financial safeguards package. This acts as a form of insurance against an unforeseen event and represents the total resources available to CME Clearing Europe in the case of a default. The size of the financial safeguards package is determined by daily stress tests and a regular review of adequacy is undertaken by the Risk Committee.

Financial Safeguards
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Initial Margin

Collateral requirements, known as initial margin requirements, are established, and re-calculated at least daily, for all open positions, and collected in order to provide the core backstop to guarantee performance of future obligations. We establish minimum margin levels for all products based on historical and implied price volatilities, market composition, current and anticipated market conditions and other relevant information. Margin levels vary by product and are adjusted to reflect changes in price volatility and other factors.

CME Clearing Europe mandates stringent minimum margin requirements for short option positions. A clearing member must deposit initial margin for each open position (long or short) held at each clearing cycle, with appropriate allowances for risk offsets. Additional margin can also be applied for contracts considered to be less liquid. If a clearing member does not have sufficient collateral on deposit with CME Clearing Europe, it must make cash margin deposits by direct debit to its account at one of our approved settlement banks by the designated time after each settlement cycle.

Calculating Margin: OTC Commodities and CME Europe Exchange FX and Commodities Futures contracts

CME SPAN

To compute margin requirements for OTC commodity derivatives and CME Europe Exchange Futures contracts, CME Clearing Europe uses CME SPAN, the Standard Portfolio Analysis of Risk™ system developed and implemented by CME Clearing in the US which is now the global industry standard.

Through CME SPAN, we are able to incorporate approximately 200 risk-based margin offsets between the various OTC commodity derivative products and a similar number are also available between the various currency futures currently offered for clearing. As the product range expands, we will adopt new CME margin algorithms and the number of margin offsets available will automatically increase.

CME Clearing Europe determines the following SPAN parameters:

  • Price scan ranges: the maximum price movement reasonably likely to occur for each instrument or, for options, their underlying instrument.
  • Volatility scan ranges: the maximum change reasonably likely to occur for the volatility of each option's underlying price.
  • Intra-commodity spreading parameters: evaluating the risk among portfolios of closely related products, for example products with particular patterns of calendar spreads.
  • Inter-commodity spreading parameters: evaluating risk offsets between related products.
  • Short option minimum parameters: providing coverage for the special situations associated with portfolios of deep out-of-the-money short option positions.

Calculating Margin: OTC IRS

CME Core

The IRS Margin Methodology leverages a Historical Value at Risk (VaR) model with Exponentially Weighted Moving Average (EWMA) volatility rescaling to determine the initial margin for a given IRS portfolio. Value at Risk (VaR) methodology is efficient and scalable, and is simple for clearing members and customers to replicate in their own systems.

CME CORE is an interactive margin calculator that allows Cleared OTC customers and Clearing Firms the opportunity to:

  • View actual initial margins and exact positions via portfolio upload or manual trade entry
  • Calculate portfolio margining savings of Cleared OTC IRS and Interest Rate Futures

Setting Margin Rates

When setting margin rates, CME Clearing Europe monitors current and historical price and volatility movements covering short, intermediate and longer-term data. We use several methods of statistical parametric and non-parametric analyses, which typically establish margin confidence levels for expected price moves of at least 99% over varying coverage time-frames. The actual margin requirements may exceed this level for some products. We review the continued appropriateness of margin levels each month or more frequently, according to market conditions.

Margin requirements for options reflect movements in the underlying futures price, volatility, time to expiration and other risk factors, and are automatically adjusted each day to reflect the unique and changing risk characteristics of each option series.

Concentration Margin

If a clearing member's potential market exposures become large relative to observed activity in the market or the financial resources available to support them, we increase that member's standard initial margin requirements by way of an additional concentration margin.

Variation Margin

CME Clearing Europe collects and pays variation margin on all open positions during the daily settlement. Variation margining is based on mark-to-market practice, which helps reduce risk by ensuring large losses are not accrued over time.

The Benefits of Daily Mark-to-Market

CME Clearing Europe facilitates financial stability in large part by removing debt obligations among market participants as they occur. We achieve this by independently determining a price at the close of each settlement cycle for each contract and marking all open positions to that price. By marking to market we track and narrow the out-of-the money exposure of sellers of options.

CME Clearing Europe's mark-to-market settlement system differs from the traditional settlement systems implemented by many other financial markets, notably those which are not cleared centrally and where participants regularly assume credit exposure to each other. In such markets the failure of one participant can have a ripple effect on the solvency of the others.

In contrast, our system prevents losses from accumulating over time and market participants from deferring losses associated with market positions. This eliminates the possibility of long-term accumulated losses or write-offs impacting financial statements. It also eliminates the possibility of a cascading series of liquidations, which can affect the orderly functions of markets.

Our daily settlement cycle takes place in the late afternoon, with instructions sent to clearing members and their settlement banks in the early hours of the following morning and payment confirmations and cash flows shortly thereafter. All new trades are captured, cleared and marked to market. All open positions are marked to market. Cash settlement occurs for the mark-to- market on open futures positions and the option premium associated with new options positions, known as variation margin. The mark-to-market on open option positions can be satisfied with collateral as part of the margin requirement.

The settlement price mechanisms are described in the contract specifications in our Rulebook. Buyers' debt obligations from options contracts are immediately removed as the premium is collected in full at the time of purchase

Guarantee Fund Contributions

There are two Guarantee Funds, one for both Commodities (OTC and CME Europe exchange traded futures) and CME Europe FX futures and the other for IRS.

The amount of the member contribution is determined by the Clearing House and re-assessed on at least a monthly basis (or more frequently if deemed necessary).
In respect of the Standard Guarantee Fund, for commodity products the minimum is $0.5mn, and for FX products the minimum contribution for each Clearing Member is $1.5 million. In respect of the Guarantee Fund for IRS, the minimum contribution for each Clearing Member is €10mn. This is re-assessed on at least a monthly basis. CME Clearing Europe re-calculates clearing members' contributions at the beginning of each month, recalculation of members’ contributions will be performed and additional funds may be called and collected by the next margin call.

Asset Class Capital Requirement Guarantee Fund
IRS $50 Million €10 Million (IRS GF)
Commodities £10 Million $0.5 Million (Standard GF)
FX £10 Million $1.5 million (Standard GF)