Deliveries

The CME Group Exchanges lists derivatives contracts for trading across a diverse set of products, all of which are cleared and settled at least once daily by CME Clearing. Certain of these exchange-traded derivatives contracts provide for physical delivery of the underlying product, including related to agriculture, energy, FX, interest rates, and metals. During the delivery period of the contracts, CME Clearing assists in the facilitation of deliveries and provides certain related services. CME Clearing does not guarantee physical delivery, rather in the event of a delivery failure, CME Clearing has a financial performance obligation to the clearing member whose actions or omissions did not cause or contribute to the delivery failure pursuant to CME Group Exchange Rule 702. CME Clearing also monitors the risk and operational capabilities for facilitating the delivery for physically deliverable exchange-traded derivatives contracts as outlined below.

Delivery Process for a Futures Contracts with Physical Delivery

The CME Group Exchange Rules provide CME Clearing the ability to declare a clearing member in default upon its failure to promptly discharge any obligation to CME Clearing or where the clearing member becomes subject to any bankruptcy or insolvency proceedings. 

In the event of a clearing member default, CME Clearing may liquidate any performance bond, Guaranty Fund contributions, and any other assets deposited by the defaulted clearing member to cover its outstanding obligations (e.g., settlement variation payments) and costs associated with managing the default. This includes the costs associated with liquidating, porting, and managing the positions of the defaulted clearing member. Losses that exceed the clearing member’s resources would be satisfied by the remainder of the relevant financial safeguards waterfall (i.e., CME Contributions, Guaranty Fund contributions of non-defaulting clearing members, and Assessment Powers against non-defaulting clearing members). 

Delivery Process for a Futures Contracts with Physical Delivery

Pursuant to CME Group Exchange Rule 716, clearing members are responsible for ensuring account owners in physically deliverable contracts have the ability to make or take delivery. During a deliverable futures contracts delivery period, accounts holding open positions can incur delivery obligations. A short position holder must be prepared to deliver the underlying commodity, while the long position holder must be prepared to take delivery of the underlying commodity and pay the full delivery value of the underlying futures contract. 

The delivery process varies by product, for additional detail on this, refer to the contract specifications defined in the CME Group Exchange Rules. Below is an example of a delivery workflow where the delivery is effected on a clearing member to clearing member basis: 

  • Day one— Position/Intent: A short clearing member notifies CME Clearing of a short position holder’s intention to make delivery, whereupon CME Clearing matches the short clearing member to a long clearing member who becomes obligated to accept delivery. 
  • Day two—Notice/Invoice: CME Clearing calculates an invoice to the long and short clearing members providing the invoice amounts to be paid and collected for the delivery obligation. 
  • Day three—Delivery: The delivery and payment is fulfilled.

Delivery Performance Risk

The primary risk CME Clearing faces with the physical delivery of exchange-traded derivatives contracts is the failure of a buyer or seller to satisfy its obligation to deliver the physical commodity or make the related cash payment for the delivery. To mitigate this risk, CME Clearing closely monitors clearing members’ exposures in contracts that have a physical delivery component, particularly when those contracts enter into a delivery period. In advance of a physical delivery period, CME Clearing works with its clearing members to confirm they are capable of making or accepting delivery.

Delivery Margin

Where a clearing member’s derivatives position in a physically deliverable contract results in a deliverable position, the clearing member guaranteeing the position is subject to a delivery margin requirement. Delivery margin requirements are monitored as a part of the CME Clearing’s daily risk monitoring of clearing members. 

For most deliverable contracts, delivery margin requirements are calculated at a rate determined by CME Clearing and is collected and held until delivery and payment is completed. The delivery margin collected for a delivery obligation is not permitted to receive margin offsets. 

Failure to Deliver or Accept Delivery

If a clearing member fails to fulfill a delivery obligation, whether it is making the delivery or taking the delivery, the Clearing House is responsible for covering the replacement cost. 

The obligations of the Clearing House relating to an event where a clearing member fails to perform delivery obligations are specified in Chapter 7 of the CME Group Exchange Rulebooks. Under these rules, CME Clearing is responsible for the financial performance (i.e., replacement cost) with respect to the delivery but CME Clearing is not obligated to make or accept physical delivery of the actual underlying commodity.  The replacement cost amount is determined by the Clearing House and should not exceed the difference between the delivery price of the underlying commodity1 and the reasonable market price of such commodity at the point in time delivery was required, according to CME Group Exchange Rules.  

References

Pursuant to CME Group Exchange Rules 702, 714 and 715, Clearing Members are responsible to the Clearing House for any damages incurred by the Clearing House as a result of a failure to satisfy a delivery obligation, including related to its customers.

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