CME Clearing financial safeguards waterfalls, commonly referred to as default waterfalls, are designed to support CME Clearing in protecting its clearing members and their customers against the impacts of a clearing member default event. CME Clearing has established a separate financial safeguards waterfall for base products (i.e., primarily exchange-traded derivatives) and IRS products. A financial safeguards waterfall would be activated in the event a clearing member defaults that has a membership associated with the products covered by such waterfall.
In the event of a clearing member default, CME Clearing would initially use the financial resources of the defaulted clearing member – e.g., its performance bond collateral and its contribution to the guaranty fund. In managing past defaults, CME Clearing has never utilized layers of the waterfall beyond the financial resources of the defaulted clearing member to cure the losses.
If there are outstanding losses after the application of the defaulted clearing member’s resources, CME Clearing would utilize its own contribution to the relevant financial safeguards waterfall, pre-funded at $100 million for base products and $150 million for IRS products.
If, after the application of the defaulting clearing member’s resources and CME Clearing’s own contribution, there are still remaining losses, non-defaulting clearing members’ pre-funded contributions to the guaranty fund for the respective financial safeguards waterfall in which the default occurred would be utilized.
If losses remain after the utilization of the pre-funded resources for the relevant financial safeguards waterfall, clearing members must provide CME Clearing with additional financial resources up to a capped amount, commonly referred to as assessments.
Base and IRS products’ financial safeguards waterfall
1 CME Rulebook Chapter 8, Rule 802.G, up to 550% for multiple defaults.
The size of CME Clearing’s guaranty funds are disclosed under Disclosure 4.1 of the CME Clearing Quantitative PFMI Disclosure document.1
References
CONTINUE READING
- Settlement
- CME Clearing Stress Testing Practices
- CME Clearing Liquidity Risk Management Practices
- Counterparty Credit Risk
- Default Management
- Delivery
- CME Clearing Performance Bond Practices
- Customer Protection and Segregation
- Customer Margining at CME Clearing
- Collateral
- CME Clearing’s Investment Policy
- Governance
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
