CME Group has seen increasing demand for the identification and subsequent reporting of trades processed through CME Clearing that are applied to a sustainable business purpose.

Firms increasingly have a mandate – and in some cases, specific lines of credit – to support the hedging of sustainable activity through the futures and options markets. Equally, management teams, regulators, shareholders, customers, and other stakeholders want to see how derivatives markets are supporting ESG-focused business activity.

While other areas of the transaction workflow may already identify sustainable trading activity, we noted a gap in identifying and reporting sustainable trades through CME Clearing. Sustainable Clearing from CME Group has subsequently been developed in partnership with several leading clearing member firms, offering the tagging and reporting of trades as ‘sustainable’ where the proceeds are being applied to a sustainable business purpose.

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Some of the types of real-world scenarios that could benefit from this solution include:

• A Spanish solar power firm buys polysilicon from China in USD and wants to hedge its FX exposure as it sells its electricity in EUR;
• An oil company plans to acquire an electric charging company but wants to lock in the repayment rate on its floating borrowings;
• A US wind power developer approaches a US bank to hedge its interest rate exposure as it takes out loans to fund further development;
• A French developer plans to build social housing and wants to manage the risk of an interest rate move.

View a use case outlining how a bank could use this solution to report on its sustainable hedging activities.

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The clearing member firm identifies which of the sustainable finance categories each eligible trade applies to, based on their internal classification framework. Then, each trade will be tagged and assigned to a category in the internal workflow, in a form that can be shared with CME Clearing operations. CME Clearing reviews the tagged transactions and returns a report to the clearing member firm validating which transactions meet the established criteria, sending two files via SFTP confirming verified activity in one report and unverified activity in the second report.

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CME Group is keen to leverage the expertise and availability of existing classification frameworks in the field of Sustainable Finance, rather than then inventing and deploying new frameworks.

This helps brings some market consistency to our solutions. CME Group has consulted market participants on which standards are most useful and relevant, resulting in using a mix of the following standards for classifying trades as eligible for Sustainable Clearing;

• International Capital Market Association;
  • Social Bond Principles
  • Green Bond Principles
• Loan Market Association;
  • Social Loan Principles
  • Green Loan Principles
• ASEAN Capital Markets Forum;
  • Social Bond Standards
  • Green Bond Standards
• EU Taxonomy on Sustainable Activities
• Climate Bonds Initiative Taxonomy

The criteria and governance of Sustainable Clearing will be administered by CME Benchmark Administration Limited, an independent legal entity within CME Group, that manages and operates the company’s benchmarks and indices. A robust governance framework and an inclusive criteria committee based on ICMA principles will ensure that Sustainable Clearing operates with integrity and transparency, staying close to relevant standards in the industry as they evolve and mature.

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Sustainable Clearing will be overseen by CME Group Benchmark Administrations with established governance processes designed to ensure the integrity of the offering. Oversight will include processes to validate the accuracy of the information being reported.

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Initially, we will be reporting cleared volumes of sustainable trades directly to clearing member firms only.

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Sustainable Clearing is open for use by any existing clearing member firm of CME Clearing, with a first wave of participants formed from those who had the most pressing client demand and were ready to report sustainable trades to CME in time for the Day 1 launch. We anticipate more clearing firms to adopt Sustainable Clearing month to month.

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For the first time, clearing member firms can clearly view and report on the full scope of their sustainable trading activity through CME Clearing, either internally within their organization or externally to their clients and other stakeholders. There is no direct impact on regulatory requirements, money movement or risk offsets across products. Fees, margins and other costs involved in the clearing workflow remain unaffected.

CME Group is committed to working with the derivatives industry as sustainable business practices evolve.

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