CME Clearing Liquidity Risk Management Practices
CME Clearing’s liquidity risk management framework covers CME Clearing’s practices for, among other things, calculating its largest potential liquidity need under extreme but plausible market conditions. In CME Clearing’s role as the buyer to every seller and the seller to every buyer, it is required to meet any payment obligations arising from the default of a clearing member. These payment obligations determine CME Clearing’s potential liquidity needs and are primarily driven by a defaulted clearing member’s mark-to-market payments.
CME Clearing’s liquidity risk management framework includes policies and procedures CME Clearing has implemented to maintain access to liquidity i.e., qualifying liquidity resources pursuant to CFTC regulations) throughout a range of stress events, including, but not limited to, the default of a clearing member (and its affiliates, where applicable) creating the largest aggregate and per currency liquidity need under extreme but plausible market conditions – i.e., Cover 1 liquidity standard.
Size and composition of qualifying liquidity resources
The resources CME Clearing relies upon to facilitate its access to liquidity are generally sourced from the collateral of the defaulted clearing member. CME Clearing has multiple prearranged and highly reliable liquidity funding arrangements in place to facilitate access to same-day liquidity in the currency of need – commonly referred to as “qualifying liquidity resources” in the context of CFTC regulations. Pursuant to CFTC regulations, CME Clearing’s qualifying liquidity resources and tools used for qualifying other resources include:
- Cash in the currency of the obligations;
- Committed lines of credit;
- Committed FX swap facility;
- Committed repurchase facilities;
- Master repurchase agreements for
- U.S. Treasury securities; and
- Rules-based liquidity arrangements.
Under CFTC regulations for qualifying liquidity resources, obligations of the U.S., and other sovereign nations, that are of high quality and highly liquid cannot be treated as prima facie qualifying liquidity resources. Rather, “prearranged and highly reliable funding arrangements” are required to be in place to make even these high quality, liquid securities qualify as liquidity resources. This approach stands in contrast to other major global jurisdictions which do not require “prearranged and highly reliable funding arrangements” to be in place for their clearing houses to treat sovereign debt obligations, such as U.S. Treasury securities, as qualifying liquidity resources. The chart above shows the difference between CME Clearing’s total aggregate qualifying liquidity resources under CFTC regulations and what would be considered qualifying liquidity resources in other global jurisdictions which do not require that “prearranged and highly reliable funding arrangements” be in place for U.S. Treasury securities to be prima facie qualifying liquidity resources. To incentivize U.S. Dollar cash and support a good balance of qualifying liquid resources, CME Clearing implemented a U.S. Dollar soft cash minimum margin requirement for all clearing members for collateral used to meet their U.S. Dollar margin requirements.
Stress testing and evaluation of sufficient liquidity resources
Pursuant to CFTC regulations CME Clearing maintains sufficient resources to cover the default of a clearing member creating the largest aggregate and per currency liquidity obligation (i.e., Cover 1). CME Clearing employs liquidity stress testing to assess the sufficiency of its liquidity resources to meet a Cover 1 liquidity standard. CME Clearing also considers the size of its liquidity need on an aggregate and a per currency basis under a Cover 2 liquidity standard. CME Clearing uses a scenarios-based approach to liquidity stress testing, including both historical and hypothetical scenarios.
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.
