CME Clearing (or “the Clearing House”) maintains a collateral policy for establishing and reviewing its criteria for acceptable collateral deposited to the Clearing House in satisfaction of performance bond and guaranty fund requirements. The collateral policy is designed to address the risks of the assets used by clearing members to meet these requirements and is overseen by CME Clearing’s internal Credit Committee and Clearing House Risk Committee (“CHRC”). The policy is subject to an annual review and approval process with more frequent reviews as necessary.
Consistent with CFTC regulations, the guidelines used to identify acceptable collateral types are designed to ensure that CME Clearing accepts only assets with minimal credit, market, and liquidity risks. In addition to establishing criteria for accepting collateral, the collateral policy outlines practices related to collateral valuation, haircuts and concentration limits.
CME Clearing’s collateral eligibility is guided by three principles:
While CME Clearing’s collateral eligibility principles are consistently applied to all forms of acceptable collateral, the terms under which CME Clearing accepts different forms of collateral vary with respect to haircuts, concentration limits and requirement type. The collateral types CME Clearing accepts from its clearing members are used to satisfy performance bond requirements. The acceptable collateral types are further subdivided based on whether they are used to satisfy performance bond—e.g. Customer Segregated, Cleared Swaps Customer or Clearing Member Proprietary Accounts—or guaranty fund requirements.
CME Clearing conducts an initial analysis of collateral types for acceptability, focusing on the credit profile of the issuer, liquidity, price volatility, and operational considerations for pledging the collateral type. The initial review takes into consideration stressed market conditions to establish, where such collateral is deemed acceptable, appropriate haircuts, concentration limits and the need for liquidity funding arrangements, if necessary.
Risks associated with acceptable collateral types are mitigated through ongoing review, daily valuation, and prudent haircuts and concentration limits. Acceptable collateral types, as well as applicable limits and haircuts, are listed on the CME Group website.
CME Clearing marks collateral to market at least daily, or more often as appropriate. Further, CME Clearing continually monitors collateral prices during the day through its internal systems. Exception reports are utilized to validate prices in order to highlight atypical intraday price moves. CME Clearing reviews the exception reports to validate current market prices and approved third-party data sources.
In addition to its mark-to-market practices, CME Clearing applies prudent haircuts to the collateral types it accepts. These haircuts capture the potential decline in value and liquidity profile of accepted collateral types during stressed market conditions. CME Clearing has developed a collateral haircut methodology to prudently quantify market, liquidity, and operational risks into haircuts for CME Clearing’s eligible collateral types. CME Clearing’s collateral haircut methodology considers factors including, but not limited to, historic stress volatility events and the liquidation time horizon of the asset type.
Consistent with CFTC regulations, CME Clearing conducts at least a monthly review of its haircuts. Quantitative and qualitative information to capture tail risks, utilizing data over at least the last 4 years, is included in the analysis to monitor haircuts. Qualitative analysis helps identify and account for factors that affect market fundamentals but may not yet be reflected in the quantitative information. CME Clearing may undertake more frequent reviews of collateral haircuts as market conditions warrant.
CME Clearing’s collateral policy utilizes collateral concentration limits for some asset types to address concentration risk. CME Clearing’s diversified collateral acceptance practice further mitigates concentration risk. Additionally, this practice reduces the risk that liquidity or pricing issues in one type of collateral will limit a clearing member’s ability to meet its collateral requirements.
Collateral concentration limits are established using quantitative and qualitative metrics, including analysis of historical liquidation time horizons, reflecting CME Clearing’s need to liquidate assets on a same-day basis. Clearing members may satisfy 100% of their performance bond requirements with the most liquid forms of collateral, such as U.S. Dollar cash and U.S. Treasury securities, to which no concentration limits are applied on an ex ante basis. Concentration limits are generally applied as hard dollar limits per clearing member and in a limited number of instances, percentage-based per clearing member. The collateral concentration limits are published on the CME Group website. CME Clearing may also require a clearing member to limit any given collateral type on an ad hoc basis if necessary.
Concentration limits are continually monitored for appropriateness, with changing market conditions taken into account. Additionally, on at least an annual basis CME Clearing completes a collateral liquidity analysis using a detailed scenario examination, which considers haircut coverage, market dynamics, concentrations, market volume, and other liquidity factors.
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