Counterparty Credit Risk

CME Clearing monitors the financial health of its counterparties on an ongoing basis through a combination of qualitative and quantitative measures. CME Clearing has developed an internal credit rating methodology, which is applied to its counterparties to promote a uniform-quality standard of credit risk measurements.

CME Clearing classifies counterparties by industry and business model, which is designed to ensure that each entity is assessed based on the risks specific to its business. Each counterparty must provide periodic financial statements and is subject to a comprehensive credit review using pre-established criteria at least annually. The criteria used to rate counterparties vary and are weighted differently based on entity type.

CME Clearing’s metrics for evaluating counterparties within its internal credit rating process generally include but are not limited to:

• Asset quality;
• Capital;
• Leverage;
• Liquidity;
• Profitability; and
• Qualitative factors.

Qualitative factors include financial and market trends, operating environment, management, reputation, sovereign strength and support, business model, access to capital and liquidity, and general risk management practices.  

As a result of CME Clearing’s review, each counterparty is assigned an internal credit rating. Results and subsequent ratings assignments are reviewed and approved by CME Clearing’s internal Credit Committee.

CME Clearing’s counterparties are monitored daily through CME Clearing’s Key Risk Indicator dashboard to monitor counterparties credit quality and to identify if any counterparties may require a change in rating or more rigorous reviews. Alerts are set to notify the Risk Management team of notable movements in credit default swap price, stock price, or external credit ratings. Additionally, CME Clearing monitors its counterparties against noteworthy news items, financial standing and regulatory reports. Based on CME Clearing’s daily monitoring and internal credit ratings, CME Clearing maintains an internal Watch List of counterparties that are subject to heightened monitoring. Through ongoing monitoring, CME Clearing continually assesses its exposures to counterparties.

CME Clearing’s internal Watch List mechanism highlights counterparties who are facing near-term issues that are currently, or are expected to, impact the counterparty’s creditworthiness or to highlight counterparties with internal ratings below a predefined level. While these counterparties continue to meet CME Clearing’s standards required to continue their relationship with CME Clearing, they have been identified as requiring additional monitoring.

Watch List counterparties are subject to greater scrutiny from CME Clearing and are monitored more frequently. In addition, whether a counterparty is on the Watch List is one of the criteria in evaluating whether a counterparty should be required to post additional financial resources, such as performance bond and/or if it should be required to reduce exposures in the markets cleared by CME Clearing.

CME Clearing’s internal credit rating methodology serves as a foundation for clearing members’ internal tolerance thresholds, which inform CME Clearing’s real-time risk monitoring of exposures. When tolerance thresholds for settlement variation and/or performance bond levels are exceeded they are subject to escalation and review, along with further investigation as appropriate. Escalation policies are designed to ensure that atypical exposures are noted and approved in a timely manner by the appropriate members of CME Clearing staff, with additional follow-up as necessary with clearing members and settlement banks as warranted.

CME Clearing may take the following actions where a Clearing Member’s exposures appear to be atypical of its normal exposures: 

• Contacting the clearing member to discuss changes to its risk profile and assess next steps;
• Requesting additional collateral;
• Imposing position limits; and/or
• Permitting risk-reducing trades only.

Tolerance thresholds are reviewed on a regular basis and updated as necessary to reflect clearing members’ current risk profiles.

In addition to the above, CME Clearing also completes on-site risk reviews of clearing members. Risk reviews allow for CME Clearing to enhance its understanding of the clearing member’s risk management policies, procedures and practices and its unique risk profile. This includes focusing on how the clearing member manages its customers’ exposures.

Risk reviews of clearing members include an assessment of the clearing member’s financial profile and an evaluation of its credit, market and liquidity risk management practices covering a series of topics, which include but are not limited to:

• Daily risk monitoring practices, including on an intraday and overnight basis;
• Customer credit risk monitoring and control, including account review processes;
• Proprietary trading risk monitoring and control;
• Approach to limiting the impact of significant market moves, such as through stress testing;
• Liquidity risk management approach, including to meet increased settlement obligations; and
• Operational risk management and business continuity plans.

During the risk review of a clearing member, CME Clearing typically requests a demonstration of the use of a clearing member’s risk management systems. Additionally, it also discusses each clearing member’s recent activity and volume during the risk review to discuss any trends or unusual activity.