Chicago Mercantile Exchange Inc.1 is registered as a derivatives clearing organization (“DCO”) with the Commodity Futures Trading Commission (“CFTC”). The DCO is known as CME Clearing (or “the Clearing House”). The CFTC is the primary regulator of the Clearing House. Additionally, as the Clearing House was designated as a systemically important financial market utility (“SIFMU”) by the Financial Stability Oversight Council on July 18, 2012 and as such, a regulatory relationship with the Board of Governors of the Federal Reserve System (“Board of Governors”) was established.
CME Clearing’s objective is to provide protection to the broader financial system through the management, containment, mitigation and prevention of risk. The Board of Directors (“the Board”) has designed the governance arrangements of CME Clearing to support the stability of the broader financial system and other relevant public interest considerations. The primary objective of the Board with respect to CME Clearing is to support an offering that prioritizes safety and efficiency of the Clearing House and generally supports the stability of the broader financial system.2 This objective is also the central tenet of CME Clearing’s Risk Management Framework, which sets out risk management principles that guide its risk management practices, both on a daily basis and during times of market stress.
The Board consists of individuals from diverse professional backgrounds who combine a broad spectrum of experience and expertise in financial markets. The overall risk management of CME Clearing is governed by the full Board, which is supported by committees and individuals with powers delegated by the Board, including the Board Risk Committee, Clearing House Oversight Committee (“CHOC”), Clearing House Risk Committee (“CHRC”), IRS Risk Committee (“IRSRC”), and certain members of the senior management of CME Clearing. Note, CHRC and IRSRC are collectively referenced as the “CME Clearing Risk Committees.”
The Board Risk Committee, which is comprised entirely of members of the Board, is tasked with overseeing CME Group’s enterprise risk management practices and assisting the Board in its oversight of the effectiveness of CME Group’s risk policies and processes. In this role, the Board Risk Committee oversees the Enterprise Risk Management Program, Global Information Security Program, Compliance & Ethics Program and Business Continuity Program. Regarding the Clearing House, the Board Risk Committee maintains oversight of the implications of the operational risk posed by the Clearing House to CME Group on an enterprise-level basis.
CHOC works cohesively with the full Board by advising it on the oversight of the Clearing House’s risk management activities, including the effectiveness of the Clearing House’s risk management program. CHOC is comprised entirely of members of the Board. In fulfilling its role, the responsibilities of CHOC include, but are not limited to:
In this role, CHOC enhances the open line of communication between the Board and senior management of the Clearing House.
The CME Clearing Risk Committees work cohesively with the full Board and CHOC. They are chaired by one or more members of the Board and include market participant representatives. The CME Clearing Risk Committees’ members are selected to represent a cross-functional expertise in various aspects of financial markets, risk management, and clearing. CHRC oversees Base products, which primarily includes futures and options, and the IRSRC oversees interest rate swaps products.
The purpose of the CME Clearing Risk Committees is to assist the Board and CHOC in fulfilling their oversight responsibilities of the Clearing House’s risk management functions. Responsibilities of the CME Clearing Risk Committees relative to the products for which they have oversight, include but are not limited to the following and then reporting back to CHOC:
The CME Clearing Risk Committees also have oversight of the Clearing House’s financial surveillance and investigation functions of its Clearing Members. CHRC also is charged with providing oversight on risk management policy matters. In this role, it reviews and approves various internal policies of CME Clearing at least annually and the eligibility of financial institutions to perform certain functions for the Clearing House – such approvals would then be recommended to CHOC.
CME Clearing also maintains staff-level internal governance committees that maintain oversight over specific areas of its risk management practices. In fulfilling their responsibilities, senior management either participates in or leads the internal governance committees. These committees are as follows:
As noted earlier, the CFTC is the Clearing House’s primary regulator. CME Clearing maintains an open line of communication with the CFTC, through one-on-one ad hoc conversations and more formal meetings, such as examinations and at least bi-monthly meetings, where the Clearing House’s management provides an update on its recent activities. These communications are also supplemented by oversight through the rule filing process. While the CFTC maintains robust oversight over the Clearing House, this document will focus on the CFTC’s examinations of the Clearing House and the rule filing process.
Additionally, as a DCO, the Clearing House must satisfy various reporting requirements by providing the CFTC with information on a daily, quarterly, annual and event-specific basis. These reporting requirements cover various areas, including relating to initial margin requirements per Clearing Member, sizes of financial resources, and audited financial statements, among others.
As a SIFMU registered as a DCO, the Clearing House is also a systemically important DCO. As such, it is subject to annual examinations conducted by the CFTC pursuant to Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC and the Board of Governors participate in these examinations, which include a comprehensive evaluation of the Clearing House’s operations and risk management practices relative to the DCO Core Principles under the Commodity Exchange Act and applicable CFTC regulations. These examinations, led by the CFTC with the participation of the Board of Governors and Federal Reserve Bank of Chicago, occur on-site annually. They cover topics that can include, but are not limited to:
In addition to Title VIII examinations, the Clearing House is subject to CFTC oversight regarding changes to the CME Group Exchange Rulebooks. Changes to the CME Group Exchange Rulebooks are filed with the CFTC in accordance with Part 40 of CFTC Regulations. These filings are publicly available through both the CFTC website and CME Group website.
Rule filings follow a standardized format that is intended to be easily digestible to market participants and to provide a venue that is suitable for market participants to provide their commentary to the Clearing House and other market stakeholders over a given period of time. The period of time in which a market participant may provide commentary is primarily dependent on the level of significance the proposed changes will have relative to the Clearing House’s risk profile. The given period of time afforded during the rule filing process also provides the CFTC time to issue a stay of the certification or extend the review period of the proposed new rule or amendment to a rule on the grounds that the CFTC believes it necessary to have additional time to further analyze such proposals.
Generally, rule filings that do not have a significant impact on the Clearing House are filed in accordance with CFTC Regulation 40.6, which permits the submission of rule filings for self-certification no later than 10 business days prior to the date on which the rule or rule change will be implemented.
However, new rules or rule changes that may have a significant impact on the risk profile of the Clearing House will generally be filed in accordance to CFTC Regulation 40.10, which requires the Clearing House to provide notice to the CFTC no later than 60 calendar days prior to the date on which the rule or rule change will be implemented. Further, this process requires that the proposed rule change also be reviewed by the Board of Governors. Rule changes filed in accordance with CFTC Regulation 40.10 may include proposed changes to the CME Group Exchange Rulebooks, procedures, or operations that significantly affect the nature of the level of risks to which CME Clearing is exposed.
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