Frequently asked questions ─ Sustainable Clearing

  • 20 Sep 2021
  • By CME Group
  • Topics: Clearing

1. What issue is Sustainable Clearing looking to address?

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.

2. What are some real-world examples of eligible sustainable business transactions?

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.

3. How will sustainable clearing work in practice?

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.

4. Who determines what transactions will be deemed as ‘sustainable’?

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;

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.

5. How do you solve for ‘greenwashing’?

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.

6. How will sustainable trades be reported?

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

7. How do clients sign up?

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.

8. What are the benefits of using Sustainable Clearing?

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.

About CME Group

As the world’s leading derivatives marketplace, CME Group is where the world comes to manage risk. Comprised of four exchanges - CME, CBOT, NYMEX and COMEX - we offer the widest range of global benchmark products across all major asset classes, helping businesses everywhere mitigate the myriad of risks they face in today's uncertain global economy.

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