Clearing House Risk Management

The CME Clearinghouse has a proactive risk management approach to:

• actively manage crisis situations
• build on experience to improve the risk management process
• provide industry leadership
• utilize a system of prudent protections and resources, and
• maximize early detection

CME Clearing uses a variety of tools and methods to manage risk, including performance bond requirements, mark-to-market functionality, and real-tme monitoring as standard risk management practices across all asset classes, and additional procedures specific to more dynamic markets.

Let’s take a closer look at these tools.

Performance bonds, also referred to as initial margin, are good-faith deposits to mitigate failure to perform on open positions, acting as an ex-ante risk-based tool to cover potential future exposures.

Initial margin or performance bond is designed to cover the potential losses in any product over a specific period of time, and ensures that sufficient resources are available to cover future obligations.

CME Clearing calculates performance bonds for each clearing member on a portfolio basis for the major asset classes which it clears. CME Clearing’s systems are developed specifically to address the risks of the products offered in each major asset class:  base products, which include futures , options on futures and cleared OTC products other than IRS and CDS, interest rate swaps, and  credit default swaps.

Risk methodologies are continually reviewed to ensure they reflect current market conditions, volatility and correlation between products.

Open positions are marked to real-time prices and are simultaneously available for risk analysis to prevent the accumulation of outstanding obligations in the system.

Completed at the end of each business cycle, CME Clearing independently determines a settlement price for each contract and marks all open positions to that price. 

Each business day, CME Clearing performs two full settlement cycles for base products and one full settlement cycle for OTC IRS and CDS positions. Settlement variation, known as the mark-to-market calculation, eliminates accumulated debt by settling profits and losses and help stabilize the markets cleared at CME.  

Intraday price movements and trading activity are monitored throughout the trading session.

To assess the impact of these price changes on clearing members, CME Clearing monitors market participants’ exposures in real time.

An extra layer of monitoring is added for risk concerns such as unusual trading patterns, profit and loss swings, and concentration risk. This is done across all major asset classes available for clearing at CME Group.

Stress testing is completed at both the clearing member portfolio level and the individual customer account level, to evaluate the potential losses in the event of various stressed scenarios, including large market moves and multiple clearing member defaults.

Stress testing ensures clearing members maintain adequate financial resources to absorb potential losses.

Additionally, clearing members are subject to stringent capital, operational, and risk management standards as a condition of clearing membership.

CME Clearing uses a proactive risk management approach to mitigate risks in evolving market conditions and to best serve our clients and their customers.

We take pride in our robust risk management framework, and are constantly working to preserve the strength and reliability of our financial safeguards.