Financial Safeguards
Explore the comprehensive set of safeguards CME Clearing uses as part of our leading risk management capabilities.
CME Clearing employs stringent risk management standards and a robust financial safeguards package to secure the safety and soundness of our markets and to support the stability of the broader financial system.
Two primary tenets of this approach are credit and market risk management. While requirements for clearing membership are rigorous, it is critical to monitor all direct counterparties on an ongoing basis. Our credit risk management team conducts routine reviews of all counterparties to ensure they maintain appropriate financial wherewithal and do not pose any undue risks to other market participants or to CME Clearing.
While these assessments provide an in-depth view of the health of each counterparty, we recognize that new risks can arise quickly, and the market expects CME Clearing to manage them swiftly and with certainty. To ensure these expectations are met, our market risk management team monitors clearing member and customer activity 24 hours a day, six days a week. By measuring profits and losses, examining portfolio shifts and monitoring for extreme market aberrations using real time observations, CME Clearing can better position itself to protect the integrity of its markets.
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Margin
Another integral part of the risk management function is margin. Each day, and twice daily for futures and options, CME Clearing marks all positions to market and calls clearing members for both settlement variation and initial margin via its regular settlement cycle.
Settlement variation
Settlement variation represents any profits or losses on a portfolio between settlement cycles and prevents the accumulation of losses in the system.
Initial margin
Initial margin is a good faith deposit that allows CME Clearing to meet settlement obligations on a portfolio in the event of a clearing member’s default. Initial margin rates are determined on a per product basis and available for public view.
Financial safeguards and the default waterfall
These preventative measures are critical to fostering trust in the marketplace, but extreme, unanticipated market events can, and have, occurred.
When such situations arise, CME Clearing relies on its financial safeguards package, also called the default waterfall, which is comprised of a CME Clearing contribution, the guaranty fund and assessments. CME Clearing supports the defaulter pays model and takes the first loss via its own contributions to the default waterfall, prior to using any resources of non-defaulting clearing members.
The robustness of our default management process greatly limits the likelihood that losses would be mutualized, but in the unlikely event neither of the aforementioned layers are sufficient, the guaranty fund is used. The guaranty fund for each clearing service is sized to meet financial obligations arising from the default of the two largest clearing members and their affiliates, known as the Cover 2 standard.
1
Defaulter resources
All available resources of the defaulter clearing member, but never those of its customers, are applied to cure losses.
2
CME Clearing contribution
CME Clearing contributes its own capital and takes first loss if the defaulted clearing member’s resources are insufficient. CME Clearing contributes $100 million and $150 million to its futures and options and IRS clearing services, respectively.
3
Clearing member contributions
Otherwise referred to as the guaranty fund, this represents the mutualized resources of non-defaulting clearing members.
4
Assessment powers
Assessments represent the unfunded component of the waterfall, and are called from clearing members if all prior layers are insufficient to cure the losses of the defaulter. Find details in the CME rulebook.
Clearing
CME Clearing serves as the neutral counterparty to every futures, option, and OTC trade, ensuring market integrity and reducing risk. Learn about the integral role we play in the global marketplace.
Market Technology
Explore our comprehensive portfolio of trading applications, infrastructure, global connectivity, and data services needed throughout the trading lifecycle.
Margin Services
Get insight on the institution-grade tools we use to reduce bilateral counterparty credit risk and free up trading capital, optimizing margin efficiency.
Contact an expert
Connect with a team member to learn more about the risk management services described here.
Phone
+1 312 648 3888
clearing.riskmanagement@cmegroup.com
