Clearing House Advisory Notice
To | Chief Financial Officers, Back Office Managers, Margin Managers
From | Clearing House Division
Subject | Concentration Margining Program Implementation Friday, January 19, 2001
Effective Date | 01/17/01
Notice Number | 01-07
The CME will implement the Concentration Margining Program on Friday, January 19, 2001, at the RTH cycle. This program allows the Clearing House to charge additional performance bond requirements when firms� potential market exposures become large relative to the financial resources available to support those exposures. In anticipation of the Concentration Margining Program implementation, the CME has provided test results to each clearing member based on actual positions so that firms can view the impact of this program. The test results are available on Infopac under Report ID CST580TEST and Report Name �TEST REPORTS FOR CONCENTRATION�. Beginning on January 19, Concentration Margins will be able to be viewed on all the normal Recap ledgers. Also, the CME has provided additional information under Report ID CPBRT99C and Report Name �CONCENTRATION STRESS TEST REPORTS� that shows the results from the stress tests described below. This report will continue to be available after implementation. All users that currently access their reports via Infopac were given access to these test reports. If you do not currently access the reports via Infopac, please e-mail jperun@cme.com to request Infopac Access. Below is a review of how Concentration Margins will be applied: On a daily basis, all clearing member portfolios will be subjected to a stress test of equity and interest rate positions of an amount equal to at least 150% of the current performance bond requirements. For example, the current S&P 500 requirement is 75 points ($18,750). The stress test would include looking at a hypothetical S&P 500 market increase of 112 points (150% of 75 points) and a decrease of 112 points. If a clearing member�s potential losses under the stress testing scenario (less any offsetting profits from its house origin positions, if applicable) exceed the clearing member�s excess adjusted net capital, the clearing member will be subject to a 25% expansion in its performance bond requirements in the product category on its net positions. If a clearing member�s potential losses under the stress testing scenario (less any offsetting profits from its house origin positions, if applicable) exceed $500 million, the clearing member will be subject to a 25% expansion in its performance bond requirements in the product category on its net positions. In cases where a clearing member that would have been subject to an expanded performance bond requirement under the two conditions described above, but the potential losses under the stress-testing scenario are less than the average of the five largest settlement variation calls over the prior twelve months, the concentration margins will not apply. Excess performance bond collateral on deposit will be used to satisfy the expanded performance bond requirement. If a clearing member has insufficient collateral on deposit to fully satisfy the expanded performance bond requirement, the Clearing House will issue an additional performance bond call. The collateral rules that apply to reserve performance bond requirements will apply to the expanded performance bond requirements. This means that clearing members may use stock or letters of credit to fully satisfy the expanded performance bond requirements. If you have any questions regarding this program, please contact Mr. Dale Michaels, Director, Risk Management, at 312/930-3062. If you have any questions regarding receiving the test reports, please contact Karen McCoy, Client Management at 312/930-4524