IMPORTANT: Changes to Futures Guaranty Fund Calculations and Concentration Margining

At its regular meeting on Tuesday, May 3, 2011, the Clearing House Risk Committee (“CHRC”) approved changes to Guaranty Fund and concentration margin parameters, as explained below. 

The Guaranty Fund utilized for futures is associated with CME Rule 802 (the “futures financial safeguards”).  CME Clearing sizes Guaranty Funds through conducting stress tests to determine the “largest net debtor” under extreme but plausible market scenarios.  The risk profile of the largest net debtor changes from time to time, resulting in the need to adjust the sizing of the Guaranty Fund.  In addition, due to the restructuring of the CDS financial safeguards into a separate financial safeguards package (see Clearing Advisory 11-166), certain diversification benefits associated with sizing the futures financial safeguards are reduced, contributing to the need to increase the size of the associated Guaranty Fund.   Taking into account these factors, current largest net debtor calculations require that the futures Guaranty Fund be increased to a new level of $3.1 billion.  

Additionally, in determining the variables used to scale each clearing firm’s proportional share of the Futures Guaranty Fund, the CHRC approved a change to 95% based on overnight risk, and 5% based on volume.  Prior standards had been to weight overnight risk at 84%, volume at 15%, and FX settlements at 1%.  Your firm will be contacted in the coming days to discuss the timing and effect of these changes on your firm’s contribution to the Futures Guaranty Fund. 

In addition, in order to appropriately balance risk exposures, CME Clearing also determined to enhance its concentration margin program.   CME Clearing employs concentration margin using a “tier structure” to determine when additional margin should be charged to clearing firms.  Below is a table showing the existing methodology and the proposed methodology approved by the CHRC.

CME Clearing believes these changes, which serve to re-calibrate the interaction of performance bond and guaranty fund size and composition, appropriately balance elements of the overall system of financial safeguards, enabling continued provision of safe and capital-efficient clearing services.   

For questions, please contact Tim Doar, MD Risk Management, at Tim.Doar@cmegroup.com, or Dale Michaels, MD Market Risk Management, at Dale.Michaels@cmegroup.com

11-165

For the full text of this advisory, click here