CME Clearing Risk Management
and Financial Safeguards

CME Group Inc. (“CME Group”) is the parent company of Chicago Mercantile Exchange Inc.
(“CME Inc.”). CME Inc. operates a registered Derivatives Clearing Organization (“DCO”).
CME Clearing (or “the Clearing House”), a division of CME Inc., is one of the world’s leading
central counterparty clearing services. CME Clearing provides clearing and settlement
services for exchange-traded and cleared swaps derivatives. CME Clearing applies robust
risk management standards and applicable Commodity Futures Trading Commission(“CFTC”) customer protection standards for all products it clears.
CME Group brings buyers and sellers together through numerous venues including the
CME Globex electronic trading platform, open outcry trading facility in Chicago, cleared
privately negotiated transactions, and through CME ClearPort. CME Clearing serves as thecounterparty to every trade, becoming the buyer to each seller and the seller to each buyer,
limiting credit risk and therefore mitigating the risk of default.
CME Clearing’s integrated clearing function is designed to ensure the safety and soundnessof our markets, serving the risk management needs of customers around the globe byoffering clearing services for a wide range of global benchmark products. CME Clearing
continues to structure its services, safeguards, and registration status to best serve theevolving markets to which it provides clearing services. This includes business transacted
on the Board of Trade of the City of Chicago Inc. (“CBOT”), CME Inc., Commodity Exchange,
Inc. (“COMEX”), the New York Mercantile Exchange, Inc. (“NYMEX”), Dubai Mercantile
Exchange (“DME”), and Eris Exchange, as well as transactions submitted for clearing
through CME ClearPort.
CME Clearing is vitally aware of its role in global markets and is confident that ouroperational standards paired with our financial safeguards provide an effective set ofrisk management tools and capabilities that result in industry leading risk management
capabilities.

This document is intended to provide an overview of CME Clearing’s financial safeguard system. For
additional details and applicable CME Group Exchange Rules, please reference the CME Inc., CBOT, andNYMEX rulebooks published on CME Group’s website (www.cmegroup.com).

CME Clearing Risk Management and Financial Safeguards

CME Clearing Overview

CME Inc. is registered with the U.S. CFTC as a DCO. CME Clearing

Governance Structure

provides clearing services to four CFTC registered Designated

CME Clearing’s risk management policies and actions areContract Markets (“DCMs”), including CME Inc., CBOT, NYMEX,

monitored by several layers of governance designed to alignand COMEX. CME Inc. additionally, provides clearing services

incentives and ensure prudent oversight. Two committees

for DME and Eris Exchange. CME Clearing also accepts trades

comprised entirely of members of the Board of Directors havesubmitted for clearing through CME ClearPort, a flexible clearing

oversight of matters relating to the risk management of CME

service that allows market participants to transact trades on over-

Clearing, which are the Clearing House Oversight Committee

the-counter (“OTC”) terms and submit them for clearing, either(“CHOC”) and Risk Committee. The primary role of CHOC is toclearing products as cleared swaps or as futures and options

provide oversight of the risk management activities and the senior

on futures (through an exchange-of-futures-for-swaps or EFS

management of CME Clearing, including oversight with respecttransaction), pursuant to applicable rules. CME Clearing provides

to the effectiveness of the risk management program. The Risk

clearing services cleared Interest Rate Swaps (“IRS”) and Foreign

Committee has the primary remit to review, assess, and provide

Exchange (“FX”) swaps.

oversight of the CME Group’s enterprise-wide risk management,

CME Clearing has two independent financial safeguards waterfalls

which encompasses its oversight of operational risks as theythat support the products for which it provides clearing services,

relate to CME Clearing.2

where the contributions to one waterfall cannot be used to cure

CHOC and the Risk Committee are comprised of members fromlosses in a different waterfall (as further explained below). CME

other Board and functional committees that have risk oversight

Clearing has a financial safeguards waterfall for IRS products andresponsibilities of CME Clearing, including the Market Regulation

one for futures, options on futures and cleared OTC products other

Oversight Committee, the Clearing House Risk Committee

than IRS (referenced collectively as “Base porudcts”).

(“CHRC”), and the Interest Rate Swap Risk Committee (“IRSRC”).

Risk management and financial surveillance are principal

Cross-representation is designed to ensure appropriate

functions of CME Clearing’s financial safeguards system. The

information sharing across the committees. The Risk Committee

safeguards are designed to provide the highest level of security

is also responsible for periodically performing a gap analysis ofand aim to protect and mitigate the consequences to Clearing

the division of risk-related responsibilities among the Board andMembers and their customers in the case of a Clearing Member

functional committees to ensure the Board has effective oversightdefault event. CME Clearing’s financial safeguards system isof CME Group’s key risks and make recommendations forcontinually evaluated and updated to reflect the most advanced

enhancing such oversight to the Board, as necessary.

risk management and financial surveillance techniques. The

The Chairmen of CHOC, the Risk Committee, CHRC and IRSRCCME Clearing Risk Management team, in collaboration with themake regular oral reports to the Board during meetings of the

Financial & Regulatory Surveillance (“FRS”) department are

Board. Additionally, in a continued effort to keep the Board of CME

responsible for design, development, monitoring, and managing

Group apprised of CME Clearing’s activities, the President of thethe financial safeguards system.

Clearing House makes at least annual reports to the Board.

1

CHRC and IRSRC (collectively, “the CME Clearing Risk
Committees”) have been established to oversee the financial
safeguards systems relevant to the major asset class in which

1	Under CME Group Exchange Rules 802.A.1, 8F006, and 8G802.A.1, as applicable, a Clearing Member is in default when it “fails to promptly
discharge any obligation to” CME Clearing.
2	A copy of the charter for the Board Risk Committee is available on CME Group’s website here: http://investor.cmegroup.com/investor-relations/committees.cfm?DocumentID=14475.

3

CME Clearing Overview, continued

they have primary oversight, Base and IRS, respectively. The
primary functions of the CHRC and IRSRC are to advise on risk
management policy and practices, approve new Clearing Members,
and assess the adequacy of the financial safeguards waterfall
for their respective major asset classes. Each CME Clearing
Risk Committee represents a balanced constituency of Clearing
Members and industry experts and is chaired by a Board member.
Additionally, CHRC, unlike the IRSRC, is charged with providing
oversight on major risk management policy issues impacting
broader functions of the Clearing House as it pertains to thefinancial safeguards waterfall. In its function, CHRC oversees thefinancial surveillance activities of the FRS department.

4

CME Clearing Risk Management and Financial Safeguards

Financial Integrity of CME Clearing

CME Clearing serves as the counterparty to every cleared

Prospective Clearing Members may apply for clearing

transaction, becoming the buyer to each seller and the seller tomembership for all or a subset of cleared products. To maintaineach buyer, maintaining a matched book and limiting the credit

clearing membership in any of the CME Clearing offered asset

risk by guaranteeing the financial performance of both parties.

classes, adequate financial resources, including performance bond

In a bilateral system, each participant faces the concentrated,

obligations, contributions to the applicable major asset class’

individual credit risk of the other party to the transaction.

Guaranty Fund, and satisfying capital requirements are required.

Satisfactory fulfillment of the transacted contract or agreement

In addition to maintaining adequate financial resources, Clearing

depends primarily on the creditworthiness and proper behavior of

Members are subject to necessary operational and technologicaleach individual party to each transaction. CME Clearing mitigates

requirements associated with the products planned to be cleared,

counterparty risk through becoming the counterparty to bothdemonstration of adequate knowledge and experience in thesides of the transaction, while utilizing risk tools such as: thedesired products, adherence to prudent risk management policies,

collection of performance bond (also referred to as initial margin),and participation in default management drills. CME Clearing isdaily mark-to-market cycles, and the collection of Guaranty

committed to providing Clearing Members with fundamental risk

Fund contributions, among other tools. By this mechanism, themanagement tools to promote and protect the financial integrity

concentrated credit risk of each transaction is transformed intoof the markets it serves.

a well-diversified and regulated risk supported by the financial
safeguards system (described below).
Market participants access CME Clearing products through
Clearing Members who serve as an integral part of the foundation
upon which central clearing is built. All transaction participants
must be represented by a Clearing Member who assumes
performance and financial responsibility for all transactions it
clears, including transactions cleared on behalf of its customers,
own account, and affiliates. Additionally, each Clearing Member isaccountable to CME Clearing as the guarantor for payment andperformance bond obligations arising from the accounts it clears.
CME Clearing utilizes a variety of risk management metrics toevaluate Clearing Members’ abilities to withstand changing market
dynamics. Under the structure which CME Clearing operates, CME
Clearing evaluates the counterparty risk posed by its Clearing
Members and ensures that Clearing Members provide prudent
oversight and evaluation of the market particpants for which theyclear. CME Clearing evaluates Clearing Members for the adequacyof their customer level risk monitoring policies and procedures.
Additionally, throughout the day CME Clearing monitors the risk
exposure of individual customer accounts that are deemed to be“Large Trader” accounts.

5

Risk Management Controls

With a globally diverse group of Clearing Members and market

swap transactions. CME SDR seamlessly integrates with CMEparticpants, CME Clearing utilizes a wide range of techniques toClearing and simplifies swap transaction reporting, reconciliation,assess the level of risks to which it is exposed under both normal

and compliance.

and stressed market conditions. CME Group provides pre-traderisk management controls for Clearing Members who provide

CME SEF

clearing services for their clients, including those clients that

CME Inc. is registered as a swap execution facility (“SEF”) withhave direct market access (“DMA”). The risk control parameters

the CFTC – referenced as “CME SEF”. CME SEF is accessible via

are determined and set by the Clearing Member. As an additional

CME Direct, which provides enhanced operational flexibility tolayer of protection for the marketplace, CME Clearing reviews andmeet customers’ needs. CME SEF currently supports commodities

monitors the risk control parameters that Clearing Members put

products.

in place on their clients. All CME Clearing risk tools are continuallyassessed to ensure appropriateness and effectiveness, as well
as evaluated against prevailing industry best practices to ensurethat the tools are properly measuring potential risks facing theClearing House.

All OTC derivative trades submitted for clearing executed on
a SEF or other third-party execution platforms are subject toall relevant CME Group Exchange Rules, particularly Rule 815.
Clearing Members are required to implement appropriate risk
controls when a trade is executed on a third-party execution

Pursuant to CME Group Exchange Rule 982, Clearing Members

platform. For risk management purposes, all third-party execution

are required to have written policies and procedures in place toplatforms that submit trades to CME Clearing are subject to CME

ensure they are able to perform certain basic risk and operational

Group Exchange Rules and are required to give CME Clearing

functions at all times. This rule is setout to ensure Clearing

access to its execution platform. CME Clearing’s authority overMembers maintain appropriate governance for trade submission

third-party execution platforms gives CME Clearing the ability toand account monitoring, but specifically to ensure order entry

ensure prudent risk management standards are met for all trades

systems include the ability to set automated credit controls or

entering into clearing.

positions limits.

Mechanisms to Limit Excessive Price Movements
Trade Execution

CME Group employs numerous mechanisms that prevent

CME Globex is the platform that hosts CME Group’s global

excessive price movements to preserve market integrity. To

electronic trading execution for futures and options on futures.

protect against market disruptions, Price Banding is employed

On CME Globex, all futures and options markets can be accessed

for all incoming electronic orders, which subjects orders to pricedirectly through iLink. CME Globex provides access to theverification. Price Banding is designed to prevent the entry ofbroadest array of futures and options products available on any

orders at clearly erroneous prices. Additionally, CME Group

platform, nearly 24 hours a day throughout the trading week, from

employs proprietary functionality that assigns a limit price or

anywhere in the world. CME Globex offers high-speed execution,

protection point to each market order entered on the CME Globex

transparency, anonymity, and global distribution.

platform and to each stop order entered without a limit price.
Similar to price banding, protection points prevent orders fromCME SDR

being filled at significantly aberrant price levels but due to the

CME Inc. supports a Swap Data Repository (“SDR”) that provides

absence of sufficient liquidity to statisfy the order. The protection

public reporting on cleared and uncleared swap transactions

point is a value that is established in connection with a definedproviding an infrastructure that allows for greater transparency

non-reviewable range. Another type of risk management tool

into OTC markets. The information is published by asset class in

is Velocity Logic, which is designed to detect significant pricereal-time after any applicable regulatory-mandated delays andmoves of futures contracts occurring within a predetermined

includes access to the history on all previous publicly reported

period. When Velocity Logic triggers, it introduces a momentary6CME Clearing Risk Management and Financial Safeguards

suspension in trade matching by transitioning the futures

non risk-reducing orders, and the cancellation of working orders.

instrument(s) and related options into the reserved/paused state

The risk administrator can also set levels at which early warning

for a prescribed number of seconds. Several exchange-tradednoifications will be automatically generated.

derivatives products have rules that establish daily price limits
and/or circuit breakers that allow market participants time toassimilate information and mobilize liquidity during periods ofsignificant and potentially destabilizing price swings. Circuit
breakers are calibrated at defined levels and completely halt
trading for a defined period of time or for the balance of the
day’s trading session. Price limits allow trading to continue, but
only within the defined limits. Additionally, CME Globex employs
matching algorithms to ensure market participants receive fair
prices at execution for each product group.

Credit Controls
CME Clearing has pre-trade credit control systems in place tomanage credit risk for Clearing Members that clear exchangetraded and cleared swaps derivatives products at CME Group.
Through setting credit limits via credit controls, Clearing Members
have the ability to limit total exposure to their electronic trading
accounts. Further, both CME Clearing and Clearing Members
can gain insight into credit exposures at the execution firm levelby utilizing the credit control system. Pursuant to CME Group
Exchange Rule 949, CME Group requires Clearing Members toplace credit controls on their customers. CME Clearing maintains
the right to advise a Clearing Member if any credit limits appear to
be inappropriate for the Clearing Member’s clients for exchangetraded and cleared swaps derviatives products.

CME Group also offers optional, granular pre-trade risk
management capability through In-Line Credit Controls (“ICC”)
for exchange-traded derivatives. ICC allows Clearing Members
and Globex Executing Firms to set daily limits for CME Globex, perproduct, at the account level through the Account Manager tool.
Risk administrators at the Clearing Members or Globex Executing
Firms also have the ability for read only view of each other’s credit
limits. Regardless of whether an account is registered for ICC,
there is no latency differential and all Globex orders are subject tothe same ICC processing.
ICC functionality features include:• Daily Quantity Limits – set quantity position limits per
product, per account level;•	Good ‘til Cancel – Good ‘til Cancel (“GTC”) orders remain
active in the order book until they are completely executed,
canceled, or when the instrument expires;•	Good ‘til Date – Good ‘til Date (“GTD”) orders remain activein the order book until they are completely executed, expire
at the specified date, are canceled, or when the instrument
expires; and• E-mail Alerts – configured at pre-set threshold level breaches.
Due to the different market structure between swaps andexchange-traded derivatives products, IRS Clearing Members have

Exchange-traded derivatives Clearing Members are required to

the flexibility to implement client credit controls utilizing either

use CME Globex Credit Controls (“GC2”) functionaility, which

CME Clearing risk control tools or their own internal systems.

provides Clearing Members access to automated risk controls andFurther, before an IRS trade can enter into clearing, it must passprotection against risks arising from adverse execution activity.

the credit controls set by CME Clearing on its IRS customers.

GC2 is intended to complement the risk management tools

IRS credit controls are set at the clearing and trade level. Credit

used by Clearing Members to manage risk at the more granular

controls are reset at the start of each trading day and monitored

trader and account level. Clearing Member or partner exchange

by CME Clearing’s Risk Management team on a real-time basis.

Clearing Member’s risk administrators can set specific credit
limits in GC2. GC2 allows Clearing Members to retain the ability to
implement risk controls in a manner that is most appropriate for
their customers and business profile. Risk administrators are able
to select from a set of automated real-time actions to alert themof risk limit breaches, including e-mail notifications, blocking of7

Risk Management Controls, continued

As an IRS Clearing Member approaches its credit limits, theCancel on Disconnect

CME Clearing Risk Management team may take any of the

CME Globex Cancel On Disconnect (“COD”) functionality is anfollowing actions:

opt-in free service that allows for automatic cancellation of resting•	Contact the firm to discuss changes to their risk profile andasses next steps;• Request additional collateral, if appropriate;

day orders upon the involuntary loss of Globex connectivity.
Market makers and liquidity providers have the ability to utilize thistool to control their risk in the market. Upon a session disconnect,
the COD functionality checks for resting orders for registered• Adjust limit thresholds to reflect the risk profile; and/or

session and trader ID pairs and sends a command to cancel the• Permit risk-reducing trades only, for the respective account.

orders. Through the COD function, a user will receive all cancel

Overall, credit controls allow for CME Clearing to prudently
manage and have oversight into Clearing Members risk exposuresand are flexible to account for changing market conditions.

Self-Match Prevention
To further limit risks associated with accounts that share common
benefical ownership, CME Group provides optional self-matchprevention (“SMP”) functionality. SMP is designed to prevent
matching of buy and sell orders for accounts where a firm has
common benefical ownership. Customers that opt in to thefunctionality are required to populate FIX tags with a specific
SMP ID on all orders sent to CME Globex. Also, customers haveflexibility in how to apply SMP functionality based upon their
particular business structure, but in all cases registration isrequired in order to utilize the SMP functionality.

Drop Copy
The Drop Copy service allows customers to receive, via a FIX
messaging interface, real-time copies of Globex execution reports,
acknowledgement and reject messages. This enables firms to feed
the data to their internal risk systems, allowing firms to monitor
risk on a real-time basis and provide greater transparency to bothrisk managers at the Clearing Member and customer levels.

acknowledgment messages upon reconnecting.

Risk Management Interface
Risk Management Interface (“RMI”) gives Clearing Members thathave access to CME Globex the ability to implement granularpre-trade risk controls. Clearing Members can access the RMI API
through their proprietary risk systems given that the proprietaryor third-party risk management applications are certified. The
RMI API allows Clearing Members (or third-party risk systemproviders) to promgrammatically send instructions to blockor unblock order entries at execution firm, account, derivative
type, side (buy or sell), or product level. Additionally, the RMI API
provides Clearing Members the ability to query current blocked or
unblocked instructions and cancel working orders, GTC and GTD
order types. Specifically the RMI GUI is a web-based user interface
that provides the capability to view current blocked orders or
block/unblock order entery at the same levels as the API.

FirmSoft
FirmSoft is a browser-based order management tool which
provides market participants access to real-time information forworking and filled CME Globex orders as well as order modification
history. Risk managers at the Clearing Member have greater
insight into working and filed orders with FirmSoft. Additionally,

The Drop Copy service also allows for the ability to monitor

FirmSoft provides order visibility and cancellation capabilities.

aggregate activity guaranteed by one or more clearing firms

Cancellation functions such as the “Cancel All” or “Kill Button”

upon approval.

provide important risk mitigation techniques at all times andduring system failures.

8

CME Clearing Risk Management and Financial Safeguards

Kill Switch
Kill Switch provides Clearing Members the ability to implementa one-step shut-down for all of CME Globex activity at theSenderComp ID (Tag 49) level, allowing Clearing Members to limit
total exposure to electronic trading entities. Upon activation of theKill Switch by the Clearing Member, all order entry capabilities areblocked and all working orders are cancelled for either a selected
subset or the entire firm’s SenderComp IDs.
Further information on CME Globex can be found on CME Group’s
website in the CME Globex Reference Guide.3

CME ClearPort and CME Direct
With regards to cleared swaps products, CME Clearing offers
services through CME ClearPort. CME ClearPort is a platformthat not only hosts CME Clearing’s cleared swaps products but
it provides a comprehensive set of flexible clearing services for
global cleared swaps markets fully backed by CME Clearing. CME
ClearPort offers an array of clearing services that vary dependingon the nature of the product traded, allowing users to submit
bilaterally negotiated trades for clearing. CME ClearPort has thecapacity to report transactions in multiple asset classes, provide
significant mitigation of counterparty risks, and allows for neutral
valuations across asset classes.
Additionally, market participants can access CME Group’s
exchange-traded and OTC derivatives markets through CME
Direct. Integrated with CME ClearPort, CME Direct allows for
OTC trades to be submitted for clearing instantaneously. Within
CME Direct, Clearing Members can view and control risk settings
through applications at either the clearing- or executing firm-level
for OTC trades submitted for clearing. All trades submitted forclearing are subject to risk controls prior to acceptance, regardlessof how they are transmitted to CME Clearing.

3

http://www.cmegroup.com/globex/files/GlobexRefGd.pdf

9

Financial Safeguards System

CME Clearing has established a financial safeguards system toClearing’s Risk Management team continuously tracks profit andprovide optimal risk management protections. CME Clearing

loss on real-time positions that are marked to real-time market

has established separate financial safeguard waterfalls for each

prices, reducing the accumulation of debt in the marketplace.

major asset class in which it provides clearing services: one for

Through 24 hour, 6 days a week monitoring, CME Clearing is

IRS and one for Base products, which includes futures, options onable to reduce risk across time zones, from Europe to Asia with

futures and cleared swaps products other than IRS. The financial

settlement occurring during peak times of activity.

safeguards waterfalls are designed to ensure that CME Clearing
has sufficient resources to cover the potential future exposuresof each of its Clearing Members and, without mutualizing losses
under extreme but plausible market conditions, has additional
resources to cover exposures borne by a Clearing Member default
event. Each Clearing Member is required to participate in eachapplicable waterfall for the product(s) it is eligible to clear.

On a daily basis, CME Clearing conducts stress testing of Clearing
Member portfolios and for Clearing Members’ large individual
customer accounts. Numerous stress scenarios have beenmodeled to reflect a diverse set of possible market events. Stressresults are evaluated against performance bond on deposit andClearing Member adjusted net capital. Results of stress tests maylead CME Clearing to request that a Clearing Member provide

CME Clearing uses a proactive risk management approach

additional information about its customer accounts, such as

through the tools and methodologies it employs. CME Clearing’s

whether offsetting positions for CME Clearing cleared products

risk management approach estimates potential market

exist in other markets. In some cases, stress test results may

exposures in real-time and prevents the accumulation of losses

cause CME Clearing to increase a Clearing Member’s performanceby marking-to-market open positions at least once daily. In

bond requirement, capital requirements, or require a Clearing

addition, CME Clearing monitors the financial integrity andMember to reduce or transfer positions.

operational capabilities of Clearing Members to meet their
obligations and the sufficiency of their resources to cover potential

Mark-to-Market

future obligations. Additional CME Clearing risk management

CME Clearing’s risk management model uses both performance

functions include: daily recalculation of performance bondbond and settlement variation to mitigate the risk of default by arequirements, monthly recalculation of Guaranty Funds with

Clearing Member, with performance bond addressing the costs

daily monitoring, setting collateral acceptability and limits,of hedging and liquidation in the case of a default. CME Clearing

client account identification, stress testing, concentration risk

limits the accumulation of losses through daily settlementmonitoring, credit risk monitoring, liquidity risk management, andvariation, known as mark-to-market calculation, which removes

other techniques as standard risk management practices. CME

debt from the system by settling profits and losses rather than

Clearing risk management tools also allow for prompt detection ofallowing outstanding obligations to accumulate in the system.

financial and/or operational weaknesses and allows for swift andCME Clearing calculates mark-to-market settlement variation andapproproiate action to rectify any financial problems to protect

performance bond twice daily for futures and options, and once

market participants.

daily for cleared swaps products to appropriately limit the build-up
of risk exposures. CME Clearing’s twice daily mark-to-market

Real-Time Monitoring

cycles limit the risk associated with trading hours in the European

CME Clearing monitors intraday price movements and trading

and Asian time zones. CME Clearing also reserves the right toactivity throughout the trading session. To assess the impact

perform ad hoc settlement cycles as market conditions warrant orof these price and activity changes on Clearing Members, CME

to call for additional performance bond collateral, as necessary.

Clearing tracks market participants’ exposures in real-time. CME
Clearing conducts intraday mark-to-market calculations, which
are performed on Clearing Member and customer positions andreviewed by CME Clearing throughout the day and overnight. CME

10

At each settlement cycle, CME Clearing determines the change
in market value of all open positions from the prior settlement
cycle and communicates this to the respective Clearing Members
for settlement. These processes ensure that CME Clearing, at a

CME Clearing Risk Management and Financial Safeguards

minimum holds sufficient collateral to protect against potential

when the account’s equity falls below minimum maintenancelosses that may accumulate prior to the next settlement cycle. The

performance bond requirements set by CME Clearing, allowing

settlement process is covered in greater detail under CME Groupcustomers to absorb some losses before issuance of another

Exchange Rule 814.

performance bond call. When performance bond collateral on
deposit of the speculative customer falls below the maintenance

Performance Bond Requirements

performance bond requirement, the account is topped up to the

Performance bond requirements are good-faith deposits tocurrent initial performance bond level, resulting in a direct debit tomitigate non-financial performance on open positions, acting as

the Clearing Members account at its designated settlement bank.

an ex-ante risk based tool to cover potential future exposures.

Clearing Members may impose more stringent performance bondThrough CME CORE, a web-based tool, CME Clearing offers fulltransparency to market participants by giving them the ability
to calculate and evaluate performance bond requirements for all
products cleared by CME Clearing.

requirements on their customers than the minimums establishedby CME Clearing, due to the greater visibility they have into thecredit risk profiles of their customers. This “excess” collateralcollected minimizes the potential need for more frequent calls for

CME Clearing permits Clearing Members to deposit performance

additional margin calls on customers. Excess customer collateralbond sufficient to cover their net exposures for their proprietary

posted to CME Clearing by a customer’s Clearing Member ispositions. CME Clearing calculates performance bondcarefully monitored and protected (see “Customer Protections

requirements for each customer, collecting gross performanceand Financial Surveillance” below).

bond for the aggregate cleared swap customer account andPerformance bond requirement policy is established to ensure

customer segregated account, for exchange-traded derivatives.

appropriate coverage for all products and portfolios, while

CME Clearing establishes minimum initial and maintenanceallowing flexibility to CME Clearing to adjust settings or model

performance bond levels for all cleared products. All Clearing

parameters as market conditions change. In compliance withMembers are required, at a minimum, to post maintenance

CFTC Regulation 39.13, CME Clearing aims to cover 99% of theperformance bond levels to CME Clearing, which represents

potential price moves on an ex post basis for a product or portfolio

the minimum amount of protection against potential losses forof products over a minimum of one-day for futures and options on

a position or portfolio. Due to the increased risk of loss, initial

futures; one-day for swaps on agricultural commodities, energy

performance bond is charged only to speculative customer

commodities, and metals; and five-days for all other swaps. CME

accounts and is calculated as a percentage above the amount ofClearing calibrates performance bond requirements for eachmaintenance performance bond level derived by the applicable

asset type to, at a minimum, meet the necessary 99% coveragemargin model. Clearing Members and hedge customers are

standard within the defined margin period of risk (“MPOR”) andmargined at the maintenance performance bond level. The buffer

therefore, where appropriate, utilizes confidence levels that exceed

between initial performance bond and maintenance performance

99% in calibrating performance bond requirements.

bond is currently 10% with CME Clearing having the discretion

Performance bond methodologies utilized to calculate portfolio

to increase the buffer, where appropriate. This buffer acts as ananti-procyclical measure, while also maintaining stable, prudent
risk management standards.

risk give consideration to product specific risk profiles. Allof CME Clearing’s performance bond methodologies look tobalance prudent coverage standards with the potential impact

Pursuant to CFTC Regulation 39.13(g)(8), Clearing Members areof procyclicality to the market place. Where appropriate, CME

required to collect at a minimum from their customers the amount

Clearing determines performance bond floors for certain products,of performance bond required by the DCO. CME Clearing therefore,

which ensures targeted performance bond levels are maintained

requires that Clearing Members collect initial performance bondduring periods of low volatility. CME Clearing considers seasonallevels from a speculative customer when an account is new orvolatility for specific products that are subject to seasonal11

Financial Safeguards System, continued

behavioral patterns. CME Clearing utilizes both shorter- andadjusted net capital, among other things can trigger concentration

longer-term volatility movements to appropriately calibrate stableperformance bond charges. The purpose of concentration

performance bond requirements.

performance bond programs is to recognize the potential market

CME Clearing calibrates performance bond levels against
expected liquidity profiles of certain products and portfolios,
considering the need to liquiduate in times of market stress. In
conducting reviews of product or portfolio liquidity profiles, CME
Clearing may increase the coverage standards and/or MPOR for
particular products directly within the portfolio risk assessment
methodology, or alternatively, by addressing liquidity issues
through “add-ons” to the basic portfolio risk assessment algorithm
calculations. Additionally, pursuant to CME Group Exchange Rule824, CME Clearing may call for additional performance bondcollateral from any Clearing Member when deemed necessary in
response to unstable market conditions.
CME Clearing uses rigorous backtesting to validate that
performance bond models are performing as they were intended
and are meeting the coverage standards defined for each product.
Any backtesting violations trigger analysis exercises to assure
model parameters are appropriately tuned to existing market
conditions. CME Clearing’s senior Risk Management team andthe appropriate CME Clearing Risk Committee have insight into

exposures due to large positions relative to the overall market.

Guaranty Funds
In addition to the collection of performance bond, each Clearing
Member contributes a risk-based (or minimum) amount to the
Guaranty Fund(s) associated with its clearing membership(s).
CME Clearing maintains two distinct financial safeguards
packages with individual Guaranty Funds for each of its major
asset classes, Base and IRS. The Guaranty Funds are a mutualized
pre-funded pool of resources to cover losses associated withextreme, but plausible, market events that can be utilized to
remedy a potential Clearing Member default event. Each Guaranty
Fund is sized to cover the default of the two Clearing Members
and their affiliates with the largest potential stress shortfalls.
The funds of one financial safeguards package cannot be used tocure the losses within a different financial safeguards package.
Further information on the financial safeguards packages and the
management of a Clearing Member default can be found below inthe “Default by a Clearing Member” section.

backtesting results.

Acceptable Collateral

Further information on CME Clearing’s performance bond

CME Clearing determines the acceptability of various collateralmethodologies and related backtesting is disclosed in CME

types, in accordance with relevant CFTC Regulations and CME

Clearing’s Principles for Financial Infrastructures DisclosureGroup Exchange Rules, and determines appropriate haircuts anddocument on CME Group’s website.4

limits, as well as requirement type eligibility – performance bondor Guaranty Fund. CME Clearing’s acceptable collateral types

Concentration Performance Bond

exhibit minimal credit, market, and liquidity risks. CME Clearing

CME Clearing maintains concentration performance bondoffers a comprehensive collateral management program that

programs for each major asset class. Clearing Members areallows for market participants to meet collateral requirements

subject to a concentration performance bond charge if they holdwith a broad set of eligible assets, while reducing concentration

positions that are sufficiently large to trigger the concentration

risk. CME Clearing’s diverse collateral offering reduces the risk

charge in the position’s respective major asset class. Each majorthat illiquidity or pricing issues in one type of collateral will haveasset class maintains a unique trigger for its concentration charge

an impact on Clearing Members’ abilities to meet their financial

that allows for prudent management of concentration risks. A

obligations. CME Clearing also has several different collateral

Clearing Member’s positions relative to the overall market andmanagement programs, providing efficient and cost-effective

412

http://www.cmegroup.com/pfmidisclosure

CME Clearing Risk Management and Financial Safeguards

solutions for Clearing Members’ collateral management needs.
Acceptable collateral may vary by account class and account type,with further detail disclosed on the CME Group website.5
Risks associated with various forms of acceptable collateral
are mitigated through ongoing review, daily valuation, prudent
haircuts, and limits. Securities are revalued on a daily basis, at aminimum, and are subject to prudent haircuts. Haircuts are set
with the intention to account for the potential decline in liquidity
and value of collateral during stressed market conditions. CME
Clearing ensures that their haircuts are sufficiently conservativeand reviewed on a regular basis, while meeting industry regulatory
standards for haircuts. Additionally, CME Clearing’s sovereignmodel utilizes numerous factors, which are reflective of the risk of
the country and other elements to evaluate the sovereign risk towhich CME Clearing is potentially exposed.

Secured Credit Facility
CME Clearing maintains a fully secured, committed line of credit
with a consortium of domestic and international banks, which
supports CME Clearing’s diverse collateral offering. Under
the terms of the credit agreement, CME Clearing may use theproceeds of the credit line to provide temporary liquidity in theevent of a Clearing Member default, in the event of a liquidity
constraint or default by a depository institution (custodian of thecollateral), or if there is a temporary problem with the domestic
payments system that would delay payments of settlement
variation between CME Clearing and Clearing Members. The lineof credit thus provides CME Clearing with additional capacity tofacilitate payments in a default situation and/or in stressed market
conditions. As of December 31, 2017, the size of the facility was $7
billion, expandable to $10 billion.

5	http://www.cmegroup.com/clearing/financial-and-collateral-management/

13

Customer Protections and Financial Surveillance

Customer Positions and CollateralThe performance bond requirement for futures is referenced

CME Clearing employs an account structure that distinguishes

in relationship to Customer Gross Margining (“CGM”) and theand segregates customer positions and performance bond fromperformance bond requirement for cleared swap customerthat of the Clearing Members and their affiliates, as required byaccounts is referenced in relationship to Legal Segregation with

the Commodity Exchange Act and CFTC Regulations. Consistent

Operational Commingling (“LSOC”) regulatory requirements.

with CFTC Regulation 39.13(g)(8)(ii), performance bond for

Both CGM and LSOC, as discussed above, ensure each customer

customers is collected on a gross basis – i.e. one customer’s

account is gross margined rather than offset against otherexposures cannot offset another customer’s exposures to reduce

customers at the same Clearing Member. Customer positions andperformance bond requirements . Customer performance bondperformance bond is required to be segregated from the positions

for the futures and options on futures is referenced in relationshipand performance bond of its Clearing Member for customer

to the “customer segregated account” and for cleared swaps issegregated and cleared swap customer accounts, in line with CFTC

referenced in relationship to the “cleared swap customer account”.

Regulation 1.20(a) and CFTC Regulation 22.2(b), respectively.

Regardless of product type, customer performance bond is

Additionally under CFTC Regulations, no futures customer

collected on a gross omnibus basis for each Clearing Member, as

collateral or cleared swaps customer collateral can be applied tothe sum of performance bond requirements for each individual

losses stemming from house positions under any circumstances.

customer of the Clearing Member. Customer performance bond

LSOC is implemented through Parts 22 and 190 of CFTCis held to protect CME Clearing from the failure of a Clearing

Regulations, which establish customer protections for cleared

Member to make payments associated with a settlement cycle.

swaps. LSOC additionally prevents a DCO from using the collateral

CME Group Exchange Rules are supported by the collectionof one customer to cover the obligation of another customerof customer performance bond on a gross basis and by CFTCin the event of a Clearing Member default. CME Clearing goesPart 190 Bankruptcy regulations, which are designed to protect

above and beyond the requirements of LSOC to provide additionalcustomers in the event of insolvency or financial instability of theirprotections to customers. CME Clearing’s LSOC with excess

Futures Commission Merchant (“FCM”) Clearing Member.

program allows for Clearing Members to post cleared swap

CME Clearing’s FRS department routinely inspects Clearing

customers’ “excess” collateral, which is the amount collected

Member records to monitor compliance with segregation andthat exceeds the margin requirement set by CME Clearing, while

cleared swap customer account requirements. The integrity

allowing for the customers’ full collateral value, as reported by theof segregated customer accounts relies on the accuracy andClearing Member to be protected. Additionally, upon the default

timeliness of the information provided to CME Clearing by FCM

of a Clearing Member, CME Clearing will cease netting settlement

Clearing Members. Violations by a Clearing Member of segregation

variation for cleared swap customers of such Clearing Member

requirements for customer accounts are considered serious

and will allow the cleared swap customers of the defaulted

infractions and can result in the imposition of significant penalties.

Clearing Member to settle directly with the Clearing House.

Customer Protection

CME Clearing complies with CFTC Regulation 1.25 that sets
forth requirements for the reinvestment of customer segregated

Although the regulatory regimes for customer protections areaccount funds and cleared swap customer account funds on

different for futures and options on futures than for cleared swaps,

deposit at a DCO. This ensures a high level of safety of customer

ultimately a high-level of protection is provided in both cases.

funds and ready access to liquidity. CFTC Regulation 1.25 imposes

Per CFTC Regulation 39.13(g), CME Clearing sets minimum

requirements that mitigate credit, liquidity, and market risks, while

performance bond levels to the sum of requirements calculated

ensuring the preservation of principal and maintenance of liquidity.

for each individual customer account for products that are under

CME Clearing only invests customer collateral in highly liquid, low

the futures regulatory regime and swaps regulatory regime.

risk instruments that are permitted under CFTC Regulation 1.25.
Furthermore, CME Clearing adheres to the permitted investment

14

CME Clearing Risk Management and Financial Safeguards

categories laid out in CFTC Regulation 1.25 for non-customer

Members must provide full financial statements monthly, provide

collateral and Guaranty Fund deposits, which goes above andcertified financial statements once a year, and submit morebeyond the requirements of the CFTC. Additionally, CME Clearing

frequent reports (daily or weekly) as directed by CME Clearing.

complies with CFTC Regulation 1.29, which requires that a DCO

Clearing Members regulated by another regulatory authority (i.e.

bear all losses related to the investment of customer funds. CME

banks) must submit to CME Clearing annual audited financial

Clearing also applies CFTC Regulation 1.29 protections against

statements as well as all unaudited financial statements provided

investment losses related to the house account funds.

to its primary regulator within five days after such statements areprovided to their regulator.

Financial Surveillance
Recognizing the need to monitor the financial condition ofClearing Members and compliance with customer segregation
requirements, CME Clearing’s FRS department, in conjunction
with other self-regulatory organizations, operates a sophisticatedfinancial surveillance program. The FRS department performs
CME Inc’s Designated Self-Regulatory Organization (“DSRO”)
function by conducting on-site, risk-based examinations on
an impromptu basis every nine to fifteen months.Through thesurveillance program, the FRS department monitors Clearing
Member’s capitalization levels through regular financial statement
submissions, ensures Clearing Member adherence to notification,
inspection and information sharing requirements, among otherthings. The program has several important aspects, as outlined
below:
Reporting. FCM Clearing Members are required to maintain
excess segregated, secured 30.7, and cleared swap funds at all
times including on an intraday basis.6 FCM Clearing Members
must calculate and report customer segregated, secured 30.7, andcustomer cleared swap statements daily to the FRS department.
FCM Clearing Members are also required to ensure their customer
segregated, secured 30.7, and customer cleared swap customer
funds depositories independently report daily balances to the FRS
department. In addition, FCM Clearing Members must submit to
the FRS department bi-monthly investments reports.
All Clearing Members must maintain compliance with capitalrequirements at all times, including on an intraday basis. Clearing

Notification. Clearing Members are required to report any failure
to meet customer segregated, customer cleared swap accountrequirements, foreign futures or foreign options secured amount,or minimum capital requirements. Clearing Members also must
notify CME Clearing prior to any significant business transaction,
any significant change in operations, or significant declines in net
capital. Numerous other notifications are required and Clearing
Members should be familiar with such requirements as highlighted
in the CME Group Exchange Rulebook.
Inspection. Generally, each Clearing Member is subject to afinancial and operational review every year. The reviews are
tailored to focus on the specific risks of the Clearing Member withinspections performed on an impromptu basis.
Information Sharing. CME Clearing participates in formal
agreements with other domestic and foreign regulatory
authorities, as well as clearing and self-regulatory organizations
with regard to information sharing. As part of these agreements,
CME Clearing regularly exchanges financial and operational
information about joint Clearing Members with other participating
entities. Recognizing that the financial marketplace spans
the globe, CME Clearing was instrumental in developing theInternational Information Sharing Memorandum of Understanding,which established a framework for participating exchanges andclearing organizations worldwide to share information relevant tomanaging risk on a global basis. CME Clearing also seeks broader
cooperation between clearing organizations through such industry

6	Secured 30.7 accounts primarily contain funds of a FCM’s U.S. domiciled customers trading futures and options on futures on foreign exchanges.

15

Customer Protections and Financial Surveillance, continued

forums as the Unified Clearing Group7, CCP128, the Joint Audit
Committee9, and the Intermarket Surveillance Group10.
CME Clearing has continually been a supporter of implementing
prudent financial surveillance over its Clearing Members and
its FRS department proactively adopted enhanced customer
protection reporting requirements and monitoring practices
of FCM Clearing Members. Various CFTC enhanced customer
protection requirements were in place and being enforced by CME
Clearing prior to their adoption by the CFTC. Further CME Clearing
has adopted several customer enhancements which go beyond
those required by the CFTC to provide an even stronger customer
protection regime.

For non-Banks:•	$5,000,000 if clearing only exchange-traded futures/options
or agricultural cleared swaps products;•	$50,000,000 if clearing swaps derivative products (including
but not limited to FX swaps and IRS); or•	20% of aggregate performance bond requirements for its
customer and house accounts for CME cleared IRS positions.
For Banks:•	$5,000,000,000 if clearing exchange-traded futures/options;or• $50,000,000 if clearing only swaps derivative products; or•	20% of aggregate performance bond requirements for its

Capital Requirements for Clearing Members
CME Clearing monitors the financial health of its Clearing
Members to ensure they are capable of meeting their obligations
to customers and to the Clearing House. CME Clearing requires
Clearing Members comply with CFTC capital requirements and also
sets its own minimum requirements. Capital requirements varycustomer and house accounts for CME cleared IRS positions.
The CHRC and IRSRC, or the Clearing House may prescribe
additional capital requirements or grant exemptions for Clearing
Members. Capital requirements are monitored by CME Clearing’s
FRS department.

to reflect the risk of each Clearing Member’s house and customer
exposures. In addition, capital requirments may vary after CME
Clearing’s assessment of each Clearing Member’s internal controls,
risk management policies, and back office operations. Minimum
capital (Adjust Net Capital for non-Banks and Tier 1 Capital for
Banks) is the greatest of the CFTC (8% of all foreign and domestic
domiciled customers and non-customers [excluding proprietary]risk maintenance performance bond requirements for all domestic,
foreign futures and options on futures contracts and clearedswaps) or the SEC capital requirement or:

7

The Unified Clearing Group promotes the cooperation of securities and futures clearing agencies on common interest topics.

8	CCP 12 is an industry group with clearing house representatives from Asia, the Americas, and Europe.
9	The Joint Audit Committee is a voluntary, cooperative organization comprised of representatives from U.S. futures exchanges and regulatoryorganizations.
10	The Intermarket Surveillance Group is comprised of an international group of exchanges, market centers, and market regulators that perform
market surveillance in their respective jurisdictions.

16CME Clearing Risk Management and Financial Safeguards

Additionally, CME Group Exchange Rules generally require if any
ANC is computed based on the following formula:person owns 10% or more of the profits of two or more Clearing

Current Assets

Members, then each such clearing member shall guarantee the– Adjusted Liabilities

obligations of the others to the Clearing House.

– Capital Charges
Adjusted Net CapitalMarket Regulation
Through CME Group’s Market Regulation department, CME

Current Assets: Cash and other assets that are reasonably

Clearing’s Risk Management team has access to specific accountexpected to be realized as cash, or sold, during the next

position information for Clearing Members’ large individual

twelve months. However, certain assets such as prepaid

customer accounts. Such position information, which is

expenses, deferred charges, and unsecured receivables frommaintained on a highly confidential basis, allows the identification

customers, non-customers, subsidiaries, and affiliates, whichof concentrated positions as they arise and the aggregation ofwould be classified as current under generally accepted

positions that may be owned by common principals throughaccounting principles are deemed non-current. Exchange

several different Clearing Members. Knowledge of concentrated or

memberships are also reflected as non-current assets.

high-risk positions, coupled with information routinely gathered on

Adjusted Liabilities: The Clearing Member’s total liabilities

the cash and/or related derivative markets, enables CME Clearing

less the liabilities which have been subordinated to the claims

to respond rapidly to market situations that might adversely affectof general creditors.

the financial integrity of CME Clearing or the financial stability of aCapital Charges: Regulatory capital charges primarily
encompass percentage deductions (“haircuts”) on thefollowing:

Clearing Member.

Clearing Member Risk Reviews
The FRS department’s risk-based examinations are supplemented

Speculative proprietary futures and options positions

by separate on-site risk reviews conducted by CME Clearing’s Risk

	Proprietary inventories, fixed price commitments, andManagement team about every other year. The Risk Management

forward contracts
	Under margined customer, non-customer, and omnibus
accounts
Marketable securities

team focuses on Clearing Members’ holistic risk management
program, including Clearing Members’ approach to market risk,
credit risk and liquidity management, including in relationshipto their customers. During the on-site review, CME Clearing
evaluates various financial metrics such as liquidity, capital
adequacy, asset quality, and earnings/profitability. In addition,

Non-bank Clearing Members which are members of all CME

reviews are conducted to review policies for new and existingGroup Exchanges (CME Inc., CBOT, NYMEX, and COMEX) mustaccount monitoring, risk management procedures for customer

assign to CME Clearing two CME Group memberships, two IMM

and proprietary exposures, default management capabilities,

memberships, two IOM memberships, one GEM membership,monitoring of liquidity risk, and operational risk management.

one full CBOT membership (two if a registered FCM), two full

These reviews cover credit, market, and liquidity risks through a

NYMEX memberships, and two full COMEX memberships. To

series of topics:

obtain clearing privileges for a single CME Group Exchange, a
Clearing Member must meet the membership requirements ofthat particular Exchange. To obtain clearing privileges for multiple•	Customer and proprietary trading risk monitoring and control;•	Risk management, monitoring, and stress test reports;

CME Group Exchanges, Clearing Members need to meet the•	Demonstration of risk management systems;

membership requirements of each of those particular Exchanges.

• Demonstration of credit control functionality;

17

Customer Protections and Financial Surveillance, continued• Counterparty credit risk management;• Internal funding process;• Internal risk system for pays/collects;• Collateral policy;• Settlement bank relationships; and•	Liquidity/capital plans in case of assessment to CME Clearing.
Results of each review are provided to CME Clearing Senior
Management. If a review indicates a potential weakness or areaof concern, the CME Clearing Risk Management team will submit
recommendations to CME Clearing Senior Management and theappropriate CME Clearing Risk Committee. Recommendations
may include, among other things, issuing a formal request to theClearing Member to address the matter within a specified period
to alleviate the need for more significant action to be taken.
Information from Clearing Member reviews is also supplemented
by CME Clearing’s ongoing monitoring of counterparty exposures,
which encompasses the monitoring of Clearing Members. On adaily basis, CME Clearing monitors counterparty market data
which includes share pricing, CDS spreads, and external credit
ratings, among other items. Each Clearing Member is subject toan internal credit risk rating determined by CME Clearing, basedon quantitative and qualitative metrics. In assessing a Clearing
Member, public and private information is considered. Internal
credit ratings are in part utilized to determine tolerance thresholds
for Clearing Members that highlight when Clearing Member
settlement variation and/or initial margin payment obligation
amounts to CME Clearing exceed the designated threshold, whichthen requires the Risk Management team to investigate the matter
further. Clearing Members with strong ratings are given higher
tolerance thresholds, while those with weaker ratings are assigned
more conservative thresholds and are subject to more frequent
review schedules.

18

CME Clearing Risk Management and Financial Safeguards

Default by a Clearing Member

The failure of a customer to meet its financial obligations to its
Clearing Member, which does not cause the failure of the Clearing

Defaulted Clearing Member Performance Bonds

Member to meet its financial obligations to the Clearing House,is managed by the Clearing Member and therefore, outside theDefaulted Clearing Member Guaranty Fund Contribution

scope of this document.
CME Clearing’s financial safeguards system includes processes

CME Contribution

related to managing defaults for both exchange-traded andcleared swaps markets. CME Clearing’s risk management andNon-Defaulting Clearing Members Guaranty Fund Contribution

financial surveillance techniques are designed to minimize thepossibility that a Clearing Member will default on its obligations toAssessment Powers

CME Clearing. CME Clearing, by Rule and by operational practice,has prepared contingencies to expeditiously deal with the unlikely
event of a Clearing Member default. A Clearing Member may bedeclared to be in default when it fails to promptly discharge any
obligation to CME Clearing,11 including but not limited to failure tosatisfy its financial obligations to CME Clearing. Upon the default
of a Clearing Member, CME will attempt to port all non-defaulting
customers as quickly as practicable to a non-defaulting Clearing
Member. CME Clearing will work to identify stable Clearing
Members with similar or complimentary customer profiles who
may be well placed to absorb solvent customers prior to thedefault of the distressed Clearing Member, minimizing the amountof time necessary to port customers once the default has been
declared. Under Chapter 8 of CME Group Exchange Rulebook, CME
Clearing has the right to immediately transfer customer positions
and associated performance bond value to a non-defaulting
Clearing Member, when the default did not occur in such customer
account. In managing past Clearing Member default events,

Member does not participate. As previously mentioned, CME
Clearing maintains two waterfall structures, one for Base productand one for IRS products. The layers of the financial safeguards
waterfalls create a pre-defined and transparent structure ofprotections that give Clearing Members the information needed
to assess potential liabilities in the event of a Clearing Member
default. Each financial safeguards waterfall is structured in thesame way, where the default of a Clearing Member will resultin the utilization of the performance bonds and Guaranty Fundcontributions of the defaulted Clearing Member first, and then in
the unlikely event those funds are insufficient the CME Clearing
contribution would be utilized, followed by the non-defaulting
Clearing Members’ Guaranty Fund contributions, and lastly funds
collected through the assessment of non-defaulting Clearing
Members – with the waterfall(s) associated with the defaulted

performance bond funds collected from the defaulted Clearing

Clearing Member’s membership(s) only being utilized.

Members were sufficient to cover the associated losses andIn the event CME Inc. is facing severe stress, unrelated to a

CME Clearing was able to quickly transfer all customer positions

Clearing Member default, Clearing Member and customer assets

and collateral to non-defaulting Clearing Members, preserving

are bankruptcy remote from CME Inc.’s estate.

customers’ access to CME Clearing’s services.
In the event of a default of a Clearing Member, depending upon
the products cleared by the particular Clearing Member, CME
Clearing may utilize the appropriate Guaranty Fund(s) andfinancial safeguards waterfall(s), in which the Clearing Member
participates, but may not use those in which the defaulted Clearing

11

CME Rule 802.A.1 (Default by Clearing Member).

19

Default by a Clearing Member, continued

Guaranty Funds

based on (a) a 30-day trailing average of their Portfolio Residual

CME Clearing’s rules are designed to maximize the safety of theLoss, which is the tail risk the IRS Clearing Member brings to themutualized pool of Guaranty Funds. CME Clearing’s Guaranty Fund

Clearing House (90%) and (b) a 30-day trailing average of its

practices are consistent with regulatory requirements and industry

gross notional (10%).

standards and subject to review and approval by the appropriate

CME Clearing recalculates the Base and IRS Guaranty Funds

CME Clearing Risk Committee. The Guaranty Funds are designed torequirements on at least a monthly basis, but may resize thecover the tail risk of potential losses in excess of performance bond

Guaranty Funds more frequently as market conditions warrant.

(considered stress shortfall) under extreme but plausible scenarios,

This is to ensure the Guaranty Funds for each waterfall are sized toas measured by stress tests. Consistent with CFTC Regulation

cover the defaults of the two largest Clearing Members and their

39.33(a), the Guaranty Funds for each waterfall are sized to coveraffilaites. The aggregate size of the Guaranty Fund contributions

the potential loss caused by the simultaneous default of the twofor each major asset class are disclosed on the CME Group

Clearing Members and their affiliates with the largest potential

website and updated regularly.13

shortfalls, within the individual major asset class. This is commonlyreferred to as “Cover Two”. For all major asset classes, the largest
potential losses from hypothetically defaulting Clearing Members
are identified through a series of stress tests simulating extreme but
plausible market fluctuations based on historical data for individual
products as well as hypothetical stresses. The stress test results arereviewed by the CME Clearing Stress Testing Committee at least on
a monthly basis, in addition to daily reviews of the results to ensure
adequacy of the Base and IRS Guaranty Funds. Results are also
shared with the appropriate CME Clearing Risk Committees.

CME Clearing Contrbiution
CME Clearing believes it’s critical that a clearing house commit
a meaningful first-loss contribution to the waterfall structure, in
advance of a mutualized Clearing Member Guaranty Fund, to furtheralign the incentives of the Clearing House and market participants.
The size of the designated CME Clearing Contribution for each asset
classes’ waterfall structures are also covered under CME Group
Exchange Rules 802 and 8G802 for Base and IRS, respectively.

Each Clearing Member is required to contribute a risk-based, orAssessment Powers

minimum amount, to the Guaranty Fund of the waterfall for each

The final layer of the financial safeguards waterfall is CME

major asset class it clears. The minimum contributions are defined

Clearing’s assessment powers against non-defaulting Clearing

in CME Group Exchange Rules 816 and 8G07 for the Base and IRS

Members. Assessment powers are determined independently

waterfalls, respectively.

for the Base and IRS financial safeguards waterfalls to ensure

Individual Clearing Member contributions to the Base Guaranty
Fund12 are computed as the greater of $500,000 or the results of aformula under which 95% of the total requirement is based on the
Clearing Member’s proportionate contribution to aggregate risk
performance bond requirements over the prior three months andthe remaining 5%is based on the Clearing Member’s contribution
to risk-weighted transaction activity over the prior three months.
Individual Clearing Member contributions to the IRS Guaranty
Fund are computed as the greater of the $15 million or the
Clearing Member’s proportional share of the IRS Guaranty Fundcoverage of extreme tail events in each specific major asset class.
For the Base financial safeguards waterfall, assessment powers
cannot exceed 2.75 times each non-defaulting Base Clearing
Member’s Base Guaranty Fund requirement for a single default.
For the IRS financial safeguard waterfall, assessment powers
are sized to cover the default of the third and fourth largest IRS
Clearing Member stress shortfalls.
In the event that the Guaranty Fund is drawn on to cover losses
caused by a Clearing Member default, each non-defaulting Clearing
Member is required to replenish its Guaranty Fund contributions by

12	Clearing members that clear OTC products covered in the Base Guaranty Fund must maintain a minimum Guaranty Fund deposit of $2.5 million.
13 http://www.cmegroup.com/clearing/cme-clearing-overview/safeguards.html

20

CME Clearing Risk Management and Financial Safeguards

Guaranty Fund, subject to any applicable cooling off periods – 5

Customer Segregated Account or Cleared Swap
Customer Account Default

business days for the Base financial safeguards waterfall and 25

If a Clearing Member fails to meet its financial obligations resulting inbusiness days for the IRS financial safeguards waterfalls under CME

a failure to make payment within its customer segregated or clearedGroup Exchange Rule 802.H and 8G802.H, respectively.

swap customer account, CME Clearing may act immediately to:close of business the business day following the utilization of the

Default Management
Default management practices are designed to ensure thecontinuity of CME Clearing’s services. CME Clearing has
established practices and procedures that allow the clearing•	Transfer non-defaulting customer segregated or cleared swap
customer account positions and collateral to a non-defaulting
Clearing Member;•	Take control of and/or liquidate defaulting customer

house to operationally manage a Clearing Member default while

segregated or cleared swap customer account positions andsimultaneously maintaining continuity of clearing services tohouse positions;non-defaulting Clearing Members. CME Clearings acts in the event•	Apply the Clearing Member’s house performance bondof either a Clearing Member house account or Clearing Member

deposits and, if necessary, the Clearing Member’s Guaranty

customer account default are described in detail below.

Fund contribution to the failed obligation to CME Clearing;
and/orHouse Account Default
If a Clearing Member fails to meet its financial obligations to CME
Clearing, related to its house account (sometimes referred to as•	Utilize all other assets of the Clearing Member that areavailable to CME Clearing (e.g. Exchange memberships).

proprietary or non-customer) account, CME Clearing may act

Although CME Clearing separates customer segregated

immediately to:performance bond deposits and positions from the Clearing•	Transfer customer segregated and cleared swap customer
account customer positions and collateral to a non-defaulting
Clearing Member;•	Take control of and/or liquidate positions in the Clearing
Member’s house account;•	Apply the Clearing Member’s house performance bonddeposits and, if necessary, the Clearing Member’s Guaranty
Fund contributions to satisfy the Clearing Member’s

Member’s proprietary performance bond deposits and positions,the customer performance bond deposits and positions for each
Clearing Member are held in omnibus accounts. Holding customer
performance bond deposits in aggregate allows for CME Clearing
to quickly port non-defaulted customers’ collateral and positions
to solvent Clearing Member(s), reducing the likelihood that
customers would not be able to access CME Clearing’s services
during market stress. Gross margining greatly imporves thetimeliness and likelihood of porting given all positions are fully

obligations to CME Clearing with regard to its house account;collateralized.

and/orIn case a Clearing Member’s default stems from a customer•	Utilize all other assets of the Clearing Member that areavailable to CME Clearing (e.g., exchange memberships).
Customer segregated and cleared swap customer account assets(positions and/or collateral) on deposit with or in the control of
CME Clearing may not be used or impaired by CME Clearing in thecase of a Clearing Member default related to the house account.

segregated account for exchange-traded derivatives, CME Clearing
has the right to apply toward the default all performance bonddeposits and positions within the respective customer segregatedaccount at CME Clearing. More specifically, a Clearing Member’s
customer segregated account is held in aggregate without specificcustomer ownership identification, which potentially subjects
positions and performance bonds deposited by customers notcausing a default to liquidation risk. For cleared swaps, LSOC
rules require daily reporting of individual customer deposits

21

Default by a Clearing Member, continued

and positions, which works to help safeguard collateral fromRecovery Plan

one customer to another customer. Further, under LSOC, CME

As a Systemically Important Derivatives Clearing Organization

Clearing is prohibited from using the value contributed by one(“SIDCO”), CME Inc. maintains a Recovery Plan in compliancecustomer to satisfy losses of another customer.

with CFTC Regulation 39.39, which additionally targets to alignwith the guidance issued by CPMI-IOSCO’s report on Recovery

Default Management Default Drillsof Financial Market Infrastructures. The Recovery Plan includes

In addition to performing various default management exercises

analysis of stressed market scenarios, which are supposed tothroughout the year, CME Clearing conducts semi-annual default

threaten CME Inc. from a “going concern” perspective, while taking

management drills with its Clearing Members and market

into account independent and related risk. The recovery tools

partcipants across each financial safeguards waterfall. Default

laid out in the Recovery Plan have the goal of preserving CME

management drills test the operational systems and processes

Clearing’s critical services and operations and allows for continuity

in place and are designed to ensure both the Clearing Houseof services. The Recovery Plan lays out actions that allows CME

and Clearing Members are operationally prepared to manage

Inc. to manage uncovered credit and liquidity shortfalls, as well asa potential Clearing Member default. The drills are structured

general business and operational risks that threaten its viability.

consistent with existing Clearing Member exposures and contain

Additionally, CME Inc.’s Recovery Plan presents a number oflarge and complex portfolios representative of the risks held

financial tools available to CME Clearing to address both Clearing

by existing Clearing Members. Each drill consists of a hedging

Member defaults and non-Clearing Member default events.

phase, where appropriate, and an auction and/or liquidation of
the hypothetically defaulting Clearing Member’s positions. The
results of each drill are reviewed by the relevant CME Clearing Risk
Committee and changes to default management processes are
implemented as warranted.

Auction Process
With regard to a default in the Base waterfall, CME Clearing may
conduct an auction for selected market participants and Clearing
Members to bid on the defaulted Clearing Member’s portfolio.
Base auction participation is voluntary and participants are
selected at the discretion of the Clearing House. Alternatively,
CME Clearing may liquidate the defaulted positions using anelectronic trading venue (i.e. CME Globex).
As part of CME Clearing’s membership requirements, IRS Clearing
Members must participate in the auction process of a defaulted
IRS Clearing Member’s portfolio, which entails the constructionof a competitive bid and potential participation on the IRS
Active Default Management Committee. The IRS Active Default
Management Committee is comprised of seconded traders whoare charged with advising CME Clearing in the hedging and/or
liquidation process of a defaulted IRS Clearing Member’s portfolio
in order to facilitate an orderly auction.

22

CME Clearing Risk Management and Financial Safeguards

Disaster Recovery and Business Continuity

CME Group’s Business Continuity Management (“BCM”) program

center; both data centers rely on separate infrastructure. CME

reflects objectives, policies and procedures that allow for the rapid

Clearing transaction data is replicated in near real-time to bothrecovery and timely resumption of critical operations following a

primary and secondary sites. In the event CME Group were to

wide-scale or major disruption. The BCM program is designed toexperience a regional outage impacting its production data center,mitigate potential impacts to the markets and customers CME

it would failover to its out-of-region, secondary data center.

Clearing serves. The BCM program defines procedures whichsafeguard the interests of key market stakeholders, and establishes
steps necessary to protect the Clearing House’s reputation andbrand, following a disruption. The BCM program helps to ensure
CME Group’s resiliency, including CME Clearing’s through:•	Aligning with U.S. and international standards for business
continuity management;•	Implementing incident response, information technology/
disaster recovery and business recovery strategies that areboth flexible and agile;•	Building effective partnerships across the company toeffectively manage risk;•	Employing tested exercise models that evolve with theenvironment and architecture;• Identifying opportunities for enhanced resilience;

Additionally, at least twice a year, all critical applications are failed
over from production to disaster recovery; the results of the
failover tests are documented in after-action reports. CME Groupalso conducts additional incremental testing, outside of the two
tests mentioned above, to further validate the recovery strategy.
The BCM program also utilizes incident response teams toensure CME Group, including CME Clearing continuity meets its
defined operational objectives after a disruption within its defined
recovery time objective.
Given the developed disaster recovery and business continuity
planning CME Clearing has in place, CME Clearing is confident
that is would be able to meet its recovery time objective upon adisruption. CME Clearing’s clearing and settlement processes
are recoverable, upon a disruption in no more than two-hours, inline with CFTC Regulation 39.34(a). The remaining systems arerecoverable, upon disruption in no more than four hours.

•	Establishing collaborative relationships with external entities,
partnerships and agencies; and•	Continually monitoring and adjusting program components
to meet both domestic and international regulatory
requirements, and that reflect any material changes to thebusiness.
CME Clearing ensures it can continually meet its recovery
time objectives of two-hours, as further described below byconducting disaster recovery exercises at least twice annually, andparticipates in the annual Futures Industry Association industrywide drills. Further, CME Clearing staff located outside of the U.S.
region are cross trained to cover and manage critical processes
to help ensure the Clearing House can complete processing
and settlements in the event where personnel in the production
location are not able to do so.
CME Group has implemented a streamlined data center approach,which includes housing all production systems within one data
center and all backup systems in a second, out-of-region data23

cmegroup.com
Helping the World Advance: CME Group is comprised of four designated contract markets (“DCMs”), the Chicago Mercantile Exchange Inc. (“CME”), the Board of Trade of the City of Chicago, Inc. (“CBOT”),
the New York Mercantile Exchange, Inc. (“NYMEX”), and the Commodity Exchange, Inc. (“COMEX”). The Clearing Division of CME is a derivatives clearing organization (“DCO”) for CME Group’s DCMs.
The content in this communication has been compiled by CME Group for general purposes only and is not intended to provide, and should not be construed as, advice. Although every attempt has
been made to ensure the accuracy of the information within this communication as of the date of publication, CME Group assumes no responsibility for any errors or omissions and will not update it.
Additionally, all examples and information in this communication are used for explanation purposes only and should not be considered investment advice or the results of actual market experience. All
matters pertaining to rules and specifications herein are made subject to and superseded by official CME, CBOT, NYMEX and COMEX rulebooks. Current rules should be consulted in all cases including
matters relevant to contract specifications.
CME Group does not represent that any material or information contained in this communication is appropriate for use or permitted in any jurisdiction or country where such use or distribution would becontrary to any applicable law or regulation. In any jurisdiction where a CME Group entity is not authorized to do business or where such distribution would be contrary to the local laws and regulations,this communication has not been reviewed or approved by any regulatory authority and access shall be at the liability of the user.
CME holds the following international authorizations for its clearing house operations:
In Australia, CME has a Clearing and Settlement Facility License.
In Canada, CME is exempt from the requirement to be recognized as a clearing agency in Alberta, Ontario, and Quebec.
In Hong Kong, CME is authorised to provide Automated Trading Services to Hong Kong investors via its GLOBEX system, and its CME Clearing System under Part III of the Securities and Futures Ordinance.
In Japan, CME has a Foreign Financial Instrument Clearing Organisation license under the Financial Instruments and Exchange Act of Japan.
In Mexico, CME is a recognized foreign CCP.
In Singapore, CME is a recognized clearing house under the Securities and Futures Act (Cap. 289) (“SFA”). Save as aforesaid, none of the CME Group entities are licensed to carry on regulated activities
under the SFA or to provide financial advisory services under the Financial Advisers Act (Chapter 110) in Singapore.
In Switzerland, CME is a recognized foreign CCP.
In the EU, CME is a recognized third-country CCP in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties
and trade repositories (EMIR).
In the UK, CME offers clearing services under the Temporary Recognition Regime of Central Counterparties.
CME Group, the Globe Logo, CME, Globex, E-Mini, CME Direct, CME DataMine and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board ofTrade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc.
All other trademarks are the property of their respective owners.
Copyright © 2020 CME Group Inc. All rights reserved.
Mailing Address: 20 South Wacker Drive, Chicago, Illinois 60606

EX005/0220