CFTC Technology Advisory Committee

Rule 1.73 

The Challenges of Risk Managing Give-Ups and 

Bunched Orders for Futures and Options on 

Futures

Version 2.5 October 30th 2012 1
Clearing Member Risk Management Rule 1.73

Give-Ups: Clearing FCMs must establish risk-based limits for the

customer and enter into an agreement with the executing broker that

requires the executing broker to screen orders for compliance. The

clearing FCM shall establish and maintain controls reasonably designed

to ensure compliance with the limits.

Bunched Orders: Clearing FCMs must establish limits for the block

account and screen the order; enter into an agreement with the

account manger requiring them to screen orders; FCMs that clear the

allocated trades must establish and maintain systems of controls

reasonably designed to ensure compliance with the limits.

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Executive Summary

• The FIA fully supports the goal of CFTC Rule 1.73 to improve risk management across FCMs.

– The risk management of give-ups is a significant challenge, and - unlike the OTC market - futures 

trades cannot be broken in the event of failure of a counterparty to meet its obligations.

• The aim of this presentation is to attempt to demonstrate the challenges around 

implementing the rules for give-ups and bunched orders.

– Clients either choose to use multiple clearing relationships to minimize counterparty risk, or have 

this mandated within the conditions of the funds that they manage.

– Clients choose to use multiple execution relationships based on various factors including quality of 

service, available functionality, relationship and the option of alternative execution in the event of 

issues with any single counterpart.

– This has led to a significant percentage of traded volume being executed through give-up 

agreements and often executed as a bunched order that is allocated on a post-trade basis.

– Risk management has evolved to support “speed bumps” on a pre-trade basis, and has a qualitative 

element as well as being quantitative on a post-trade basis, and is generally geared to avoiding limit 

breaches rather than reacting to them.

• Both clients and FCMs have built a complex infrastructure of in-house and 3rd party vendor 

solutions for various components of the futures trade cycle.

– Core components are costly and time consuming to upgrade or replace.

– There are no common standards for transmitting risk management messages.

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Major Futures Exchanges 

Give-Up Volumes

CME Group Total Volume Give-Up Volume Give-up % of Total Volume

January 2012 144,573,133 73,610,717 51%

February 2012 115,826,085 88,440,551 76%

March 2012 118,860,082 95,655,852 81%

TOTAL 379,259,300 257,707,120 68%

Exchange Total Volume Give-Up Volume Give-up % of Total Volume

ICE US Q1 2012 25,434,329 4,545,390 18%

ICE EU Q1 2012 69,477,970 15,332,835 22%

LIFFE Q1 2012 216,595,302 152,955,737 71%

EUREX Q1 2012 409,021,213 238,545,933 58%

TOTAL 720,528,814 393,896,649 55%

• Who Uses Give-Ups ?

- Asset Managers, Pension Funds, Hedge Funds, Commodity Trading Advisors, Institutions

• Why Use Give-Ups ?

- To minimize counterparty and concentration risk

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Bunched Orders and Allocations

• Account managers use bunched orders to maximize the efficiency of their execution to 

avoid entering multiple orders for the same instrument and side:

– By executing all orders together, the trades can then be equitably allocated across all individual funds 

to minimize any price disadvantage.

• Bunched orders that will be allocated post-trade are executed into what is often referred to 

as a “Top” account1

• Top accounts used for post-trade allocation are risk managed by the FCM separately from 

other accounts: 

– All top accounts should be flat by the end of the day. This is typically mandated by the exchange2.

– FCM Operations teams monitor top accounts throughout the day and generate alerts if trades have 

been waiting too long for allocation.

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1 Top accounts are also known as “Allocation” accounts or “Suspense” accounts depending on local exchange rules. The Top account is used by the 

executing broker to initially clear the trades from a bunched order pending allocation. On allocation the trades are given up to a clearing broker or 

moved to a cleared account for the client at the executing broker.

2 Extract from CME Group Rulebook regarding bunched orders, http://www.cmegroup.com/rulebook/CME/I/5/36C.html:

With respect to bunched Globex orders, such orders may be entered using a series designation or suspense account number provided that 

1) the order is being placed by an account manager for multiple accounts eligible for post execution allocation or 

2) a written, pre-determined allocation scheme that defines the series has been provided to the futures commission merchant accepting or 

clearing the order prior to the time that such order is entered. 

In the latter case, if such information has not been provided to the futures commission merchant prior to the time of order entry, each specific 

account number must be entered into Globex. Additionally, for all such bunched orders executed on Globex, the final account specific allocations 

must be submitted to the clearing system no later than the end of each trading day. 
Exchange 1

FCM 1

Clearing

FCM 2 

Clearing

FCM 3 

Clearing

FCM 1 

Execution

FCM 2 

Execution

FCM 4 

Execution

C Fund 1 Fund 2 Fund 3

EMS Vendor

GUI

Order Management

MO Vendor MO Vendor MO Vendor

Direct Access 

Vendor

EMS/Broker FIX connectivity

Broker Exchange Links 

shared across clients

ABC Capital Management 

trades on behalf of Fund 1, 

Fund 2 and Fund 3

Fund 1 clears at FCM 1

Fund 2 clears at FCM 2

Fund 3 clears at FCM 3

ABC executes orders on 

behalf of Funds 1, 2 and 3 on 

Exchanges 1 and 2 through 

FCMs 1,2 and 4 via various 

methods and allocates trades 

to FCMs 1, 2 and 3

Locations for pre-trade risk 

management

GUI: Single Dealer Platform

EMS: Execution Management 

System

FIX: Financial Information 

eXchange protocol

RMS: Risk Management 

System ABC Capital Management

Exchange 2

Full Service Give-up Give-up Full Service Give-up

Allocations

Broker Exchange 

Link shared 

across clients

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RMS RMS RMS
Executing Broker Risk Management

• FCMs use different pre-trade risk methodologies for listed derivatives trades that they execute. 

• As per FIA Best Practice recommendations3 these limits are typically based on order size (“fat finger”) 

checks and intraday position per product, although there may be variations across FCMs. 

• Intraday position limits are typically intended to act as “speed bumps” as opposed to accurately 

measuring the purchasing power of the client –

– There is a feedback loop to set accurate limits based on accounts that are also cleared at the FCM.

• Pre-trade limits are typically set based on the following hierarchies –

– Limits per Product per Client firm.

– Limits per Product per Client trader.

• Different sized pre-trade limits are set based on the following factors –

– Smaller limits for orders sent direct to market.

– Larger limits for orders sent to the FCM desk to be worked, or traded via an execution algorithm that 

slices the order before sending it to the exchange.

– Larger limits for orders executed into an allocation account as opposed to a single fund account.

• Pre-trade limits are distributed across multiple electronic execution systems -

– Limits are typically set separately per execution system to minimize latency.

3 FIA Order Handling Best Practices for Executing Brokers, http://www.futuresindustry.org/downloads/Order_Handling-Ex_Brokers.pdf 7
Clearing Broker Risk Management

• FCMs use different near-trade risk methodologies for listed derivatives trades that they clear. 

• Near-trade risk management occurs as close as possible to the time of the trade and relies on 

consolidating activity across a variety of execution channels:

– Multiple trading systems which may provide drop-copies to the risk management system.

– Notification of trades (including give-ins) via the exchange clearing system.

• Near-trade risk is typically managed on a fund level basis and looks at the ability of the client to meet 

the initial margin requirements of the trading activity in the fund that the FCM clears:

– This includes trades that remain with the FCM as well as trades given -in to the FCM.

– This does not include trades that are given out to another FCM, or those that are held within a Top 

account awaiting allocation instructions from the client.

• Clearing risk management is quantitative but also has a qualitative element:

– It has evolved to minimize hard limits that may inadvertently force the rejection of trades.

– Client activity is constantly monitored in at near-trade and post-trade levels to avoid the possibility 

of a client being unable to meet their margin requirements.

– It provides purchasing power feedback to adjust pre-trade limits set at the same FCM.

– Thresholds are established for escalation and concerns are addressed with the client.

• Due to the delays in accurately reflecting trading activity in a fund that the FCM clears, automated alerts 

are set at various thresholds such as 65%, 80%, 90% and 100%.

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Proposed Technology Vendor Solutions

• Several 3rd Party technology vendors have announce that they can provide Rule 1.73 compliance. 

– The FIA has spoken to several of these vendors and has evaluated how they provide compliance 

based on their own interpretation of the rule. 

• These vendors provide one or more components that facilitate execution and/or clearing, often 

connected via a common API of their own design:

1) Execution Management System or Direct Access Solutions for order entry.

2) Middle Office system for accepting trades from the exchange clearing house/facilitating allocations.

3) Post-trade clearing systems to manage client positions and collateral.

4) Near-trade/post-trade risk management systems that also provide automated alerting.

• It is important to note that different vendors have specialized footprints within the industry, and few 

vendors have equal footprints in execution, middle-office, clearing and risk management.

– Vendors with larger footprints in execution technology usually have a smaller footprint in operations. 

– Vendors with larger footprints in operations technology usually have a smaller footprint in execution.

– Vendors that specialize in risk management typically do not have execution or operations footprints.

• The main challenge with vendor solutions is the integration across other FCM systems.

– FCMs typically do not contract vendors to supply all 4 components.

– Any migration of an FCM core component would be costly and time consuming.

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Next Steps

• The industry would like to work with CFTC staff to help the agency reach 

its goals.

• The industry has formed a working group to consider ways of improving 

risk management for give-ups and bunched orders.

• Evaluating systems and controls already in place and discussing changes 

needed.

• Evaluating ways of electronically communicating risk management limits.

• Reviewing the FIA International Uniform Give-Up Agreement.

• Evaluating leveraging EGUS to agree and store limits.

• Actively interviewing third-party vendors.

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APPENDIX A - § 1.73 Clearing futures commission merchant risk management (extract)

(a) Each futures commission merchant that is a clearing member of a derivatives clearing organization shall:

(1) Establish risk-based limits in the proprietary account and in each customer account based on position size, order size, 

margin requirements, or similar factors;

(2) Screen orders for compliance with the risk-based limits in accordance with the following:

(i) When a clearing futures commission merchant provides electronic market access or accepts orders for 

automated execution, it shall use automated means to screen orders for compliance with the limits;

(ii) When a clearing futures commission merchant accepts orders for non-automated execution, it shall establish 

and maintain systems of risk controls reasonably designed to ensure compliance with the limits;

(iii) When a clearing futures commission merchant accepts transactions that were executed bilaterally and then 

submitted for clearing, it shall establish and maintain systems of risk management controls reasonably designed to 

ensure compliance with the limits;

(iv) When a firm executes an order on behalf of a customer but gives it up to another firm for clearing,

(A) The clearing futures commission merchant shall establish risk-based limits for the customer, and 

enter into an agreement in advance with the executing firm that requires the executing firm to screen 

orders for compliance with those limits in accordance with paragraph (a)(2)(i) or (ii) as applicable; 

and

(B) The clearing futures commission merchant shall establish and maintain systems of risk management 

controls reasonably designed to ensure compliance with the limits.

(v) When an account manager bunches orders on behalf of multiple customers for execution as a block and posttrade allocation to individual accounts for clearing:

(A) The futures commission merchant that initially clears the block shall establish risk-based limits for the 

block account and screen the order in accordance with paragraph (a)(2)(i) or (ii) as applicable;

(B) The futures commission merchants that clear the allocated trades on behalf of customers shall 

establish risk-based limits for each customer and enter into an agreement in advance with the 

account manager that requires the account manager to screen orders for compliance with those 

limits; and

(C) The futures commission merchants that clear the allocated trades on behalf of customers shall 

establish and maintain systems of risk management controls reasonably designed to ensure 

compliance with the limits. 11
Appendix B – Key to Terms and Abbreviations in the Diagram

FIX Financial eXchange 

Protocol

Industry standard protocol for the transmission of trading messages between clients, 

brokers, vendors and exchange.

GUI Single Dealer Platform A trading platform supplied to the client that allows the client to trade only with the 

FCM supplying the GUI. Orders are routed through the FCM’s infrastructure.

Direct 

Access 

Vendor

3rd Party Trading 

Platform

A trading platform that connects directly to the exchange but is administered by the 

FCM providing access. Examples include Trading Technologies, PATSystems, FfastFill and 

Bloomberg TradeBook.

EMS 

Vendor

3rd Party Execution 

Management System

A trading platform used to stage and route orders to multiple brokers. It typically

connects to the FCM through the FCM’s FIX infrastructure and connectivity to the 

exchange. Examples include Bloomberg EMSX, Trading Screen, RealTick, FlexTrade or 

Portware.

Sponsored 

Access

Direct exchange access The client connects directly to the exchange to submit orders and bypasses the FCM’s 

infrastructure. The FCM manages the risk of the system using an exchange provided risk 

management API.

MO Vendor 3rd Party Middle Office 

System

A system that facilitates trade messages between the FCM and the exchange. The 

system receives trades executed through the FCM, trades given in to the FCM and 

allows the FCM to give out grades to other FCMs. Examples include Sungard’s 

ClearVision and FfastFill’s SEALS.

RMS Risk Management 

System

A system that provides near-trade and post-trade risk management, taking holistic 

information from a variety of trading systems and generating automated alerts based on 

various parameters. 3rd party vendors include PATSystems Risk Informer, FfastFill Orbit 

and Sungard STREAM Instant Control.

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