DCO CAPITAL AND SKIN IN THE GAME

AREAS FOR DISCUSSION

Report of the

Central Counterparty Risk and Governance Subcommittee,

Market Risk Advisory Committee of the

U.S. Commodity Futures Trading Commission

Acting Chairman Rostin Behnam, Sponsor

Lee Betsill & Alicia Crighton, Co-Chairs

This report was approved on July 1, 2021 by the CCP Risk and Governance Subcommittee of the

Market Risk Advisory Committee (MRAC). The views, analyses, and conclusions expressed herein

reflect the work of the CCP Risk and Governance Subcommittee of the MRAC, and do not necessarily 

reflect the views of the MRAC, the Commodity Futures Trading Commission or its staff, or the U.S.

government. Reference to any products, services, websites, organizations, or enterprises, or the use

of any, organization, trade, firm, or corporation name is for informational purposes only and does not

constitute endorsement, recommendation, or favoring by the U.S. Government.

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Central Counterparty Risk and Governance Subcommittee of the

Market Risk Advisory Committee of the CFTC:

Discussion regarding DCO Capital and Skin-in-the-Game

This report of the Subcommittee on “Recommendations regarding DCO Capital and Skin-in-theGame” (the “Report”) reflects the collective work of Subcommittee members to identify and

analyze issues related to the capital framework for CCPs that are subject to regulation by the

CFTC as derivatives clearing organizations (“DCOs”) and to identify areas of policy agreement to

the MRAC based on that work. The Report was drafted by a subset of MRAC members

representing DCOs, clearing members and end-users (the latter two groups collectively referred

to herein as (“Market Participants”) and one independent.

The Report covers the following areas of discussion by the Sub-committee: DCO Skin-in-theGame (“SITG”); DCO non-default losses (“NDLs”); DCO capital available to address losses

exceeding the default fund (including assessments); and ex-ante resourcesfor addressing a DCO’s

resolution.

The Report sets forth agreed upon policy views across certain elements of a DCO’s capital

framework, some of which represent current practices of some DCOs. Where agreement could

not be reached by the Subcommittee with respect to certain issues, a summary of the discussion

concerning those issues is noted below.

Discussion topics:

A. Skin-in-the-Game

I. Agreement regarding DCO SITG

There was broad agreement among Subcommittee members that the primary purpose of DCO

SITG is to incentivize management of market and other risks, rather than serve as a significant

resource to absorb losses arising from a clearing member’s default. Such primary loss-absorbing

resources should be paid-in by the defaulter in the form of initial margin and its default fund

contribution. Global regulatory bodies, including the Financial Stability Board (“FSB”), have

highlighted that SITG should not be considered a significant loss-absorbing resource.1. 

Notwithstanding that broad agreement was reached, there was no agreement among

Subcommittee members on prescribing SITG into specific regulatory text.

1 See FSB discussion paper on “Financial resources to support CCP resolution and the treatment of CCP

equity in resolution” at pg. 18 (Nov. 2018).

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ii. No agreement on specific language to implement a rule to require DCOs to

contribute a specific amount of SITG

Subcommittee members were unable to reach agreement on an appropriate methodology to

utilize for sizing a DCO’s SITG contribution to the default waterfall and the related matters, such

as the specific size of any DCO’s SITG contribution. Discussions considered the relative merit of

establishing a risk-based sizing for SITG versus considering SITG sizing to reflect different DCO

business models or risk management approach. Members also took into consideration and

evaluated the relative merit of a new CFTC requirement for DCO SITG versus addressing SITG

within a DCO’s rulebook.

B. Non-default Losses

i. Agreement for DCOs concerning NDLs

Subcommittee members agree that DCOs should maintain appropriately sized capital

requirements to cover NDLs for which they are responsible, and a DCO’s default fund should not

be used to cover NDLs. Applicable law in some jurisdictions, including under CFTC Regulation

39.11, prohibits the use of mutualized financial resources intended for default-related purposes

to be used to cover NDLs. In addition, there was broad agreement, consistent with financial

market practices, that a DCO should not be responsible for losses arising from the failures of

third-party custodians and settlement banks, where the DCO has not acted negligently or in bad

faith in the selection and monitoring of such third-parties.2

Subcommittee members agree that the DCO should be responsible for certain types of NDLs,

such as market value investment losses related to the investments a DCO directs, not only for

customer funds, but also for clearing members’ own funds.3 In addition, there is broad

agreement that DCOs’ distinct operations present different NDL profiles which should be

considered in determining the responsibility for such NDLs.

2 By way of background, as a matter of course, entities relying on the services of third-party custodians and

banks for collateral that has been posted to them often disclaim all liability for the failure of those third-party

institutions, where they have not acted negligently. This is standard practice for customer relationships across the

financial industry. By way of example, futures commission merchants broadly disclaim liability for depositing

customer funds with a third-party depository unless that futures commission merchant has acted in bad faith,

similar to how a custodian disclaims liability for its use of third-party sub-custodians and a bank disclaims liability

for its use of third-party correspondent banks.

3 CFTC Regulation 1.29 requires that DCOs bear losses related to investment of customer funds. DCOs are

further required to maintain conservative investment portfolios for customer funds pursuant to CFTC Regulation

1.25, thus minimizing the risk of investment losses.

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ii. No agreement on specific language to implement additional rules concerning NDLs

Subcommittee members were unable to agree on whether there should be more specific CFTC

rules with respect to loss allocation for specific NDLs or whether capital reserves should be set

aside for such specific NDLs. Members took into consideration and evaluated the relative merit

of amendments to the existing CFTC NDL rule requirement versus addressing a DCO’s approach

to NDLs within a DCO’s rulebook.

C. Residual DCO Capital

i. Agreement for DCOs to solicit shareholders for voluntary contributions

Subcommittee members agree in principle that to the extent a DCO’s losses exceed available

resources after capped assessments have been made that a DCO’s shareholders should be

solicited to contribute voluntarily to address such losses.

ii. No Agreement on specific language to implement a rule to utilize CCP residual

capital

Subcommittee members were unable to agree whether residual DCO equity at the end of the

waterfall should be required to be used to address uncovered losses.

D. DCO Ex-ante Resources

i. No Agreement to require DCOs to arrange ex-ante resources for use in Resolution

Subcommittee members were unable to agree on whether it is appropriate to establish distinct

ex-ante resources that would be available in resolution to continue to operate the resolved DCO

and noted that CCP resolution does not fall under the jurisdiction of the CFTC.

[1] U.S. Commodity Futures Trading Commission, Release Number 8087-19 (December 2, 2019),

available at: https://www.cftc.gov/PressRoom/PressReleases/8087-19

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SUPPORTING STATEMENTS

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July 1, 2021

BlackRock Statement in support of CFTC MRAC CCP Risk and Governance

Subcommittee Papers

BlackRock commends Acting Chair Behnam for establishing the CFTC’s CCP Risk & 

Governance Subcommittee to provide reports and recommendations regarding issues 

impacting clearinghouse risk management and governance. BlackRock believes that

stable and secure financial markets are paramount to the protection of end-users’

investment activity and is pleased to have had the opportunity to engage in constructive 

dialog with industry participants to advance market integrity and financial stability.

Over the course of the last 18 months, Subcommittee members representing Central

Counterparties (CCPs), clearing members and end-users (the latter two collectively

referred to as “market participants”) have worked to find agreement on CCP risk issues

that have previously been identified by market participants as areas of concern. The

CFTC provided a unique forum in which stakeholders in cleared markets could come

together to debate often controversial and divisive topics.1 At the February 23, 2021

MRAC meeting, the Subcommittee presented papers on CCP Margin Methodologies

and CCP Governance; at the July 13, 2021 MRAC meeting, two additional papers are

being presented: CCP Liquidity and Stress Testing, and CCP Capital and Skin in the

Game. While the Subcommittee members spent a meaningful amount of time

discussing CCP Transparency, members were unable to reach any areas of agreement.

The Subcommittee papers represent an important part of a broader endeavor to

enhance financial stability that is supported by CCPs, clearing members and end-users

alike. BlackRock therefore encourages the CFTC and other relevant regulatory

authorities to: (1) pursue rulemaking to implement recommendations put forth in the

papers, (2) explore whether additional regulation could further buttress areas of

agreement put forth in the papers, (3) consider regulatory intervention where the papers

put forth specific areas of disagreement, and (4) conduct further diligence on the

members’ perspectives on CCP Transparency, where no paper could be put forth.

1 Many of the discussion topics mirrored recommendations in A Path Forward for CCP Resilience,

Recovery, and Resolution, a paper that BlackRock co-authored with a group of a buy-side and sell-side

firms, released in 2019. The paper proposed twenty recommendations to enhance CCPs’ resilience,

recovery and resolution.

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July 1, 2021

CME Group Statement on CFTC MRAC CCP Risk and Governance Subcommittee Papers

CME Group Inc. (“CME Group”)1 commends Acting Chairman Behnam for establishing the

Market Risk Advisory Committee’s (“MRAC”) CCP Risk and Governance Subcommittee

(“Subcommittee”). The Subcommittee provides a useful and effective forum for discussing areas

of interest and providing recommendations to the broader MRAC with a focus on the stability of

the broader financial system.

We applaud members of the Subcommittee, which includes representatives from across the

industry, for successfully working together to recognize the importance of the risk management

practices utilized by derivatives clearing organizations (“DCOs”) and preserving the incentives

endemic to the central clearing model that promote effective risk management. Most recently,

the Subcommittee successfully worked together to publish papers on CCP capital and skin-inthe-game and stress testing and liquidity risk management. While these are topics that have

been discussed amongst the industry for a number of years, the Subcommittee reached

agreement in a number of areas, reflecting a consensus from the Subcommittee of the

importance of best practices in risk management.

The areas of agreement reached by the Subcommittee in regard to CCP capital, stress testing

and liquidity risk management allow DCOs to continue to follow their regulatory mandate to

prioritize the safety of their markets and stability of the broader financial system, while

preserving the incentives that are critical to ensuring that risk-takers effectively manage their

risks. We are pleased with the cohesion demonstrated by the Subcommittee in agreeing on

unbiased risk management best practices rather than focusing on policy proposals that skew

incentives and negatively impact the ability of DCOs to manage risks and continue to

successfully navigate market stress events in the future. We look forward to ongoing

engagement on how to further solidify the robust risk management practices utilized by DCOs to

enhance financial stability and reduce systemic risk. 

1 Chicago Mercantile Exchange Inc. is a registered derivatives clearing organization.

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Eurex Clearing statement on the Report of the Market Risk Advisory Subcommittee on its

RECOMMENDATIONS REGARDING DCO CAPITAL AND SKIN IN THE GAME

Eurex Clearing agrees that both CCPs and Clearing Members (CMs) should have balanced

incentives to preserve the loss mutualization function of CCPs. Let’s not forget that during the

COVID-19 market turmoil financial stability and integrity of global financial markets were maintained

throughout 2020. The recent crisis has thus proven the G20 Pittsburgh reforms as the right decision,

especially when it comes to central clearing. In this context, we believe that global markets generally

benefit from global minimum standards. However, while international standards such as the PFMI

principles or FSB guidance are providing some global minimum standards, as an EU CCP, Eurex

Clearing is even subject to higher regulatory requirements set by EU regulation (EMIR and CCP

Recovery and Resolution (RR)) for the STIG, NDLs and use of CCP capital in resolution, which are

not directly applicable to non-EU CCP even when they are registered within the EU due to existing

equivalence agreements. Hence, as alluded to by the subcommittee, the results of the MRAC report

may not be applicable to EU CCPs given the differences in existing regulatory requirements.

Eurex Clearing would like to emphasize that in a global market like derivatives similar global

standards are critical to avoid competition on risk standards and allow for a competitive level playing

field. Therefore, Eurex Clearing encourages the CFTC to continue to engage with international

standard setters and other regulators to achieve further convergence of defined and required

minimum standards.

A. Skin in the Game

Eurex Clearing considers the STIG as an important component of the CCP’s risk management

structure. We agree with the subcommittee members that its purpose is to ensure that the CCP is

incentivized to perform robust risk management and not to serve as a loss absorbing tool. Eurex

Clearing thus believes that the calibration of the SITG should be proportionate to the size of the CCP

and should reflect the role of the CCP as risk manager. As pointed out in the MRAC report, CCPs

typically contribute an appropriately sized SITG, which is used prior to non-defaulting CMs default

fund. While international standards are indeed silent regarding a minimum amount of SITG, PFMI

principles require CCPs to maintain sufficient financial resources to cover their credit exposure to

each participant fully with a high degree of confidence and encourages systemically important CCPs

to maintain additional financial resources sufficient to cover a wide range of potential stress

scenarios. The PFMI guidance refers to national legislation to set the respective amount of the STIG.

In the EU, regulators set a specific methodology and size for the SITG under EMIR. EU CCPs

therefore have to provide 25% of the CCP’s regulatory capital which Eurex Clearing is overfulfilling

approx. 4 times. In addition, with the newly introduced CCP RR framework, EU CCPs are even

required to install a second SITG of up to 25% of regulatory capital for both default and non-default

loss scenarios.

B. NDLs

A CCP’s rulebook and recovery plan governs the allocation of different types of NDLs. In the case of

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such NDLs, CCPs allocate the losses in ways that preserve the incentive structure of central clearing

for market participants to appropriately manage their risks. Generally, Eurex Clearing believes that

loss allocation for NDLs should be proportional to the level of responsibility and/or benefits extracted

from a service of each stakeholder (polluter-pays principle). Hence, we agree with the subcommittee

members that CCPs should maintain appropriately sized capital requirements to cover NDLs for

which they are responsible and that there might also be cases where a CCP should not be

responsible, such as for losses arising from the failures of third party custodians and settlement

banks.

EU CCPs are well placed to meet NDLs. In line with the PFMI principles and EMIR, EU CCPs hold

capital proportionate to the non-default risks that the CCP is exposed to. The EU regulation thus

requires EU CCPs already to ensure sufficient financial resources for operational risks, market risk,

credit risk, wind down and business risk. Note that in the EU, also the new CCP RR provides a list

of recovery and resolution tools for default and non-default events and the amount up to which they

can be used.

C. Residual CCP Capital and D. CCP ex-ante resources

Also, the use of CCP capital has already been defined in detail in EU regulation. Assessment powers

are defined in a CCP’s rulebook and recovery plan. Generally, the rules for EU CCPs under the new

CCP RR framework, following the FSB guidance on CCP equity in resolution, establish a list of

available tools and the amount up to which they can be used as well as rules for compensation of

non-defaulting CMs, providing predictability for CMs and ensuring that both the CCP and the CMs

have balanced incentives to contribute in a recovery or resolution situation.

2

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July 1, 2021

JPMorgan Statement on CFTC MRAC CCP Risk and Governance

Subcommittee Reports

JPMorgan commends Acting Chair Behnam for establishing the CFTC’s CCP Risk &

Governance Subcommittee (Subcommittee) and supporting the development of actionable

recommendations on these topics. The topics discussed within the Subcommittee covered

many of issues highlighted within A Path Forward for CCP Resilience, Recovery, and

Resolution, a white paper that JPMorgan, together with a group of a buy-side and sell-side

firms, released in 2019 (2019 White Paper).1 The 2019 White Paper proposes twenty

recommendations to enhance CCPs’ resilience, recovery, and resolution, for consideration by

policymakers and regulators.

Over the last eighteen months, JPMorgan has supported and contributed to the efforts of the

Subcommittee, seeking to make progress on the important topics of CCP risk governance, CCP

margin, CCP transparency, CCP capital and skin-in-the-game, and CCP stress testing and

liquidity. While the Subcommittee presented agreed-upon recommendations to the MRAC and

CFTC on CCP margin and CCP risk governance in February, all of which JP Morgan supported,

we note that the Subcommittee was unable to agree specific actionable recommendations for

the CFTC within the June reports on CCP Capital and Skin-in-the-Game or Liquidity and Stress

Testing. Both reports provide summaries of what was discussed, noting where policy views are

aligned between market participants and CCPs and specify where no agreement was reached.

While we support the two June reports, on CCP Capital and Skin-in-the-Game specifically, we

also reiterate the views expressed in the 2019 White Paper: increasing CCP contributions to the

default waterfall to a meaningful quantum of CCP SITG; requiring CCPs to be responsible for

non-default losses, supported by appropriately-sized regulatory capital requirements; residual

CCP capital being available as a last resort to absorb outstanding losses; and requiring CCPs to

set aside recapitalization resources (e.g., long-term debt that could be bailed in).

Importantly, despite a significant amount of work performed by the CCP transparency and

disclosure work-stream and extensive discussion on this topic among Subcommittee members,

the Subcommittee was unable to agree upon a report to be presented to the MRAC and CFTC.

Similarly, as noted within the Liquidity and Stress Testing report, the Subcommittee discussed

the merits of CCPs providing greater transparency on matters relating to stress testing, with no

agreement being established. The Subcommittee’s inability to advance recommendations on

this topic, as well as on CCP capital and skin-in-the-game, underscores the need for

policymakers to consider these topics alongside CCP risk governance and margin and

determine whether regulatory intervention is required in the best interests of the market as a

whole. Work on addressing the issues raised in the 2019 White Paper is critical and we stand

ready to partner with regulators, policymakers, CCPs, and other market participants to further

enhance CCP risk and governance and strengthen the US financial system. 

1 The paper was originally published in October 2019 and now has twenty signatories.

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P.O. Box 2600

Valley Forge, PA 19482

vanguard.com

June 29, 2021 

Submitted electronically

Alicia Lewis

CFTC MRAC Designated Federal Officer

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, N.W.

Washington, DC 20581 

Re: CFTC MRAC CCP Risk and Governance Subcommittee: Vanguard Statement with respect to

policy positions related to CCP Capital and Skin in the Game (“SITG”)

Dear Ms. Lewis:

Vanguard1 appreciates the opportunity to serve on the Central Counterparty (“CCP”) Risk and Governance

Subcommittee (the “Subcommittee”) of the Commodity Futures Trading Commission’s (“CFTC”) Market Risk

Advisory Committee (“MRAC”). We commend Acting Chair Rostin Behnam for establishing the Subcommittee

to develop actionable recommendations to address CCP risk issues.2

In multiple forums in recent years, Vanguard has consistently called on global regulators to address risks

related to CCPs. In 2019, Vanguard joined with a group of concerned asset managers and futures commission

merchants (“FCMs”), to publish “A Path Forward for CCP Resilience, Recovery, and Resolution” which sets

forth twenty recommendations to address CCP incentives, transparency and governance to enhance the resiliency

of cleared markets for the benefit of our investors. 

While our support for clearing is resolute, we see compelling opportunities to enhance the resiliency of

CCPs, and to better prepare for their recovery and resolution. Especially as non-defaulting market participants may

need to backstop CCP failures, market participants should have an effective voice in CCP governance and a clear

window into CCP risks. Market participants presently have inadequate transparency into CCP risk management

practices and limited involvement in CCP risk management decision making given the absence of effective formal 

governance structures.

Policymakers also should consider enhancing the global ruleset to strengthen the incentives for CCPs to

offer products they can effectively risk manage, as the downside of a CCP’s risk management failure is presently

disproportionately borne by non-defaulting market participants, including, potentially, mutual fund investors. 

1 Vanguard is a global asset manager that offers more than 417 funds and serves more than 30 million investors globally. Our

core purpose is to take a stand for all investors, treat them fairly, and give them the best chance for investment success.

2 As a part of prudent management, Vanguard funds enter into derivatives contracts, including swaps and futures, to achieve

a number of benefits for our investors, including hedging portfolio risk, lowering transaction costs, managing cash, and

achieving more favorable execution compared with traditional investments. Vanguard has been fully supportive of global

derivatives regulatory reform to bring much-needed transparency and regulation to the derivatives markets. 

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CFTC MRAC CCP Risk and Governance Subcommittee

June 29, 2021 

Page 2

Vanguard supports the policy positions in the paper addressing CCP capital and skin in the game as being

directionally appropriate, and firmly believes such policy positions should be implemented through regulatory

action both to enhance the resiliency of the mandated global clearing markets and to establish a more consistent

regulatory regime for such markets in harmony with regulatory requirements already enacted in Europe and

elsewhere.

The incentive effect of a comprehensive capital regime is enhanced when it is not left to a more voluntary

approach – no matter how strong are current practices. We respectfully urge the CFTC to assess potential regulatory 

gaps in Part 39 of its regulations to more appropriately address CCP capital in a manner commensurate with the

risk managed by the CCPs. While the CCP core principles require CCPs to be accountable for their risk management

decisions, beyond requiring modest CCP capital contributions and limited capital coverage for non-default losses

(“NDLs”), CCP losses and costs in excess of the required coverage may transfer to non-defaulting market

participants.

We are concerned that existing voluntary SITG levels, or a CCP’s franchise value or remuneration practices,

or even a CCP’s general preference for systemic stability, do not provide adequate risk management incentives – 

especially compared to the levels of liability imposed on non-defaulting market participants who neither vet the

products cleared nor set the initial margin levels for such products. Neither the Part 39 regulations nor the CCP core

principles prescribe a specific minimum amount of CCP risk-based capital as SITG to serve as an incentive for

CCPs’ risk management responsibilities. 

Likewise, we maintain it is inappropriate for non-defaulting market participants to bear a CCP’s NDLs.

Market participants are not responsible for the choices or management oversight that could lead to a CCP’s NDLs,

including operational failures, fraud, theft, cyber-threats and attacks that could lead to monetary loss or market

value loss of margin investments.

We fully support the CFTC’s further work to enhance the resiliency of cleared markets by strengthening

the existing regulatory regime in the areas of CCP capital and incentives, governance and transparency, stress testing

and liquidity, and default management. Vanguard also supports future work by global regulators to consider the

need for, and develop as appropriate, international policy on the use, composition and amount of CCP financial

resources to strengthen CCPs in default and non-default scenarios, including assessing new types of prefunded

resources to facilitate the operation of a failed CCP in resolution. 

If you have any questions about Vanguard’s comments or would like any additional information, please

contact Sam Priyadarshi, Principal, at (610) 669-4928 or sam_priyadarshi@vanguard.com.

Sincerely,

/s/ Sam Priyadarshi, Principal

Head of Portfolio Risk and Derivatives

Vanguard 

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