RBA: Assessment of Chicago Mercantile Exchange Inc. against the Financial Stability Standards for Central Counterparties Standard 18: Tiered Participation Arrangements

CME collects data on indirect participants daily. The CME Rulebook (Rules 560 and 561.A) requires clearing participants to submit daily individual client account reports^[1] and large trader reports^[2] to the Market Regulation Department, for customers holding positions in futures contracts that exceed specified thresholds.^[3], In addition, clearing participants are required to submit daily reports on the identity of customers and the amount of their initial margin for OTC Base products and IRS products, and gross open-interest customer data for Base products (see CCP Standard 13.2). CME rules allow it to amend these reporting requirements (e.g. requiring more than one large trader report on a daily basis), as appropriate.

The Market Regulation Department is responsible for the oversight of larger trader reporting requirements, ensuring that such reporting is accurate and timely. Staff in the Department utilise the large trader reports to conduct market surveillance, including ensuring compliance with position limits. Any violation of market surveillance rules would be handled in accordance with the applicable rules in the CME Rulebook.

CME monitors dependencies between direct and indirect participants through real-time monitoring of clearing participant positions, daily customer position reports and large trader reports. In addition, CME conducts a review of all clearing participants at least once every two years, or more often as appropriate (see CCP Standard 18.3). Through these reviews, CME conducts a more thorough investigation of clearing participants' risk management procedures, including the management of large customer accounts.

Apart from these monitoring activities, CME relies on FCMs to primarily manage customer account risk exposures, including liquidity and funding obligations. FCMs are required to meet rules and policies set by CME, for example on counterparty risk management as outlined in Rule 982. The relevant internal policies of FCMs are covered in the biennial review of clearing participants' risk management procedures.

To mitigate disruptions in the event of a clearing participant default, CME attempts to port non-defaulting customers to solvent clearing participants (see CCP Standards 12 and 13). If a customer account cannot be ported, it will be liquidated along with the clearing participant's account in accordance with default management procedures.

CME is able to identify positions held by indirect participants through its monitoring activities, which include daily individual client account reports and semi-monthly analysis of clearing participants' positions to ensure segregation of customer funds. In addition, customers holding large positions in futures contracts are identified to CME through large trader reports.

CME does not have any specific rules or policies to encourage customers to become direct clearing participants. However, in mitigating risks arising from large customer positions, CME:

• is required by the CFTC to margin all customer accounts on a gross basis, rather than net basis, such that customers with offsetting risk profiles do not reduce initial margin
• is required by the CFTC to have its clearing participants call margin from their customers at least at the level called from the participant by CME
• can call for additional margin on the customer account and impose additional Guaranty Fund deposit requirements at the clearing participant level
• allows clearing participants to apply credit limits to their customers, which CME enforces by refusing to clear any trades in excess of the limit
• requires clearing participants to liquidate customers' excess positions, where those positions exceed the position limit thresholds stipulated by CME.

CME seeks to ensure direct participants have or develop appropriate risk control measures in managing their relationships with indirect participants. These measures include: risk management methodologies; operational risks and system capabilities; reporting; credit controls and controls on high volume indirect participants; and liquidity management. The adequacy of these risk control measures is assessed at least once every two years as part of CME's monitoring of direct participants' compliance with CME participation requirements.

Under US law, only clearing participants that are registered FCMs are permitted to offer indirect clearing services at a US DCO. To mitigate legal risks, including those associated with indirect clearing, CME obtains legal opinions for jurisdictions from which it accepts non-US-based direct clearing participants to ensure CME's rules and procedures are enforceable and effective (see CCP Standards 1 and 13.1).

CME has taken steps to ensure its Rulebook defines the legal status of indirect participants' positions, collateral and exposures. CME has self-certified that its account structures for indirect participants meet regulatory requirements for Base products and IRS products.

CME monitors the day-to-day market risk of indirect participants' portfolios on an ongoing basis (see CCP Standards 18.1 and 18.3). In particular, CME reviews indirect participants with: large exposures at one direct participant; highly concentrated positions; concentrations of deliverable contracts; or trends atypical of that indirect participant.

Under the CME Rulebook, CME has the right to order indirect participants, through their clearing participant, to take risk mitigating steps. These steps include calling additional margin, limiting activity in expiring contracts, ordering position reduction and moving an account from one clearing participant to another.