CME Clearing: Principles for Financial Disclosure

1 CME Clearing: Principles for Financial market infrastructures DisclosureThe information provided in this Disclosure is accurate as of November 30, 2017. This Disclosure can also be found at For further information, please contact | P a g e Responding institution: CME Group Inc. Jurisdiction: Commodity Futures Trading Commission The information provided in this Disclosure is accurate as of November 30, 2017. This Disclosure can also be found at For further information, please contact I. Executive summary CME Group Inc. ( CME Group ), on behalf of its subsidiary Chicago Mercantile Exchange Inc. ( CME Inc. ) supports the work of the Committee on Payments and market infrastructures ( CPMI )1 and the International Organization of Securities Commissions ( IOSCO ) to encourage the clear and comprehensive disclosures set forth in the Principles for Financial market infrastructures : Disclosure framework and Assessment methodology (the Disclosure Framework ).

2 CME Inc. operates CME clearing (or the clearing House ), which provides clearing and settlement services for a broad range of exchange-traded futures and options on futures contracts and over-the-counter ( OTC ) derivatives (also, referred to as cleared swaps ). CME Inc. is registered with the Commodity Futures Trading Commission ( CFTC ) as a Derivatives clearing Organization ( DCO ) and Designated Contract market ( DCM ). In July 2012, CME Inc. was designated as a Systemically Important Financial market Utility ( SIFMU ) under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ) by the Financial Stability Oversight Council ( FSOC ). CME clearing employs various risk management practices to prudently manage the risks to which it is exposed through the provision of its clearing and settlement services.

3 Some of these practices include: Real-time risk monitoring; Counterparty risk management; Daily mark-to- market ; Initial margin collection; and An established Financial safeguards waterfall. These risk management practices are described in detail below. II. Summary of major changes since last update Consistent with guidance under the Disclosure Framework and CFTC Regulation (b), CME clearing updates its Disclosure framework ( CME clearing PFMI Disclosure document ) at least every two years and following material changes to its practices of the environment in which it operates. The version published on November 30, 2017 includes the following primary changes, since the last version was published on December 31, 2015: Role of clearing House Oversight Committee ( CHOC ); Launch of Direct Funding Participant; Maintenance of accounts at the Federal Reserve Bank of Chicago; Practice of re-sizing the Base Guaranty Fund on monthly, opposed to quarterly basis; and 1 CPMI was formerly known as CPSS or Committee on Payment and Settlement Systems.

4 3 | P a g e Enactment of the end of waterfall rules. Other revisions were made to the CME clearing PFMI Disclosure document to clarify language describing CME clearing s current risk management practices as of November 30, 2017. III. General background on CME clearing A. General description The exchanges for which CME clearing provides clearing services offer a wide range of benchmark products across all major asset classes, including futures and option on futures based on interest rates, equity indexes, foreign exchange ( FX ), energy, metals, agricultural, and commodities products. CME clearing also provides clearing services for interest rate swap ( IRS ) and credit default swap ( CDS )2 products. CME clearing has arrangements to provide clearing services for the Dubai Mercantile Exchange ( DME ) and Eris Exchange ( ERIS ).

5 The CME Group Exchanges CME Inc., the Board of Trade of the City of Chicago, Inc. ( CBOT ), the New York Mercantile Exchange, Inc. ( NYMEX ), and the Commodity Exchange, Inc. ( COMEX ) serve the hedging, risk management, and trading needs of their global customer base by facilitating transactions through the CME Globex ( Globex ) electronic trading platform, open outcry trading facilities in Chicago, and through privately negotiated transactions. CME Group provides hosting, connectivity, and customer support for electronic trading through its co-location services. CME clearing also maintains connectivity to market infrastructures that serve the OTC market , such as existing trade affirmation platforms ( Affirmation Platforms ), swap execution facilities ( SEFs ), and swap data repositories ( SDRs ).

6 CME Group also offers a wide range of market data services including live quotes, delayed quotes, market reports, and a comprehensive historical data service. CME Group understands its importance to the global Financial markets infrastructure, its role in assuring the safety and soundness of the markets for which it provides clearing services, and the importance of ensuring that CME clearing s clearing members ( clearing Members ) and their clients are able to assess the risk profile of their activity through appropriately articulated, transparent risk management standards supported by public documents available on the CME Group website ( CME Group Exchange Rulebooks, as defined below). As Financial markets and the economy have evolved, CME clearing has worked to adapt its clearing services to meet the needs of its market participants.

7 CME clearing applies robust risk management standards and enforces and facilitates compliance with applicable CFTC customer protection standards for exchange-traded and cleared swaps derivatives products. CME clearing s integrated clearing function is designed to ensure the safety and soundness of its markets by serving as the counterparty to every trade becoming the buyer to each seller and the seller to each buyer. Moreover, CME clearing s clearing model is based on an agency relationship between its clearing Members and their underlying clients. Use of an agency clearing model enhances 2 CME Group announced plans to cease to clear CDS by mid-2018. See 4 | P a g e portability and certainty in clearing Member default scenarios.

8 CME clearing is responsible for clearing trades, collecting and maintaining performance bond3 funds, and reporting trading data. CME clearing has a diverse set of entities approved as its clearing Members, which include some of the largest bank-affiliated, broker-dealer, and Financial services firms in the world. Many of these clearing Members are also registered with the CFTC as Futures Commission Merchants ( FCMs ) and therefore, can provide client clearing services for CME clearing s markets. A list of CME clearing s clearing Members, can be found on the CME Group CME clearing utilizes a combination of risk management tools to assess clearing Member s aggregate and individual account exposure levels for all three of its major asset classes (Base,5 IRS, and CDS), 24-hours a day, six days a week.

9 These risk management tools include, novation and netting, real-time risk monitoring, and the collection of initial margin, among others. CME clearing marks open positions to market at least once a day for all products and at least twice daily for exchange-traded products and as such, eliminates exposures through facilitating the exchange of settlement variation by requiring payments from clearing Members whose positions have lost value and making payments to clearing Members whose positions have gained value. CME clearing maintains three independent Financial safeguards waterfalls for each of its major asset classes. CME clearing s Financial safeguards waterfalls are for: Base, which primarily includes exchange-traded products; IRS products; and CDS products.

10 CME clearing s Financial safeguards waterfalls are designed to ensure that sufficient resources are in place to manage multiple clearing member default events under extreme, but plausible market conditions. B. General organization The Board of Directors of CME Inc. is comprised of the same individuals as the Board of Directors CME Group (collectively referred to as the Board ). The Board recognizes the important role CME clearing plays in the marketplace and the importance of providing active governance designed to ensure the safety and soundness of its operations, as noted in CME Group s publicly available Corporate Governance As part of fulfilling its oversight and governance responsibilities, the Board has established dedicated committees to focus on specific governance matters of the organization.