In its 103-year history, CME has never had a default of a clearing member firm.
The new package more than triples - to $1.2 billion - the amount of liquid resources available in the unlikely event of a clearing member firm default on its financial obligations to the CME Clearing House. Previously, liquid resources were available exclusively from a security deposit pool of $370 million, which will now be increasing to $700 million. In addition, CME intends to obtain $500 million in default insurance, believed to be the highest level of such protection for any financial exchange in the world. The $1.2 billion in liquid resources may be used to supplement the performance bond collateral and other resources of the defaulting member firm.
In addition, following extensive customer input, CME's unique unlimited assessment powers will be eliminated. CME will limit its assessment powers with clearing firms to $1.4 billion. Placing a limit on how much CME can assess its clearing firms enables them to better define their maximum exposure to CME while maintaining a fund large enough to ensure the financial integrity of CME's Clearing House. All told, the new financial safeguard package provides $2.6 billion to ensure that all financial obligations are met if a clearing firm were to default.
Phupinder Gill, Managing Director and President of the CME Clearing House Division, said that the exchange's unlimited assessment powers have been a valuable asset for decades and contributed to the impeccable reputation of the Clearing House. "The new package can help us grow our business by enhancing CME's attractiveness to new clearing firm prospects whose business structures would not adhere to unlimited assessment powers."
"The integrity of our markets is of utmost importance to CME," said Gill. "Our new financial safeguard package provides necessary comfort to market participants while responding to the needs of member firms to more accurately reflect their financial exposure to the exchange. The default insurance also will remove some of the pressures on clearing firms with respect to their cost of capital."
Risk management and financial surveillance are the two primary functions of CME's financial safeguard system. The system is designed to provide the highest level of safety and the early detection of unsound financial practices on the part of any clearing member. Its purpose is to protect all clearing members and their customers from the consequences of a default by a participant in the clearing structure.
The accounts of individual members, non-member customers and clearing firms themselves doing business through CME must be carried and guaranteed to the CME Clearing House by a clearing member firm. In every matched transaction executed through the exchange's facilities, the Clearing House is substituted as the buyer to the seller and the seller to the buyer, with a clearing member assuming the opposite side of each transaction. The system ensures the financial integrity of the marketplace and virtually eliminates counterparty risk by removing the need to determine the creditworthiness of those taking the opposite side of transactions.
The CME Clearing House manages $25 billion in collateral deposits, administers more than $1 billion of letters of credit and moves an average $1 billion per day in settlement payments. On Jan. 3, 2001, the second busiest trading day in CME's history, the Clearing House moved a record $6.4 billion in settlement payments through the banking system.
Chicago Mercantile Exchange Inc. (www.cme.com) is an international marketplace that brings together buyers and sellers on its trading floors and GLOBEX®2 around-the-clock electronic trading system. CME offers futures contracts and options on futures primarily in four product areas: interest rates, stock indexes, foreign currencies and agricultural commodities. All over the world, pension funds and investment advisers, portfolio managers, corporate treasurers, commercial and investment banks, broker/dealers and individuals are among those who trade on CME as an integral part of their financial management strategy. In 2000, a record 231 million contracts, with an underlying value of more than $155 trillion, changed hands at the exchange. On November 13, 2000, CME finalized its transformation into a for-profit, shareholder-owned corporation as it became the first U.S. financial exchange to demutualize by converting its membership interests into shares of common stock that can trade separately from exchange trading privileges.
