The GSCC and CME are preparing rule filings for their respective regulatory agencies for the cross-margining arrangement, and implementation is slated for early next year.
"Cross-margining allows members to optimize their capital usage by viewing their positions at different clearing organizations as a combined portfolio and reducing margin requirements accordingly," explained Jeff Ingber, General Counsel and Managing Director at GSCC. "The GSCC-CME cross-margining relationship will recognize members' offsetting positions in Government securities and Eurodollar futures and options, creating the potential for large margin savings for members active in both markets. Reducing the amount of margin members have to post at various clearing organizations not only increases their liquidity, it further decreases the cost of capital, improves collateral management and lowers operational costs."
Said Phupinder Gill, Managing Director and President of the CME Clearing House Division: "We are very pleased to enhance our cross-margining capabilities through this important arrangement with the GSCC. Our member firms will achieve significant benefit through offsetting their substantial Eurodollar positions against their Government securities activity."
Cross-margining programs have long been recognized as enhancing the safety and soundness of clearing systems and reducing clearing system exposure during times of market stress. By minimizing the need for clearing organizations to call for large amounts of additional margin in volatile markets, cross-margining reduces the risk of a liquidity crisis. Various risk management benefits result, including providing clearing organizations with more complete data concerning the true risk of inter-market positions and enhanced sharing of collateral resources.
The GSCC-CME cross-margining arrangement expands the cross-margining opportunities that each organization offers. The GSCC currently has a cross-margining agreement with the New York Clearing Corporation (NYCC), which clears Treasury futures for the Cantor Exchange. The CME was the first to implement a cross-margining arrangement when the exchange introduced such a program with the Options Clearing Corporation (OCC) and the NYCC for equity products. The CME has also been a leader in launching separate cross-margin agreements with the London Clearing House (LCH) and the Board of Trade Clearing Corporation (BOTCC) for interest rate products.
In order to participate in the GSCC-CME cross-margining program, a firm must either be both a GSCC netting member and a CME clearing member, or be one of the two and have an affiliate that is the other. The member must also sign (together with its affiliate, if applicable) a Cross-Margining Participant Agreement. Once a member executes the Agreement, it will have no further implementation requirements, as the margining will take place automatically. That is, the use of the cross-margining facility, which can only reduce a participating member's margin requirement, will be virtually transparent to members from an operational standpoint.
The CME is one of the leading futures exchanges in the world, offering trading in an array of interest rate, agricultural, currency and equity index futures and options products. Its flagship three-month Eurodollar futures contract is the most heavily traded futures contract in the United States and one of the most versatile hedging vehicles in the listed markets. Given the large amount of trading activity and open interest in the Eurodollar contract, this cross-margining arrangement has the potential to provide significant margin savings for market participants.
Government Securities Clearing Corporation (GSCC) is the leading provider of centralized trade comparison, netting and settlement services in the U.S. Government securities industry. Established in 1986, GSCC offers automated comparison and settlement services that provide risk-management and financial benefits and operational efficiencies to industry participants. Its participants include the nation's major brokers and dealers, as well as a wide range of other entities that trade U.S. Government securities.
