CME Group and DTCC Propose Enhanced Cross-Margining Agreement
Commentary by Steven Lofchie
In a joint submission to the CFTC and the SEC, the Chicago Mercantile Exchange Inc. ("CME") and the Fixed Income Clearing Corporation ("FICC"), (a subsidiary of DTCC) proposed an amended and restated Cross-Margining Agreement between the clearing agencies.
Key aspects of the proposals by CME and DTCC include:
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Eligible Products. Expansion of the range of eligible products to include SOFR futures, Ultra Ten-Year U.S. Treasury Note futures and Ultra U.S. Treasury Bond futures.
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Simplified Margin Calculation Process. A more "simplified" margin calculation process, through changes in the need to apply offsets of certain security classes and converting certain CME products into their GSD Treasury equivalents.
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Enhanced Default Management. Express agreement that joint liquidation is the preferred means of addressing cross-margining positions in the event of a member default. The agreement also allows for the possible exchange of variation margin during a joint liquidation, enabling a party with a mark-to-market loss to use variation margin gains from offsetting cross-margining positions held by the other clearing organization.
The proposed changes may become effective on September 1, 2023, subject to approval by the CFTC and the SEC.
Commentary
The SEC proposal to mandate clearing of many cash market and repo transactions involving Government securities has been the target of substantial criticism as costly and unnecessary. However, if the clearing agencies can improve the cross-margining between SEC- and CFTC-regulated products to reduce the margin requirements then the clearing mandate would become less painful.