CME Proposed Rule Requiring Clearing Members to Provide It Liquidity in Certain Crises (with DeWaal Comment)

The Chicago Mercantile Exchange has submitted to the CFTC for its approval new rules to enhance its ability to raise cash from clearing members during certain crises. Among other measures, the CME proposes that if it ever needs to convert non-cash collateral to cash for same-day settlement for a clearing member or its customers, it will attempt to do so through asset sales, uncommitted funding arrangements or other services that it has arranged. However, if these efforts are unsuccessful to raise sufficient liquidity, the CME proposes to be able to declare a "Liquidity Event" and unilaterally substitute any cash deposited by a clearing member subject to the Liquidity Event for their guaranty fund deposits up to the amount of U.S. Treasury securities deposited in its guaranty fund. The CME may also advise any clearing member that is a primary dealer (or has a primary dealer affiliate) to replace any non-cash guaranty fund collateral with cash. The CME may also substitute payment of settlement variation to any primary dealer-clearing member (or if there is an affiliate primary dealer) with U.S. Treasury securities up to the amount of its guaranty fund contribution. Other measures are also proposed in order to help the CME meet its enhanced liquidity requirements as a Systemically Important Derivatives Clearing Organization under new CFTC rules approved by the CFTC on November 15, 2013.

DeWaal Comment: These rule changes arguably reflect the fact that, rather than reducing overall risk, mandatory central clearing has simply transferred and concentrated what previously was diversified risk among many financial services firms to a concentrated risk at a few clearing houses. Clearinghouses still look principally to clearing members to maintain sufficient resources and liquidity to help out when a fellow clearing member or members default. Not only might the economics of clearing not support this investment in the first instance by clearing members, but it's hard to imagine a scenario where the one or two clearing members with the most exposure default, and the remaining clearing members are unaffected enough to be able to contribute sufficient additional funds to help the CCP perform its functions.

See: Text of Proposed Rule Change.The summary and comment were provided by Gary DeWaal, President of Gary DeWaal Associates LLC.