Assessment of Chicago Mercantile Exchange Inc. Developments Relating to the Bank's Assessment

CME is a Chicago-based central counterparty (CCP) that provides clearing services for a number of products from its US operations. CME operates two clearing services: an OTC IRS clearing service; and a ‘Base’ clearing service.[1] The Base service accounts for the majority of CME's total clearing activity and covers exchange-traded interest rate futures and options on futures, foreign exchange (FX), equity, soft commodity, energy and metal futures, certain OTC FX forwards and options, and commodity swaps. CME maintains separate default resources (i.e. default waterfalls) for each clearing service. Further background on CME's risk management is set out in Appendix B.2.

In Australia, CME holds a CS facility licence which permits it to offer clearing services to Australian-based institutions as direct clearing participants for OTC interest rate derivatives (IRD) and non-Australian dollar-denominated IRD traded on the CME market or the Chicago Board of Trade (CBOT) market, for which CME permits portfolio margining with OTC IRD.[2] CME's Australian CS facility licence was varied on 26 February 2019 to permit CME to provide CS services for commodity, energy and environmental derivatives traded on the financial market operated by FEX Global Pty Ltd (FEX).[3] CME does not currently have any direct Australian-based clearing participants, although Australian firms access CME's clearing services indirectly as clients of direct participants.

Given the nature and scope of CME's current activities in Australia, the Bank has not considered it necessary at this stage to conduct a detailed assessment of CME against all of the CCP Standards. The Bank instead conducts and publishes a narrower assessment, focusing on CME's progress towards addressing key issues. During the assessment period, the Bank continued its ongoing assessment of progress. The Bank also conducted an assessment of CME's application for a licence variation, focusing on arrangements to manage any ‘new or novel’ risks arising from the extension of CME's clearing service to include the FEX-listed products. Further background on this review and the Bank's findings are set out in Section 2.2.

This section summarises developments during the assessment period in relation to the Bank's outstanding regulatory priorities for CME set out in its March 2018 Assessment and CME's application to vary its CS facility licence.[4] This section also summarises the Bank's priorities and supervisory focus for the next assessment period.

1.1 Progress against Regulatory Priorities and Supervisory Focus

The Bank's previous Assessment set out two regulatory priorities for CME for the year ending December 2018.

Recovery and Wind-down Plans. CME should complete its work to implement its recovery and wind-down plans for each of its clearing services. The Bank will expect to complete its review of the plans in the 2018 assessment period subject to the updated recovery and wind-down plans being received.

CCP Standards 3 (Framework for the comprehensive management of risks) and 14 (General business risk)

During the assessment period CME provided the Bank with copies of its updated recovery and wind-down plans. The Bank completed a review of these plans against the CCP Standards and the updated CPMI–IOSCO report on Recovery of financial market infrastructures (Recovery Guidance).[5] A process is currently underway with CME's home regulators to improve aspects of the plans, including: the applicable stress scenarios; recovery tools and triggers; supporting analysis and documentation; and, more broadly, the governance of recovery and wind-down implementation. The Bank expects that this process will adequately address issues identified in its review.

As noted in the March 2018 Assessment, CME's program to implement the recovery and wind-down plans included changes to the end-of-waterfall rules for the CME Base clearing service introduced in late 2016. During the assessment period CME continued discussions with its home regulator on conforming rule changes for the OTC IRS service. CME has indicated to the Bank that these changes are expected to be implemented in 2019 subject to US regulatory approval.

Given the progress outlined above, the Bank has concluded that, once the improvements and rule changes currently underway are fully implemented, CME will have addressed this regulatory priority. Over the next year the Bank will continue to engage with CME on this topic, including to monitor any material changes introduced.

Liquidity risk. The Bank expects CME to share the reports from the validations that it conducts of its liquidity stress testing model and any further validations of the LRMF, and to engage with the Bank on the results.

CCP Standard 7 (Liquidity risk)

In June 2018, CME provided the Bank with the report from an external validation of its LRMF commissioned in 2017. The report included a review of the completeness, appropriateness and regulatory compliance of the LRMF, as well as a qualitative assessment of the liquidity tool and its implementation (i.e. liquidity stress testing, liquidity stress-test scenarios and the liquidity dashboard).

CME also provided the Bank with a copy of confidential documentation assessing the design and effectiveness of controls for CME's credit and liquidity risk management processes. The documentation concluded that CME's credit and liquidity risk management control environment remained ‘adequate’ (the highest possible rating).

During the assessment period, the Bank completed a review of the material provided, as well as CME's response to the findings of the external validation. The Bank engaged with CME on the results of its review and will discuss them further during 2019 with CME's home regulator. Over the course of this engagement CME confirmed it had introduced a settlement bank failure event as part of its daily liquidity stress testing. This liquidity-specific stress testing scenario is consistent with the recommendation made by the international guidance formally adopted by the Bank in interpreting the relevant CCP Standards.[6]

The Bank has concluded that CME has addressed the 2018 regulatory priority relating to liquidity risk. The Bank will continue to engage with CME to monitor ongoing initiatives to improve CME's liquidity risk management arrangements and the testing of those arrangements.

1.1.1 Australian regulatory priorities

CME does not currently have any direct Australian-based clearing participants, and its clearing of Australian dollar-denominated OTC IRD remains relatively low (See Appendix A for further details on activity in CME). The Bank does not therefore expect CME to make substantial progress against regulatory priorities specifically related to the provision of services to the Australian market until CME has material direct Australian participation, or there is a significant increase in CME's provision of services of Australian-related products. This includes developments related to the new clearing service for the FEX market (see below).

1.1.2 Supervisory focus

The focus of the Bank's resources over the period was the review of documentation provided by CME in response to outstanding regulatory priorities and the assessment of CME's application to vary its CS facility licence. The Bank did not progress work on the proposed areas of supervisory focus identified in the March 2018 Assessment related to how CME's practices align with international guidance on financial and cyber resilience. The Bank will carry these areas of supervisory focus forward into the next assessment period.

1.2 CME's Clearing Service for FEX

CME's Australian CS facility licence was varied in February 2019 to permit CME to provide clearing services for commodity derivatives, energy derivatives and environmental derivatives listed for trading on the financial market operated by FEX.[7]

CME proposes to clear positions in futures and options contracts listed on the FEX market within CME's existing Base guaranty fund. CME expects that this service would be accessed indirectly by Australian end users through brokers acting as customers of existing CME clearing participants (i.e. futures commission merchants). The service will be covered by the Base service's risk management arrangements and default resources. CME's existing margin methodology for Base products will be applied to portfolios of FEX products, although CME will establish new intra-day and end-of-day settlement cycles aligned with Australian business hours. At launch, CME will limit the collateral accepted to meet margin requirements on FEX positions to streamline the related operational arrangements.

A high-level assessment of CME against the CCP Standards was conducted by the Bank in September 2014 (the 2014 Assessment), when CME applied for its Australian CS facility licence.[8] In preparing its advice on CME's licence variation application, the Bank revisited those aspects of the 2014 Assessment likely to be impacted by arrangements to manage any new or novel risks arising from the extension of CME's clearing service to include the FEX-listed products.[9]

Overall, the Bank is of the view that the variation of CME's licence to permit it to offer clearing services for FEX-listed products will not impact CME's observance of the CCP Standards. However, the Bank's analysis identified three areas, specific to the FEX service, in which the Bank expects CME to conduct further work to ensure ongoing observance of the CCP Standards. The Bank has set out three new regulatory priorities addressing these areas, outlined below.

1.3 Supervisory Focus and New Regulatory Priorities

1.3.1 Supervisory Focus

In the coming period the Bank will maintain a supervisory focus of monitoring how CME's practices align with recent guidance from CPMI–IOSCO in relation to resilience. This guidance is applicable to all CCPs, and the Bank expects Australian-licensed CCPs, including CME, to align their arrangements and practices with it. The Bank also continues to expect CME to consider any applicable implications of the CPMI–IOSCO Guidance on cyber resilience for financial market infrastructures for its operations.

1.3.2 New regulatory priorities

The Bank expects to monitor CME's progress against three new regulatory prorities as the clearing service for FEX develops.

Margin arrangements and close-out period

The Bank's assessment of CME's licence variation application gave careful consideration to CME's proposed close-out period for FEX products, its margining arrangements more broadly, the liquidity characteristics of proposed contracts, as well as CME's approach to participant default management, portfolio auctioning and porting of customer positions. CME's margining arrangements for FEX products, as for its Base products more broadly, assume that customer positions would be closed out within one day, likely through an auction process. At launch, however, this close-out assumption will effectively be extended by up to an additional day through an add-on reflecting liquidity considerations at the product level.

The Bank focused on the importance of a CCP's ability to close out, or successfully port, cleared portfolios in a timely manner, while limiting losses to the CCP and its participants. The Bank expects to review CME's default management drills which should include client positions and positions in FEX products, to ensure CME continues to demonstrate its ability to close out (or port) these positions in a timely manner.

Close-out period. CME must test the closing out of a hypothetical defaulted portfolio of FEX positions in a default management drill within the first twelve months following the commencement of trading on the FEX market. Thereafter, positions in FEX products will be included in default management drills at a minimum once every two years.

CME must also test porting and/or closing out of client positions on a regular basis as part of its default management drills.

The Bank will review the results of these drills.

CCP Standards 6 (Margin), 12 (Participant default rules and procedures) and 13 (Segregation and portability)

Australian dollar liquidity arrangements

CME is not currently in a position to source Australian dollar liquidity through its existing pre-arranged facilities during Australian business hours. As a result, at launch, CME will limit acceptable collateral to meet initial margin requirements for Australian dollar-settled FEX contracts to Australian dollar cash.

The Bank expects CME will arrange access to pre-arranged liquidity resources during Australian business hours prior to extending its list of eligible collateral for Australian dollar-settled FEX products.

Australian dollar liquidity arrangements. CME must establish adequate liquidity arrangements for Australian dollar collateral during Australian hours before introducing any type of eligible collateral for Australian dollar-settled FEX products other than Australian dollar cash.

CCP Standards 5 (Collateral) and 7 (Liquidity)

Australian dollar settlement bank arrangements

CME has established arrangements with one settlement bank to offer services for the new FEX settlement cycles at launch. CME indicated it would seek to organise additional settlement bank arrangements after launch, should the FEX service grow. In addition, CME noted it has existing arrangements with a number of settlement banks which are available for Australian dollar-denominated transactions during CME's main settlement cycles.

The Bank expects that CME will minimise settlement exposures by introducing further settlement arrangements for the FEX service, conditional upon the use of CME's clearing services for FEX products.

Australian dollar settlement bank arrangements. Should the FEX service grow, CME must ensure the settlement arrangements in place to support money settlements for the FEX clearing service remain appropriate, including adequate back-up arrangements. CME must share its assessments of these arrangements with the Bank for review.

CCP Standards 8 (Settlement finality) and 9 (Money settlements)

1.3.3 Australian regulatory priorities

In the event that CME has material direct Australian participation, or should there be a significant increase in CME's provision of services in Australian-related products, consistent with the expectations set out in the Council of Financial Regulators (CFR) policy on Ensuring Appropriate Influence for Australian Regulators over Cross-border Clearing and Settlement Facilities (July 2012), the Bank will expect that CME should:

  • ensure that Australian representation in governance arrangements appropriately reflects the scale and nature of Australian participation
  • ensure that local market practices are appropriately accommodated
  • ensure that there is appropriate representation of Australian membership and regulators in default management
  • provide adequate operational support arrangements to Australian participants, particularly during Australian market hours.

1.4 Other Regulatory Developments

CPMI–IOSCO implementation monitoring

In May 2018, CPMI and IOSCO published a report reviewing CCPs' progress in implementing the Principles for Financial Market Infrastructures (PFMI) with respect to their financial risk management and recovery practices.[10] The report focuses on CCPs' progress in addressing the most serious issues of concern identified in an initial report published in 2016. This initial review included the results of a peer review examining consistency in the outcomes of CCPs' implementation of the PFMI, covering 10 CCPs internationally that provide clearing services for derivatives, including CME.[11] The follow-up assessment extended the scope to cover 19 CCPs that provide clearing services to a broader range of product classes, such as clearing services provided in the repo, bond and equity markets, as well as derivatives.

The Bank participated in this follow-up review and it expects to continue engaging CME on relevant findings in the next assessment period.


CME operated an OTC Credit Default Swap (CDS) clearing service which was wound down in March 2018. [1]

A copy of the licence is available at <>. CME also holds an Australian Market Licence. [2]

A copy of the CS facility licence variation is available at < >. [3]

See RBA (2018), ‘Assessment of Chicago Mercantile Exchange Inc.’, March. [4]

See CPMI–IOSCO (2017), ‘Recovery of financial market infrastructures’, July. Available at <>. [5]

Prior to introducing this liquidity-specific stress testing scenario in its daily liquidity stress testing procedures, CME had been working on monitoring indirect liquidity risks (risks originating from counterparties other than a defaulting clearing participant). [6]

To accommodate the clearing service for FEX, CME made a number of changes to the CME Rulebook which were submitted to the CFTC via a 10-day self-certification process under Regulation 40.6(a) on 3 July 2018. [7]

See RBA (2014), ‘Initial Assessment of Chicago Mercantile Exchange Inc. against the Financial Stability Standards for Central Counterparties’, September. [8]

The Bank's assessment focussed on relevant aspects of CCP Standards 1, 2, 3, 4, 5, 6, 7, 8, 9, 12, 13, 15, 16, 17, 18 and 21. [9]

See CPMI–IOSCO (2018), ‘Implementation monitoring of PFMI: follow-up Level 3 assessment of CCPs' recovery planning, coverage of financial resources and liquidity stress testing’, May. Available at <>. [10]

See CPMI–IOSCO (2016), ‘Implementation monitoring of PFMI: Level 3 assessment – Report on the financial risk management and recovery practices of 10 derivatives CCPs’, August. Available at <>. [11]