Rise Above the Risk
Provided by CME Group ISSUE 710 | October 2008
In the current market environment, effective risk management is imperative - arguably more than ever before. And although risk management is measured on your balance sheet in terms of dollars and cents, it also depends on the tangible benefits of transparency, liquidity, trust and confidence in the marketplace.
That's why the clearing facility at CME Group is so important. By acting as the counterparty to every trade, CME Clearing virtually eliminates credit default risk. That means for every trade completed on the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Mercantile Exchange, CME Clearing guarantees the financial soundness of both parties.
CME Group also provides the added benefit of marking positions to market twice each day to transparent prices, so you know where you stand. And because customer funds are segregated for all cleared futures products, your positions are secure even in the case of a loss or potential default of another clearing firm. This is an industry leading and comprehensive set of risk management services that provide you the security and confidence that market participants need to operate, invest and grow.
By being at the center of every transaction, CME Clearing processes are designed to protect everyone's interest and to ensure the integrity of the marketplace.
“Effective risk management is not always achieved… but managing risk at all levels is critically important,” said Kim Taylor, Managing Director and President, CME Clearing, in an online presentation given October 6, 2008, titled, “The Best Risk Management Starts with Security.”
CME Group steps in as a neutral party to both buyer and seller, mitigating the default risk to the central parties of a trade. Over 2 billion trades were processed last year at the exchange, worth more than $1 quadrillion in value. There’s never been a default by a clearing member, nor has a customer lost funds due to counterparty failure.
The principal functions of CME Group’s financial safeguard system are risk management and financial surveillance. “Our audit team works very hard to monitor the health of clearing members in real time. We make sure concerns are addressed before they become a problem,” said Taylor.
The exchange has a $7 billion financial safeguard system in place, not only through margin requirements, but also through a type of mutualized risk management pool that all clearing members contribute to, a pool of liquid deposits in case a CME Group clearing member defaults. The exchange also has the ability to call on other clearing members to make additional capital contributions in case of default of a member firm. These are the types of safeguards CME Group offers that aren’t available in over-the-counter markets.
As a customer, you can be assured that even if a clearing member firm is facing financial difficulties, your funds are secure. The Commodity Exchange Act requires that funds deposited with a futures commission merchant (like MF Global, Lind-Waldock’s parent company) be maintained in a “segregated” account for you exclusively. That means your funds are kept independent from any other funds used for firm operations, or for its debt obligations.
“The important thing to keep in mind that even in the case a clearing member goes out of business, the customer is protected,” said Taylor.
The CME Group Web site has some helpful links. For more information on clearing, click on a quick reference guide here: http://www.cmegroup.com/clearing/files/financial-safeguards-summary. More details on CME Clearing can be found here: http://www.cmegroup.com/clearing/cme-clearing-overview/index.html. And financial safeguards information is here: http://www.cmegroup.com/clearing/cme-clearing-overview/safeguards.html.
Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.
Futures trading involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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