CME Group is seeking regulatory approval for new rules that will allow market participants to become "direct funding participants" of CME’s clearinghouse. This type of member will be able to clear trades for its own account and post collateral directly to CME, provided that its obligations to the clearinghouse are guaranteed by a futures commission merchant.
CME is the latest clearinghouse to propose an alternative membership model in response to changes in the economics of clearing. Eurex Clearing recently launched a new account structure called ISA Direct for buy-side clearing of interest rate swaps, and ICE Clear Europe offers a “sponsored principal” account structure that allows clients to become direct counterparties to the clearinghouse.
The clearinghouses are rolling out these new structures because of the cost pressures on clearing firms, according to Tom Lehrkinder, an analyst at Tabb Group. In a report released in August, Lehrkinder explained that the new models may provide clearing firms with some relief from the impact of the leverage ratio and other capital requirements. “The costs around allocating capital usage are driving self-clearing schema as the industry begins to more closely track and assign capital usage across the brokerage firm,” he said.
According to draft rules submitted by CME to the Commodity Futures Trading Commission in July, a direct funding participant will not be required to make a contribution to CME's guaranty fund. Instead, the FCM acting as its guarantor will have to adjust its guaranty fund contribution to account for the direct member's activity. The guarantor will have the ability to set risk controls on the direct member's activity, but those controls will be implemented by the clearinghouse, rather than the FCM.
CME pointed to several benefits for direct funding participants, including the elimination of a pro rata loss allocation that a customer of an FCM might face in the event of an FCM default, as well as reduced exposure to "transit risk" in the movement of collateral. CME also stated that providing a direct funding participant with a guarantee will require less capital for a FCM than holding a customer's cash on its balance sheet.
