Default Management Process

Default procedures are an essential component of CME Clearing Europe's overall financial safeguards.

There are two Guarantee funds, one for OTC Commodities & CME Europe Exchange traded FX and commodities futures and the other for OTC IRS. The risk management and financial surveillance techniques we use for both are specifically designed to prevent a clearing member from defaulting on its obligations.

Our risk management and financial surveillance techniques are designed to maximise the liquidity and safety of the pool of guarantee fund contributions and CME Clearing Europe's own default resource commitments. However, should a defaulting clearing member's obligation not be fully satisfied by applying the resources that it has transferred to CME Clearing Europe as primary protection against such an event, CME Clearing Europe will apply additional default resources in the following agreed order:

  1. If the defaulter's margin, excess margin cover and contribution to the guarantee fund are together insufficient to meet the financial obligations at the time of the default, CME Clearing Europe will apply its funds (known as CME Clearing Europe's default contribution).
  2. If there is still an unsatisfied obligation, CME Clearing Europe will apply the contributions made by other members to the guarantee fund. These are held by CME Clearing Europe in the form of cash or government securities.
  3. If financial obligations arising from the default are still unsatisfied, CME Clearing Europe will invoke its right to assess clearing members to meet remaining obligations. The amount required would be allocated amongst each non-defaulting clearing member up to a sum equal to 275% of their contribution to the guarantee fund for Commodities & FX. For OTC IRS an amount sized to accommodate the default of the third and fourth largest net debtor (LND) would be required

On-going Assessment of Default Resources

CME Clearing Europe increases its default resources in line with clearing activity and risk exposure. The total initial margin and the guarantee fund are both linked to the size and risk profile of positions. In the case of the guarantee fund, stress testing the adequacy of margins at clearing member level is undertaken on a daily basis. This data is then fed into tests of the continued adequacy of the guarantee funds and CME Clearing Europe's default contribution.