"We have allowed firms to set up self-clearing accounts that directly face the CME for their futures business," says CME Director of FX and Interest Rate Products Derek Sammann. "They utilize a facilities manager, who is a CME clearing member, and also an FICC clearing firm. [That] facilities manager handles and backstops both their futures business at CME as well as clearing some of their cash securities."
Sammann says the membership would offer a maximum margin offset of 65%; through nearly six months of beta-testing the average margin savings for potential FICM members was in the 40% to 45% range on the futures leg.
NYPC estimates capital savings of 15% to 30% over existing clearing structures but Lukken cautioned that because of the different risk structures, such estimates could not be compared on an apples-to-apples basis.
While NYSE and NYPC officials said there was not sufficient information on the CME membership to comment specifically, they suggested that it would add another player in the mix that could increase counterparty risk. "Anytime you introduce a new [entity] into the equation that is just more operational complexity and potentially more counterparty risk. If you look at the NYPC solution, we clearly decrease operational complexity and risk by harmonizing the collateral movements between futures and cash," Lukken says.
Sammann disputes this. "If you look at the risk that these FICM firms present, it is no different than other self-clearing firms. They face directly CME clearing and on the futures side of that transaction everything reverts back and is handled by the facilities manager which is a CME clearing firm," he says, adding, "When firms take on the FICM membership one of the things they have to do is make a contribution to the guarantee fund that scales up [based] on the size of their positions."
John Coleman, managing director of R.J. O’Brien’s fixed income division, says the NYPC one-pot method is a little more of a thorough cross-margining arrangement, especially because it will include repos, but adds, "Nothing is complete until you have liquidity. At the end of the day nobody is going to go anyplace that isn’t liquid."
By Daniel P. Collins