Treasuries not good enough as swaps collateral in CFTC rule

‘High Quality’

“U.S. Treasury securities are generally deemed to be ‘high quality liquid assets,’ as defined by the Basel Committee on Banking Supervision, i.e., unencumbered cash or assets that can be converted into cash at little or no loss of value in private markets,” the FIA said in the letter.

Clearinghouses, which are capitalized by their bank and brokerage members, are meant to lessen the effect of a default by requiring collateral and marking positions daily so losses don’t snowball. Initial margin is pledged to fund a potential default while variation margin is required when positions lose value. If investors can’t meet their margin calls, the positions are liquidated.

CME Group increased the size of its credit line to a maximum of $10 billion from $7 billion, the company said yesterday. Banks including Deutsche Bank AG, Citigroup Inc., Barclays Plc and Wells Fargo & Co. have agreed to loan the money, which CME Group could use during times of stress.

CME’s Collateral

Even the new credit line is less than the $14 billion exposure that CME Group has to its largest bank clearing member, according to a person familiar with the matter, who asked to not be named because the details are private. CME Group doesn’t disclose how much of its collateral is made up of Treasury securities.

Laurie Bischel, a CME Group spokeswoman, declined to quantify the company’s exposure to potential losses in the event its biggest member defaults. She said the collateral held at the clearinghouse is sufficient to cover the two biggest member defaults.

CME Group said in its letter to the CFTC that it may be unable to secure a credit line exceeding $10 billion. The total committed credit facility market is made up of 1,800 arrangements that total about $1.2 trillion, with only 12 of those equal to or exceeding $10 billion, the company said.

“The obstacles to CME obtaining committed liquidity facilities large enough to cover its liquidity requirements will only be exacerbated in the future as the cleared OTC market grows, which in turn will increase CME’s liquidity resources obligations,” the exchange operator said.

In a sign of the interwoven nature of the derivatives market, the banks that tend to provide lines of credit to clearinghouses are also the same firms that are required to post collateral there.

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