The Chicago Mercantile Exchange Inc. is set to launch an over-the-counter clearing initiative that it says will help its global customers reduce counterparty, operational and legal risks.
Pending regulatory approval, the CME will launch CME Clearing360 on April 3, a new initiative that will provide a comprehensive clearing solution to OTC market participants. CME Clearing360 will be an extension of existing CME Clearing services, and will offer customers the flexibility of OTC transactions with the risk management efficiencies of centralized clearing.
Initially, CME Clearing360 will permit bilateral OTC interest rate transactions, to be converted into futures contracts, beginning with “substitutions” using CME Eurodollar futures. Substitutions allow customers to substitute CME futures contracts for an OTC transaction in standard contract terms, such as an interest rate swap or forward rate agreement, with flexible settlement dates. Over time, CME Clearing360 is expected to feature additional products and services.
CME Clearing360 will provide OTC participants with central counterparty clearing, which offers greater capital and operational efficiencies, including risk offsets against related futures and options positions. It will also provide a proven history of risk management for the credit, operational and legal risks that customers face in OTC trading; and, because CME Clearing is the counterparty to every trade, the risk of default is virtually eliminated, it said.
“The efficiencies offered by CME Clearing are a natural fit for the OTC market, and another example of CME expanding its reach into new markets,” said CME chairman Terry Duffy. “With this service, OTC market participants can take advantage of existing systems and infrastructure offered by CME Clearing and clearing member firms, along with the existing benefits offered by exchange- traded products.”
“The OTC market can be extremely flexible since its products do not have to conform to a specific exchange product’s size or value, but OTC market participants are also exposed to counterparty risk,” said CME CEO Craig Donohue. “With CME Clearing360, we will offer the full resources of CME Clearing, the world’s largest derivatives clearing organization, to a market that lacks the benefits of a central clearing process. Moreover, CME Clearing offers participants an added risk management advantage through our financial safeguards: customer collateral is segregated and protected from bankruptcy petitions of other market participants.”