CME Requires Guarantees on Traders

The CME Group just amended rule 574 stating:

“All connections to the Globex system, including direct connections of non-clearing members or customers, must be guaranteed by a clearing member that assumes financial responsibility for all activity through the connection. With respect to transactions given up to other clearing members, such guarantee is effective only until such time that the other clearing member accepts the trade.”

This is significant because the exchange is emphasizing the financial responsibility of the Clearing Member or the Executing Member that is giving up to another clearing member. Clearly this is in line with the direction of the Futures Industry Association (FIA) and their best practices.

This rule doesn’t specifically state the need for pre-trade risk controls. The need for pre-trade controls and entering only bona fide transactions are covered in other rules. In this rule one can easily infer that it is impossible to guarantee any electronic order or trade on the exchange without having effective pre-trade controls in addition to margin in the account to guarantee the trade.

Yes. That is somewhat of a bold statement. Consider the following example.

I buy 10 Jellybean futures contracts on an electronic exchange. My account has barely margin enough for this purchase. Consider the case where I have another order to buy another 10 contracts that is open in the market. If it gets filled I won’t have enough margin to cover the purchase.

In this example the clearing member may not know that 10 more contracts are possibly coming into the account and that there will be the need for a margin call.

Effective pre-trade risk controls help the clearing members reduce the risk of margin calls.

Recommended Reading:

·        Pre-Trade Risk for Futures in the Future

·        FIA Guide to the Development and Operation of Automated Trading Systems