A few weeks ago, CME Group filed proposed rule changes with the Commodity Futures Trading Commission that would create a new category of clearing membership, termed a “Direct Funding Participant.” Under CME Group’s proposal, a DFP could clear all of its eligible proprietary CME Group trades directly with the CME clearinghouse but would not be obligated to contribute to CME Group’s guaranty fund or otherwise be responsible in case of a default by another clearing member. Instead, all of a DFP’s obligations (except for obligations arising from disciplinary actions against a DFP) to CME Group would be guaranteed by at least one other clearing member – termed a “DFP Guarantor” – that must also be a CME Group clearing member and be registered with the CFTC as a futures commission merchant. Previously, EUREX rolled out its own version of DFP clearing membership called ISA Direct. Under this program, eligible insurance companies, financial institutions, pension funds and investment funds domiciled in the European Union or Switzerland can become direct clearing members of EUREX Clearing without incurring obligations for the default of other clearing members. Instead, their membership is facilitated by an existing General Clearing Member (known as a “clearing agent”) that will not guarantee its client’s performance, but will be responsible for what otherwise would be the ISA Direct member’s default fund contribution and default management obligation. The ISA Direct member’s clearing agent could also provide transaction, cash and collateral management services. Clients opting to become ISA Direct members would enhance their collateral protection through this program, claims EUREX because they will have legal and beneficial ownership of all their collateral. ISA Direct members may ultimately carry their over-the-counter interest rate swaps, listed derivatives, and secured funding and financing positions directly through Eurex Clearing. However, for now, only OTC IRS and Repo transactions are currently available under the program.
My View: As Bob Dylan sung, The Times They Are A Changin’ (click here to access a vintage 1964 recording). Eurex already has, and CME Group has proposed, clearing memberships that at least somewhat disintermediate the traditional role of what are known in the United States as future commission merchants. Instead of carriers of client accounts, FCMs would at most become facilitators of client accounts, acting as introducing brokers to clearinghouses. In the United States, CME Group has claimed its proposal will alleviate fellow customer risk for DFP clearing members and reduce certain BASEL bank charges for banks that own FCMs, while EUREX generally emphasizes only the benefits to customers. DFP members’ obligations will be fully guaranteed by another clearing member as proposed by CME Group, while no such general guarantee exists for a clearing agent of an ISA Direct member. Time will tell whether any of these proposals will fulfill their promises. However, they are worth studying, and it is likely beneficial to have a public forum in the United States — perhaps sponsored by the CFTC’s Market Risk Advisory Committee— to discuss the intricacies of CME Group’s DFP proposal and other proposals likely soon to be proposed by other derivatives clearing organizations.