On December 21, 2009, the Chicago Mercantile Exchange (CME) submitted a revised petition to the Commodity Futures Trading Commission for an order pursuant to Section 4d of the Commodity Exchange Act. The requested order would permit the CME and futures commission merchants clearing through the CME to commingle collateral deposited by customers to support credit default swaps (CDS) cleared by the CME with segregated funds deposited on behalf of futures customers.
The CME submitted its original petition in August 2009. Among other changes, the revised petition includes enhancements to the financial safeguards applicable to CDS clearing. In particular, the petition describes the tranching of clearing member guaranty fund deposits based on a clearing member’s participation in CDS clearing. Although the entire guaranty fund is potentially at risk to cover losses on cleared CDS in the event of a clearing member default, CME rules establish a CDS security deposit “tranche” (equal to 80% of all security deposits with respect to cleared CDS) which would bear such losses ahead of other tranches in the guaranty fund (including security deposits attributable to futures positions). In addition, because losses on CDS are likely to be determined later than losses on futures positions, due to the nature of the CDS default process, the CDS tranche is protected from futures specific losses until the CDS specific losses have been determined.
The CFTC has requested public comment on the CME’s revised petition. The comment period closes on February 19.