Clearing Member Risk Management
In accordance with Title VII of the Dodd-Frank Act, on August 1, 2011 the CFTC published for comment proposed rules addressing risk management for cleared trades by futures commission merchants (“FCMs”), swap dealers (“SDs”), and major swap participants (“MSPs”) that are clearing members.
Proposed Section 1.73 would apply to clearing members that are FCMs; proposed Section 23.609 would apply to clearing members that are SDs or MSPs. The provisions would require all clearing members to have procedures designed to limit the financial risks they incur as a result of clearing trades and to carry liquid resources to meet the obligations that may arise. Like an FCM or Derivatives Clearing Organization (“DCO”), a clearing member would be required to:
- Establish credit and market risk limits based on position size, order size, margin requirements, or similar factors;
- Use automated means to screen orders for compliance with the risk-based limits;
- Monitor for adherence to the risk-based limits intra-day and overnight;
- Conduct stress tests of all positions in the proprietary account and all positions in any customer account that could pose material risk at least once per week;
- Evaluate its ability to meet initial margin requirements at least once per week;
- Evaluate its ability to meet variation margin requirements in cash at least once per week;
- Evaluate its ability to liquidate the positions it clears in an orderly manner, and estimate the cost of the liquidation at least once per month; and
- Test all lines of credit at least once per quarter.
The CFTC does not intend to prescribe the particular means by which a clearing member would fulfill its risk management obligations. Instead, the proposing release provides examples on how a clearing member could do so. The proposal does require a clearing member to establish written compliance procedures and to maintain documents recording its compliance.
Throughout the proposing release, including within the cost-benefit section, the CFTC repeatedly states its belief that the risk management requirements consist of nothing more than what the prudent clearing member would adopt on its own. The release does ask whether that assumption is accurate. The CFTC also requests comment on the costs of upgrading compliance systems.
Comments should be submitted on or before September 30, 2011. View the proposed rule here.