Chicago Mercantile Exchange CDS Clearing Review

In March, CME Group won final approval to provide central counterparty clearing services for credit default swaps (CDS), following an extensive review by the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, and the Financial Industry Regulatory Authority. As a result, CME became the first clearinghouse permitted to clear single-name CDS contracts alongside CDS index contracts. A Compass Lexecon team, headed by Professor Christopher Culp, and assisted by Hal Sider and Andrea Neves, was retained by CME to evaluate its proposed methodology for determining margin requirements for CDS contracts and the adequacy of financial safeguards available to cover default-related losses in excess of margin by a CME CDS clearing member. The Compass Lexecon team concluded in a series of written reports and presentations made to government regulators, that CME’s approach to determining CDS portfolio margin is conceptually sound and that financial safeguards are available to absorb potential losses associated with CDS clearing member defaults.