Portfolio Margining for OTC Interest Rate Swaps

Portfolio Margining of Interest Rate Swaps and Interest Rate Futures and Options allows the Clearing House and Clearing Members to recognize reduced risks associated with offsetting open positions, along with the following potential benefits: 

• Reduce margin requirements for portfolios containing both products

• Reduced regulatory capital costs for FCMs

• Reduced Guaranty Fund requirements for FCMs 

Customer Portfolio Margining leverages a 5-day, multi-currency Value at Rick (VaR) framework, applying this methodology to Secured Overnight Financing Rate (SOFR) and Treasury futures and options prices.

This topic provides the context and functional specification for OTC IRS Customer Portfolio Margining as follows:

Contents

Firm Readiness Checklist

Follow the steps below to utilize Portfolio Margining for OTC Interest Rate Swaps.

Contact

Onboarding Team

312-338-7112

Onboarding_Clearing@cmegroup.com

CORE Team

312-580-5353

posttradeservices@cmegroup.com

Supported Products

The following products are supported for Customer Portfolio Margining:

• All OTC IRS Swaps

• IR Futures and Options as follows: 

See Optimizer release notes here.

In addition to the above eligible contracts, it is recommended to include the following ineligible contracts in Positions input file to ensure appropriate margins are calculated in the Futures and Options account.

*Where FUT = future and OOF = Option on a Future.

Account Setup

The Portfolio Margining account must be set up in the below manner:

• Firms currently utilizing the HOUSE Portfolio Margining Program – the HOUSE TMF will be leveraged for the Customer Accounts which will be created.

• Firms which do not currently have a HOUSE TMF, CME will add this value. Please email onboarding@cmegroup.com with this request.

• Firms shall set up a new Portfolio Margining Position Account. 

  • Onboarding new clients for creating new IRS trading and portfolio margin accounts should follow the steps here.

  • For client or house accounts already trading OTC IRS, FCM back office managers can simply create a new portfolio margin account in Account Management Service and link to an IRS margin account.

The interest rate futures and options positions for Customer Portfolio Margining must be held in a separate and newly created Position Account for this purpose. The existing OTC IRS Performance Bond (PB) account will be leveraged for Portfolio Margining purposes as shown below.

Open

Position Management

 Should Clearing Members choose not to utilize the CME Optimizer, and independently establish the optimal allocation of positions for margining, firms may move trades between the existing futures account and a portfolio margining account.

Please note the following:

• Trades may be moved on Trade Date or after Trade Date using processes outlined in the following sections.

• Trades must be moved in FEC before 8:00 PM EST

• CME will send messages to CMF back offices in real time, for activity related to Portfolio Margining.

• CME will process a PCS report from the Clearing Members that reflects adjusted Interest Rate Futures and Options numbers for Futures position account.

• CME will process a PCS report from the Clearing Members that reflects the new Portfolio Margining Futures position account; however, the default setting is to net positions, so no PCS is required.

• CME will produce a Variation Summary file showing VM on each account. Swaps margin calculations begin at 8 PM EST, rather than 7 PM EST. Swaps Margin Reports will move to 10:00 PM EST with a Critical SLA of 11 PM EST, from 9 PM EST.

To manage positions on Trade Date, Clearing Member Firms may utilize any of the following methods described below:

1. Direct execution to the Portfolio Margining account.

2. Initiate Give-up to the new account, via FEC API or directly from the GUI.

3. Initiate Transfer to the new account, via FEC API or directly from the GUI.

Direct Execution to PM Account

In this scenario, user of the CMF specifies the appropriate portfolio margining account upon trade execution. The IR future or option is then routed to this account, eliminating the need to transfer this trade at a later time.

• This option requires configuration for “point of execution” in CME Globex

• All accounts that intend to execute directly into a PM account should coordinate with the CME Globex Account Management (GAM) team.

Give-Up

Give-Ups may be executed through the FEC API or directly in the application. If performed through the API, CMFs can give-up a single trade from the default futures account to the appropriate portfolio margining account. This allows CMFs to send a group of trades or a portion of a group of trades to the destination account. For portfolio margining purposes, this allows middleware to setup rules for routing trades between accounts throughout the day. All messaging to CMFs will be real-time.

Once CME Clearing has confirmed a trade, a CMF may submit replace (change) instructions to update information specific to the Clearing Member Firm, such as Account, Origin, and CTI.

Clearing Member to CME – Change Message Marking for Give-Up

The below message is sent to CME from CMFs, marking a trade for Give-Up: TransTyp=”2”, give-up indicator set (AllocInd=”2”) and give-up information contained in the Allocation block:

CME Acknowledgment Message to Executing Firm

Allocation Instruction Alert to Executing Firm

The below message is sent from CME to the Executing Firm, indicating the trade (TrdID="100619") was marked for post-trade processing (Give-UP → PostTrdTyp = 0 / APS → PostTrd Typ = 1):

Transfer

In this scenario, a Clearing Member Firm initiates a Transfer of a single trade or a position within a given contract to be transferred. Transfers will offset the original trade/position and will update the position in the destination account. Users may leverage the FEC API to develop further automated processes or the FEC GUI to execute transfers.

Transfer Requirements in FEC

Please see Transfer Management Chapter of the FEC Plus user guide here for instructions. Please note:

•  Account – Portfolio Margining Account number (firm defined)

•  Firm – Trading Member Firm (TMF) which currently holds the position

•  Opposite Firm – Default Portfolio Margining trading Firm (TMF) (assigned by CME)

•  Transfer Reason Code – “M” (Portfolio Margining)

Transfer Flow in FEC 

 The combination of TMF and Account ID on the transfer message dictate where the position will flow:

Scenario 1: TMF is correct, and the Account ID indicated matched a customer-specific Portfolio Margining Position Account as defined at CME Clearing.

•  The position will be held and margined alongside that Customer’s Interest Rate Swaps

Scenario 2: TMF is correct, but the Account ID indicated does NOT match a customer-specific Portfolio Margining Position Account as it is defined at CME Clearing.

• The position will be held and margin alongside the Customer Segregated account of the firm.

CME Optimizer

To facilitate Customer Portfolio Margining, CME Group provides the CME Optimizer as an option available for download to facilitate a straight through processing.

The Optimizer accepts as inputs various CME-produced data files as well as a firm-produced file outlining the current allocation of a portfolio’s futures and options positions to be cross-margined with Interest Rate Swaps, then recommends a more optimal allocation to improve Margin requirements. CME Optimizer is made to run in batch, processing multiple portfolio allocations through each run. CME Optimizer also gives transfer message files (in FIXML format) if an FCM would like to execute the recommended transfers at the end of each day. This translates into a substantial cost savings for clients who clear at CME Group.

The current production version of the Optimizer is 17.0. For further details about Optimizer 17.0, please see the detailed release notes page.

Example

Given two portfolios, one of Interest Rate Swaps and one of eligible Interest Rate Futures and Options, the CME Optimizer will:

1. Derive the optimal allocation of existing Futures and Options positions for SPAN and OTC IRS VAR (historical and stressed Value at Risk) margin treatment.

2. Deduce the net positions in each contract that should be transferred from one account to the other.

3. Provide FIXML transfer messages compatible with CME Clearing systems, which the Clearing Member Firm may submit only after CME’s ITD cycle, to move the positions on the books and records of the Clearing House (which then produce confirmation messages Clearing Members can use to update their books and records).

Optimizer Program Diagram

Open

Optimizer Technical

Technical details related to installing the Optimizer, system requirements, and running Optimizer can be found at the dedicated Optimizer User Guide here.

Once the data is read into the Optimizer and parsed, the Optimizer will process the data and calculate what transfers (if any) can be made to improve the allocation of futures and options to take advantage of CME’s Portfolio Margining program. The Optimizer can process multiple portfolios (PB accounts and associated PM and SEG accounts) in batch. Therefore, multiple portfolios may be represented in portfolio input files.

Position Netting

Position netting feature helps users avoid maintaining concurrent long and short positions between the SEG and PM accounts. The netting process takes place after Treasury Delivery Roll Logic (if applicable) and before Optimization. Please note this process may produce up to three sets of transfers: 1) Delivery Roll Log Transfers, 2) Netting Transfers, 3) Optimizer Transfers (Deliveries Roll Log and Netting are configurable options, which must be enabled to utilize). If both of these options are enabled, Deliveries Roll Log will impact eligible positions for netting, and Netting will impact eligible remaining positions for Optimization.

The following is a detailed overview of netting logic: