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:

*For gross position keeping, it is recommended to set NettingEligible flag in the positions file to 'N'. The NettingEligible Flag is portfolio-level.

Once the optimal allocation of futures and/or options has been found, the Optimizer will generate 6 output files: a CSV Margin summary file, a FIXML file containing associated transfer messages, an Optimizer Log file, a Total Savings Report file and a Funding Impact file.

There will be 1 CSV and 1 FIXML file created per execution of the Optimizer. For instance, if the Delta Ladder and Positions files contain 5 separate portfolios within them, there will be a single CSV and FIXML output containing optimized position allocations for 5 portfolios. The FIXML file is in a format ready to be sent to CME for clearing.

Positions Input File

The file below provides examples of the necessary format for the positions file. Positions files can be up to 25 fields, all fields additional to the below are considered optional and passed through.

Message Samples

Transfer Add Message from CME Optimizer to CME

The following message will be sent from the CME Optimizer to CME when initiating a trade Transfer via API: add transfer (TrdTyp=”3”) with original trade date (OrigTrdDt) and Transfer Reason Code (OrdTyp) = “M”:

CME Acknowledgment of CME Optimizer Add Transfer Message

The following acknowledge message is sent from CME back to Clearing Member Firm, with TransTyp = “0”:

Reporting

CME Group will publish all reports as usual. Additionally, CME Group will publish a Variation Summary Report which will list the Interest Rate Futures and Options Variation Margin and OTC IRS Variation Margin cash flows in IRS Position Account from Portfolio Margining process and CME will publish an OTC Margin Report, this Initial Margin Report will list IRS margin requirements by PB account, as well as equivalent currency requirements. This report offers the same information as the IRSMR3 report – only in a slightly different format. Initial margin is passed as a combined number (you cannot break out what portion is futures/options and what portion is swaps).

The following reports may be used for reconciliation of each position maintained by the Clearing House for the Clearing:

Clearing Member Published Reports

Clearing

CME will continue to receive the PCS as usual. The overall requirement of properly reporting customers’ open interest to CME via PCS does not change. PCS submitted in the futures position account should not reflect any positions held in the PM PA account. The PM PA account requires a separate PCS file if a firm should not elect to use the default netting of all positions in the PM account.

All Customer Portfolio Margin Positions Accounts which are requested to be set up for this program will be set up with a netting maximization requirement. FOR EXAMPLE:

•  A customer with 100 x 0 in their Portfolio Margin Position Account transfers in 30 sells

• The Position Account automatically reduces to 70 x 0 at the end of the day

•  No PCS required for the Portfolio Margin Position Accounts

The PCS for the regular Futures Position Accounts will need to be manually amended to only reflect the open interest of the remaining Futures positions that were not moved into the Portfolio Margining Position Accounts. FOR EXAMPLE:

• A customer with 100 x 0 in the regular Futures Position Account transfers 30 positions to the Portfolio Margin Position Account

•  PCS for the regular Futures Position Account must reflect a Final Long of 70 so as to not overstate open interest

Clearing Member Back Office Reporting and Bookkeeping

Customer Portfolio Margining will impact bookkeeping practices for Clearing Member Firms. Although CME is aware that there are multiple manners in which to handle bookkeeping impacts, CME offers the below options as two examples of guidance in handling these implications.

Option 1: One new account created:

• Each transfer will have two sides (the buy and the sell)

• In this case, the buy is booked to the 4df account to move 10,000 long positions

•  The sell is booked to the existing 4d account of the client

Option 2: Two new accounts created plus one related master account created:

• Each transfer will have two sides (the buy and the sell)

• In this case, the buy is booked to the 4df account to move 10,000 long positions

• The sell is booked to a new 4d account for the client

• The firm will know books are balanced if the sum of the positions in these two accounts adds up to zero

Deliveries

When a firm effects a transfer of Treasury futures from its Base Futures Account to its IRS Portfolio Margin Futures Account (or vice versa), the firm must retain the original trade date(s) of the transferred Treasury futures, irrespective of the date of transfer, in the firm’s Long Date File.

Firm Implications

• If a firm does not plan taking their Treasury Futures position to delivery, keeping track of their Original Trade Date is irrelevant.

• If a firm does plan on or does not know whether they will be taking their Treasury Futures position through to delivery they must keep track of the Original Trade Date (though that does not necessarily mean the Original Trade Date must be on the transfer).

Additional Delivery-related Points

• CME is agnostic as to the Transfer Date on transfers that occur for portfolio margining.

• CME is agnostic as to the Price on the transfers that occur for portfolio margining (though prior day settle is encouraged as it reduces and meaningless pass of Variation Margin between the same firm).

Position Movement During Delivery Period Example

Option Expiration and Exercise and Assignment

• Options in portfolio margining are settled in the existing cleared OTC account structure used for futures in portfolio margining.

• Exercising long options in portfolio margin accounts:

  • Clearing firms must demonstrate the ability to appropriately manage changes to books and records occurring as a result of exercised long options for a client proprietary account participating in portfolio margining.

  • If following Account structure 1 above, Clearing firms are expected to exercise long positions in the SEG futures account until the account has insufficient quantity, then continue exercising any excess quantity in the sequestered OTC swaps account.

  • If following account structure 2 above, Clearing firms are expected to exercise long positions in the SEG futures account as it should always have sufficient quantity since it is based on all traded positions.

• Random assignment of short options:

  • CME’s random assignment process takes into account cleared OTC accounts in addition to cleared segregated accounts - the process is randomized across all accounts containing options, regardless of account type.

  • Short options in an OTC accounts during the EOD assignment process at CME can be flagged for random assignment.

    • Clearing firms must process future trades booked as a result of random assignment in the OTC account.

    • Clearing firms can choose to utilize Optimizer’s exclusion logics, described in the Optimizer User Guide here, to mitigate the risk of option expiration in OTC accounts.

• For more details and examples related to exercise and assignment of listed options in portfolio margining, please contact posttradeservices@cmegroup.com. 

Cash Flows

Initial Margin and Variation Margin requirements are calculated and banked on a portfolio basis for portfolios containing both IRS and Interest Rate futures/options at the end of each day. A report will break out the Variation Margin cash flow between VM associated with commingled futures/options and IRS positions. Cash flows for IR futures/options not commingled with IRS positions will not change.

For listed options in portfolio margining, Available Net Option Value (ANOV) will be settled in OTC cleared accounts. Similar to the existing behavior in segregated futures accounts, Available Net Option Value settled in OTC accounts can offset market risk, capped at the total Risk Maintenance Requirement using this formula:

• If Risk Maintenance Requirement (RRM) is > or = total Net Option Value, then Total Requirement = RRM – NOV.

• If Risk Maintenance Requirement (RRM) < total Net Option Value, then Total Requirement = 0 due to NOV capping.

• Available Net Option Value (ANOV) is therefore the applied net option value

  • For example, if an account’s computed risk factors are:

    • RRM = $1,000,000

    • NOV = $1,200,000

    • Then total requirement = $0, ANOV was capped to $1,000,000

More general details about Net Option Value can be found here: A Primer on Margining Styles of Options

At Intraday, for commingled IR futures/options, VM gains will be kept in clearing (not paid out) and VM losses must be paid to the Clearing House.

Intraday (ITD) Process

Futures and options products in the Portfolio Margining Futures Position Account will calculate VM at Intraday.

For IR futures and options in the Portfolio Margining account at ITD, the variation margin process is as follows:

• If the Clearing Member owes money, CME shall collect the money.

• If the Clearing Member is owed money, CME shall hold on to the money.

• The EOD process will follow current pay and collect (when EOD Mark to Market process takes place).

• Please also reference the LSOC compliance document available on the CME Group website.

Variation Summary Report

Variation Summary Report for reconciliation, shows Interest Rate futures and options VM and OTC IRS VM cash flows in the IRS position account from Portfolio Margining process including all trades/positions from the Portfolio Margining account:

File Name = IRSXV_(FIRMID)_YYYYMMDD.csv

Format = CSV

Location = Firm Directory on SFTP site

Timing = 9:00 PM EST

Portfolio Margin Savings Calculation - CME CORE

CME CORE is an interactive margin calculator that allows customer to input positions via portfolio upload or manual trade entry and download Margin Results. CME CORE calculates margin savings and capital efficiencies within the Customer portfolio Margining Offering. CORE has the ability to show both naked swap amounts (using 5 day HVaR), naked futures and options amounts (using SPAN) and then a combined savings.

A CME Group Login is required to access CME CORE. If you need a CME Group Login, please follow these steps or and view CME Group Login Help for more details:

1. Go to the CME CORE login screen. (https://cmecore.cmegroup.com/)

2. Click on the "Need to Register" link and provide the required information.

3. Receive your CME Group Login.

4. Email posttradeservices@cmegroup.comto request entitlements to CME CORE. You need only provide:

   • Your user ID

   • The asset class for which you want interactive margin calculations

Advisories

For further information please also refer to the relevant CME Group advisories:

Launch of CME Optimizer & IRS/Futures Portfolio Margin for Customers Update

Deliveries Plus Changes and New Functionality

Rules

Please refer to the CME Rulebook as follows for rules regarding Large Trader reporting and Transfers.

CBOT Rulebook, See Chapter 8, sections below:

Rule 853. TRANSFERS OF TRADES AND CUSTOMER ACCOUNTS

Rule 854. CONCURRENT LONG AND SHORT POSITIONS

CME Rulebook, See Chapter 5, section below:

Rule 561. REPORTS OF LARGE POSITIONS