This topic describes expected use cases for the CME Treasury Rules-based Offset Engine, RBOE, which is used to build offsetting positions in Fixed Income Clearing Corporation (FICC)/CME Cross-margin Allocation Process. Eligible products for risk offset between CME and FICC will need to be moved into designated position accounts within CME Clearing. This content covers both a manual approach and an automated approach for position transfers via the CME Optimizer software. This content is considered a draft for discussion purposes. This content is supplemental to normal Optimizer release notes.

Please see Optimizer release notes for additional details on release scope.

Background

CME Group and FICC are working together to enhance the capital efficiencies available to our common members (and their affiliates, where applicable) when trading U.S. Treasury Securities and CME interest rate futures that have offsetting risk exposures. For the avoidance of doubt, this content refers to the FICC Cross-margin arrangement within the Background section but subsequently refers to all CME operational workflows as the Treasury Rules-based Offset Engine or RBOE. This can be used interchangably with RBOE.

Proposed Methodology

Key Enhancements Planned

• Introduce active management aspect applicable to CME positions; passive management remains for FICC positions.
• Expand the eligibility of interest rate futures products available for cross-margining

Timeline to Delivery:

• Target Production Date: Pending Regulatory Approval

Eligibility:

• Eligibility for the arrangement remains house (proprietary) accounts of CME Clearing Members & FICC GSD Netting Members, however, subject to regulatory analyses and approvals, CME & FICC are supportive of extending this program beyond house accounts as part of a later phase

Glossary of Terms

• Treasury rules-based offset engine (RBOE): term used to define the operational offset process at a high level. Can be used synonymously with CME / FICC offset process.
• Target allocation: the allocation of CME futures selected to offset FICC cash treasuries as defined in Equivalent Position Report. Conversion of treasury cash to CME futures applied via DV01. Represented in FutAllocQty field in the equivalent position report.
• FICC position account: This account is new for the CME/FICC Cross Margin Program and is the account which contains CME eligible interest rate futures positions that will available to offset the FICC treasury cash positions. Clearing firms can move positions into this account by performing transfers in FEC+ (manual or API) or by running the RBOE within the Optimizer software. Firms may also give up or directly execute into this account. All positions margined in this account are subject to 3-day MPOR margin treatment.
• Portfolio Margin (PM) position account: existing trading account containing offsets to cleared IRS positions. Clearing firm, via manual process or Optimizer software, transfers or directly executes into this account to achieve offsets using 5-day MPOR. Not all participants of RBOE offsets participate in this account structure.
• Futures and Options position account: existing trading account capturing all futures and options positions not allocated to a special function trading account per above. Margined via 1-day or 2-day MPOR in SPAN® margin methodology.

Changes to Account Structure

To support the enhanced methodology, a new margin, position account, and trading member firm will be established at CME Group and in the Clearing member firm back office. This is the account in which CME treasury offsetting positions are established and the level at which the margin offsets will be assessed. Clearing firms can choose to:

• Directly execute CME treasury trades into this account.
• Book give-ups/transfers eligible futures from the original futures and options position account to this account to achieve offsets.
• Utilize Optimizer software to transfer positions between the futures and options position account and this account.

A diagram of the updated account structure is below. In this example, the clearing firm also participates in the portfolio margin program for Interest Rate Swaps versus futures and options at CME. For users not participating in that program, disregard the Portfolio Margin structure on the right.

It is expected Clearing Firms may want to implement additional account structures within their back office to assist with position keeping such as using a bridge or offset account which acts as a holder of transfer offset positions between the normal futures and options position account and the new FICC position account. This setup is common to clearing firms but is not part of the CME Group account set up. Firms interested in this setup should review additional documentation and speak with back office service providers.

Expected Input Files

See expected input files described in this section.

Equivalent Position Report

The RBOE process introduces a new "Equivalent Position Report" generated by CME and published daily to clearing firm existing secure FTP and Enterprise Reporting (EREP) mechanisms. This report expresses the notional value of treasury cash positions (shown as synthetic futures positions with the product code prefix "XM") in a given FICC position account during a given cycle, as well as a DV01 equivalent quantity of CME treasury futures positions.
File details:

• Producer of file: CME
• File location:
  • Secure FTP local: /FXXXFTP/cme/ftp/XXX/Outgoing where (XXX is the firm ID)
  • EREP user interface (please contact support team for entitlement details)
• File availability: daily in conjunction with multiple cycles including ITD, EOD, FINAL

• Production filename convention: "XMFICCPOSN_\[cycle code\].yyyymmdd.\[firm id\].csv

  • For example. the EOD file for August 22, 2022 for test firm 123 would be XMFICCPOSN_EOD.20220822.123.csv
• Test filename convention: same as production with "NR_" prefix
• File Format: Comma-delimited Value (CSV)

• Detailed file specification:

  Field	Index	Type	Description	Links to Other Optimizer Inputs
  BusDate	0	Date	YYYY-MM-DD
  Cycle	1	String	ITD, EOD, EODXM, CUR
  Run	2	Integer	Non-negative number
  RunTime	3	String	Timestamp
  CO	4	String	Clearing organization
  CMF	5	String	Clearing member firm ID
  PBA	6	String	FICC Performance bond (margin) account ID.	Maps to FICCPBAccountID in FICCPositions.csv.
  Seg	7	Enum	Segregation type e.g. HOUS/CUST	Maps to Origin in FICCPositions.csv and Positons.csv
  FICC_ID	8	String	DTCC participant ID
  PA	9	String	FICC Position account ID	Maps to FICCAccountID in FICCPositions.csv.
  CME_TMF	10	String	Trade management firm ID for CME products. Used to generate transfers.
  CBT_TMF	11	String	Trade management firm for CBOT products. Used to generate transfers.
  Exch	12	String	Exchange ID of the synthetic contract for margining e.g. CBT
  PFCode	13	String	Product code of the synthetic e.g. XM21
  PFType	14	Enum	Product type of the synthetic i.e. FUT
  Period	15	PeriodCode	Period code of the synthetic e.g. 202209 Only one anchor tenor is possible per instrument.
  LongPosn	16	Double	Total notional long position for this bucket (2dp)
  ShortPosn	17	Double	Total notional short position for this bucket (2dp)
  LongEquivPosn	18	Integer	Total converted-equivalent of long positions (rounded)
  ShortEquivPosn	19	Integer	Total converted-equivalent of short positions (rounded)
  NetEquivPosn	20	Integer, can be negative	Net converted equivalent position for margining
  FutAllocQty	21	Integer, can be negative	Treasury futures allocation net quantity. This is the optimal amount of treasury futures in this maturity bucket. CME uses the cheapest-to-deliver DV01 to convert from the NetEquivPosn field.	Used as target allocation in FICC Position Account by Optimizer during RBOE function.

  FICC Positions Report

• Users of Optimizer also must generate a new positions input file expressing positions only residing in the FICC position account or account mapping details, should no positions exist. This file is very similar to the existing positions.csv file format Optimizer uses but has been customized for FICC position representation. Users will also need to use the positions.csv file to represent futures positions that are not in FICC position account.
  Filename convention:

• Producer of file: Clearing Firm
  • If using manual process described below in 4.1, disregard this file.
• File location: clearing firm back office
• Filename convention: FICCPositions.csv is the default filename pattern, though users can amend the filename manually in the Optimizer's configuration.json file (found in the Optimizer's Plugins directory).
• File Format: Comma-delimited Value (CSV)
• Special use: when no positions are present in a FICC position account (for instance on the first day of using the program), users must specify a line item for each FICC position account defining indexes 0 – 6 and 18 below. All others are blank (null, not 0). This line item is used by Optimizer as an account definition.

• Examples of the new FICCPositions file is available in the Optimizer's \[local dir\]\Samples.

  
  

• Detailed file specification:

  Field	Index	Type	Description	Links to Other Optimizer Inputs	Present when no positions in FICC account?
  FICCPbAccountID	0	String	Links to PBA in FICC Equivalent Position Firm Report. This is the FICC performance bond (margin) account.	Maps to PBA in XMFICCPOSN . . .csv.	Y
  SegTMFID	1	String		Maps to SegTMFID in Positions.csv.	Y
  FICCTMFID	2	String		Maps to CME_TMF or CBT_TMF in XMFICCPOSN . . .csv.	Y
  SEGAccountID	3	String		Maps to SEGAccountId in Positions.csv.	Y
  FICCAccountID	4	String		Maps to PA in XMFICCPOSN . . .csv.	Y
  Origin	5	Enum	Account origin. Applicable Values: C, H	Maps to Seg in XMFICCPOSN. . .csv and Origin in Positions.csv	Y
  AccountType	6	Enum	Account type. Should only contain FICC position account in this file. Applicable Values: FICC		Y
  ProductCode	7	String	Represents a typical product code i.e. 17, 21 etc. in the FICC position account. Can also include synthetic contacts (i.e. "XM17") which Optimizer ignores. Blank if no position existing within account.		N
  ProductType	8	Enum	Product Type. Only FUT supported day 1. Blank if no position existing within account.		N
  OptionExpiration	9	PeriodCode	Left blank, for future expansion. Blank if no position existing within account.		N
  FutureExpiration	10	PeriodCode	Follows existing period code formats. Blank if no position existing within account.		N
  CallPut	11	Enum	Left blank, for future expansion.		N
  Strike	12	Double	Left blank, for future expansion.		N
  TotalLong	13	Integer	Non-negative integer value. Blank if no position existing within account.		N
  TotalShort	14	Integer	Non-negative integer value. Blank if no position existing within account.		N
  TradeDate	15	Date	Trade date in either YYYYMMDD or MM/DD/YYYY or M/D/YYYY format. Blank if no position existing within account.		N
  ExchangeCode	16	String	Exchange code e.g. CME, CBT Blank if no position existing within account.		N
  NettingEligible	17	Boolean	Indicates if portfolio is eligible for netting. Applicable Values: N or Y (false or true respectively) Should match value in Positions.csv, only one value expected per account.	Maps to NettingEligible in Positions.csv	N
  PBAccountId	18	String	Conditional: used to relate a given FICC position with an IRS position (position.csv). Blank if not using IRS PM.	Maps to PBAccountId in Positions.csv	Y

  
  

  RBOE Allocation Offset Workflow

  Clearing firms can, as always, directly execute trading activity in the new FICC position account. This action assumes the Clearing Firm's trading strategy evaluates potential offsets to be realized against cash treasury positions in the FICC position account prior to execution. Note all positions in the FICC position account during ITD and EOD margin settlement cycles will be margined using the SPAN Methodology calibrated to 3-day Margin Period of Risk to meet regulatory requirements. Clearing Firms should only move risk offsetting positions into the FICC positions account.
  Users of the rules-based offset engine have two alternative integration methods to achieve treasury offsets:

  Clearing Firm Manual Process

  One option for Clearing Firms to realize treasury offsets is to consume a new file produced by CME, the XMFICCPOSN file described above, then use their a standard BAU process to give-up/transfer positions from the normal futures and options trading account to the FICC position account. BAU give-up/transfer processes include direct transfer entry in the Front End Clearing (FEC+) user interface or programmatically via existing message queues. Positions in the FICC position account during ITD and EOD margin settlement cycles will be used to offset treasury cash positions defined in a new position file shared between CME and DTCC at regular intervals throughout the business day.
  The target allocation of positions which should be allocated in the FICC position account is available in the FutAllocQty field by instrument and FICC margin account in the XMFICCPOSN file.
  Clearing Firms must use the available allocation from their books and records to satisfy, if possible, the target allocation. Note all standard firm regulatory reporting is required, no new open interest is to be created as a result of the new offsetting process.
  Note positions transferred to the FICC position account during prior day cycles will be retained in the FICC position account day over day, so a re-evaluation and re-establishment of the target allocation from the XMFICCPOSN file is necessary daily. In some cases the target allocation may be lower on T compared to T-1 and a transfer from the FICC position account back to the normal futures and options account would be expected.
  Here is an operational workflow:
  
  Workflow in depth:

1. Position data shared between FICC and CME (multiple times daily).
2. CME generates reports, including the Equivalent Position Report (XMFICCPOSN)
3. The Equivalent Position Report (XMFICCPOSN) is shared to firm secure FTP directories and picked up by Clearing Firms.
4. Clearing Firm runs internal process comparing target allocation to available allocation and identifies the offset to be achieved.
5. Transfers booked via standard BAU process.

Position Transfer Automation via Optimizer Process

A second solution for Clearing Firms to realize treasury offsets is to utilize the CME Optimizer software, which is being enhanced to support a rules-based offset allocation in Q4 2022. The Optimizer solution allows firms to automate the process of deriving and generating offsetting transfers to the new FICC position account in the firm back office.
The operational process is very similar to the manual solution above, aside from step 3-4, where a Clearing Firm utilizes the Optimizer to build transfers versus generating transfers via their own internal process. Interested users should read the Optimizer RBOE user Guide below.
Here is an operational workflow:


Workflow in depth:

1. Position data shared between FICC and CME (multiple times daily).
2. CME generates reports, including the Equivalent Position Report (XMFICCPOSN)
3. The Equivalent Position Report (XMFICCPOSN) is shared to firm secure FTP directories and picked up by Clearing Firms. Firm generates new input FICCPositions.csv.
4. Clearing Firm runs Optimizer software, which compares the target allocation to available allocation and identifies the offset to be achieved.
5. Transfers booked via standard BAU process.

Optimizer RBOE Use Cases

This section defines expected RBOE use cases for the Optimizer software. RBOE use cases are supported from Optimizer software version 18, expected for release September 30, 2022. This content is not expected to take precedence over the normal Optimizer User Guide here.

Users new to Optimizer should also review the user guide as well as release notes here during testing.

Running the Optimizer's Samples directory (found in Optimizer at \[local path\]\Samples) is also recommended as a reference. 

Users leveraging the manual process described above to book offsetting transfers can disregard this section.

Rules-based Offset Engine

The Optimizer software was originally designed to minimize overall initial margin between IRS and futures and options accounts. The Optimizer is now enhanced to run the new rules-based offset engine (RBOE) as a new process that can be run before or after the existing OTC IRS PM process. Note, the new RBOE is not designed to minimize total initial margin across the FICC PB account, CME PB account and OTC PM PB account. Further, the RBOE process does not perform any margin calculations, but instead targets automating risk reducing transfers by using the equivalent position report to identify user provided treasury positions that could offset the FICC account DV01 using CME eligible interest rate futures. To achieve this, version 18.0 of Optimizer Software evaluates the target allocation, defined in the XMFICCPOSN file and derived from the cheapest-to-deliver DV01 value of an equivalent treasury contract, and compares this to the available allocation of the same contract and tenor or related contracts defined in the input positions files (FICCPositions.csv and Positions.csv).

• If the Optimizer can satisfy all or part of the target allocation in an available account with the instruments supplied, it books an offsetting transfer to the FICC position account, thereby removing that position from the futures and options or IRS PM account.
• If the allocation in the FICC position account is in excess of the target allocation or does not satisfy the target allocation, an offsetting transfer is booked to the futures and options account, thereby removing that position from the FICC position account.
• If the target allocation cannot be achieved in same anchor tenor and contract, Optimizer will also attempt to satisfy the target allocation using other tenors in the same contract, prioritizing the next upcoming tenor first before moving on to tenors further out. Optimizer currently uses a single contract across multiple tenor points to satisfy the target allocation, it does not attempt to satisfy the target out of related contracts.

Unlike during IRS Optimization, Optimizer does not evaluate initial margin impacts of the RBOE transfer activity. It is therefore recommended users perform their own testing to ensure they are comfortable with the Optimizer's rules-based approach. Note that Optimizer does continue to perform the existing OTC PM margin optimization consistent with prior versions of the software. The eligible futures for the OTC PM process will be impacted if users configure optimizer to run RBOE process before OTC PM optimization process.

Account Setup Considerations

See Changes to Account Structure above.

Expected Inputs

Aside from the inputs required to run Interest Rate Portfolio Margining, as described in the CME Optimizer Software content, Optimizer requires three input files to run the RBOE workflow:

• Positions.csv, an existing file generated by the Clearing Firm and described in the Portfolio Margining for OTC Interest Rate Swaps topic. 
  1. No changes are expected to existing users of this file.
• The FICCPositions.csv file, generated by the Clearing Firm and described in 'Expected Input Files' above.
• The XMFICCPOSN file, generated by CME, distributed over secure FTP and described in 'Expected Input Files' above.

Configurations

The Optimizer requires a configuration file to run, the "configuration.json" file. This file is saved, by default, in the program's "\[local path\]\Plugins\Optimizer" directory. Please review details on all configuration properties and settings in the User Guide here.

This version of Optimizer reuses some existing configurations for RBOE workflows:

• Exclusion logic: allows users to exclude contracts from Optimization during a specific lifecycle event (such as treasury deliveries). Product exclusions logic is applied globally to FICC position accounts and PM accounts. See user guide above for more details.
• Move Decisions: allows users to define an order for generating transfer records when more than one line item for a given account represents the same unique instrument. See above user guide and 5.3.2 below for more details.
• Filename definition: allows users to update the expected file naming convention for any Optimizer input. See above user guide and 5.3.2 below for more details.
• Additional configs defined in the User Guide above but not below.

In addition to existing configuration, this version of Optimizer supports the following configurations which are new for the RBOE workflows:

• "FICC" section
  • Enabling RBOE: RBOE Optimization is disabled by default in this version of Optimizer. Users must explicitly change this flag from 'false' to 'true' to enable. See 5.3.2 below.
  • Execution Mode: RBOE Optimization can occur before or After IRS Optimization. See 5.3.2 below.
• "Exclusions" section
  • FICC Account Exclusions: allows users to exclude RBOE operations for specific accounts present in the Positions.csv file. See 5.3.2 below.

Example JSON Config Snippet - RBOE Operations

\{
  /* Existing configuration properties/sections omitted for brevity */
\\   
	"Ficc": {
    "Enabled": false,
    "ExecutionMode": "BeforeIrsOptimization",
    "OptimizeMoveDecision": "LIFO",
    "UseBackMonthContracts": true,
    "FiccPositionsFilename": "FICCPositions_",
    "FiccEquivalentPositionsFilename": "*XMFICCPOSN_*.csv"
  },   

\\ 

	"Exclusions": {
	"IncludeBaselineInOptimalState": false,
    "EarlyExercise": {
      "Enabled": true
    },
    "PBAccount": {
      "Enabled": false,
      "Exclusions": [
        {
          "Enabled": false,
          "Type": "OOF",
          "Accounts": []
        }
      ]
    },
    "FiccPbAccount": {
      "Enabled": false,
      "Exclusions": [
        {
          "Enabled": false,
          "Type": "FUT",
          "Accounts": []
        }
      ]
    },     /* Existing exclusion sections omitted for brevity */
\\

Specifications

"FICC" section

"Exclusions" Section

FICC Account Exclusion - Definition

RBOE Workflow Settings

Running RBOE Before or After IRS Optimization

As described in the Configurations section above, users can choose to run RBOE optimization before or after IRS Optimization. This setting, in conjunction with the netting versus gross considerations below, can impact the Optimizer's solution for both RBOE and IRS portfolio margining transfers.

Description of Execution Modes

• Users indicating RBOE occurs before IRS Optimization, via ExecutionMode = BeforeIrsOptimization, are prioritizing offsets in the FICC position account. With this configuration, the RBOE runs first and uses all available positions in the FICC, futures and options, and IRS PM position accounts to satisfy the target allocation specified in the XMFICCPOSN equivalent position file and generate transfersOnce the RBOE completes running, the remaining eligible futures and options positions will be considered for IRS Optimization.
• Conversely, users indicating RBOE occurs after IRS Optimization, via ExecutionMode = AfterIrsOptimization, are prioritizing offsets in the IRS portfolio margin account. With this configuration, the Optimizer uses all available positions in the FICC, futures and options, and IRS PM accounts to satisfy the IRS portfolio margin target. Only residual positions in the futures and options position account will be considered for RBOE.. The NettingEligible flag, described in more detail below, must also be Y when using this configuration.
• Users interested in running some other sequence of IRS Optimization and RBOE can also choose to run the IRS and RBOE Optimization processes separately during the EOD batch process. In that setup, users have complete control over both the sequence of Optimization events and the portfolios provided to the Optimizer during both optimization workflows. If interested in this setup, please contact CME to discuss.

CME has observed the risk correlation for CME treasury futures versus FICC cash positions leads to potentially higher offsets when the user prioritizes the RBOE workflow before IRS Optimization but, overall, it is recommended user test both configurations to determine their preferred workflow. Initial margin savings, as always, will be depedant on unique portfolio characteristics, regardless of the user's preferred workflow.
As described earlier, the RBOE workflow is rules-based and is not explicitly attempting to minimize initial margin.

Netting Versus Gross Considerations

The Optimizer software allows users to configure if an account is to be treated as 'net,' meaning all positions in a given instrument are a single net long or short quantity; or 'gross,' meaning positions in a given instrument are simultaneously long and short, representing potentially multiple sub-accounts or other account structures not known to CME. This can be configured using the fields 'NettingEligible' in both Positions.csv and FICCPositions.csv files described in Expected Inputs above. The NettingEligible flag is expected to be consistent between these files for a given account and only one value (Y or N) is expected per account.
Gross Account Treatment
Leveraging the setting NettingEligible = N (i.e. a gross account) enables optimizer software to theoretically use both a long position and short position independently to achieve risk offsets in either the RBOE or OTC Optimization process.
Below is a simple example representing the total position in a given interest rate product that is eligible for both RBOE and the OTC PM program. The Optimizer is configured to run gross (NettingEligible = N) and is configured to run RBOE process before IRS Optimization.

• The target allocation in the FICC position account is 350 short, established in "RBOE Offset Process" below.
• The Optimized allocation in the PM Position account is 100 short, established in "FUT/IRS Optimization Process."
• The starting position across all three accounts (FICC position account, F&O account, PM account) is 200 long by 500 short, established in "Input to Optimizer."
• Achieving the target RBOE allocation 350 short is possible because the F&O account short quantity 400 exceeds the target 350.
• Achieving the Optimized allocation is also possible because the 100 short position is in the PM Position account.
• This configuration is expected to receive the highest potential savings in the FICC position account, but please note close-outs are not managed by the Optimizer.

Net Account Treatment
Leveraging the setting NettingEligible = Y (i.e. a net account) is expected to result in more limited savings in the FICC position account because the Optimizer can choose only a net quantity to satisfy the target allocation specified in the XMFICCPOSN file.
Below is a simple example representing the total position in a given interest rate product that is eligible for both RBOE and the OTC PM program. The Optimizer is configured to run net (NettingEligible = Y) and is configured to run IRS Optimizatin before the RBOE process.

• The target RBOE allocation in the FICC position account, the Optimized allocation in the PM account and the starting position are the same as the above.
• Achieving the target RBOE allocation 350 short is not possible because netting has reduced the total allocation available from 200x500 to 0x300.
• Achieving the Optimized allocation is possible.
• This netting configuration is typical for Optimizer users. This configuration is expected to receive lower potential savings, but netting is managed between accounts by Optimizer.

Expected Output Files

Optimizer generates a number of reports in the \[local path\]\Outputs directory after completing. In this version of Optimizer, the csvTransfersyyyymmdd.csv file is being enhanced to include a new TransferOrigin value "FICCXM" for transfers that are generated as a result of RBOE optimization. All transfers which are generated through normal netting and exclusion process, even if transferring from the FICC position account, will continue to use the existing TransferOrigin "Exclusion" or "Netting."

The fixmlTransfersyyyymmdd.txt file, which includes transfer records that are sent to CME via existing firm message queues, is not being updated in this version of Optimizer. The transfer reason code continues to be "M" for all transfers, regardless of TransferOrigin.

All other outputs, aside from the log file which highlights the RBOE process, are the same as prior versions of Optimizer. Note the margin approximation reports are not expected to include positions in the FICC position account within the margin calculations. Please review the outputs here (after "Position Netting" section) for more information.

Running Optimizer Without Using IRS Portfolio Margining

Users not familiar with Optimizer software for IRS portfolio margining can use the Optimizer for RBOE workflows alone. More details are expected to be published on this use case later in Q4 2022.

Support Contact

This topic illustrates the Rules-based Offset Engine and changes to the Optimizer software supporting this new program. If you have any questions, please contact posttradeservices@cmegroup.com.