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CME Group Inc., the world’s largest derivatives market, wants its bank members to bear responsibility for ensuring there is enough cash on hand in the case of a default.
CME said in a white paper it has set aside the equivalent of 5.25 percent of the money its bank members have put into a collective default fund. In September, JPMorgan said CME’s contribution, referred to as skin in the game, should equal 10 percent.
Clearinghouses such as CME’s serve as an antidote to panic in derivatives markets, holding money that can fulfill a failed trading firm’s obligations. Although most of the funds they hold are in the form of margin that backs trades, they also pledge some of their own money. The importance of ensuring they are adequately funded was emphasized in the 2008 financial crisis, the intensity of which was blamed in part on a lack of clearinghouses in the over-the-counter derivatives market.
A clearinghouse’s “most important contribution to managing systemic risk is the management of concentration risk among their largest participants,” CME said in the paper. “CME Clearing believes that skin in the game requirements must be developed on principles that incentivize market participants to manage the risks they create.”