CME: “No Customer Has Ever Lost A Penny…..”

“…. as a result of a clearing member default at CME Group”


Except….. now it appears that’s not true any more, right?

The “Trends Journal” says it has uncovered critical information that – in light of the MF Global bankruptcy – casts doubt on the fitness of CME Group to serve as a trustworthy derivatives and commodities exchange, and on the credibility of its Executive Chairman, Terence Duffy.

The “Trends Journal” says not only has the scandalous MF Global bankruptcy (the eighth-largest in US history) wreaked financial havoc on thousands of individuals, it has single-handedly destroyed faith in the commodity markets. CME’s reputation as the financial Rock of Gibraltar, upon which the commodity markets are anchored, has now been undermined. By its recent actions, CME’s claim of being committed to guaranteeing the transactions undertaken by its members has been called into question.

As recently as 2010, Terrence Duffy boasted, “No customer has ever lost a penny as a result of a clearing member default.”* Moreover, in the same press conference, Duffy stated unequivocally, “Since we are the guarantor of every transaction that happens in our markets, we have to guarantee the performance of each and every one of these contracts … To do this, we hold more than $100 billion of collateral to support the transactions that are being done on our markets.”

So let’s ask the question: What’s the truth and why should anyone be trading through an allegedly transparent “guarantor” of contracts when segregated customer funds wind up “missing”?

It is at times like this that we find out if the alleged transparency and exchange trading guarantees actually mean something.  I have long been a strong proponent of the regulated futures and options markets on the premise that even during severe events like 1987, 2000 and the 2008 crashes — even when the solvency of clearing members has been called into serious question (or they’ve failed outright!) nobody has gotten rooked as a consequence.

That is the function of a regulated and transparent exchange.  The regulation of margins and supervision of the cash that backs transactions and provides collateral against non-performance is the primary function of such an institution.

It is not clear at this point point exactly what happened with MF Global.  But this much is quite clear — the rapid transfer of open positions to other firms along with the cash margin deposits held on behalf of customers to guarantee trades did not happen in a reasonably-expeditious (like “right now”) basis when MF Global failed.  Some customers were forced to come up with a second margin deposit and if they were unable to do so their positions were forcibly liquidated.  Significant amounts of that margin money appear to have disappeared outright, despite the fact that it is the CME’s job to guarantee performance through the enforcement of margin deposits.  Indeed, they call these margin requirements performance bonds — because they are.

Well, if they were and are performance bonds then perhaps CME would like to explain why they did not demand a full accounting of them on a nightly basis from all clearing firms (including MF Global), how it is that MF Global managed to evade proving up their customer performance bonds, and why their failure to supervise the presence and legitimacy of these performance bonds should not fall on them.

If this alleged supervision and guarantee is in fact worthless then the role of a neutral “referee” that CME Group has asserted has been abdicated and there is no reason to believe that any transparency, any guarantee of fairness in execution is real or any alleged “performance bond” money actually exists.

Indeed, the entire purpose of CME’s existence has been rendered null and void by their own hand.

The entire premise of my endorsement of exchanges — and for forcing derivative contracts onto exchanges as a means of de-fanging the CDS monster — rests on the integrity of this performance bond process.  An exchange, due to the fact that it is paid a relatively small amount of money to handle each contract that passes through it, has a very strong incentive to make sure nobody is cheating and that all margin money is actually there because if they don’t they face losses that are radically outsized when compared to the fee they collect for facilitating the trade itself.

It appears, however, that in the MF Global case this supervisory function failed.  That’s bad.  What’s worse is that it appears CME Group has, at least thus far, successfully dodged taking responsibility for that failure and the apparent non-presence of alleged “performance bond” deposits that in fact disappeared.

There are only two possibilities: Either CME knew the alleged “performance bonds” were not present or they were tricked into believing they were present when they were not.

CME’s thus-far successful dodge of responsibility to make good on these alleged “performance bonds” that were not where they were represented to be makes a mockery of the premise that an underwater position is fully collateralized by the customer who has the losing position and thus the customer with the winning side of that trade will, with certainty, get paid.

That is the entire purpose of requiring margin deposits in the first place!

If we are to have actual regulated markets and a known safe place to trade where customer “performance bonds” actually mean something that must not occur.  If CME was either tricked or worse, allowed MF Global to close a single day’s trading book while the allegedly deposited customer performance bond funds were missing then CME must promptly make good on the missing funds as this is the premise on which a regulated exchange rests!

The literal existence of safe and sound markets is at stake here.  If CME successfully dodges  responsibility for failure to actually guarantee that performance bond funds are real and are where they are represented to be in each and every case then no end user, industry group or other person can reasonably believe that their trades are in fact “money good” anywhere on any United States exchange.


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