Resources

Q. How are DME trades cleared?

A. All DME trades are cleared by CME Clearing. The same safeguards and standards that apply to CME transactions also apply to business conducted on the DME.

Q. What is the central counterparty for a DME transaction?

A. The Clearing House stands as the financial intermediary on every open futures transaction. In other words, it is the central counterparty to all trades executed on DME. Each contract traded on DME results in two contracts with the Clearing House:

  • one between the buying Clearing Member and the Clearing House as seller, and

  • ​another between the selling Clearing Member and the Clearing House as buyer.

Novation of these contracts to the Clearing House as central counterparty is critical in the mitigation of credit risk.

Q. Are all CME Clearing Members permitted to clear DME contracts?

A. CME Clearing Members are eligible to become DME Clearing Members which gives them the ability to clear DME transactions (subject to complying with any relevant DME and DFSA requirements). All Clearing Members are required to be recognised by the DFSA. They must also comply with the DME Rulebook, and complete a Clearing Member application form. A list of CME Clearing Members that are also DME Clearing Members can be found here.

Q. What is the role of the Clearing Member within the trade?

A. The Clearing Member guarantees the financial performance of its customer to the Clearing House.

Q. What are Initial and Variation Margins?

A. The mitigation of credit risk through use concept of a central counterparty is underpinned by the collection of two types of margin: the first is Initial Margin, calculated to reflect the degree of risk associated with price movements in the underlying commodity. Simply put, the initial margin reflects the potential change (up or down) in the value of a futures contract worth in a single trading day.

Initial margin is essentially a deposit that is required to be made by buyer and seller for each futures contract opened, the value of which is based upon factors such as market volatility and outright price.

This initial margin is held for as long as the futures position is open and is returned to the market participant upon closure of the position.

Initial margin is completely discrete from variation margin (see below) and may NOT be used as a financial resource for any other purpose whilst on deposit with the Clearing House.

The appropriate value for Initial Margin is calculated using an algorithm known as SPAN® (Standardised Porfolio Analysis), licensed by the CME to all leading clearing houses around the world.

Whilst Initial Margin is a deposit that will be returned upon closure of futures positions, variation margin reflects the actual change in value of open futures positions on a daily basis.

At the close of each trading day, an end of day settlement price is calculated for every futures contract month.

This price is compared with the previous days settlement price and the difference in value is called and paid to long and short positions depending on the price movement.

Variation Margin Day 1 Day 2 Day 3 Day 4 Day 5
Open Long position 1 lot @ $35 and market settles at $35 - - - - -
Settlement $38 - + $3 - - -
Settlement $34 - - $4 - -
Settlement $35 - - - + $1 -
Close position $36 - - - - + $1

In the above example, we can see how a one lot open long position bought at $35 would be margined each day according to settlement price movements, until the position is closed.

For every long position in the market there must be a short position such that the payment and calling of variation margin is equal and opposite across these positions. Therefore at the close of each trading day the Clearing House is balanced and the value of open positions is accurately reflected for all open positions held.

The CME Clearing Division constantly monitors Clearing Members' financial status and trading positions, as well as supply and demand factors in the physical world, to ensure the integrity of its markets. The Guaranty Fund is an additional financial safeguard and contributes to the naturalization of risk among the Clearing Members.

 

Q. On expiry of the DME Oman Crude Oil Futures Contract, what happens if the Clearing House matches two counterparties, who cannot deal with each other, for reasons other than credit?

A. The Clearing House cannot prevent a customer from being matched to a counterparty with whom it is not authorised to trade with. The Clearing House can make sure the contract and credit risk is mitigated. All DME Clearing Members must be CME Clearing Members and as such are subject to US requirements concerning US and UN sanctions (e.g. Iran, North Korea, etc).

Q. Are margin offsets available for customers who hold positions in the CME Group crude oil contracts and the DME?

A. A full allowable spread offset margin exists against any open position at CME Clearing and is afforded to all DME positions. For minimum CME initial margin requirements for current contracts, please click here.