Hide Not Slide on Twitter: "I'll be writing a premium post about CME's clearing process in the context of Ronin, its rise to prominence as a trading firm, and its peculiar downfall in the depths of March 2020. You can sign up below if interested: https://t.co/rsfAT80cW9"

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Hide Not Slide‏ @HideNotSlide Aug 10

Let's say our loss dwarfs the clearing member's bank account. CME will then sell off the remains of our position to pay some of the loss, followed by its CH contribution - ~$100 million. Still no systemic damage done.pic.twitter.com/AbrI0jBEWL

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Hide Not Slide‏ @HideNotSlide Aug 10

Let's say our loss dwarfs the $100 million CME contribution. What then? Enter the Guaranty Fund. Every other CME clearing member has to deposit money into this fund to cover losses like the one we're causing. As of Q1 2021 CME's Guaranty Fund was ~$5 billion.pic.twitter.com/mzF7g5lugI

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Hide Not Slide‏ @HideNotSlide Aug 10

Let's say our loss is EVEN bigger than the guaranty fund amount. What then? CME's last defense is called "assessment powers". This allows CME to call on its members to contribute extra capital in the event of an emergency. The more members in a CH, the more $ it can call.pic.twitter.com/rGhnyfQ5iH

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Hide Not Slide‏ @HideNotSlide Aug 10

So to bring CME's clearinghouse down we would need losses surpassing: Our clearing member's capital CME's $100M contribution A $5 billion Guaranty Fund The funds of every other member called by assessment powers Our loss would have to be MANY billions of dollars to do this.

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Hide Not Slide‏ @HideNotSlide Aug 10

This doesn't even consider the $180 BILLION of margin deposits held by the clearinghouse for other users throughout the system. If it truly came to that, CME could in theory start dipping into this $ to cover losses at the expense of other users.pic.twitter.com/jRs70Sz4IN

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Hide Not Slide‏ @HideNotSlide Aug 10

Okay, hypothetical situation aside, has a CH come close to blowing up? Honestly, no. Not even CLOSE. Nasdaq's 2018 Nordic power blowup may be the biggest example:https://www.reuters.com/article/us-nordic-power-nasdaq/nasdaq-restores-nordic-clearing-buffer-after-power-trader-default-idUSKCN1LX0WD …

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Hide Not Slide‏ @HideNotSlide Aug 10

A European power trader single handedly lost enough money to wipe out Nasdaq's small Member Default Fund (~$125 million). Members had to refill the fund or face default themselves. Nasdaq also spent $22 million refilling the fund with its own money.

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Hide Not Slide‏ @HideNotSlide Aug 10

Other than this, there aren't many instances of clearinghouses losing money or facing collapse. Even in the height of COVID when big firms like Ronin blew up, it had no impact on CME's CH contribution or any other member funds.https://www.cnbc.com/2020/03/20/clearing-firm-ronin-capital-unable-to-meet-capital-requirements-at-cme-sources.html …

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Hide Not Slide‏ @HideNotSlide Aug 10

The only way for a clearinghouse to truly collapse would be if MULTIPLE users & clearing members suffered ungodly losses simultaneously. If it didn't happen during 2008 or during COVID, chances are low it'll ever happen.pic.twitter.com/QsUyhSDI3s

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Hide Not Slide‏ @HideNotSlide Aug 10

I say all this to applaud & admire the clearinghouse system. Its design is downright beautiful & it's been working quietly for decades now. I have no worries about clearinghouses blowing up anytime soon in their current structure.

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Hide Not Slide‏ @HideNotSlide Aug 10

I'll be writing a premium post about CME's clearing process in the context of Ronin, its rise to prominence as a trading firm, and its peculiar downfall in the depths of March 2020. You can sign up below if interested:https://frontmonth.substack.com/

12:53 PM - 10 Aug 2021

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1. ONAN‏ @ONAN_OUS Aug 10
  Replying to @HideNotSlide
  
  A good related post https://www.google.com/amp/s/gendal.me/2014/01/05/a-simple-explanation-of-how-shares-move-around-the-securities-settlement-system/amp/ …pic.twitter.com/m4mZjjQD2j
  
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1. John Handel‏ @_John_Handel Aug 11
  Replying to @HideNotSlide
  
  Great thread as always. Didn’t end up writing my chapter on clearing and settlement because of time reasons, but really need to for the book. Took me forever to realize even in C19 the London Clearinghouse was different from formal LSE (although LSE rented LCH their rooms)
  
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