You just don't get it. If you trade 100 r/t's in ES today through IB, some of your trades were with traders clearing RCG, JPM, GS, Transmarket on and on. Do you think IB does a match-up for funds with each of them? NO! Everyone matches up with the CME. If today IB's costumers lose 10mil then IB wires that money to the CME. Tomorrow IB's costumers make 10mil and the CME wires IB 10mil. Extreme case: You have the best crystal ball in history and you know that tonight Obama will announce that the Treasury is going to default on it's debt. So you short thousands of ZB's. Tomorrow ZB opens 10 sellers and you're up billions. Does your broker have your billions on hand? Of course not. They may not even have millions on hand. They only receive your money if the CME can pay them. If the longs who lost billions can't make good to the CME then the CME calls a special meeting and says to it's members"pony up we have to make Anaconda good." What if they can't? Then you're shit out of luck UNLESS either a white knight takes over the liabilities of the CME in exchange for stock or unless Congress and the Fed create your billions out of whole cloth. That's where we are now.....
You know why I've earned better than 2 million plus in my trading career? Because I never wasted one minute or one penny on economics courses. To any young traders lurking: study logic, logic, logic and more logic. One good philosophy course will help you 10x more in trading than econ. Learn to PROVE your theories.....
Be careful ripping on The Great Neiderhoffer. Market surfer might get upset and try to explain how good ol Vic was a great trader. The Great Neiferhoffer....I like it....sounds like a magician. "I am The Great Neiderhoffer....Abracadabra....I will make all your money go away !!!"
For interested parties : http://www.cmegroup.com/rulebook/CME/I/7/7.pdf 713. DELIVERY PROCEDURES 713.A. Notice of Intent to Deliver 713.B. Delivery Notice 713.C. Possession of Product and Relevant Documents 713.D. Notice to Buyers 713.E. Payment 714. FAILURE TO DELIVER 715. FAILURE TO REMIT FULL PAYMENT 716. DUTIES OF CLEARING MEMBERS 717. [RESERVED] 718. CUSTOMER SUBSTITUTION IN THE EVENT OF CLEARING MEMBER
The chapter relevant to the discussion: http://www.cmegroup.com/rulebook/CBOT/I/8/8.pdf 802.B. Satisfaction of Clearing House Obligations1 If the Clearing House is unable to immediately satisfy all claims against it including, but not limited to, costs associated with the liquidation, transfer and managing of positions, arising out of: 1) its substitution (pursuant to Rule 804) for a defaulting clearing member or a defaulting Participating Exchange, or a defaulting Partner Clearinghouse; 2) a shortfall in a cross-margining program; 3) the failure of a depository, exchange or market apart from the Exchange but whose transactions are cleared pursuant to the provisions of Chapters 8B, 8C, 8D, 8E or 8F of the CME Rulebook; 4) for any other cause, then such claim or obligation shall be met and made good promptly by the use and application of funds from the following sources in the order of priority hereafter listed. Each source of funds set forth below shall be completely exhausted, to the extent practicable, before the next following source is applied. Here's the bottom line. A futures exchange clearing house is nothing more than a de facto insurer. The business is universally regarded as such. To the extent that in the 1980's the CBOT unsuccessfully sought entrance in the reinsurance market in a quest to compete against Lloyds. So the futures industry with great pride regards the Clearing House as the ultimate insurer. Any insurance policy guaranteeing unlimited payoff has an inherent risk. Hence the CME is just a better run, better financed, more liquid products version of AIG. Even the light years better CME version has ABSOLUTE RISK of an extreme case-particularly some funky yield curve stuff-and the CME could indeed default. Let's face it-institutional members don't have the pockets of two years ago. IF ED ever makes a 600 basis point move overnight, the CME could be AIG.
I don't recall the details, but when Continental Bank went under, members of the exchange had trouble with their credit lines. It would be interesting to see what problems emerged then.
I remember Continentals demise caused a lot of problems with CD futures. Continental was deliverable to longs. Anticipation of further messes like that led to the advent of cash settled ED futures. The only other probs I recall Greg were quite a few members had their seat loans through Continental and had to re-fi at Harris etc. But yes there's certainly counter parties who could cause the CME trouble rather than just an exchange traded blow-up......
Geesh all this name calling, I know you guys don't talk to people in person like this. I'm guilty too, but trying to improve.