Was counterparty risk high enough to worry about for futures exchanges during 2008?

Discussion in 'Risk Management' started by learner88, Dec 12, 2018.

  1. In 2008 financial crisis, almost everyone was scared of counterparty risks in the financial system because even strong banks were falling apart. For futures traders, were there counterparty risks (high enough to worry) that the clearing houses like CME may not be able to pay the shorts for their huge profits in 2008?

    Just wondering how were things like from players who have been around the vicinity for a much longer time than me. Newbies like me can learn from your experience.
  2. Robert Morse

    Robert Morse Sponsor

    When you hold a futures position "over-night" where the SPAN margin is $100,000:

    You have to have $100,000 in equity.
    Your FCM has to put up 8% more or $8000 from their equity.
    If your account were to go below zero, the FCMs balance sheet would get hit next. After that, the CME would have to be there as your counter-party.

    I wish the NFA/CFTC would agree to create a SIPC/FDIC type insurance that would get funded over time to protect small accounts at FCMs but up until now, they do not see the need.
    positive etc likes this.
  3. traderjo


    CRAZY THOUGHT PERHAPS...:sneaky: but for Futures and OTC products why not the exchange or some other govt body hold the funds? instead of brokers/ FCMs? specially in case of murky OTC fx . Too left wing perhaps! Broker's business is to get more and more people to trade on the exchange that is it ! is it not? not play with client funds! as of today IMO in the non equity market and in the western world perhaps UK FCA only protects clients in case of broker default. ( and my be some other EU countries)
  4. Sig


    Um, you do know that OTC stands for "over the counter" and is defined specifically as those transactions not traded on an exchange. So why in the world would an exchange hold funds for a class of transactions which actually defined as not occurring on an exchange?
    Without trying to be a jerk, I'd offer that a little further understanding of how securities markets work would answer all your questions, which are all to a varying degrees nonsensical if you know the background behind what you're asking about.
  5. traderjo


    Sig I DO know what OTC means ,
    I was trying to put 2 things addressing the issue of A) Counter party risk and B) Client money safety ...what I meant was 1) INSTEAD of an OTC why does not major exchanges bring products which can replace OTC and 2) and in doing so (and for existing Futures contract) Brokers/ FCMs dont hold client's money Exchange or govt / 3rd party does!

    Imagine a Global regulated FX spot exchange instead of likes of OTC FX
    I dont understand what is so nonsensical,, or you just want to offend for no reason!
  6. newwurldmn


    Clients want OTC. The contract is specifically tailored to their needs (exact terms and days, etc); they may not want the transaction printed to the tape.
  7. Sig


    Again not to be insulting but the exchange and clearing functions are separate and distinct and you seem to be mashing them together and conflating them. An exchange exists to match buyers and sellers. Clearing it itself at least two functions, moving securities between owners and guaranteeing the transaction.
    The entire point of OTC is for products that don't have enough regular volume to make it worth a market maker's while to make a market in them. You already can clear OTC trades with I think all of the main clearing firms, although often firms opt not to because the perceived cost/benefit isn't there. If you're a big bank you can ensure you have a relatively balanced book with your main counterparties risk wise at which point you know your risk situation far better than if you're depending on a clearing organization whose exposures you're not privy to.
  8. traderjo


    Although I take your point TAILORED OTC situation , I was referring more to retail level highly liquid products such as EUR/USD, Futures exists on regulated exchanges and there is SPOT in a non unregulated manner , where the Broker might be acting as MM or a true exchange type of function, you never know. so liquidity is not an issue All I am pointing out is to reduce the conflict of interest people and exchanges can come up with a TRUE exchange FX spot product, second point is clearing and where client money stays
    Just for a second imagine a true exchange where broker's work just as brokers and bring client to exchange, Exchange takes care of regulatory and execution functions and a third govt org takes care of all the margin money!
    Even for current Futures market there is no client money protection in USA ( point made by Robert on SIPC for futures/FCM)
    I am not from the industry so my jargon may be wrong but the intent of the post to see if there could be a solution! I am sure vested interest wont make it happen,