The CME Group is partnering with Dwolla, a start-up bank transfer platform in Des Moines, to facilitate real-time margin calls and payments.
The initiative will use Dwolla’s real-time architecture to facilitate on demand payment capabilities for clearing and settlement, as well as streamlining payment operations for CME Clearing members and clients.
“Dwolla’s technology provides CME Group with an innovative platform to deliver secure and sophisticated payment services to our clearing house member firms,” said Sunil Cutinho, president of CME Clearing.
The system will be trialled initially on CME’s Broker Payment Systems and Give Up Payment Systems, and will enable customers to process payments more quickly. In addition, CME is a strategic investor in Dwolla through its venture capital arm CME Ventures.
Dwolla’s network provides financial institutions with a real-time payments platform through its FiSync protocol. It gives banks an interoperable private-by-default ledger and mechanism to allow real-time clearing and settlement services.
“CME Group has helped Dwolla bring real-time technology to the derivatives industry to enable faster access to liquidity and funding for the industry,” commented Ben Milne, chief executive officer and founder at Dwolla.
The partnership comes as a growing number of over-the-counter (OTC) derivatives transactions are pushed into clearing as mandated under Dodd-Frank in the US and the European Market Infrastructure Regulation (EMIR). Esoteric OTC transactions will continue to be traded bilaterally between counterparties but will be subject to tougher margining requirements.
As part of these reforms, financial institutions trading OTC instruments will be obliged to post high-grade collateral, usually government bonds or cash, as initial margin and variation margin at the central counterparty clearing house (CCP). Variation margin can be called intra-daily depending on market volatility.
Posting high-grade collateral could be a challenge for some financial institutions, which might not possess these high quality liquid assets. It could also lead to collateral shortfalls, a point made in a 2014 paper published by the Depository Trust & Clearing Corporation (DTCC) and London School of Economics (LSE).
Some have urged CCPs to ease their margin requirements. A handful of CCPs are accepting lower grade collateral albeit subject to haircuts. Nonetheless, regulators have made it abundantly obvious that they will not tolerate CCPs adopting a race to the bottom on margin requirements.