CME Group clearing house Ronin Capital failed to meet their capital requirements this week. As a result, CME stepped in to auction off their portfolio. Required by their risk management procedure, CME has not announced the buyer. Ronin served as a proprietary clearing house for CME and as such did not hold any client assets. All exchange funds remain safe. Ronin is not CME Group’s only direct clearing house – and the action should not impact traders significantly.
A clearing house serves as the intermediary in asset trading. In regular situations, they match buy orders against sell orders to ensure the smooth transfer of funds across the board. This ‘balancing of the books’ allows the exchange to operate with more efficiency than requiring buyers and sellers to negotiate directly with one another. However, periods of high volatility – like that we are seeing now – can create disparities within the system.
CME Group and Ronin Capital
The Chicago Mercantile Exchange Group offers one of the most diverse global marketplaces for financial derivatives. As such, the recent damage done to the global economy disproportionately impacts their business. Alongside managing Ronin’s recent catastrophe, they’ve also pushed back against a call for shorter trading hours.
Ronin Capital served as one of their clearing houses. CME Group remains tight-lipped about the direct issues that caused the failure to sustain capital requirements. However, the issues appears to stem from untenable future positions. Tied to the CBOE Volatility Index, these assets are particularly risky during periods of economic upheaval.
The Economic Impact of the Coronavirus
Unprecedented in modern times, the coronavirus pandemic continues to wreak havoc on the global economy. Travel and trade are a near standstill, with airlines and cruises struggling to survive in the face of near-zero usage. Airlines that operated on razor-thin margins are now facing complete annihilation as travel bans are ramped up to contain the virus. Some cruise companies, desperate for revenue, offered their ships as temporary hospitals.
The stock market continues to suffer in the face of these issues. After erasing all gains made since Trump took office, the Dow Jones Industrial Average hovers on uncertainty. As other countries resort to nationwide quarantines, infections in the United States continue to grow exponentially. Such a lockdown would cause untold economic devastation – but may be necessary to turn the tide.
Article By: Adam Stone