Can someone fully explain the CME
Hey all,
Can anyone take a minute to fully explain what the CME is...
Is it just an exchange where standardized futures and options contracts are traded and the guarantee liquidity to the market as opposed to OTC??
If the above is true, that means they must have a tremendous amont of capital correct?
Thanks.
http://lmgtfy.com/?q=cme
You are right in that it is an exchange/central counterparty to derivative trades (futures and options). Not sure what you mean by "tremendous" amount of capital but they are able to manage risk by a)netting positions among the various counterparties that trade there and b) collecting initial and variation margin. This keeps the actual risk exposure of the exchange low relative to normal OTC trading, so I think 'tremendous' in an overstatement. That said, they are not highly levered at all. As of 2010 leverage ratio was .1 (2bn in debt to 20bn in equity).
They accept counterparty risk, so yes they require market participants to post capital based on their own creditworthiness, in proportion to their outstanding risk-weighted position.
Booth sums it up pretty well.
In addition to the financial and interest rate products which are what the CME thrives on these days, it is still(by far) the largest commodities exchange in the world. This is where you go when you need to buy 50,000 tons of butter.
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