Home | FAQs | Legal, Counterparty Risk, Clearing & Settlement

Last Updated: 11/11/2008

• About the DME
• Membership
• Trading on the DME
• DME Oman Crude Oil Futures Contract (OQ)
• DME Brent Crude Oil Financial Contract (ZO)
• DME Oman Crude Oil Financial Contract (ZG)
• Information Technology
• Legal, Counterparty Risk, Clearing & Settlement

Q. How are DME trades cleared?
A. All DME trades are cleared at the NYMEX Clearing House. The same safeguards and standards that apply to NYMEX transactions also apply to business conducted on the DME. NYMEX has been purchased by the CME group and now operates as a Division of the CME with their full financial support

Q. Are all NYMEX Clearing Members permitted to clear DME contracts?
A. Should they choose, current NYMEX Clearing Members have the ability to clear DME transactions subject to complying with any relevant DME and DFSA requirements. All Clearing Members are required to be recognised by the DFSA. They must also comply with the DME Rulebook, and complete a Clearing Member application form. A list of NYMEX Clearing Members that are also DME Clearing Members can be found here.

Q. What is the role of the Clearing Member within the trade?
A.  The Clearing Member guarantees the financial performance of its customer to the Exchange and Clearing House.

Q. How will the NYMEX Guarantee Fund be applied in the event of a default by a DME Clearing member?
A. The NYMEX Guarantee Fund will be applied as per existing NYMEX rules which handle payments from the Guaranty Fund on a “mutualized basis”. It should be noted that there is now one combined Guaranty Fund between NYMEX and CME. The Guaranty Fund could be accessed after the Clearing House has exhausted other assets of the defaulting clearing member in accordance with NYMEX rule 9.23.

Q. When does novation occur?
A. Novation occurs at the point when the NYMEX Exchange Clearinghouse accepts the DME trade.

Q. What Market Risk mitigation measures are used?
A. The Clearing House only accepts Clearing Members who meet NYMEX’s capital and operational requirements. Furthermore, the NYMEX Clearing House controls the risks of Clearing Member default by setting high capital requirements and holding liquid collateral (i.e. initial margin) to cushion against large potential overnight moves in contract prices. It also collects variation margins twice daily to prevent Clearing Members from accumulating loss positions during the trading day.

The NYMEX Clearing and Risk Management department constantly monitors Clearing Members’ financial status and trading positions, as well as supply and demand factors in the physical world, to ensure the integrity of its markets.
The Guaranty Fund is an additional financial safeguard and contributes to the naturalization of risk among the Clearing Members.

Q. What are the Exchange and/or Clearinghouse Default Procedures?
A. The Exchange’s default procedures are set out in Chapter 8 of the DME Rulebook.

Q. What liability do we have to other participants (e.g. shortfall payments, bilateral counterparty risk should a default occur, etc.)?
A.:

• If a customer fails to meet a margin call, then the customer is in has default with the Clearing Member and the Clearing Member could liquidate the customer’s open positions to satisfy the margin payment to the Clearing House.
• The shortfall of one customer should not become a problem unless the total customer margin payments made by the Clearing Member to the Clearing House was less than the total required amount for the Clearing Member’s customers.
• If the Clearing Member is in default, then all assets (proprietary and customer) held by the Clearing Member could be used by the Clearing House to discharge the obligation. The Exchange could also sell the membership seats of the Clearing Member.
• If the default is caused by proprietary trading, customer assets are not permitted to be liquidated.
• If additional funds were needed, the DME would proceed to use additional financial assets as provided by Exchange rules.
• NYMEX’s Clearinghouse is rated AA+ and has never defaulted.

Q. Where are the Arbitration rules?  
A. Chapter 5 of the DME rule book covers the Arbitration process.

Q. Should the DME and/or Clearinghouse itself default, what happens? What is the extent of their liability?
A. The existing NYMEX rules still apply.

Q. What is the settlement margin for the contract at expiry?
A. During the last three trading days prior to expiry, customers holding positions will be required to post additional margin, called the Spot Month Assessment. The Spot Month Assessment is applied to each open contract in addition to the initial and maintenance margins, and is a portion of the contract value, please click here for the current margin rates. The Spot Month Assessment provides additional delivery collateral, and will alert the customer to an imminent physical delivery position. After expiry, the Clearinghouse will continue to hold the margin and Spot Month Assessment for each contract that is matched for physical delivery. Then, one business day prior to the actual delivery month, long delivery position holders will be required to post additional collateral with the Clearing House so that margin will equal the full value of the delivery position. The delivery margins will be maintained at the Clearing House until notification of payment has been made to the Clearing House.
The initial margin and spot month assessment are set by the Clearinghouse, and can vary, so check the DME website for updated information. The Clearinghouse determines the level of the initial margin based on implied volatility in the crude oil market. The goal is to ensure that adequate margin is in place to account for a large one-day move. The margin is adjusted from time-to-time when the implied volatility moves up or down. The Exchange monitors this on a daily basis, and thus adjustments to margin can be made quickly if the market warrants it.

Q. Margin Posting: What is Spot Month Assessment and how is it applied to positions?
A. The assessment is a risk management tool for the physically delivered Oman Crude Oil Futures Contract to ensure that Clearing Members have protection against a customer default or a delivery obligation. The rate can vary from time to time so please click here for the current margin rates

Q. Is a Letter of Credit an acceptable form of margin?
A Letter of Credit is acceptable as a form of margin. A list of approved banks for the issuance of Pass-Through Letters of Credit is located at: http://www.nymex.com/deposit.aspx. Please contact the DME for a copy of the most recent acceptable form of Letter of Credit from the NYMEX Clearing Department.

Q. When will a Letter of Credit be activated to act as a margin on open positions of customers?
A. Letters of Credit are activated upon default (failure to make a margin call or payment for delivery) of a Customer or a Clearing Member. Upon the declaration of a default the Letter of Credit may be presented to the bank as a demand payment to the NYMEX Clearing House or the Clearing Member. Additional forms of margin are also available to Customers. It is recommended that you check with your Clearing Member to determine which forms of margin are acceptable to them. Also, rules concerning margin requirements relating to the Clearing Member's obligation to the NYMEX Clearing House may be found at: http://www.nymex.com/rule_main.aspx?pg=8#9.05.

Q. Can long or short positions less than the minimum stem size of 200,000 barrels (or 200 lots) going in to expiry be held by a customer for the DME Oman Crude Oil Futures Contract?
A. Petroleum Development Oman (PDO), the terminal operator, has a minimum loading volume per vessel (or "stem size") of 200,000 barrels. If a customer (long or short) in the futures market has a position that is less than the minimum stem size of 200,000 barrels (or 200 lots) going into expiry for the DME Oman Crude Oil Futures Contract, then the customer must be able to demonstrate that he has access to additional oil by way of OTC supply or co-loading to make up the minimum stem size of 200,000 barrels to his Clearing Member, and by extension, to the Exchange. Failing to do so will enable the Clearing Member and/or Exchange to have the Customer liquidate his position ahead of contract expiry, execute an EFP trade post-expiry or perform an ADP during the delivery process to insure performance of the contract.

Q. On expiry of the DME Oman Crude Oil Futures Contract, what happens if the exchange matches two counterparties, who can not deal with each other, for reasons other than credit?
A. The Exchange can not keep a customer from being matched to a counter party with whom they cannot deal with. The Exchange can make sure the contract is performed and credit risk removed. By virtue of NYMEX shareholding, no customer will be matched to companies that are outlawed by US and UN sanctions (e.g. Iran, North Korea, etc).

Q. Are margin offsets available for customers who hold positions on NYMEX and the DME?
A. A full allowable spread offset margin exists against any open NYMEX position and will be afforded to all DME positions. Minimum NYMEX original margin requirements for current contracts are located at: http://www.nymex.com/ewd_margins.aspx.