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CLEARING OPERATIONS

9 Months Ended

Sep. 30, 2023

CLEARING OPERATIONS

CLEARING OPERATIONS

12. CLEARING OPERATIONS

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Cboe Clear Europe

Cboe Clear Europe is a European equities central counterparty that provides post-trade services to stock exchanges, MTFs, over-the-counter (“OTC”) equities trades and an equity index derivatives exchange. Cboe Clear Europe clears equities from eighteen European markets and the United States, as well as Depositary Receipts, ETFs, and exchange traded currencies (“ETCs”). In September 2021 Cboe Clear Europe began clearing equity index derivatives for ten European markets. Through a novation process, Cboe Clear Europe becomes the buyer for every seller and the seller for every buyer, thereby protecting clearing participants from counterparty risk and allowing the settlement of trades in the event of a clearing participant default.

Cboe Clear Europe only assumes the guarantor role if it has an equal and offsetting claim against a clearing participant. For the period ended September 30, 2023, there have been no events of default for which a liability is required to be recognized in accordance with GAAP.

Clearing Participant Deposits

Cboe Clear Europe generally requires all clearing participants to deposit collateral to help mitigate Cboe Clear Europe’s exposure to credit risk in the event that a clearing participant fails to meet a financial or contractual obligation.

Margin Deposits

Margin deposits, which are predominately in the form of cash and cash equivalents, are deposits made by each clearing participant to Cboe Clear Europe to cover some or all of the credit risk of its failure to fulfill its obligations in the trade. Cboe Clear Europe maintains and manages all cash deposits related to margin deposits. Substantially all risks and rewards of margin deposit ownership, including net interest income, belong to Cboe Clear Europe and are recorded in cash and spot markets on the condensed consolidated statements of income. In the event of a default, Cboe Clear Europe can access the defaulting participant’s margin deposits to cover the defaulting participant’s losses. For more information, see “Default and Liquidity Waterfalls” below.

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Clearing Funds

The clearing fund mutualizes the risk of default among all clearing participants. Depending on their membership, clearing participants contribute to the cash-equity and/or derivatives segment of the clearing fund. Although the entire clearing fund is available to cover potential losses in the event that the margin deposits and the clearing fund deposits of a defaulting clearing participant are inadequate to fulfill that clearing participant’s outstanding financial obligations, the clearing fund first uses the product class segment of the Clearing Fund in which the defaulting participants was active (see “Default and Liquidity Waterfalls” below). In the event of a default, Cboe Clear Europe is generally required to liquidate the defaulting clearing participant’s open positions. To the extent that the positions remain open, Cboe Clear Europe is required to assume the defaulting clearing participant’s obligations related to the open positions. Clearing participants are required to make contributions to the clearing fund that are proportional to their risk exposure in the form of cash or non-cash contributions, which generally consist of highly liquid securities.

Interoperability Fund

For the cash equity business line, Cboe Clear Europe has entered into interoperable arrangements with two other central counterparties (“CCPs”). Under these arrangements, margin is pledged to and from interoperable CCPs. The interoperability fund consists of collateral provided by clearing participants that is pledged by Cboe Clear Europe to the other interoperable CCPs, to cover margin calls Cboe Clear Europe receives from such interoperable CCPs.

As described in Note 1 (“Organization and Basis of Presentation”), effective August 14, 2023, Cboe Clear Europe enacted changes to its rules, and is able to invest the cash collateral received in the form of interoperability fund deposits from clearing participants in certain investments, typically securities issued by pre-approved sovereign issuers and reverse repurchase agreements with overnight maturities. When investments are made in accordance with the Regulation Investment Policy, Cboe Clear Europe receives the amount of investment earnings and pays clearing participants those earnings minus a set basis point cost of collateral. As Cboe Clear Europe is able to direct the investment of the cash interoperability fund deposits received from the clearing participants within the program parameters and receives an economic benefit from those investments, these amounts are included in the Margin Deposits, Clearing Funds, and Interoperability fund captions in the condensed consolidated balance sheets and the related interest income and expense is recorded in other revenue and other costs of revenue respectively on the condensed consolidated statements of income.

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The details of our margin deposits, clearing funds, and interoperability funds as of September 30, 2023 and December 31, 2022, are as follows (in millions):

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​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2023
​		Margin Deposits			Clearing Funds			Interoperability Funds
Central bank account	​	$	496.0	​	$	88.9	​	$	345.9
Reverse repurchase and other	​	​	71.5	​	​	4.1	​	​	302.5
Cash contributions	​	​	567.5	​	​	93.0	​	​	648.4
Non-cash contributions (1)	​	​	426.0	​	​	44.3	​	​	241.3
Total	​	$	993.5	​	$	137.3	​	$	889.7

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​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2022
​		Margin Deposits			Clearing Funds			Interoperability Funds (2)
Cash contributions	​	$	426.9	​	$	103.4	​	$	376.0
Non-cash contributions (1)	​	​	338.2	​	​	38.6	​	​	89.3
Total	​	$	765.1	​	$	142.0	​	$	465.3

(1) These amounts are not reflected in the condensed consolidated balance sheets, as Cboe Clear Europe does not have the ability to sell or repledge the amounts absent a clearing participant default.

(2) The interoperability funds were not reflected in the condensed consolidated balance sheet as of December 31, 2022, as Cboe Clear Europe did not have the ability to invest the balances at that point in time. See the updated rule change discussed in Note 1 (“Organization and Basis of Presentation”) for additional information.

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Default and Liquidity Waterfalls

The default waterfall is the priority order in which the capital resources are expected to be utilized in the event of a default where the defaulting clearing participant’s collateral would not be sufficient to cover the cost to liquidate its portfolio. If a default occurs and the defaulting clearing participant’s collateral, including margin deposits and clearing fund deposits, are depleted, then additional capital is utilized in the following order:

● Cboe Clear Europe dedicated own resources: The Cboe Clear Europe default waterfall first utilizes its dedicated own resources in two forms and totaling 35% of Cboe Clear Europe capital requirements; the ‘first skin in the game’, equal to 25% of Cboe Clear Europe capital requirements before the use of clearing fund contributions described below and the ‘second skin in the game’, an amount between 10-25% of capital requirements as discussed in Note 16 (“Regulatory Capital”).

● Clearing fund: Second, the Cboe Clear Europe default waterfall utilizes traditional CCP risk mutualization, in the event that default losses fully exhaust Cboe Clear Europe’s dedicated own resources amount, whereby contributions applicable to a particular product class are applied first to any loss attributable to that product class.

● Pro rata contributions: Third, if the default losses caused cannot be covered by the first two layers, the non-defaulting clearing participants shall on demand make additional payments to Cboe Clear Europe on a pro rata basis in proportion to the amount of their clearing fund contributions to cover any such remaining losses, which is limited to an amount equal to twice their clearing fund contribution as established under Cboe Clear Europe’s rules and regulations. In this scenario, contributions applicable to a particular product class are first applied to any losses attributable to that product class.

In addition to the default waterfall, the liquidity waterfall is the priority order in which the liquidity resources are expected to be utilized for Cboe Clear Europe’s ordinary course business operations and in situations when additional liquidity resources and liquidity measures may be activated in case of a potential liquidity shortfall. Liquidity, intraday or overnight, is mainly required for securities settlement. In ordinary course business circumstances, liquidity resources include the collateral directly deposited with Cboe Clear Europe, FX swap arrangements, and reverse repurchase agreements, as well as the use of the Facility.

Cboe Clear Digital

Cboe Clear Digital is a digital asset and digital asset derivatives clearinghouse and central counterparty that provides clearing and settlement of digital asset trades. Cboe Clear Digital is registered as a Derivatives Clearing Organization (“DCO”) regulated by the U.S. Commodity Futures Trading Commission (“CFTC”) and is registered with the U.S. Treasury

Financial Crimes Enforcement Network (“FinCEN”) as a money services business (“MSB”). Cboe Clear Digital is authorized, by license or not subject to licensing, to conduct MSB services in 50 U.S. jurisdictions. Cboe Clear Digital performs a guarantee function whereby Cboe Clear Digital helps to ensure that the obligations of the transactions it clears are fulfilled. Cboe Clear Digital attempts to mitigate this risk by performing internal compliance and due diligence procedures as well as implementing internal risk controls. Cboe Clear Digital 's due diligence procedures include review of the personal and corporate information, financial position of the member participant, and monitoring of Cboe Clear Digital's risk exposure thresholds. As of September 30, 2023, Cboe Clear Digital does not expect a material loss concerning credit risk on any member participant. In accordance with the SEC issued Staff Accounting Bulletin 121 (“SAB 121”), the Company includes customer cash deposits on the condensed consolidated balance sheets in margin deposits and clearing funds and includes customer digital assets on the condensed consolidated balance sheets in digital assets – safeguarded assets, with a corresponding offset in digital assets – safeguarded liabilities.

The table below presents the Company’s cash deposits and safeguarded digital assets held on behalf of its customers for the purposes of supporting clearing transactions as of September 30, 2023 and December 31, 2022 (in millions):

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​	​	​	​	​	​	​
​	​	September 30, 2023		​	December 31, 2022
Customer bank deposits	​	$	15.8	​	$	12.7
Digital assets - safeguarded assets	​	​	40.2	​	​	22.9
Total	​	$	56.0	​	$	35.6

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The following table depicts the Company’s valuation of digital assets – safeguarded assets and safeguarded liabilities as of September 30, 2023:

​	​	​	​	​	​	​	​	​	​
Digital Asset		​	Number of Units		Valuation per Unit			Fair Value (in millions)
Bitcoin ("BTC")	​	​	849	​	$	27,072	​	$	23.0
Ethereum ("ETH")	​	​	8,653	​	​	1,681	​	​	14.5
Litecoin ("LTC")	​	​	16,613	​	​	66	​	​	1.1
Bitcoin Cash ("BCH")	​	​	3,673	​	​	236	​	​	0.9
USD Coin ("USDC")	​	​	714,550	​	​	1	​	​	0.7
Total	​	​	​	​	​	​	​	$	40.2

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- Definition

The entire disclosure for financial services, specifically for brokers and dealers, for the accounting period and at the balance sheet date. Disclosure may include amounts receivable from and payable to broker-dealers and clearing organizations, including securities failed to receive, deposits received for securities loaned, amounts payable to clearing organizations related to open transactions, floor brokerage payables and payables for commodities futures accounts liquidating to an equity balance on a broker-dealer's records. May also include disclosure on company's consolidation policy and a note indicating the amount of the broker-dealer's actual net capital and the amount of required net capital.

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-Topic 940
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