With everyone looking for the first big financial collapse of the coronavirus market meltdown, all eyes turned to Ronin, a Chicago-based proprietary trading firm, last Friday. Ronin is (was?) a direct clearing member of the CME. As of Sunday morning, though, there was no indication that the firm was failing, that its liabilities exceeded its assets or even that it was unable to pay (any of) its obligations.
On Friday the CME Group announced that it had auctioned off clearing member Ronin’s portfolios, saying:
The auction process was completed this morning, March 20, 2020. Though Ronin is a direct clearing member, it does not handle customer business; and no clients were impacted by the auction. The firm was unable to meet its capital requirements going forward.
The CME said that Ronin could not meet its capital requirements – not that it had failed to make timely margin payments. Capital is not “margin” or “performance bond.” Furthermore, there is no way to tell what Ronin’s capital requirement was at the time. Clearing members must have $5 million in adjusted net capital but the clearing division may assign a higher level.
The CME’s statement does not imply that there were any immediate issues with Ronin’s potential solvency. CME says the fact that the firm “was” unable to meet its capital requirements does not mean it is not able to meet those requirements after the auction. The auction may have been one of several steps the firm and the exchange took to address the capital shortfall last week. The CME’s statement does not say that Ronin’s clearing or trading memberships were impaired.
According to an “Important Notice” from the Depository Trust & Clearing Company (DTCC), also on Friday, its Fixed Income Clearing Corporation’s Government Securities Division (GSD) said it would no longer “act for” for Ronin and named two specific accounts by number. The DTCC notice says that the division was acting in accordance with its Rule 21, “RESTRICTIONS ON ACCESS TO SERVICES.” Rule 21 establishes a variety of bases for the GSD to deny access to a “Member.”
According to Rule 21 the GSD may suspend a Member’s access according to Rule 21 if “(e) the Board has reasonable grounds to believe that the Member is in or is approaching significant financial or operational difficulty or otherwise will be unable to meet its obligations to the Corporation; (f) a GCF Clearing Agent Bank has determined to cease to extend credit to the Member.” The DTCC did not indicate which, if either, rule it applied to Ronin.
Among the sparse relevant documentation regarding Ronin that is available to the public trying to figure out what is going on is Friday evening’s Issues and Stops report from the CME. According to the cumulative report “YEAR TO DATE ISSUES AND STOPS,” published at 9:51 Friday night, Ronin had issued intentions to deliver on 3604 10-year T-note, 2,064 10-year ultra T-note, 1049 and 5-year T-note futures contracts for March 2020. It was clear from the Issues and Stops reports whether Ronin had already delivered during March.
Around 2:45 Friday afternoon, CNBC reported that Ronin’s difficulties were tied to losses on its VIX positions. VIX futures and options trade at Cboe, but Ronin’s losses on those contracts could conceivably have caused its capital to fall below the level it is required to maintain by CME Clearing. CNBC’s report was based on unnamed sources. A Cboe spokeswoman noted that Ronin is a customer of Cboe and that it trades a number of Cboe listed products.
OCC clears trades on Cboe, including VIX futures and options, but Ronin was not a member of OCC.
Going into the new trading week, there are few things known for sure about Ronin: CME auctioned its portfolios last week and DTCC’s government securities division stopped doing business with it. As of Friday night, Ronin still appeared to be a trading member, if not still a direct clearing member of CME. Ronin could continue to trade as a customer of an FCM clearing member and could conceivably return to its direct clearing status once it has satisfied the CME of its financial capacity.