• Margin cycles could increase, making derivatives trades safer
  • CME clearing firms to introduce Dwolla to all of Wall Street

CME Group Inc. and Dwolla Corp., a digital-payment network, have struck a deal that will allow the exchange’s users to send and receive collateral payments in real time throughout the trading day.

The two companies have been working together on Dwolla’s first foray into the derivatives market since the world’s largest futures exchange invested in the company in 2014, Dwolla Chief Executive Officer Ben Milne said in an interview. Payments will move over Dwolla’s network immediately rather than the three to five days it can take for funds to travel over the Automated Clearing House system, according to a description of the service on CME’s web site.

“Speed is certainly at the heart of it,” Milne said. “We’ve got a lot of exciting work to do to not only replace ACH but wire transfers,” he said.

CME requires margin payments to be sent to its clearinghouse several times a day to cover losing derivatives positions or pay off winning trades as prices move. The members of CME’s clearinghouse include all of the world’s largest banks. Clients of those firms such as asset managers, hedge funds and insurance companies are also on the network. That would give Dwolla an inroad to introduce its payment system to Wall Street.

“With its established customers and proven real-time systems, Dwolla’s technology provides CME Group with an innovative platform to deliver secure and sophisticated payment services to our clearinghouse member firms,” Sunil Cutinho, President of CME Clearing, said in an e-mailed statement announcing the deal today.

To date, Dwolla’s financial customers have included a credit union in Iowa and Banco Bilbao Vizcaya Argentaria SA, Milne said. The deal with CME could mean the exchange is considering moving toward a more real-time system rather than conducting margin calls two or three times a day. The less time between margin cycles, the safer that trading at CME would become, as the clearinghouse would face less time between losing trades building up and securing the collateral to back them.

“The beautiful part of a real-time system is it makes that possible” to collect margin more often during the day, Milne said. “That option becomes available for the first time.”

The development is the latest success for Dwolla, which began in 2010 as a two-person start-up in Iowa. Now the company processes more than $1 billion a year in payments and counts Andreessen Horowitz, Union Square Ventures, Thrive Capital and Village Ventures among its early investors. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

The Midwest roots of both companies may have helped cement the deal, Milne said. “Maybe stylistically we get along really well with CME because of the Midwest connection,” he said. There’s also an element of being at the right place at the right time. “We have a solution from a technological perspective and they have a market need for it,” Milne said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE