As a continuation of the harmonization of the rules of the Chicago Mercantile Exchange Inc. (“CME”), Chicago Board of Trade, Inc (“CBOT”), New York Mercantile Exchange Inc. (“NYMEX”) and Commodity Exchange, Inc. (“COMEX”) (collectively “Exchanges”), changes were made recently to the Exchanges’ Rules for clearing and corporate member firms. These changes will be effective on September 1, 2010.
Generally, most of the changes to the Exchanges’ Rules are for harmonization, clarification and language consistency purposes but a summary of the more significant changes is presented below.
CME Corporate Equity Member Firm converted to CME Rule 106.J. Equity Member Firm
Under current CME Rules, CME Corporate Equity Member Firms (“CEM”) are “clearing” member firms of CME. These clearing member firms:
In addition, CME CEMs are required to meet Exchange clearing membership and share requirements (i.e. own/assign two CME Division memberships, two IMM Division memberships, two IOM Division memberships, one GEM Division membership and 8,000 shares of CME Group), deposit a minimum guaranty fund contribution of $500,000 with CME Clearing, submit annual certified financial statements to the Audit Department and are subject to clearing house assessments under CME Rule 802 and clearing member withdrawal procedures under CME
Rule 913. CME CEMs and their 100% wholly owned subsidiaries are eligible to receive Exchange fee benefits on their proprietary trading when the trading activity is conducted in accordance with CME Group’s fee policies.
Toward the goal of harmonization of the member firm requirements among the Exchanges, CME Rules were recently changed and the member firm status of all CME CEMs will change. Effective September 1, all CME CEMs will be converted to “CME Rule 106.J. Equity Member Firms” (“EMF”), a CME corporate member firm. This change harmonizes the requirements of CME’s equity non-clearing member firms with the CBOT and NYMEX equity non-clearing/corporate member firms.
The Exchange membership and CME Group share assignment requirements of (including independent assignments) and the Exchange fee benefits received by CME Rule 106.J. EMFs will not change and will remain identical to those of CME CEMs. However, CME Rule 106.J. EMFs:
In addition, all 100% wholly-owned subsidiaries of CME Rule 106.J. EMFs will be eligible to receive Exchange fee benefits on their proprietary trading activity when the activity is conducted in accordance with CME Group fee policies. The rules for CME Rule 106.I. Affiliate Member Firms have been modified to provide that affiliates of CME Rule 106.J. EMFs are eligible for Exchange fee benefits. The rules for CME Rule 106.S. Family of Funds Member Firms have been modified to provide that Exchange fee benefits apply to the trading activity of up to five funds within the family of funds managed by the same investment management company as a CME Rule 106.J. EMF which is a hedge fund. Thus, the subsidiaries and affiliates or qualified funds of CME Rule 106.J. EMFs will continue to receive the identical Exchange fee benefits that they received when the firm was a CME CEM.
CME Group fee policies have also been modified to provide that traders on a CME Rule 106.J. EMF’s Exchange memberships may receive their compensation in any manner including a W-2, 1099-MISC, 1099-B, or K-1 for their (not of a team/division) trading activity of the CME Rule 106.J. EMF’s account. CME Group’s most recent fee policy bulletin is on our Web Site at: http://www.cmegroup.com/company/membership/files/clearing-fees.pdf
This member firm status conversion will result in no change in Exchange fee rates or benefits received by CME CEMs, their 100% wholly-owned subsidiaries, affiliates eligible for member firm benefits under CME Rule 106.I. Affiliate Member Firm or qualified funds eligible for Exchange fee benefits under Rule 106.S. Family of Funds Member Firm. In addition, Clearing Members will not need to make any changes or modifications in the Exchange Fee System for this conversion and the conversion will be transparent to them.
Independent Assignments of Memberships and/or Shares
The Exchanges’ Rules now allow for 50% independent assignments of Exchange memberships (where two or more Exchange memberships are required) and CME Group shares for CME, CBOT, NYMEX and COMEX corporate member firms. This is consistent with the current independent assignment requirements of CME, CBOT, NYMEX and COMEX clearing members.
CBOT Member Firm Categories
The CBOT clearing and Rule 106.J. equity member firm category of “Closely Held” has been eliminated for firms approved after July 1, 2010. Existing clearing and Rule 106.J. Equity Member Firms which qualify as Closely Held member firms as of June 30, 2010 will be grandfathered with such designation.
The categories within CBOT corporate memberships (i.e. Equity FCM, Equity Corporate Member and Trading FCM) have been eliminated as no such designation exists for CME and NYMEX corporate member firms.
These changes result in no change in Exchange fee benefits received by these member firms.
Exchanges’ Rule 130. Required Notices by Member Firms and Suspension of Member Firm Privileges and Rule 974. Failure to Meet Minimum Financial Requirements
Current Exchanges Rule 130 and 974 provide that a corporate member firm may be suspended by Exchange staff if it has filed for bankruptcy or other conditions occur. The Rule change will provide that the member firm may be suspended if it has notified the Exchange or the Exchange becomes aware of a significant event as defined in Rule 442 which includes a bankruptcy filing.
Rule 130 will also require corporate member firms to notify the Audit Department in the event of a material change in key personnel who are responsible to act on behalf of the member firm.
The changes to the Exchanges’ Rules were published in CME Group’s Special Executive Report on August 2, 2010 and are on CME Group’s Web Site at: http://www.cmegroup.com/rulebook/rulechanges.html.
If you have any questions, please call the Audit Department at (312) 930-3230 or at (212) 299-2120.