Audit Advisory Notices
To Chief Financial Officers and Chief Compliance Officers
From Audit Department Clearing House Division
Subject CME Memberships and Shares
Notice Date 2003-01-17
Notice Number 03-01
Effective Date  

Recently, we have received several inquiries concerning the mechanics of CME memberships and shares, how to record them on financial statements, and their acceptability for performance bond.

Background

CME demutualized on November 13, 2000 and subsequently created a holding company, Chicago Mercantile Exchange Holdings Inc. ("CME Holdings") on December 3, 2001.  As a result of these events, memberships were converted into memberships and shares in CME and, with the holding company restructuring, into shares of CME Holdings.

Memberships converted into bundled memberships and shares as follows:

CME  -  CME Membership + 17,999 Class A Shares + 1 Class B-1 Share

IMM   -  IMM Membership + 11,999 Class A Shares + 1 Class B-2 Share

IOM   -  IOM Membership + 5,999 Class A Shares + 1 Class B-3 Share

GEM  -  GEM Membership + 99 Class A Shares + 1 Class B-4 Share


 

Class A Shares (representing equity and voting rights) and Class B Shares (representing equity and voting rights and, in addition, certain voting rights concerning "Core Rights" and the election of Directors as detailed in the Prospectus) represent ownership in CME Holdings.  CME, IMM, IOM and GEM memberships represent trading rights in the applicable division of Chicago Mercantile Exchange.

Clearing Membership Requirements

The requirements for memberships and shares assigned for clearing purposes have not changed.  All clearing members must have 2 CME memberships and the coupled Class B-1 Shares, 2 IMM memberships and the coupled Class B-2 Shares, 2 IOM memberships and the coupled Class B-3 Shares, 1 GEM membership and the coupled Class B-4 Share and 72,093 Class A Shares assigned to it.  An assigned membership must be bundled; that is, a membership must be assigned with its associated Class A Shares.  Further, bundles must represent the original membership and associated Class A Shares derived from demutualization and the formation of CME Holdings.  Bundles cannot be created by combining the relevant number of Class A Shares with a membership.

Class A Share Restrictions

Unless the Class A Shares were offered through the Initial Public Offering ("IPO") of CME Holdings on December 6, 2002, the Class A shares are 100% restricted at this time; that is, they cannot be separately sold.  The Class A Shares can be sold only bundled with the membership and coupled Class B Share through CME's Shareholder Relations & Membership Services Department.

The trading restrictions on the Class A Shares will be lifted as follows:

  • 25% of the Class A Shares (i.e., Class A-1) become    unrestricted 180 days after the completion of the IPO (transferable on June 10, 2003)
  • 25% of the Class A Shares (i.e., Class A-2) become unrestricted 360 days after the completion of the IPO (transferable on December 7, 2003)
  • The remaining 50% of the Class A Shares (i.e. Class A-3 and Class A-4) become unrestricted 540 days after the completion of the IPO (transferable on June 4, 2004)

However, Class A Shares which are bundled with memberships and are assigned for clearing membership are 100% restricted until Class A Shares are freely transferable (all trading restrictions are lifted) on June 4, 2004. 

Class B Share Restrictions

Class B Shares in CME Holdings cannot be sold or transferred separately from the sale of the associated membership (CME, IMM, IOM, or GEM) in the Exchange.  That is, Class B Shares must be sold or transferred with the associated CME, IMM, IOM, or GEM membership.  Further, no membership in the Exchange may be sold unless the purchaser also acquires the associated Class B Share.  Class B Shares and the associated membership may, however, be sold separately from Class A Shares at any time unless the shares are assigned for clearing purposes.

Financial Statement Presentation

At this time, CME memberships and shares assigned for clearing purposes must be recorded as a non-current (non-allowable) asset at original cost on 1-FR Line 15 ¨C Exchange memberships at cost or FOCUS Line 12.B. ¨C Memberships in exchanges: Owned at cost, as appropriate.

Memberships and the associated Class B Shares held in excess of that required for clearing purposes must be recorded as a non-current (non-allowable) asset at original cost on 1-FR Line 15 or FOCUS Line 12.B. at cost, as appropriate.  As memberships and the associated Class B Shares owned by the firm are subject to claims of CME they must be recorded as non-current (non-allowable).

Further, excess Class A Shares which are restricted must be recorded as a non-current (non-allowable) asset at original cost on 1-FR Line 15 or FOCUS Line 12.B. as appropriate. 

Class A Shares which are not restricted may be recorded as a current (allowable) asset at market value on 1-FR Line 3.A. Securities, at market value: Firm owned and FOCUS Line 7.E. Securities and spot commodities owned, at market value: Stock and warrants, as applicable.  Such Class A Shares are subject to a capital haircut in accordance with SEC Rule 240.15c3-1, currently 15% of market value.  To determine the cost basis of such Class A Shares, please consult your public accountants.

Class A Shares as Acceptable Performance Bond

Unrestricted Class A Shares in CME Holdings are acceptable for performance bond under Rule 930.C. at the customer level; that is, from the customer to the firm.  Such shares must be and remain unencumbered by third party claims.  For performance bond purposes, unrestricted Class A Shares shall be valued at market value less applicable haircuts as set forth in SEC Rule 240.15c3-1, currently 15% of market value.  Note:  Memberships, representing the trading rights in the different divisions of CME, and the associated Class B Shares are not an allowable performance bond asset.

If you have any questions, please call the Audit Department at (312) 930-3235 or e-mail us at audits@cme.com.