Audit Advisory Notices
To Chief Financial Officers, Chief Compliance Officers
From Audit Department, Clearing Division
Subject CME Memberships and Shares
Notice Date 2006-01-31
Notice Number 06-01
Effective Date 2006-01-31

Chicago Mercantile Exchange Inc. (“CME”) recently announced a reduction in the requisite number of Class A Shares of Chicago Mercantile Exchange Holdings Inc. (“CME Holdings”) that clearing members are required to have assigned for clearing purposes from 30,000 to 15,000 shares.   As such, 3,000 Class A shares will be released to existing clearing members over a five month period beginning February 1, 2006.  Previous Audit Information Bulletins 03-01, 03-03 and 04-01 discussed the mechanics of CME memberships and shares, how to record them on the financial statements, and their acceptability for performance bond.  This bulletin updates and further clarifies the recording of memberships and shares on financial statements.

Financial Statement Presentation

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 – Exchange memberships at cost or FOCUS Line 12.B. – 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 owned by the firm are subject to claims of CME, they must be recorded as non-current (non-allowable). 

Excess Class A Shares which are not restricted (shares which are available for sale including shares released by CME as part of the share reduction) must be recorded as a current (allowable) asset at market value.  If the securities are held at Computershare (CME Holding’s transfer agent) or in a bank safekeeping account, the securities should be recorded on 1-FR Line 3.A. - Securities, at market value: Firm owned.  If the securities are held at a broker-dealer or an FCM, the securities should be recorded on 1-FR Line 7.A. - Receivables from registered FCMs, Net Liquidating Equity.    For broker-dealers, the securities may be reported on FOCUS Line 7.E. Securities and spot commodities owned, at market value: Stock and warrants but can be reported on other lines as well.    

Excess Class A Shares are subject to a capital haircut, currently 15% of market value, and may be subject to a concentration haircut if the clearing member’s capital is concentrated in stock of CME Holdings.   Refer to SEC Rule 15c3-1(c)(2)(vi).

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, are not an allowable performance bond asset.

Unrestricted Class A Shares are not acceptable for performance bond or security deposit collateral by CME’s Clearing House.    

If you have any questions, please call the Audit Department at (312) 930-3230.