The CME and OCC have a cross-margining program in place that allows for the margining of a combined position in stock index futures, futures options, and cash options as a single, combined portfolio. In addition, market-makers in the securities markets are margined based on the combined risk posed by their stock and stock index futures and options. These market-maker margins (or haircuts) also have capital implications for clearing members.

On a day when the cash markets continue to decline once the CME circuit breakers are hit, the pricing discrepancy will have performance bond, cash flow, and capital implications on various market participants. CME and OCC staff have worked on a plan to alleviate the detrimental effects of a potentially uncoordinated market move. Various regulatory agencies, including the Federal Reserve, the Commodity Futures Trading Commission, and the Securities and Exchange Commission have also identified these issues.

The following outlines the circuit breaker contingency plan:

• Should an uncoordinated stock market move occur, the CME will provide the OCC with theoretical

futures and futures options prices based on the market move experienced in the cash market.

• The performance bond requirements for cross-margin participants, the market-maker haircuts, and the firm capital computations for market-makers will be based on these theoretical prices. This will keep both sides of the portfolio in line when evaluating the portfolio risk.

• The CME will also calculate the difference in futures mark-to-market between the CME settlement prices and the theoretical futures prices. This uncollected profit or unpaid loss will be used to either offset or increase the performance bond requirement for clearing level cross-margin participants.

If you have any questions, please call us at (312) 930-3230 or email us at audit@cme.com