Clearing and Globex Fees for Proprietary Accounts

CME’s marketplace, both the trading environment and the customer base, has evolved and expanded over the years. We have seen a tremendous growth in both clearing and corporate membership among proprietary trading groups which trade our markets electronically. Responding to this growth, CME has announced changes to proprietary trading fee policies effective October 1, 2006 concerning independent contractors and owner traders of member firms. As such, we believe it is beneficial to summarize our requirements for proprietary trading activity which is entitled to preferential clearing and Globex fees, collectively fees. The policies below incorporate the proprietary trader policy changes effective October 1, 2006.

Clearing Member Proprietary Account

In order to obtain equity member clearing fees, CME rules require that the proprietary account of clearing members, including inactive clearing members, Rule 106.I. members and Rule 106.S. members must be 100% owned by the firm. A proprietary account, owned 100% by the member firm, is evidenced through:

Only the firm’s capital may be at risk of loss; that is, no traders may make any contributions or payments to the member nor have any capital at risk in connection with their trading of the member’s proprietary accounts.
All trading activity must be solely for the benefit of the member or one of its 100% owned subsidiaries. No other individuals or entities may have any ownership interest in these accounts.
All funds contributed to and traded under the firm are subject to loss from any and all trading activity of the firm.
All profits and losses of the account are written off to income of the firm.
All profits and losses of the account are taxed to the firm.

For Rule 106.I./S. corporate members to receive equity member fees, all proprietary trading must be conducted within the division of membership held. Proprietary trading activity of a Rule 106.I./S. corporate member outside the division of membership held will receive non-member customer fees.

In addition to the account being defined as a proprietary account, in order to receive equity member fees, the proprietary trading activity must be conducted by traders including operators/administrators of Automated Trading Systems (“ATS”) that are:

These accounts should be coded in the Exchange Fee System (“EFS”) as proprietary accounts of the clearing or Rule 106.I./S. member, as appropriate, and the operator IDs of the above individuals must be appropriately registered as Clearing Firm Proprietary Traders. Clearing Firm Proprietary Traders must be further defined as “W-2 Employee”, “Commodity Trading Advisor”, “Independent Contractor 1099-MISC” or “Owner w/ $500K+ Interest” as applicable. In addition, for operators/administrators of an ATS, the “ATS” box on the registration screen must be checked. These accounts are eligible for Globex fee capping and volume-based tiered pricing with other accounts of the firm.

A clearing member or Rule 106.I./S. member may have a joint account with an equity or lessee member and receive preferential fees on contracts under the lowest division of membership held. Further, a proprietary account traded by an equity/lessee member who is not a W-2 employee or 1099-MISC independent contractor/self-employed individual is assessed fees based on the lowest membership status of the firm and the equity/lessee member.

These accounts should be coded in EFS with the equity or lessee member as the account owner. These accounts are eligible for Globex fee capping but are not considered with other proprietary accounts of the firm for volume-based tiered pricing.

Individual owners of clearing members and Rule 106.I. members who maintain at least $500,000 of bona-fide capital in the firm may receive equity member fees on their trading activity of the firm’s proprietary account.

Individual owners of clearing members and Rule 106.I. members who do not maintain at least $500,000 of bona-fide capital in the firm are not eligible to receive equity member fees unless their trading profitability is reported to them on an IRS Form W-2 or 1099-MISC.

Individual owners of clearing members and Rule 106.I. members with less than $500,000 of bona-fide capital who trade the proprietary account of the clearing or Rule 106.I. member and whose trading profitability is reported on a form other than an IRS Form W-2 or 1099 MISC (e.g. an IRS Form K-1) are assessed fees based on the lowest division of membership held by the owner and the firm. If such owners are not equity or lessee members themselves, non-member customer fees will apply and these accounts should not be registered in EFS, are not eligible for Globex fee capping and will not be considered with other accounts of the firm for volume-based tiered pricing.

Further proprietary traders which are compensated through an IRS Form W-2 or 1099-MISC for their trading profitability should be registered in EFS as “W-2 Employee” or “Independent Contractor 1099-MISC”, as appropriate, even if they are an owner of the firm with less than $500,000 in bona-fide capital.

Effective October 1, 2006, discounted fees are no longer available to owners of a clearing member that do not maintain $500,000 of bona-fide capital in the firm and whose trading profitability is reported on an IRS Form K-1.

Previously, independent contractors and other self-employed traders of a firm’s proprietary account were entitled to discounted fees which were higher than the equity member fees. Effective October 1, 2006, 1099-MISC independent contractors/self-employed individuals may receive the equity member fees when trading a clearing member or Rule 106.I./S. member’s proprietary account.

The proprietary trading activity of independent contractors and other self-employed individuals whose compensation is reported on an IRS Form 1099 which is not a 1099-MISC (e.g. an IRS Form 1099-B) or equivalent document of a foreign jurisdiction will be assessed fees based on the lowest division of membership held by both the firm and the independent contractor/self-employed individual. Traders receiving compensation reported on a Form 1099-B are regarded as “holders” of the positions and, as such, the account would not qualify as a proprietary account of the trading firm.

If the Form 1099-B independent contractor/self-employed individual is not an equity or lessee member of the Exchange and is trading a proprietary account of a clearing member or Rule 106.I./S. member, non-member customer fees will apply. These accounts should not be registered in EFS, are not eligible for Globex fee capping and will not be considered with other accounts of the firm for volume-based tiered pricing.

In addition to the account being defined as a proprietary account, the proprietary trading of a clearing member or Rule 106.I./S. member is entitled to equity member clearing fees on all contracts when an individual owning and holding a membership or the firm’s Rule 106.F. or Rule 106.I./S. member executes it on the floor of the Exchange in open outcry.

The proprietary trading of a clearing member or Rule 106.I./S. member conducted with discretion by a Rule 106.D. lessee member on the floor of the Exchange in open outcry will be charged Rule 106.D. lessee clearing fees regardless if the lessee member is a clearing member W-2 employee or 1099-MISC independent contractor/self-employed individual. The Rule 106.D. lessee member must be registered as an account controller for the proprietary account in CME’s EFS.

In order to obtain Rule 106.H. or Rule 106.R. corporate member fees, CME rules require that the proprietary account of the corporate member must be 100% owned by the firm. A proprietary account, owned 100% by the corporate member firm, is evidenced through:

In addition to the account being defined as a proprietary account, in order to receive Rule 106.H. or Rule 106.R. corporate member fees, the proprietary trading activity must be conducted by traders including operators/administrators of ATSs that are:

For Rule 106.H. corporate members to receive corporate member fees, all proprietary trading must be conducted within the division of membership(s) held. Proprietary trading activity of a Rule 106.H. corporate member outside the division of membership(s) held will receive non-member customer fees.

For Rule 106.R. corporate members to receive corporate member fees, all proprietary trading must be conducted in accordance with the Question & Answer Guide for Electronic Corporate Members under Rule 106.R. which may be found on CME’s Web site at http://www.cme.com/files/ECMQ&A.pdf.

Affiliates and subsidiaries of Rule 106.H. and Rule 106.R. corporate members are not entitled to the membership benefits of the corporate member.

The proprietary accounts of Rule 106.H. and 106.R. members should be coded in EFS as proprietary accounts of the corporate member and the operator IDs of the above individuals must be appropriately registered. In addition, for operators/administrators of an ATS, the “ATS” box on the registration screen must be checked. These accounts are eligible for volume-based tiered pricing with other accounts of the corporate member.

Previously independent contractors and other non-W-2 employee traders of a Rule 106.H. corporate member’s proprietary account were charged non-member customer fees. Effective October 1, 2006, 1099-MISC independent contractors/self-employed individuals may receive the Rule 106.H. corporate member fees when trading a Rule 106.H. corporate member’s proprietary account.

The proprietary trading activity of independent contractors and other self-employed individuals whose compensation is reported on an IRS Form 1099 which is not a 1099-MISC (e.g. an IRS Form 1099-B) or equivalent document of a foreign jurisdiction will be assessed fees based on the lowest division of membership held by both the corporate member and the independent contractor/self-employed individual. Traders receiving compensation reported on an IRS Form 1099-B are regarded as “holders” of the positions and, as such, the account would not qualify as a proprietary account of the trading firm.

If the IRS Form 1099-B independent contractor/self-employed individual is not an equity or lessee member of the Exchange and is trading a proprietary account of a Rule 106.H. or Rule 106.R. corporate member, non-member customer fees will apply. These accounts should not be registered in EFS and will not be considered with other accounts of the corporate member for volume-based tiered pricing.

In addition, employees, owners and independent contractors of the clearing member, Rule 106.I., Rule 106.S., Rule 106.H. and Rule 106.R. corporate member must meet the following requirements:

The policies set forth herein will be strictly enforced by the Exchange. A member, clearing member, or corporate member found to have engaged in fraudulent or dishonest conduct or to have acted in bad faith will be subject to a charge of a major rule violation. Major rule violations are punishable by a fine up to $1,000,000 plus the monetary value of any benefit received as a result of the violative activity.