Chicago Mercantile Exchange

Clearing House Advisory Notice

99-65

July 21, 1999

TO: Clearing House Personnel

ATTN: Back Office Managers

Margin Managers

Service Bureau Representatives

FROM: Risk Control Department

SUBJECT: Short Option Minimum Performance Bond Calculations

The Board of Directors has approved a change in the short option minimum performance bond calculation. The short option minimum is a minimum performance bond requirement for portfolios containing short options to ensure that these options have at least some margin requirement, even though they may show little risk under the SPAN® margining methodology. Currently, the SPAN margining system aggregates the number of short calls and short puts positions in each commodity to arrive at the total number of short option positions, and then multiplies that number by some dollar amount to arrive at the short option minimum rate.

Beginning on July 23, the CME will introduce a new method to calculate the short option minimum in Clearing 21® and in SPAN. The new method will take the greater of the number of short calls or short puts, and then multiply that number by some dollar amount to arrive at the short option minimum rate. This will reduce performance bond requirements for members and customers who are being charged the short option minimum requirement and have both short calls and short puts.

The service bureaus are aware of the change to the short option minimum method, but are unlikely to implement this change by July 23. In the interim, firms may use PC-SPAN to calculate an adjusted performance bond requirement for those are accounts that are charged the short option minimum requirements.

Please contact Kim Taylor, Senior Vice President at (312) 930-3156 or Dale Michaels, Risk Manager at (312) 930-3062 if you have any questions regarding this change to short option minimum calculations.