Clearing House Advisory Notice
To | Chief Financial Officers, Back Office Managers, Margin Managers
From | Clearing House Division
Subject | Restructuring of CME Financial Safeguards Package
Effective Date | 01/11/01
Notice Number | 01-06
Chicago Mercantile Exchange Inc. (CME) will implement a new financial safeguards package that will both strengthen the Clearing House and eliminate CME�s unlimited assessment powers. The new package, providing the exchange with $2.6 billion in resources, is designed to further enhance CME�s financial safeguards system, continue to protect market participants in periods of extreme market stress and respond to customer needs. The new package will increase the amount of liquid resources available in the unlikely event of a clearing member firm default on its financial obligations to the CME Clearing House. Previously, liquid resources were available exclusively from the CME security deposit pool of $330 million. Under the new plan, CME is increasing the security deposit pool from 1.75% to 3.75% of total aggregate risk performance bond. Given current performance bond requirement levels, this change will result in a security deposit pool of approximately $700 million. CME will also obtain $500 million in default insurance that will stand ahead of a large portion of the clearing member funds backing the Clearing House guarantee.CME will fund the default insurance, thereby bearing the cost of a larger portion of the Clearing House capital backing than is currently the case. CME assessment powers of its clearing firms will ultimately be limited to an amount equal to 200% of a clearing member�s security deposit requirement. Given a $700 million security deposit pool, the total assessment power across all clearing members would total $1.4 billion. Placing a limit on assessment powers helps clearing firms define their maximum exposure to CME while maintaining a fund large enough to ensure the financial integrity of CME�s Clearing House. The changes in the security deposit pool and the assessment powers will be phased in over a period beginning on April 1, 2001 and ending in September, 2002. The phased approach will provide clearing members with seven calendar quarters to prepare for the increased security deposit requirements. Details of how this program affects each individual clearing member, including estimates of the phased in security deposit contributions, will be distributed to each clearing member within the next few weeks. If you have questions about these changes, please contact Kim Taylor, Managing Director, Risk Management, at (312) 930-3156 or ktaylor@cme.com or Dale Michaels, Director, Risk Management, at (312) 930-3062 or dmichael@cme.com.