Chicago Mercantile Exchange

Clearing House Advisory Notice

99-112
December 22, 1999

IMPORTANT MEMORANDORM

TO: Clearing Member Firms

Attention Chief Financial Officers

Back Office Managers

FROM: CME Clearing House

SUBJECT: Banking and Asset Management Contingencies

The purpose of this memorandum is to outline the management approach that the Clearing House has undertaken with respect to banking and asset management contingencies associated with the year-end and Y2K concerns. Of course, given the scope of the Y2K compliance efforts of the CME, the futures industry, and of the banks that serve the futures industry, the "what if" scenarios that are the object of the Y2K contingency planning effort of the CME fall into the category of "highly unlikely events".

However, the clearing membership of the CME should feel comfortable that the Y2K contingency plan of the Clearing House will enable it to minimize the impact of any Y2K-induced operational failures during or after the New Year weekend which impede the ability of the CME or its clearing membership to process performance bond collateral or cash payment transactions as per normal.

# Staffing and Communications

The Clearing House is normally staffed on a 24-hour basis throughout the workweek. During the week of Monday, December 27, 1999, and the week of Monday, January 3, 2000, Clearing House staff coverage will be expanded. After regular business hours and during the New Year weekend, Clearing House staff may be reached by phone at (312) 930-3170, or by fax at (312) 930-3187.

Additionally, the CME Y2K Command Center will be operational around the clock from Wednesday, December 29, 1999, through Sunday, January 9, 2000, inclusive of the New Year weekend. During the December 29, 1999 – January 9, 2000 timeframe, CME Y2K Command Center staff may be reached by phone at (312) 930-2022, or by fax at (312) 930-3026.

# Performance Bond Requirements

The CME has no plans for across-the-board margin increases over the millennium weekend period. The Performance Bond Committee will meet prior to the end of the year and review market volatility on a product-by-product basis. If warranted, some products’ margins may be increased, but increases would be due to volatility, not Y2K reasons.

# General Operating Procedure and Performance Bond Collateral

The CME's markets will close early on Friday, December 31, 1999. Intra-day settlement cycle mark-to-market pay/collect and performance bond call/release information will be available to clearing firms during the usual time frame of 12:15 – 12:30 p.m. While processing schedules for performance bond collateral transaction purposes will generally follow established deadlines, end-of-day processing deadlines pertaining to trade and position management will generally be scheduled earlier in the day than normal. For example, the final reconciliation trade match deadline will be 3:30 p.m., while the deadline for option exercise and PCS file submission will be 4:00 p.m. Information will be forthcoming which details the operational schedules contemplated by the Clearing House at year-end.

However, aside from generally earlier processing schedules contemplated on Friday, December 31, 1999, the CME intends to pursue a "business as usual" approach to the conduct of business on Friday, December 31, 1999, and on Monday, January 3, 2000. Consistent with this approach, the Clearing House does not plan to make any recommendations to any firm as to either the amount or the composition of the firm's performance bond collateral on deposit with the Clearing House during the days and weeks before and after the New Year weekend. This having been said, clearing firms should carefully assess their collateral position with the Clearing House at year-end. For most clearing firms, it will probably be prudent to minimize performance bond collateral transactions with the Clearing House on Friday, December 31, 1999, and Monday, January 3, 2000. Additionally, clearing firms that desire to post excess collateral with the Clearing House during this general time frame are welcome to do so, but this is a decision that the CME leaves to the discretion of each clearing firm.

# Performance Bond Collateral and Contingencies

The vast majority of the performance bond collateral on deposit with the CME is in the form of U.S. Treasury securities. These financial instruments are dependent on a variety of computer system infrastructures in order to be delivered between the bank accounts of the Clearing House and the bank accounts of the clearing membership of the CME. In the unlikely event that one these computer systems suffers an outage due to a Y2K-induced operational failure, the Clearing House can be counted upon to work diligently with each of its clearing firms to ensure that collateral transactions are processed as requested. Additionally, the Clearing House is prepared to be flexible with its collateral policies as events may warrant. For example, standard policies limiting the amount of letters of credit and other forms of performance bond collateral that any one firm may utilize to satisfy its performance bond obligations with the Clearing House may be relaxed. However, it is important to note that specific actions that the CME may take with respect to any particular situation are intended to be short-term in nature, and will be dependent on circumstances prevailing at the time.

# Banking Relationships

Many CME clearing firms have incorporated the concept of “secondary settlement bank” relationships into their Y2K contingency planning. In other words, should a firm’s primary provider of CME-related banking services suffer a Y2K-induced operational failure, a secondary, back-up bank could be immediately called upon to effect payments and collateral processing to and from the bank accounts of the CME. The CME has supported this initiative, and has worked continually with its clearing membership over the course of the last three months to coordinate the establishment of secondary settlement bank relationships.

Sixty per cent of the CME’s clearing membership, which includes all of the largest of the CME’s clearing firms, have registered their secondary settlement bank relationships with the Clearing House. The Clearing House is in the final stages of confirming secondary banking relationships with the CME’s network of settlement banks. Clearing firm secondary settlement bank relationships have been incorporated into the Y2K contingency operational plan of the Clearing House. The circumstances under which these secondary banking relationships would be activated are such that the decision to implement them would be a measure of the last resort. However, in a worst case scenario, utilization of secondary banking relationships will minimize financial risk to the Exchange and to its clearing membership at large.

## Clearing Contingency Processing

In the unlikely event that the CME clearing system experiences Y2K related problems, the Clearing House will utilize a PC-based system on a contingency basis to evaluate performance bond requirements and estimate settlement variation payments. This contingency system will, if necessary, be used by the Clearing House in lieu of normal, mainframe-based systems to provide the information necessary for the Clearing House to issue instructions to settlement banks to remove accumulated credit exposure from the system. An abbreviated set of clearing reports will be produced on a contingency basis for clearing members as well.

The Clearing House highly recommends that all clearing members download the intra-day Trade Register machine readable file on December 31, 1999 and January 3, 2000. This report is produced daily as a result of the intra-day settlement cycle. Although clearing members typically do not use the intra-day Trade Register, this Trade Register could be a valuable tool in a contingency situation.

The CME has every confidence that the futures industry is ready for the challenges that are posed by the Year 2000. The implications of the Year 2000 challenge are, however, multi-dimensional in nature and global in scope. Any thoughts or suggestions that you may have as to how the CME may better prepare for this historic event are appreciated.

Inquiries concerning any of the above can be directed to Tim Doar, Vice President, Financial Management, at (312) 930-3162, or to Tim Golomb, Director, Financial Management, at (312) 930-3194.