Clearing House Advisory Notice
To | Chief Financial Officers, Back Office Managers, Margin Managers
From | Clearing House
Subject | Elimination of CME�s Unlimited Assessment Powers
Effective Date | 05/08/01
Notice Number | 01-34
As a result of Chicago Mercantile Exchange Inc. (CME) implementing a new financial safeguards package, the unlimited assessment powers of the Clearing House have been eliminated and have been replaced with a combination of higher security deposits, default insurance, and limited assessment powers. The new package continues to provide market participants with protection in periods of extreme market stress, yet also responds to customer needs. The enhanced financial safeguards package will increase the amount of liquid resources available in the unlikely event of a clearing member firm default on its financial obligations to CME�s Clearing House. To achieve the more liquid resources under the new plan, CME will be phasing in increases in its security deposit pool until October 2002. This phased approach will allow clearing members to prepare for the increased security deposit requirements. 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 after October 2002. In the interim, while the liquid resources are being expanded, CME assessment powers will be limited to 10% of the aggregate performance bond requirement at the Exchange over the 90-day period preceding the default. Each firm would then be assessed in proportion to their contribution to the aggregate security deposit at the Exchange. This limit on assessment powers will help clearing firms define their maximum exposure to CME while maintaining a fund large enough to ensure the financial integrity of CME�s Clearing House. CME will also soon 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 capital backing the Clearing House than is currently the case. Attached is the revised language for Rule 802 B., �Satisfaction of Clearing House Obligations,� that pertains to the new limited assessment powers of the Clearing House. If you have questions about these changes, please contact Dale Michaels, Director, Risk Management, at (312) 930-3062 or dmichael@cme.com. Attachment CME Rule 802 B. Satisfaction of Clearing House Obligations If the Clearing House is unable to satisfy immediately all claims against it arising out of 1) its substitution (pursuant to Rule 804) for a defaulting clearing member or a defaulting Participating Exchange, or 2) a shortfall in a Cross-Margin Liquidating Account, as described in a Cross-Margining Agreement between the Exchange and a Cross-Margining Clearing Organization; or if the Clearing House is unable to meet any of its obligations as a result of the failure of a depository, larceny, embezzlement or for any other cause, then such claim or obligation shall be met and made good promptly by the use and application of funds from the following sources in the order of priority hereafter listed, with each source of funds to be completely exhausted, to the extent practicable, before the next following source is applied. While such application of funds shall be mandatory, the detailed implementation of Rule 802.B. shall be the responsibility of the Clearing House Risk Committee with the approval of the Board. Surplus funds of the Exchange in excess of funds necessary for normal operations. The amount of security deposit required under Rule 816 from all classes of clearing members shall be applied toward meeting the said loss, in direct proportion to the total security deposit requirement of each clearing member. Proceeds from any default insurance maintained by the Exchange to the extent that such proceeds are available in a timely manner to be applied towards the default. The balance of the Clearing House loss remaining after application of the above funds shall be assessed against all clearing members (excluding any insolvent or defaulting clearing member) in the following manner: a. i. Up to and including October 10, 2002, the total amount that the Exchange may assess all clearing members (excluding any insolvent or defaulting clearing member) shall be an amount equal to ten (10) per cent of the aggregate average performance bond requirement of all clearing members (including the requirement of each defaulting or insolvent clearing member) over the ninety day period immediately preceding the event of default that triggers the assessment. ii. Each clearing member shall then be assessed an amount in a proportion that such clearing member�s security deposit requirement bears to the aggregate security deposit required of all clearing members under Rule 816. b. After October 10, 2002, each clearing member (excluding any insolvent or defaulting clearing member) shall be subject to an assessment up to an amount that does not exceed 200 per cent of such clearing member�s security deposit requirement. Any clearing member that does not satisfy an assessment, that may be made pursuant to paragraph 4 above, and in accordance with paragraph 7 below, shall be in default. Any Clearing House loss that remains as a result of such default shall be assessed pursuant to paragraph 4. If a clearing member (i) makes payment of all amounts assessed against it pursuant to paragraph 4 above and in accordance with paragraph 7 below, and (ii) replenishes any deficiency in its security deposit in accordance with Rule 802.D., it may, within five (5) business days of such payments, apply to withdraw from clearing membership pursuant to Rule 913. Immediately after the Exchange posts the clearing member�s withdrawal notice to the membership, the withdrawing clearing member shall not be subject to any other assessment pursuant to this Rule. Further, the security deposit that it has restored shall not be used or applied towards meeting any claim or obligation of the Clearing House pursuant to this Rule and shall be released in accordance with Rule 913. All amounts assessed by the Exchange against a clearing member pursuant to this Rule, during the hours in which the Federal Reserve�s wire transfer system (Fedwire) is in operation, shall be paid to the Exchange by such clearing member prior to the close of Fedwire on such day. All amounts assessed within one (1) hour prior to the close of Fedwire shall be paid to the Exchange within one (1) hour after Fedwire next opens. After payment of an assessment pursuant to this Rule, a clearing member shall charge other clearing members for whom it clears contracts or carries positions on its books to recover their proportional share of the assessment. Such other clearing members shall promptly pay the charge. To the extent that, and irrespective of, the fact that the Exchange has default insurance coverage in effect at the time of an event of default, the Exchange may nevertheless continue to utilize the resources under the priority outlined in Rule 802.B.1, B.2, and B.4. for immediate liquidity while awaiting any insurance proceeds. Any insurance proceeds so recovered by the Exchange, to the extent not required by the Exchange to cure a default, will be applied to the credit of the non-defaulting clearing members.