Topics in this issue include:

       Critical System Updates

·         UPDATED: FECPlus Testing and Production Deployment Schedule

·         Minimum Price Fluctuation Reduction for Natural Gas Products

·         Change to ClearPort Exposure Limit Calculation

·         Adjustment to Effective Date for Change to ClearPort Exposure Limit Calculation – Now Effective Saturday, May 5, 2012

      Deliveries

·         Updated List of Live Cattle Stockyards and Slaughter Plants

·         CME Group Delivery Dates for April 2012

      Events & Announcements

·         CME Clearing Collateral Diversification Requirements

·         New Reporting Requirements Regarding Gross Customer Margining

·         Verbal 17f-6 No-Action Assurance Issued by SEC Division of Investment Management for Registered Investment Companies for Interest Rate Swaps and Credit Default Swaps

·         FIA “Rate Identifier” Indicator Coming Soon

·         Review of Collateral Haircuts Advisory

·         REVISED:  Initial Requirements for Non-Hedge Cleared Swaps Customers

·         SFTP Connectivity Conversion Deadline Extension-June 1, 2012

·         Japanese Government Bonds

·         Brokerage Payment System/Give-up Payment System User Group Meeting

·         2^nd Quarter 2012 Eligible Stocks (Data from January 3^rd thru March 31^st, 2012

·         Minimum Price Fluctuation Limit Reduction for Natural Gas Contracts

·         CDS Margin Parameter Change in NR

·         NEW PRODUCT:  Western Canadian Select (WCS) Crude Oil Option - WCO

UPDATED: FECPlus Testing and Production Deployment Schedule

In response to requests from the Clearing community, the schedule for FEC+ has been amended.  Below is the deployment schedule for FECPlus for the remainder of the year:

• Testing for the FPL-compliant FIXML 5.0 API for ALL post-trade processing, including give-ups, average-priced give-ups, and cross-exchange allocations, is currently available in New Release. This includes both outbound and inbound messaging capabilities.  FECPlus in New Release will be used to manage all post-trade processing transactions.  The existing FIXML 4.4 API will no longer function for any post-trade processing in New Release.
• Thursday, May 3, 2012: Testing for the migration of ClearPort trades to FECPlus will begin in New Release.  With this change, all ClearPort trades, including CDS and OTCFX, will no longer be posted to existing FEC in New Release. There will be NO API messaging changes for these trades.
• Monday, June 4, 2012: Production launch date for migration of ClearPort trades, including CDS, to FECPlus.
• Monday, June 11, 2012: Production launch date for CMECE for ALL post-trade processing, including give-ups, average-priced give-ups, and cross-exchange allocations using the FPL-compliant FIXML 5.0 API.
• Monday, July 30, 2012: Production launch date for CME/CBT/NYMEX/COMEX for ALL post-trade processing, including give-ups, average-priced give-ups, and cross-exchange allocations using the FPL-compliant FIXML 5.0 API.
• Q3 2012: Electronic Trades will be migrated to FECPlus.  Specific dates will be disseminated as they become available.

If you have any questions or require further information please contact CME Clearing at 312-207-2525 or ccs@cmegroup.com.

Minimum Price Fluctuation Reduction for Natural Gas Products

Effective Sunday, April 15, 2012, for trade date Monday, April 16, 2012, the New York Mercantile Exchange, Inc. (NYMEX or Exchange) will reduce the minimum price fluctuation for the natural gas contracts, listed in the table below, from $0.0025 per MMBtu to $0.0001 per MMBtu.

The Exchange shall provide notification to the Commodity Futures Trading Commission of the amendments to the respective “Products and Fluctuations” rules for these contracts, in order to reflect the reduction of the minimum price fluctuation, within one week following the effective date of this change.

Please refer questions on this subject to:

Change to ClearPort Exposure Limit Calculation

Effective on April 14^th 2012, CME ClearPort will be shifting from the current RAV (Risk Account Value) algorithm to SPAN (Standard Portfolio Analysis of Risk) as the algorithm used to calculate credit usage for CME ClearPort trades.  SPAN calculates performance bond requirements by analyzing potential market scenarios and is the main margining tool employed by CME Clearing.  There are some significant differences between the current RAV algorithm and the SPAN algorithm.  In the current RAV calculation, an outright future is charged its maintenance margin rate while an option is calculated by taking the underlying future’s maintenance margin rate and multiplying it by the option’s delta.  Intra-commodity spread rates are available; however, no inter-commodity spread rates are defined in the current RAV calculation.  The SPAN algorithm takes into account both intra-charges and inter-commodity spread rates as well as volatility, time to expiration and a variety of other factors with regard to calculating margins on options.

Due to the differences between the RAV and SPAN algorithm calculations certain ClearPort accounts may see changes in their credit usage when the transition is made.  Specifically, accounts trading many inter-commodity spreads will likely see a decline in their credit usage, while accounts trading options, specifically out of the money, will likely see an increase in their credit usage.  It is recommended that clearing firms with accounts such as the above reevaluate their limits considering the items listed above.

For more information on SPAN, please see the following link http://www.cmegroup.com/clearing/risk-management/span-overview.html#works, or reach out to the Clearing Risk Management at 312-648-3888 or at Clearing.Riskmanagement@cmegroup.com.

For information on adjusting credit limits within CME Clearport, please contact the ClearPort facilitations desk at +1 866 246 9639 or +1 212 299 2457 or through email at ClearPort@cmegroup.com.

Deliveries

Updated List of Live Cattle Stockyards and Slaughter Plants

This link provides the stockyards and slaughter plants that have been approved for deliveries against the CME Group Live Cattle futures contract from February 1, 2012 through January 31, 2013.  Delivery point information and contact numbers are listed for your reference.

If there any questions, please contact the Deliveries Unit at (312) 930-3172.

CME Group Delivery Dates for April 2012

This link provides the relevant delivery dates for March 2012 Chicago Mercantile Exchange Inc., Chicago Board of Trade, New York Mercantile Exchange, Dubai Mercantile Exchange, COMEX and GreenX contracts.

Events & Announcements

As per the normal review of acceptable collateral and limits, CME Clearing is making the below changes regarding expansion and diversification requirements of collateral composition used by clearing member firms to meet performance bond requirements.

Collateral accepted by CME Clearing will be categorized as noted below. Effective with the RTH cycle on Friday, April 13, 2012, clearing member firms are permitted to meet a maximum of 40% core performance bond requirements with each of Category 2 and Category 3 assets. Also, Category 3 assets have a hard dollar limit of $3 billion per clearing member firm across settlement accounts. Category 1 assets have no requirement type limits. Please refer to the website link below for details on individual asset type limits and product class restrictions.

Clearing member firms that do not use assets in Category 3 should contact the Financial Unit for utilization of assets in Category 2 according to a 40% limit for U.S. Government Agencies, Mortgage Backed Securities, and TLGP, as well as a 40% limit for IEF5 and Letters of Credit.

Additionally, CME Clearing will no longer differentiate utilization of assets for reserve performance bond requirements. The core performance bond requirement will envelope requirements previously categorized as reserve performance bond requirements.  The reserve requirement will be phased out beginning with the RTH on Friday, April 13, 2012. There is no change to CME Clearing’s policy for concentration performance bond requirements. Each clearing member firm will be subject to core performance bond requirements and concentration performance bond requirements as applicable.

Category 1 Assets:

• U.S. Cash

·         U.S. Treasuries

·         IEF2  Money Market Fund Program (limits and diversification requirements within IEF2 program remain in effect)

Category 2 Assets:

·         U.S. Government Agencies

·         Select Mortgage Backed Securities

·         TLGP

·         IEF5 Specialized Cash Program

·         Letters of Credit

Category 3 Assets*:

·         Physical Gold

·         Select U.S. Equities from the S&P 500

·         IEF4 Specialized Collateral Program**

·         Select Foreign Sovereign Debt - Canada, France, Germany, Sweden, UK

Please call CME Clearing for availability of Foreign Cash deposits. 

*Note: The maximum allowable limit for utilization of Category 3 Assets will be the lesser of a) 40 % of core margin requirements and concentration requirements per origin and asset account or b) $3 billion per Clearing Member Firm across all settlement accounts.

**Note: Although CME Clearing is operationally ready to support the new IEF4 collateral acceptance structure, final legal documentation with custodians is pending.

Please refer to the website http://www.cmegroup.com/clearing/financial-and-collateral-management/ for further detail regarding acceptable collateral, haircuts, and limits.  For questions about requirements, please call Risk Management hotline at 312-634-3888 and questions about collateral can be directed to the Financial Unit hotline at 312-207-2594.

Introduction

This advisory details new reporting requirements for FCMs stemming from certain CFTC regulations going into effect on November 8, 2012.  There are two inter-related functional areas:  Customer Gross Margining (CGM) and LSOC (Legally Segregated, Operationally Commingled).  Customer Gross Margining will apply both to products which are under the futures regulatory regime and to products which are classified as cleared swaps for regulatory purposes.  LSOC will apply only to cleared swaps customer accounts.

Reporting for Customer Gross Margining

Customer Gross Margining will require a significant change in how derivatives clearing organizations (DCOs) calculate performance bond (initial margin) requirements for customer positions.  Specifically, under CFTC Regulation 39.13(g)(8)(i), DCOs will be required to set minimum performance bond levels as the sum of requirements calculated for each individual customer account.

This new method of customer gross margining will require CME Clearing and some other DCOs to switch from the “modified customer gross margining method” which has long been used.  Under the existing method, clearing firms categorize individual customer account positions according to the degree to which risk offsets exist, and report this data twice daily (as the “spreads” information included in the PCS submission used to determine open interest).  The new method will assure that client account risk offsets will be applied only for the benefit of each individual customer account. 

The key operational implication of Customer Gross Margining is that the DCO must know positions for all customers.  For interest rate swaps (IRS) and credit default swaps (CDS), CME Clearing already keeps positions customer by customer.  For certain other cleared swaps and for futures, however, customer positions are held in the clearing system in position accounts which typically commingle positions of many individual customers.  

For customer positions in futures and in these other types of cleared swaps, therefore, clearing firms must submit a datafile, to identify positions by individual customer, so that CME Clearing may calculate margins customer by customer.   The file must be submitted for both the end-of-day settlement cycle and the intraday cycle.  We are referring to this file as the Customer Gross Margin file, or simply the CGM file.

The industry has selected FIXML as a standard format for the CGM file.  The format is highly analogous to the FIXML PCS format widely in use.  The “firm number” in the file should be provided in exactly the same manner as is currently used for PCS submissions, and the account ID will identify the individual customer account.  Where multiple customer accounts have the same owner, the account ID may be provided as the “related master” account which ties all the detail accounts together.

For positions in expiring options:  clearing firms differ in the timing of when they process final exercises and assignments in books.  Clearing firms have a choice, therefore, in how these positions are represented in the CGM file:  either prior to final E&A processing, or after such processing.

Reporting for LSOC

Separately, new Part 22 of the CFTC Regulations, which also goes into effect on November 8, 2012, will implement a form of protection for customer cleared swaps and related collateral that has been referred to as “LSOC” (Legally Segregated, Operationally Commingled).  LSOC poses a number of additional operational requirements for FCM clearing members.  It requires that FCM clearing members report their customer positions in cleared swaps (the “portfolio of rights and obligations”, in the language of the CFTC regulation) to CME Clearing at least once per business day.  Also, if the FCM transmits to CME Clearing any collateral posted by a cleared swaps customer in excess of the amount required by CME Clearing (as permitted under CME rules), the FCM must identify, for each such customer, the value of collateral posted with CME Clearing in addition to the minimum margin requirement.

LSOC Position Reporting

For IRS and CDS, FCM clearing members already do position reporting to CME Clearing in real time, as they submit trades identified by customer and do allocations to individual customers.  But for other cleared swaps, the LSOC “portfolio of rights and obligations” mandate will require that FCM clearing firms submit an end-of-day datafile, identifying cleared swaps positions customer by customer.

CME Clearing will not require a separate datafile to be submitted for this purpose.  Rather, pending regulatory approval, the same CGM datafile of customer positions in these cleared swaps will serve two purposes: (a) for customer gross margining, and (b) for LSOC reporting of the “portfolio of rights and obligations”.

Omnibus accounts and position reporting

For futures, the Customer Gross Margining mandate does not require any changes in how clearing firms handle omnibus accounts.  Firms may continue to hold omnibus accounts on their books, and these may be fully disclosed, partially disclosed, or entirely non-disclosed.

The CGM file format supports all three of these possibilities.  If you provide an omnibus account with no detail subaccounts, this is the “entirely non-disclosed” case.  If you provide an omnibus account with detail accounts, and the sum of the detail account positions is equal to the omnibus account positions, then the omnibus account is fully disclosed.  If you provide detail accounts, but the sum of the positions in detail accounts is less than the positions in the omnibus account, then the omnibus account is partially disclosed.

For Customer Gross Margining, the calculation of the margin requirement for an omnibus account will follow long-established practices.  First, normal portfolio margin requirements are calculated for each disclosed subaccount.  The remaining non-disclosed positions are considered “naked”, and are margined without recognizing any risk offsets.  The total requirement for the omnibus account, then, is the sum of the portfolio requirements for the disclosed subaccounts, and the naked requirements for the non-disclosed positions.

For customer cleared swaps, if a domestic omnibus account is utilized, the new CFTC LSOC regulations will require the non-clearing FCM (i.e., a “Depositing Futures Commission Merchant”) to disclose to the carrying FCM (i.e., a “Collecting Futures Commission Merchant”),  which, in turn, must disclose to the  DCO: (a) “information sufficient to identify” each Cleared Swaps Customer in the domestic omnibus account; and (b) on a daily basis, each Cleared Swaps Customer’s “portfolio of rights and obligations arising from the Cleared Swaps that the Depositing Futures Commission Merchant intermediates for such customer.”   CME Clearing’s own policies require full disclosure of end customer positions for interest-rate swaps and credit default swaps.  Note that other regulatory mandates may affect omnibus accounts and cleared swaps, and that additional information on this subject will be published in the future.

LSOC reporting of additional collateral

As noted above, LSOC requires that clearing firms provide an additional daily report to the DCO for customers with positions in cleared swaps.  For each such customer, pending regulatory approval, the report will identify the value of collateral provided to CME Clearing that is in excess of the collateral meeting the clearing minimum margin requirement.

CME Clearing has worked together with other DCOs to develop a scheme for this reporting that will provide firms with flexibility in how this additional collateral reporting will work.

For each such cleared swaps customer, and for each currency in which margin requirements may be denominated and/or in which collateral may be deposited, the clearing firm may specify the customer’s additional collateral amount in several different ways:

• The additional collateral amount may be specified either as a percentage of the minimum margin requirement, or as an absolute money amount, or both. 
• In addition to the capabilities specified in the first bullet, and again for each currency, the clearing firm may specify a collateral floor amount.  If provided, the collateral floor specifies a minimum value for collateral on deposit at the DCO for that customer.
• Last, as an alternative to the methods described in the first two bullets, the clearing firm may specify a total value of collateral.  The additional collateral value then is determined as the amount by which the total value exceeds the clearing minimum margin requirement.

We’re calling this file the LSOC Additional Collateral file, and it must be reported at the end of each clearing business day.  In a manner exactly analogous to that for the FIXML Customer Gross Margin file, we’ve worked together with other DCOs and through the FIA to develop a standard file format using FIXML.

Testing and implementation

CME Clearing’s goal is to provide our clearing firms with maximum time for implementation and testing, and we are working with service providers and the broader industry to develop an overall plan  and schedule.  We intend to begin accepting submissions of the Customer Gross Margin and LSOC Additional Collateral files on a date to be specified, and to require firms to begin submitting them by a date to be specified. 

Daily reports will be provided to firms allowing the comparison of customer-origin requirements calculated the new way versus the existing way.

For more information please contact CME Clearing’s Risk Department at 312-648-3888.

Technical Details

Customer Gross Margining Position Submission via FIXML

<PosMntReq                                                     // position maintenance request message

            ReqID=”123456789”                               // unique record ID

TxnTyp=”4”                                         // position specification

AdjTyp=”tbd”                                       // customer-specific submission

Actn=”1”                                                // new submission

BizDt=”2012-02-06”                                // clearing business date

SetSesID=”EOD”                                   // settlement cycle (end-of-day)

TxnTm=”2012-02-06T18:23:49”>  // submission time

<Pty ID=”CME” R=”21”/>                                                // clearing organization

<Pty ID=”111” R=”4”/>                                        // clearing member firm ID

<Pty ID=”NYMEX” R=”22”/>                                           // firm exchange

<Pty ID=”111” R=”1”/>                                        // trade mgmt firm ID

<Pty ID=”ABC12345” R=”24”>                          // customer account

<Sub ID=”1” Typ=”26”/>                                  // customer origin

<Sub ID=”ACCT NAME” Typ=”5”/>      // account name

<Sub ID=”H” Typ=”tbd”/>                                // customer account type

<Sub ID=”OMNIACCT” Typ=”tbd”/>     // omnibus account, if relevant

</Pty>

<Instrmt                                                            // contract data

Exch=”NYMEX”

ID=”CL”

SecTyp=”FUT”

MMY=”201203”/>

<Qty Typ=”TQ” Long=”4250” Short=”1243”/>  // long and/or short quantity

</PosMntReq>

Notes on the party specifications:

For CME, the clearing member firm ID (party role 4) is optional, and may be omitted.  OCC and NYPC require it, however.

The account name is as specified on the firm’s books and is optional for the purposes of customer gross margining reporting.

The customer account type indicates whether the account is member, hedge, spec or omnibus.  If not provided, the default is spec.

If the account is a disclosed subaccount of an omnibus account, the “omnibus account” role specifies that omnibus account.  It should not be provided for detail accounts that are not disclosed subaccounts of an omnibus account.

There is variability across the CCP’s in the usage of the “position account” role (role number 38) in FIXML.  (CCP’s use the term “position account” in the same manner, but differ in how the value is assigned.)  For the sake of discussion, we’ll denote this as the “CME usage” and the “ICE usage”.

For CME:

Position account is a value, typically three or four alphanumeric bytes, which clearing firms typically do not know and do not use.  It is provided by CME on output back to the firm, but again, firms typically do not know and do not use it.

Rather, CME derives the position account from the submitted data:  (a) the trade management firm ID; (b) the product; (c) the customer account and origin code. 

Note that the origin is submitted as a sub role of the customer account.

For ICE:

Position account is a single byte, roughly corresponding to the origin and regulatory class of the account and product.  It is a required part of the submission.

For ICE, then, the origin is not provided as a sub role of the customer account.

So the party submission for ICE would look something like this:

<Pty ID=”ICE” R=”21”/>                                      // clearing organization

<Pty ID=”111” R=”4”/>                                        // clearing member firm ID

<Pty ID=”ICE” R=”22”/>                                      // firm exchange

<Pty ID=”111” R=”1”/>                                        // trade mgmt firm ID

<Pty ID=”C” R=”38”>                                       // position account

<Pty ID=”ABC12345” R=”24”>                          // customer account

<Sub ID=”ACCT NAME” Typ=”5”/>      // account name

<Sub ID=”H” Typ=”tbd”                                   // customer account type

<Sub ID=”OMNIACCT” Typ=”tbd”/>     // omnibus account, if relevant

</Pty>

Note that position account may be submitted for CME, but if so, it must correspond to the CME usage, not the ICE usage.

Notes on the instrument block

The instrument block usage is standard.  The example above shows how it looks for a future.

Here’s an example of how it would look for a vanilla option on future, where underlying need not be specified:

<Instrmt           

Exch=”NYMEX”

ID=”LC”

SecTyp=”OOF”

PutCall=”1”

StrkPx=”32.75”

MMY=”201203”/>

For an option, such as a flexible option, where the underlying must be explicitly enumerated, the “Undly” sub element must be included:

<Instrmt           

Exch=”CME”

ID=”XP”

SecTyp=”OOF”

PutCall=”1”

StrkPx=”32.75”

MMY=”20120327”>

<Undly

Exch=”CME”

ID=”SP”

SecTyp=”FUT”

MMY=”201412”/>

</Instrmt>

The Src attribute is optional, and may be provided, as:  Src=”H”, indicating that the value is the clearing product code.

Again, nothing different from existing usage.

LSOC Collateral Report Submission via FIXML

Customer-specific report:

<CollRpt                                                           // collateral report

            RptID=”123456789”                                // unique record ID

BizDt=”2012-02-06”                                // clearing business date

SetSesID=”EOD”                                   // settlement cycle (end-of-day)

TxnTm=”2012-02-06T18::49”                    // submission time

Stat=”2“                                               // status = assigned to this customer

ApplTyp=”0”>                                      // customer-specific report type

<Pty ID=”CME” R=”21”/>                                    // clearing organization

<Pty ID=”111” R=”4”/>                                        // clearing member firm ID

<Pty ID=”NYMEX” R=”22”/>                               // firm exchange

<Pty ID=”111” R=”1”/>                                        // trade mgmt firm ID

<Pty ID=”ABC12345” R=”24”>                          // customer account

<Sub ID=”1” Typ=”26”/>                      // customer origin

<Sub ID=”ACCT NAME” Typ=”5”/>      // account name

<Sub ID=”H” Typ=”tbd”/>                    // customer account type

</Pty>

<CollAmt Typ=”1” Amt=”10000000” Pct=”0.10” Ccy=”USD”/>

<CollAmt Typ=”2” Amt=”30000000” Ccy=”USD”/>

<CollAmt Typ=”1” Amt=”20000000” Pct=”0.20” Ccy=”EUR”/>

<CollAmt Typ=”1” Pct=”0.30” Ccy=”JPY”/>

<CollAmt Typ=”2” Amt=”40000000” Ccy=”CHF”/>

<CollAmt Typ=”3” Amt=”50000000” Ccy=”GBP”/>

</CollRpt>

The report is used to specify:  (a) for a given customer of an FCM, (b) for collateral deposited by the FCM with this DCO, that is (c) denominated in a particular currency, (d) the additional collateral value over and above the minimum margin requirement, that (e) is attributable to this customer.

Any number of Collateral Amount elements may be provided, one per currency and type.

A collateral amount of type 1 means:  the additional collateral amount is specified as either a percentage of the minimum margin requirement denominated in this currrency, or an absolute amount, or both.

A collateral amount of type 2 means:  a floor below which the total value of collateral attributable to that currency may not be allowed to drop.

A collateral amount of type 3 means:  the total value of collateral including the minimum margin requirement and any additional amount.

For the different currencies, these different types of Collateral Amount elements may be mixed and matched by the FCM as desired and appropriate.  For any given currency, however, the message may contain either (a) types 1 or 2 or both, or (b) type 3.

For a given customer and currency, if the report is provided via type 1 and/or 2, then the total value of collateral attributable to that customer and denominated in that currency is calculated as: 

• Take the minimum margin requirement.
• Add on the specified percentage of the minimum and the specified absolute amount.
• Take the larger of this value and the floor.

A report can also be provided as a percentage without specifying a currency, which means that the percentage applies to all currencies in which minimum margin requirements are denominated.

“Minimum margin” in this context means the contribution for that customer of the minimum margin assessed by the DCO to the FCM – not the minimum assessed by the FCM to the customer, which may be higher.

“Value” in this context means haircutted market value as determined by the DCO.

In these examples, the FCM is saying:

• For USD, add in an additional 10% of the minimum margin, plus another $10M, and in any event don’t let the collateral attributable to this customer go below $30M.
• For EUR, add in an additional 20% of the minimum margin, plus another 20M.
• For JPY, add in an additional 30% of the minimum margin.
• For CHF, don’t let the total value of collateral on deposit go below 40M.
• For GBP, the total value of collateral on deposit is 50M.

In all cases, the additional collateral attributable to a customer is calculated as the total collateral value less the minimum margin requirement.

The value of collateral attributable to the FCM that is not attributable to any specific customer, then, is equal to the total value of collateral deposited by the FCM for cleared swaps customers, less the sum across customers of total collateral value attributable to each customer.

Verbal 17f-6 No-Action Assurance Issued by SEC Division of Investment Management for Registered Investment Companies for Interest Rate Swaps and Credit Default Swaps

On July 29, 2011, the U.S. Securities and Exchange Commission’s Division of Investment Management (the “Division”) extended temporary no-action assurance that the Division would not recommend enforcement action under Section 17(f) of the Investment Company Act of 1940 against any registered investment company (a “Fund”) if the Fund or its custodian places and maintains cash and/or certain securities in the custody of CME or a CME clearing member for the purpose of meeting CME’s or a clearing member’s margin requirements for certain interest rate swap contracts and credit default swap contracts that are cleared by CME (the “Existing No-Action Letters”). 

The no-action relief provided in the Existing No-Action Letters expired on December 31, 2011.  However, the Division has provided CME with verbal no-action assurance extending that relief, pending further review of CME’s recently-submitted request for further no-action relief. 

Questions regarding this Advisory Notice may be directed to the following individuals:

Mike Kobida (312-454-8961)

Tim Doar (312-930-3162)

Tim Maher (312-930-2730)

FIA “Rate Identifier” Indicator Coming Soon

In response to requests from clearing firms, and in conjunction with an initiative of the Futures Industry Association (FIA), CME Group is planning to introduce a new field to allow clearing firms to identify on each trade in books, the source of the order which resulted in that trade.  This in turn will allow firms to charge appropriately differentiated rates for orders entered directly by customers versus orders phoned into an order desk, as well as other order distinctions a firm may want to recognize for differentiating customer fees and commissions.

The formal name of the new field is the Execution Source Code. More typically, it is called the Rate Identifier, and it is informally referred to as the Voice/Director Indicator. In summary:

·         The new field may be submitted on Globex orders.

·         Submitted values will be provided to clearing firms on all FIXML trade confirmation messages and allocation messages generated by CME Clearing.  Note that when a trade is given up, the original value submitted with the trade will flow along with the give-up.

·         The values will be carried with the trade into the Give-up Payment System (GPS), where they can be used to drive processing at different rates according to the different values.

FIA has defined the following set of values for the indicator:

A          Phone simple

B          Phone complex

C          FCM-provided screen

D          Other-provided screen

E          Client-provided platform controlled by FCM

F          Client-provided platform direct to exchange

G          FCM API or FIX

H          Algo Engine

J          Price at Execution (price added at Initial order entry, trading, middle office or time of give-up)

W         Desk – Electronic

X          Desk – Pit

Y          Client – Electronic

Z          Client – Pit

An existing FIX attribute called the Customer Order Handling instruction will be used for this purpose.  On iLink messages for CME Globex, this is FIX tag 1031.  In FIXML, the attribute name is CustOrdHdlInst. For example:  CustOrdHdlInst=”W”

The new field is expected to be available in CME’s “New Release” testing environment for CME Globex and clearing in the second quarter of 2012, and available in production also in the second quarter (exact dates will be announced soon).

FIXML message samples are available at:

ftp://ftp.cmegroup.com/pub/span/util/RateIdentifierExamples.zip

For the CME Globex notice, please see:

http://www.cmegroup.com/tools-information/lookups/advisories/electronic-trading/20120116.html#VOI

For more information, please contact CME Clearing at 312-207-2525.

Review of Collateral Haircuts Advisory

REVISED:  Initial Requirements for Non-Hedge Cleared Swaps Customers

Effective Monday May 7, 2012, the CFTC is requiring the use of “initial to maintenance ratios” for non-hedge customer positions in cleared swaps.  These will work in a manner exactly analogous to the way they have long worked for futures.

So for example, suppose a non-hedge (“spec”) customer holds positions at your FCM in CME’s cleared interest-rate swaps, and the minimum initial margin (“performance bond”) requirement for that customer is calculated by CME Clearing as $1,000,000.  Suppose further that the initial to maintenance ratio for IRS is set by CME Clearing as 1.10.

This means that the “maintenance” requirement level that you must assess for the customer is $1,000,000 and the “initial” requirement level is $1,100,000.  (1.10 times the maintenance level.)

On the first day that the non-hedge customer holds CME-cleared IRS positions at your FCM, the higher “initial” requirement level applies.  Thereafter, as long as the customer has enough collateral on deposit to meet the lower “maintenance” requirement, no margin call need be issued.  But if on any particular day the customer’s collateral level falls below the maintenance level, then the higher “initial” requirement level applies, and the customer must deposit collateral to come back up to that higher level.

Exactly as with any other parameter of the margin calculation process, CME Clearing will publish advisory notices detailing what the initial to maintenance ratios will be for each swaps asset class.

Every night, CME Clearing provides FCM’s with datafiles showing the margin requirement levels for each customer’s portfolio.  These datafiles have now been enhanced to show both the maintenance and the initial requirement levels.  For record layouts, please see:

http://www.cmegroup.com/clearing/files/PBRequirementsDatafiles.pdf

Note that the datafiles will show the higher initial requirement level for all accounts, since CME Clearing will not know which accounts are hedge and which are not.  If the account is not hedge, the firm must read and use both the maintenance and initial requirement levels, and apply the normal logic to determine which requirement level applies and whether a deficit exists.  If the account is hedge, then you need to read only the maintenance requirement level.

If you wish to calculate the requirement levels yourself, the initial to maintenance ratios are published in machine-readable form in the various risk parameter files.

In the New Release testing environment, the change will take effect for interest-rate swaps on Wednesday, April 18.  For CDS and FX, the change will be made in New Release on Friday April 6.  And again, as noted above, the change takes effect in production for all swap products on Monday, May 7.

For more information, please contact CME Clearing at 312-648-3888.

Technical Details For CDS and FX:

The initial to maintenance ratio is on the OVPT combined commodity in the end-of-day CDS risk parameter files available on the Firm FTP Server in the pub/cmd/cmf directory.  For example, the file cds.risk.cmf.20120320.s.xml.zip contains the CDS risk parameter file for March 20.  A corresponding New Release file would be in pub/cmd and is named cds.nr.risk.20120320.s.xml.zip.

To find the ratio, search for the ccDef element further containing the element <cc>OVPT</cc>.  The initial to maintenance ratio can then be read from the <adjRate> element with rate ID 5 and base rate 2.  For example:

<adjRate>

<r>5</r>

<baseR>2</baseR>

<val>1.100000</val>

</adjRate>

For FX, the process is exactly analogous, except that there is a combined commodity, and hence an initial to maintenance ratio, for each currency pair.  The files will be in the pub/span/fx directory.  The production file for March 20 would be named cme.fx.risk.20120320.s.xml.zip, and the corresponding New Release file would be named cme.fx.NR.risk.20120320.s.xml.zip.

For IRS:

The risk parameter files are located on the Firm FTP Server in the pub/irs directory.  The initial to maintenance ratios are provided in the file IRS_IM_Ratio.csv.  The corresponding New Release file would be IRS_IM_Ratio.NR.csv.  The data is provided by currency of denomination of the swaps.  For example:

CO,Prod_Type,Cur,IM_Ratio

CME,IRS,CAD,1.10

CME,IRS,CHF,1.10

CME,IRS,EUR,1.10

CME,IRS,GBP,1.10

CME,IRS,JPY,1.10

CME,IRS,USD,1.10

SFTP Connectivity Conversion Deadline Extension-June 1, 2012

At the request of Clearing Member Firms, we are extending the conversion deadline for WAN (Leased Line) connections from FTP to SFTP (secured FTP) until June 1^st, 2012.

Please reference Advisory Notice number 12-038 at this link for additional detail.

http://www.cmegroup.com/tools-information/advisorySearch.html#

Please be aware, firms that have not converted to the new SFTP IP address by June 1^st, 2012 will incur a monthly maintenance fee to use the old FTP server.  Updated notices will follow to outline fees.

For further information or assistance please contact Clearing Services at (312) 207-2525 or

E-mail SFTPConversion@cmegroup.com

Japanese Government Bonds

CME Clearing (CME) is pleased to announce the addition of Japanese Government Bonds to our acceptable collateral list for foreign sovereign debt effective May 1, 2012.  This will be applicable for CDS, IRS and listed derivatives.  Please see the table below for haircut information.

Japanese Government bonds will be accepted in the local market.  The settlement platform in Japan is the JGB Book-Entry system. 

CME Clearing will need clearing member firm’s local market JGB Book Entry system delivery instructions prior to firm’s intent to pledge.  Please contact CME Clearing for more information.  Japanese Government bonds typically settle in T+2.  Please allow enough time to enter your Clearing 21 transaction on trade date two days prior to expected settlement date.  The asset type will be BILL or BOND and selecting currency JPY to enter these transactions into Clearing 21.  CME Clearing may have to add your ISIN to the available securities list.  Please email chfin@cmegroup.com with your ISIN request.

Brokerage Payment System/Give-up Payment System User Group Meeting

Please be advised that the CME Group will be hosting a user group meeting for all BPS and GPS users. The meeting is scheduled for Tuesday April 17, 2012 from 10:00-11:00am. It will be held at 20 S. Wacker, Chicago, Il 60606, Upper Lobby Room B. 

Dial in instructions are as follows:

US Toll Free:                 1-888-394-8197

Toll/International:           1-719-457-6443

Participant code:           931630

If you have any questions concerning the meeting, please contact CME Group Clearing Services at (312) 207-2525 or via e-mail at ccs@cmegroup.com.

2^nd Quarter 2012 Eligible Stocks (Data from January 3^rd thru March 31^st, 2012

CME Clearing accepts shares of certain equity stocks for customer and house segregated performance bond collateral.  CME Clearing implemented its Stock Program to enable clearing members to post shares of selected stock with the Clearing House to satisfy performance bond requirements. 

CME Clearing’s performance bond requirements consist of two amounts. The core performance bond requirement and the concentration performance bond requirements. Concentration performance bond requirements are set from time to time and are equal to that portion of the total performance bond requirement, which may be met using concentration collateral.  

Collateral accepted by CME Clearing will be categorized as noted below. Effective with the RTH cycle on Friday, April 13, 2012, clearing member firms are permitted to meet a maximum of 40% core performance bond requirements with each of Category 2 and Category 3 assets. Also, Category 3 assets have a hard dollar limit of $3 billion per clearing member firm across settlement accounts. Category 1 assets have no requirement type limits. Please refer to the website link below for details on individual asset type limits and product class restrictions.

Clearing member firms that do not use assets in Category 3 should contact the Financial Unit for utilization of assets in Category 2 according to a 40% limit for U.S. Government Agencies, Mortgage Backed Securities, and TLGP, as well as a 40% limit for IEF5 and Letters of Credit.

Additionally, CME Clearing will no longer differentiate utilization of assets for reserve performance bond requirements. The core performance bond requirement will envelope requirements previously categorized as reserve performance bond requirements. The reserve requirement will be phased out beginning with the RTH on Friday, April 13, 2012.

There is no change to CME Clearing’s policy for concentration performance bond requirements. Each clearing member firm will be subject to core performance bond requirements and concentration performance bond requirements as applicable.

Category 1 Assets:

·         U.S. Cash

·         U.S. Treasuries

·         IEF2 Money Market Fund Program (limits and diversification requirements within IEF2 program remain in effect)

Category 2 Assets:

·         U.S. Government Agencies

·         Select Mortgage Backed Securities

·         TLGP

·         IEF5 Specialized Cash Program

·         Letters of Credit

Category 3 Assets:

·         Physical Gold

·         Select U.S. Equities from the S&P 500

·         IEF4 Specialized Collateral Program**

·         Select Foreign Sovereign Debt - Canada, France, Germany, Sweden, UK

Please refer to the website http://www.cmegroup.com/clearing/financial-and-collateral-management/ for further detail regarding acceptable collateral, haircuts, and limits. For questions about requirements, please call Risk Management hotline at 312-634-3888 and questions about collateral can be directed to the Financial Unit hotline at 312-207-2594.

The clearing level performance bond requirements in Stock Index Futures are displayed in the table on the following page.

All clearing members with positions in the S&P 500 products will have core performance bond requirements and may be subject to concentration performance bond requirements. Clearing members are not required to participate in the Stock Program or to make any other changes in their collateral on deposit to satisfy their concentration performance bond requirement.

CME has selected the Depository Trust & Clearing Corporation (DTCC) as the depository for the Stock Program. In order to participate in the program, clearing members must have an account at DTCC.  For those firms familiar with the DTCC system, the CME’s account has “Repo” status.

Clearing members with an account at DTCC can originate free pledges of securities to the CME account or request the release of pledged securities from the account at the CME. CME staff has direct access to DTCC’s system to view clearing member pledges and approve release requests.  Release transactions are not finalized until CME has approved the transactions. Clearing members have the opportunity to pledge securities in the morning to facilitate the release of a.m. cash calls at the intra-day performance bond cycle, or to request the release of pledged securities. The deadline for morning transactions is 10:30 a.m. CST. Clearing members have an additional opportunity to pledge securities in anticipation of increases in their overnight performance bond requirements until approximately 1:30 p.m. CST.

STOCK ELIGIBILITY

The eligible stocks for the Stock Program include a subset of the stocks in the S&P 500. On a quarterly basis, CME will review the daily volume statistics for the S&P 500 stocks over the prior calendar quarter. The guidelines of the stock qualification process are enumerated below:

1)     All stocks, which are for parent or affiliate companies of any clearing member, will be automatically excluded from participation in the program.  Such stocks will be designated with an eligibility code of “P,” a V Rating of 0 and allowable maximum shares of 0 on the Official Stock Pledge Table.

2)     All stocks, which had daily trading volume of fewer than 100,000 shares per day on two-thirds of the days in the preceding quarter, will be excluded from that quarter’s Stock Program and designated with a V Rating of 8 and allowable maximum shares of 0 on the Official Stock Pledge Table.

3)    All stocks which had daily trading volume ranging from 100,000 - 199,999 shares per day on two-thirds of the days in the preceding quarter will be accepted in the Stock Program with a limit on the number of shares accepted in any single clearing member origin of 50,000 shares and designated with a V Rating of 7 on the Official Stock Pledge Table.

4)     All stocks which had daily trading volume ranging from 200,000 - 499,999 shares per day on two-thirds of the days in the preceding quarter will be accepted in the Stock Program with a limit on the number of shares accepted in any single clearing member origin of 100,000 shares and designated with a V Rating of 6 on the Official Stock Pledge Table.

5)     All stocks which had daily trading volume ranging from 500,000 - 999,999 shares per day on two-thirds of the days in the preceding quarter will be accepted in the Stock Program with a limit on the number of shares accepted in any single clearing member origin of 250,000 shares and designated with a V Rating of 5 on the Official Stock Pledge Table.

6)     All stocks which had daily trading volume ranging from 1,000,000 – 1,999,999 shares per day on two-thirds of the days in the preceding quarter will be accepted in the Stock Program with a limit on the number of shares accepted in any single clearing member origin of 500,000 shares and designated with a V Rating of 4 on the Official Stock Pledge Table.

7)     All stocks which had daily trading volume ranging from 2,000,000 – 4,999,999 shares per day on two-thirds of the days in the preceding quarter will be accepted in the Stock Program with a limit on the number of shares accepted in any single clearing member origin of 1,000,000 shares and designated with a V Rating of 3 on the Official Stock Pledge Table.

8)     All stocks which had daily trading volume ranging from 5,000,000 – 9,999,999 shares per day on two-thirds of the days in the preceding quarter will be accepted in the Stock Program with a limit on the number of shares accepted in any single clearing member origin of 2,500,000 shares and designated with a V Rating of 2 on the Official Stock Pledge Table.

9)     All stocks which had daily trading volume in excess of 10,000,000 shares per day on two-thirds of the days in the preceding quarter will be accepted in the Stock Program with a limit on the number of shares accepted in any single clearing member origin of 5,000,000 shares and designated with a V Rating of 1 on the Official Stock Pledge Table.

10)  Any stock whose last closing price was less than $10 per share on the last business day of a calendar quarter will be excluded from the program for the entire quarter and then re-evaluated at the end of that quarter. Such stocks will be designated with an eligibility code of “PR,” a V Rating of 0 and maximum allowable shares of 0 on the Official Stock Pledge Table.

11)  Clearing members’ stock pledges will be valued at no more than 70% of market value.  Stocks pledged to the CME will be priced at least on a daily basis.

12)  The performance bond value of stocks pledged to CME will be computed as the lesser of the number of shares on deposit multiplied by the closing price per share multiplied by 70%, or the maximum number of shares eligible to participate in the Stock Program for that stock multiplied by the closing price per share for that stock multiplied by 70%.  If a clearing member has shares pledged to CME in excess of the maximum number of shares allowable for a given stock, the excess shares will receive zero performance bond value.  Shares held at zero performance bond value are not included in CME’s computations of a clearing member’s excess collateral, and the clearing member may request the release of such shares regardless of its remaining collateral excess position.

13)  The list of eligible stocks will be made available to clearing members.  The list will change quarterly or more frequently due to changes in the composition of the S&P 500 index or changes in clearing member ownership.

If you need further information about the Stock Program please contact the Financial Unit at (312) 207-2594.

CDS Margin Parameter Change in NR

Please be advised that CME Clearing is updating CDS margin related parameters in the New Release Environment. The following parameter changes will be effective April 11, 2012:

·         CDX HY Liquidity Margin Exponent will change from 1.20 to 1

·         CDX IG Liquidity Margin Exponent will change from 1.25 to 1

·         CDX HY Curve will change from  0.4% to 1%

·         CDX IG Curve will change from 0.2% to 0.5%

Contact the CME Client Services Group at onboarding@cmegroup.com if you have questions.     

This link provides the advisory notice reflecting the contract specifications for this new contract.