Clearing Membership

Participation in a Strong Community. Throughout the history of CME, no clearing member has ever defaulted in its obligations to the Exchange and no customer has ever lost money as a result of the insolvency of an Exchange clearing member. Firms clearing their trades directly with the Exchange are well-capitalized in terms of both regulatory capital and net worth.
Strength of Financial Safeguard System. CME has a strong reputation for the rigorous enforcement of an integrated package of financial surveillance and risk management procedures. Clearing members are continuously monitored for required capital compliance and financial solvency. The Exchange's Financial Safeguard System is outlined in CME's publication Financial Safeguards of Chicago Mercantile Exchange Inc. which is available on CME's Web site at www.cme.com.
Leadership and Reputation. CME is a leader in the futures industry and has long been recognized for its product innovation, market liquidity, efficient trading floors, global electronic trading platform, self-regulatory capabilities, marketing and educational services, and financial surveillance capabilities.
Customer Service. At CME, Customers Mean Everything. The Exchange is committed to delivering an outstanding customer service experience in each and every interaction with our customers.
Clearing Agreement with the CBOT ^®. As CME provides clearing, settlement and guarantee services for the CBOT, joint clearing members realize capital efficiencies by combining two substantial portions of their business under a joint guarantee pool and significant cost savings through common processing and standardized business practices. In addition, customers enjoy collateral and capital efficiencies from combined portfolio margining to the extent that there are risk offsets recognized between products that were previously margined independently.
Inactive Clearing Membership. Clearing members, who meet certain eligibility requirements, may request approval as an inactive clearing member. Inactive clearing members include proprietary trading firms and hedge funds. While meeting all CME requirements for clearing membership, inactive clearing members are not subject to Exchange capital, monthly financial reporting and examination requirements as they have no customers, do not qualify traders and do not clear their trades directly with the Exchange.
Affiliates are Eligible for Rule 106.I. Related Party Status. A clearing member or a firm that owns, directly or indirectly, 100% of a clearing member or that has 100% ownership, direct or indirect, in common with a clearing member ("related parties"), may purchase a CME, IMM, or IOM Division membership and the proprietary trades of all related parties may receive preferential clearing fee and performance bond rates on products within the division of membership held.
Affiliated Hedge Funds are Eligible for Rule 106.S. Family of Funds Status. A hedge fund clearing member or fund management company, that meet certain eligibility requirements, may purchase a CME, IMM or IOM Division membership and the proprietary trades of up to 5 additional funds within such family of funds may receive member clearing fee and performance bond rates on products within the division of membership held.
Membership in OneChicago ^®. OneChicago is an electronic exchange which trades futures on individual stocks, narrow-based indices, and Exchange Traded Funds and is a joint venture between CME, CBOE and CBOT. Clearing members of CME are automatically clearing members of OneChicago.
Member Clearing Fee Rates. The proprietary accounts of clearing members and their 100% owned subsidiaries are entitled to member clearing fee rates (the lowest rates available), compared with non-member and public customers.
Member Performance Bond Rates. The proprietary accounts of clearing members and their 100% owned subsidiaries are entitled to member performance bond rates.
Net Margining. Proprietary accounts of clearing members and their affiliates, employees and directors are "netted" against each other when determining the house performance bond requirements at the Clearing House level. In addition, customer CBOT products may also be margined on a net basis at the Clearing House level.
Access to CME ^® Globex ^®. Clearing members have direct access to CME Globex, CME's electronic marketplace, for entry of their own and customer orders. In addition, clearing members may authorize Globex access for its customers to directly enter their orders, thereby enhancing the services the clearing member provides. Access to Globex is available through CME-provided trading software and independent software vendors.
Flow-Through Benefits to Customers. Customers have fewer credit decisions to make as the firm carrying their positions and holding their funds is doing business directly with the Exchange. That is, no additional counterparties/intermediaries exist between the firm carrying the positions and funds of customers and the Exchange.

Customers of clearing members may have access to CME’s Trust Fund, which held $62 million in net assets as of December 31, 2004. While payments from the fund are discretionary, its trustees have the authority to make payments to customers who have lost monies as a result of a default of a clearing member. Customers of non-clearing firms are not direct beneficiaries of the Trust Fund, even though they are trading CME products.

Customers of clearing members have access to the Exchange's arbitration system. Such customers may bring actions against clearing members and clearing members may bring actions against other members before CME's Arbitration Committee. CME's Arbitration Committee offers an expeditious and cost-effective way to resolve disputes relating to or arising out of any transaction upon the Exchange or membership in the Exchange. CME's Arbitration Committee is not available for complaints against non-clearing members, although there are other forums within the industry to resolve those disputes.
Trading Floor Access. Clearing members are the only entities allowed booth space on the Exchange trading floor.
Membership Transfer Privileges. Firm-owned memberships may be transferred among employees of clearing members to service customers directly from the trading floor.
Participation in Exchange Governance. As a clearing member, you may serve on Exchange committees or CME's Board of Directors through your employees or officers.

All clearing members must demonstrate fiscal and moral integrity, as well as financial capitalization, which justify the Exchange's assumption of the risks inherent in clearing their trades. Clearing members must be corporations (including C Corporations, Subchapter S Corporations, and Limited Liability Companies), partnerships (including Limited Partnerships and General Partnerships) or cooperative associations. Outlined below are the principal requirements for clearing membership at CME.

Share and/or Membership Requirements

Assigned Class A shares and memberships are pledged to the Exchange as security for a clearing member's obligations. Assigned shares and memberships are subject to sale by the Exchange in the event of insolvency of a clearing member, and the proceeds thereof will be used to fulfill the obligations of the clearing member.

Clearing members are required to have at least two CME memberships, at least two IMM memberships, at least two IOM memberships, at least one GEM membership and at least 15,000 Class A shares assigned to the clearing member.

Currently, all Class A shares and memberships required to be assigned for clearing membership privileges must be owned by the clearing member or a person, including a parent company, with an acceptable proprietary interest in the clearing member. An acceptable proprietary interest is defined as $500,000 and includes the person's interest in the ownership equity of the clearing member plus the person's subordinated debt to the clearing member. Voting rights are not considered when determining an owner's proprietary interest.

Shares and memberships which are assigned to a clearing member may not be subject to a lien of any kind.

Financial Requirements – Capital

All clearing members, except inactive clearing members, must maintain adjusted net capital in excess of the greatest of:

$2,500,000; or
CFTC minimum regulatory capital requirements; or
SEC minimum regulatory capital requirements.

Firms approved as inactive clearing members are not subject to CME capital requirements.

Financial Requirements – Reporting

All clearing members, except inactive clearing members, must submit monthly Form 1-FRs (FCM-only firms) or FOCUS Reports (dually registered FCM-Broker/Dealers), including Exchange Supplemental Information, through the WinJammer system within seventeen (17) business days of month-end.

Inactive clearing members are not required to file monthly financial statements.

In addition, all clearing members, including inactive clearing members, are required to submit certified financial statements to the Audit Department. Broker/dealer clearing members are required to submit certified financial statements within sixty (60) days of fiscal year-end. Clearing members who are not registered as broker/dealers are required to submit certified financial statements within ninety (90) days of fiscal year-end.

Financial Requirements - Security Deposits

All clearing members must deposit a security deposit with the Exchange. A clearing member’s security deposit is the greater of the minimum requirement or its proportionate share of the "Aggregate Security Deposit." The Aggregate Security Deposit is an amount determined by CME's Clearing House Risk Committee and is set at a percentage of the average aggregated performance bond requirements of the Exchange for the preceding three months. U.S. dollars, U.S. treasury and agency securities, and/or money market mutual funds may be deposited to meet the security deposit requirements.

The minimum security deposit is $500,000 for all clearing members.

The security deposit is based on the proportionate risk that a clearing member represents to the Exchange as measured by its performance bond requirements and trading volume. A firm's security deposit amount is based 85% on the clearing member's risk performance bond requirements with the Exchange for the preceding three months and 15% on the clearing member's average number of contracts executed during the preceding three months. For purposes of the 15% volume component of the Aggregated Security Deposit, CME's Clearing House Risk Committee may apply a different weighing to the volume of a particular contract(s) if the Committee determines that such contract(s) represents a disproportionate exposure to CME's Clearing House. The security deposit is recalculated on a quarterly basis (more frequently if deemed necessary) by CME's Clearing House.

Parent Guarantee Requirements

All clearing members are required to provide parent guarantees for all noncustomer and proprietary obligations. Such noncustomer and proprietary obligations include performance bond and settlement for noncustomer and proprietary positions held and cleared, noncustomer and proprietary trades executed by traders qualified by the clearing member until accepted for clearing by another clearing firm, and noncustomer and proprietary trades executed and processed through CME's Give Up System ("GUS") by the clearing member until accepted for clearing by another clearing firm.

A clearing member must submit a parent guarantee for any person or entity which owns, directly or indirectly, 5% or more of the clearing member. The guarantor will be severally liable to the Exchange for all noncustomer and proprietary obligations of the clearing member. A clearing member's ultimate parent should provide a parent guarantee unless an intermediate company providing a guarantee has capital greater than or equal to $300,000,000. Note: If the parent company is a regulated entity, capital shall be defined as adjusted net capital. If the parent company is a non-regulated entity, capital shall be defined as assets less liabilities plus acceptable subordinated debt.

An individual or an entity is required to execute a full guarantee if the individual or entity owns, directly or indirectly, 50% or more of the clearing member. A partial guarantee is required for individuals or entities which own, directly or indirectly, 5% or more but less than 50% of the clearing member. The individual or entity need only provide a guarantee to the extent of their ownership.

If the guarantee is executed by a corporation or limited liability company, the guarantee must be signed by an authorized officer of the entity. In addition, the guarantor must submit a corporate resolution or similar written documentation stating the guarantor's decision to issue the guarantee, and granting such officer the authority to sign the guarantee. If the guarantee is executed by a general or limited partnership, the guarantee shall be signed by a general partner.

Clearing members may request an exemption from the parent guarantee requirements if: (1) the clearing member maintains $300,000,000 or more in adjusted net capital; or (2) the clearing member does not clear, execute and give-up, or qualify individual traders who execute noncustomer or proprietary trades; or (3) the clearing member meets certain criteria and is determined to have minimal activity in the house origin. The request will be reviewed by the Audit Department.

Application Requirements and Review Process

The appropriate clearing membership application, along with all attachments and the assignment applications should be submitted to CME's Audit Department. The Audit Department is responsible for the review of all clearing member applicants. The application process takes approximately four to six weeks.

The applicant is reviewed and approved for membership by CME's Clearing House Risk Committee subject to ratification by CME's Board of Directors.

In addition, if the clearing member elects to have individuals placed on memberships which are owned by and/or assigned to the clearing member, these individuals must apply for individual membership status if they are not current members of the Exchange. This process takes approximately four to six weeks and should occur concurrently with the clearing membership application process.

Questions can be directed to:

Ms. Debbie Kokal, Director, Audit Department, at (312) 930-3235 or dkokal@cme.com
Ms. Cathleen Downs, Audit Manager, Audit Department, at (312) 648-3802 or cdowns@cme.com.
Mr. Robert Krewer, Associate Director, Shareholder Relations and Membership Services Department, at (312) 930-3483 or rkrewer@cme.com
Ms. Jule Mondschein, Supervisor, Shareholder Relations and Membership Services Department, at (312) 930-3485 or jmondsch@cme.com
Ms. Sharon Bowler, Supervisor, Shareholder Relations and Membership Services Department, at (312) 930-3006 or sbowler@cme.com