CFTC Approves CBOT's Derivatives Clearing Organization

The Chicago Board of Trade (CBOT®) today announced that the Commodity Futures Trading Commission (CFTC) approved the exchange's application for registration as a Derivatives Clearing Organization (DCO).

In order to fulfill its responsibilities as a DCO, the CBOT entered into a Clearing Services Agreement ("CSA") with Chicago Mercantile Exchange® Inc. in April 2003. This resulted in the CME/CBOT Common Clearing Link, bringing together two premier financial institutions and providing significant benefits to futures commission merchants (FCMs) and end users of futures products.

CBOT Chairman Charles P. Carey said, "This ruling allows the CBOT to move forward in establishing its own clearing entity, creating the autonomy and flexibility needed to provide our customers with the most cost-effective clearing process currently available. By using CME's state-of-the-art clearing system, CLEARING 21® , we are driving standardization within the industry and providing significant overhead, margin, and capital efficiencies for the industry."

CBOT President and CEO Bernard Dan said, "Receiving the stamp of approval from the CFTC to move forward with our independent clearing arm brings us closer to realizing one of our major goals put forth in 2003. This initiative, in conjunction with our transition to the LIFFE CONNECT®® platform, epitomizes the innovative spirit which exists at the CBOT today and spurs us to better address the needs of our customers."

Under the CBOT's DCO, the exchange will determine requirements for CBOT Clearing Membership and review and approve applicants, set clearing fees, be represented on the CME® Clearing House Risk Oversight Committee, and conduct financial surveillance and audits of CBOT Clearing Members, as well as risk monitoring.

In addition, the CBOT will work with CME in determining clearing level margin requirements for CBOT products, including risk offsets between CBOT and CME products and participate in cross-margining agreements with other entities. The CBOT will set settlement prices for CBOT products and manage the delivery process for CBOT products.

The CME/CBOT Common Clearing Link will be implemented for select CBOT products, including agricultural, fed funds, swap, muni and Dowsm contracts starting on November 24, 2003. When it is fully operational and clearing all CBOT products in January 2004, the CME/CBOT Common Clearing Link will clear approximately 85 percent of U.S. futures and futures options volume, based on 2002 volume levels.Customer Benefits of CCL

The CBOT has a total of 87 clearing members and the CME has a total of 79 clearing members. The agreement affects 54 joint CME/CBOT clearing members. These firms will enjoy:

• Capital and margin efficiencies. CME's Standard Portfolio Analysis of Risk (SPAN® ) system will calculate a customer's margin requirements based on the customer's entire portfolio of positions at both exchanges. This is more efficient than cross-margining the customer's net exposures at two separate clearing houses.
• Enhanced portfolio margining. Under the CME/CBOT Common Clearing Link, firms will have the opportunity to take advantage of the best elements of both CME's "gross" margining and the CBOT's "net" margining treatment, depending on their business profile.
• Combined financial safeguards package. A single guarantee fund will be administered for CME and CBOT products. Security deposits at CME currently total about $900 million, which is sufficient collateral to guarantee trades for both CME and CBOT at current volume levels. This will free up about $200 million in capital, based upon the amount of risk capital that CBOT members post with BOTCC in the form of BOTCC stock.
• Operational efficiencies for FCMs. Under the CME/CBOT Common Clearing Link, the DCO will combine CME and CBOT operations in a manner that will deliver maximum benefits to the exchanges' customers and users, by recognizing risk offsets (portfolio margining) among CME and CBOT products, combining guarantee pools and streamlining banking, collateral, processing and connectivity costs. Because firms will have all their CME and CBOT positions in a single location, all position reporting and open interest calculation will be done only once and in the same, consistent manner. With firms' collateral in a single clearing house, firms will not have to incur the expenses associated with moving collateral between clearing houses, or the compliance costs associated with satisfying two different sets of clearing house rules.
• Cost savings. Spread credits between CME and CBOT products will be recognized by the CME Clearing House in a single portfolio. Spread credits for certain products will be as high as 70 percent to 90 percent.

Industry Benefits of CCL

• Reduced performance bond collateral requirements. Performance bond savings from enhanced portfolio margining (cross-market risk offsets) are estimated to free up to $1.4 billion in performance bond collateral now posted by industry participants.
• Reductions in direct clearing-related fees (transaction fees and ancillary fees). For example, BOTCC charges fees for cash margin calls/releases and collateral substitution transactions, while CME does not. BOTCC charges transaction fees to provide customers with average pricing (APS) on trades, while CME does not. Industry savings on these two fees alone are estimated to exceed $1 million annually.
• Operational efficiencies will be realized by firms that can combine clearing operations for two exchanges into a single back office.
• Simplified business practices -- for example, a single set of systems interfaces, including formats for data files, trade messages and reports; a standardized online interface.

Chicago Mercantile Exchange Inc. (www.cme.com) is the largest futures exchange in the United States. As an international marketplace, CME brings together buyers and sellers on its trading floors and GLOBEX® electronic trading platform. CME offers futures and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. The exchange moved about $1.5 billion per day in settlement payments in the first nine months of 2003 and managed $29.6 billion in collateral deposits at Sept. 30, 2003. CME is a wholly owned subsidiary of Chicago Mercantile Exchange Holdings Inc. (NYSE: CME), which is part of the Russell 1000® Index.