The CME/CBOT Common Clearing Link is designed to provide the benefits and efficiencies that firms have requested, including holding collateral and positions in a single location, realizing performance bond (margin) savings to the maximum extent possible, a single clearing interface and a single guarantee fund.
Under the CME/CBOT Common Clearing Link, CME will provide clearing and related services to the CBOT for all products, beginning no later than Jan. 2, 2004, pending regulatory approval. CBOT will establish a Derivatives Clearing Organization (DCO) under Commodity Futures Trading Commission regulations and will outsource the provision of its clearing processing and guarantee services to CME's Clearing House. The CME/CBOT Common Clearing Link will clear approximately 85 percent of U.S. futures and futures options volume, based on 2002 volume levels. CME and CBOT have currently 51 clearing members in common.
The CME/CBOT Common Clearing Link-unlike a common processing outsourcing arrangement-will actually 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 and collateral 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, eliminating the need for costly operational support of a cross-margin arrangement between these exchanges.
Spread credits between CME and CBOT products will be recognized by the CME Clearing House in a single portfolio. CME and CBOT will publish inter-commodity spread credits for interest rate, equity and agricultural products in the coming months, and initial indications are that these spread credits will be as high as 90 percent.
Exchange officials said that net margining will still be in effect for CBOT proprietary and customer accounts, while CME will continue to have net margining for proprietary accounts and gross margining for customer accounts. Portfolio margining also will be available for customer positions on a net and gross basis.
With the common clearing link, firms no longer will have to maintain redundant interfaces to two clearing organizations, leading to significant cost savings for the firms. Additionally, a single guarantee fund will be administered for CME and CBOT products. As an illustration of the risk offset savings for interest rate products, CME and CBOT offered the following example* for a portfolio containing CBOT 10-year Treasury note futures and CME Eurodollar futures in years five, six and seven, assuming a 75 percent risk offset:
| Reasonable Hedge Position | Performance Bond without Portfolio Margining | Performance Bond with Portfolio Margining | Risk Offset Savings |
| Long 40 CME ED futures | $26,000 | $6,500 | $19,500 |
| Short 15 CBOT 10 Year Note futures | $19,500 | $4,875 | $14,625 |
| Total Performance Bond | $45,500 | $11,375 | $34,125 |
| Total Guarantee Fund Obligation (at 5% of Performance Bond) | $2,275 | $569 | $1,706 |
For stock index products, assuming an 80 percent risk offset on a portfolio containing CME S&P 500® index futures and CBOT Dow Jones Industrial AverageSM futures, an example of the potential savings is as follows:
| Reasonable Hedge Position | Performance Bond without Portfolio Margining | Performance Bond with Portfolio Margining | Risk Offset Savings |
| Long 2 CME S&P 500 futures | $28,500 | $5,700 | $22,800 |
| Short 5 CBOT DowSM futures | $20,000 | $4,000 | $16,000 |
| Total Performance Bond | $48,500 | $9,700 | $38,800 |
| Total Guarantee Fund Obligation (at 5% of Performance Bond) | $2,425 | $485 | $1,940 |
Since signing the CME/CBOT Common Clearing Link agreement two weeks ago, staff at both exchanges continue to work out details of the arrangement and have begun sharing these details with their members and other interested parties through a series of workshops, informational seminars and one-on-one visits.
CME's Clearing House is wholly owned by Chicago Mercantile Exchange Inc. and will continue to be governed by a Clearing House Risk Oversight Committee composed of clearing member and settlement bank representatives. Currently, six members represent firms that are joint clearing members of CME and CBOT, and one member represents a settlement bank. An additional member will be named from a firm that clears only at CBOT to ensure that the committee remains appropriately representative.
As of March 31, 2003, the CME Clearing House acted as custodian for approximately $28.5 billion in performance bond assets deposited by its clearing firms, and during the first quarter of 2003, moved an average of approximately $1.5 billion a day in settlement funds through its clearing system. CME's Clearing House currently guarantees the performance of cleared contracts with a financial safeguards package of approximately $3.4 billion.
*Note: Examples are hypothetical, based on reasonable assumptions concerning offset rates and guarantee fund. Actual risk offsets will be determined and published by CME and CBOT prior to the launch of the CME/CBOT Common Clearing Link.
