The Chicago Mercantile Exchange's Proposal To Establish a Cross-Margining Program With the London Clearing House

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice of proposed rule amendments of the Chicago Mercantile Exchange to implement cross-margining with the London Clearing House.

SUMMARY:

The Chicago Mercantile Exchange (“CME” or “Exchange”) has submitted to the Commodity Futures Trading Commission (“Commission”) proposed rule amendments that would establish a “two-pot” cross-margining program between the CME and the London Clearing House (“LCH”). The program would permit participants to cross-margin their positions at the CME Clearing House and LCH while holding those positions at each clearing house in separate accounts.

Acting pursuant to the authority delegated by Commission Regulation 140.96(b), the Division of Trading and Markets (“Division”) has determined to publish the CME's proposal for public comment. The Division believes that publication of the proposal is in the public interest and will assist the Commission in considering the views of interested persons.

DATES:

Comments must be received on or before February 8, 2000.

ADDRESSES:

Comments should be submitted to Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581. Comments also may be sent by facsimile to (202) 418-5221 or by electronic mail to secretary@cftc.gov. Reference should be made to “Chicago Mercantile Exchange's Proposal To Establish A Cross-Margining Program With the London Clearing House.”

FOR FURTHER INFORMATION CONTACT:

Joshua R. Marlow, Attorney-Advisor, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581. Telephone (202) 418-5490.

SUPPLEMENTARY INFORMATION:

I. Background

On October 22, 1999, CME submitted to the Commission proposed rule amendments that would set forth a framework for the establishment of guaranteed cross-margining programs with other clearing organizations. These proposed rule amendments were submitted by CME in anticipation of its plan to establish a cross-margining program with LCH, based on an electronic trading link between CME and the London International Financial Futures Exchange (“LIFFE”). All transactions executed at LIFFE are cleared by LCH. Because the October 22, 1999 submission lacked certain details regarding specifics of the CME-LCH program, CME agreed to allow the Commission to stay its review of the proposal until providing the Commission with such details. On December 27, 1999, CME submitted additional materials to the Commission, including a letter summarizing the proposal; a “Cross-Margining Agreement” between the CME, LCH and LIFFE; a copy of the “Cross-Margining Participant Agreement” for clearing members participating in the Cross-Margining Program; an opinion of outside counsel regarding the cross-border bankruptcy implications of the program's payment guaranty provision; and an overview of the proposal's loss-sharing arrangement.

II. Description of the Proposed Cross-Margining Program

Under the program, CME clearing members that either (1) are clearing members at both LCH and LIFFE, or (2) have affiliates that are clearing members at both LCH and LIFFE, would be eligible to cross-margin proprietary positions that they maintain in Euro Euribor and Euro Libor futures and option contracts at LIFFE and Eurodollar futures and option contracts at CME. This program would take the “two-pot” approach to cross-margining, whereby performance bond and positions of participants are held in separate accounts by the CME Clearing House and by LCH, rather than a “one-pot” approach in which cross-margined positions and performance bond are maintained by the participating clearing organizations in jointly-held accounts. The CME Clearing House and LCH, by the terms of the Cross-Margining Agreement, would calculate daily the amount that each participant in the program could, with cross-margining, reduce its margin levels at LCH and CME. LCH and the CME Clearing House would then provide each other with cross-guaranties in the amount of the associated margin reductions to protect each clearing organization in the event of default by a clearing member of the other clearing organization. CME's proposal is unique in that, unlike the “two-pot” guaranteed cross-margining arrangement between the Government Securities Clearing Corporation and the New York Clearing Corporation (“NYCC”) recently deemed approved by the Commission, the current proposal raises issues of transnational insolvency which have not been previously considered in the cross-margining context.

III. Request for Comment

The Commission requests comment from interested persons concerning any aspect of CME's proposed cross-margining program. The Commission is especially interested in comments regarding the cross-border bankruptcy aspects of this proposal.

Copies of CME's proposed rule amendments and certain other materials are available for inspection at the Office of the Secretariat, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. Copies of the proposed amendments and related materials may also be obtained through the Office of the Secretariat by mail at the above address, by telephone at (202) 418-5100, or by electronic mail at secretary@cftc.gov. Other materials submitted by CME may be available upon request pursuant to the Freedom of Information Act, 5 U.S.C. § 552, and the Commission's regulations thereunder, 17 CFR § 145 (1987), except to the extent they are entitled to confidential treatment as set forth in 17 CFR §§ 145.5, 145.9. Requests for copies of such materials should be made to the FOIA, Privacy Act, and Sunshine Act Compliance Staff of the Office of Secretariat at the Commission's headquarters in accordance with 17 CFR §§ 145.7, 145.8.