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«Summary of Requirements for CME, CBOT, NYMEX and COMEX Clearing Membership And OTC Derivatives Clearing Membership April 2016 CME Clearing ...»

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Summary of Requirements for

CME, CBOT, NYMEX and COMEX Clearing Membership

And OTC Derivatives Clearing Membership

April 2016

CME Clearing (“Clearing House”) is the clearing house division of Chicago Mercantile Exchange

Inc. (“CME”) which is wholly owned by CME Group Inc. (“CME Group“). CME Group is the

ultimate parent of: (1) CME; (2) Board of Trade of the City of Chicago (“CBOT”); (3) New York

Mercantile Exchange, Inc. (“NYMEX”); and (4) Commodity Exchange, Inc. (“COMEX”) (hereafter referred to as “Exchange(s)”).

A firm may become a clearing member of one or more Exchanges and have privileges to clear exchange-traded futures and/or options on futures (“futures/options”) on that Exchange.

Depending upon the clearing membership privileges held, these clearing members may be eligible to clear OTC derivatives products (i.e. cleared swaps and forwards) if additional requirements, including additional capital and risk management requirements, are met. For example, CME clearing members are eligible to clear FX OTC products, Credit Default Swaps (“CDS”) and Interest Rate Swaps (“IRS”), CBOT clearing members are eligible to clear ethanol and grain swaps, NYMEX clearing members are eligible to clear energy OTC products and COMEX clearing members are eligible to clear metal forwards. A CBOT-only, NYMEX-only or COMEX-only clearing member is not eligible to clear CDS or IRS.

Clearing members that will clear exchange-traded futures/options and/or OTC derivatives for customers must be registered with the United States Commodity Futures Trading Commission (“CFTC”) as a Futures Commission Merchant (“FCM”). FCMs are subject to CFTC rules and regulated pertaining to regulatory capital, daily, bi-monthly and monthly financial reporting, required notifications and customer protection. More detailed information concerning FCM registration can be found on the CFTC’s web site at www.cftc.gov.

The general requirements of clearing membership are stated in Chapter 9 of each Exchange’s rulebook. The additional requirements for clearing OTC derivative products are stated in Chapter 8F of CME’s Rulebook, for IRS are stated in Chapter 8G of CME’s Rulebook and for CDS are stated in Chapter 8H of CME’s Rulebook. Also, the Clearing House may impose additional requirements upon the clearing member that may be specific to the products cleared by the clearing member. Below is a summary of the major requirements. For a more detailed account of clearing membership requirements, please review the Clearing Membership Handbook. It can be

found on CME Group’s web site at:

http://www.cmegroup.com/company/membership/files/cme-group-clearing-membershiphandbook.pdf Clearing membership in the Exchanges or for OTC derivatives is a privilege granted by the appropriate Clearing House Risk Committee and may be withdrawn at any time.

General Requirements

–  –  –

3. A clearing member must have an authorized representative (i.e., officer, principal or partner), satisfactory to the Clearing House Risk Committee, to represent the clearing member before the Exchanges and their committees.

4. A clearing member shall be engaged in or demonstrate immediate capacity to engage in the conduct of the business of a clearing member.

5. A clearing member shall ensure that any and all necessary approvals have been received from regulatory authorities, including, but not limited to, the United States Federal Reserve and other foreign banking regulators, to allow the firm to conduct the business of a Clearing Member, if applicable.

6. A clearing member shall demonstrate such fiscal and moral integrity as would justify the Clearing House’s assumption of the risks inherent in clearing its trades.

7. A clearing member shall agree to abide by all Exchange rules upon which it has membership privileges and to cooperate in their enforcement.

8. A clearing member shall agree to guarantee and assume complete responsibility for: (a) all trades executed or directed to be executed by floor brokers and traders qualified by it; and (b) all orders that floor brokers qualified by it negligently execute or fail to execute. In addition, a clearing member shall agree to guarantee and assume responsibility for all trading activity routed through any electronic trading system, if applicable, to the Clearing House for clearing of such transactions and which are guaranteed to the Clearing House by the clearing member via any connection, terminal, link, telecommunications hub or handheld unit provided by a clearing member to a third party, as well as any applicable electronic trading systems and terminals that the clearing member provides to a third party, including an eligible customer, to enter orders.

9. A clearing member shall comply with all credit control policies developed by the Exchange for customer and proprietary transactions. Such credit control policies may include, but not be limited to, registration of credit control administrators with the Exchange, definition of credit control limits, and maintenance of written procedures verifying compliance with Exchange credit control requirements. Any “GC2” credit control functionality required by the Exchange shall be in addition to a clearing member’s initial risk monitoring and credit control procedures.





10. A clearing member must be in “good standing” under each applicable regulatory regime which it is subject to and must maintain this status while it is a clearing member.

Refer to Exchange Rule 901. (General Requirements and Obligations)

–  –  –

Clearing members that are incorporated/domiciled in non-U.S. jurisdictions must be subject to a legal and insolvency regime acceptable to the Clearing House. Clearing members from nonU.S. jurisdictions must use the Clearing House’s approved settlement banks for performance bond deposits and variation margin.

Choice of Law

The rules of the Exchange shall be governed by and construed in accordance with the laws of the State of Illinois in the United States. Any action, claim, dispute or litigation of any kind between the clearing member and the Exchanges shall be adjudicated in a federal or state court in Chicago, Illinois. Clearing members must consent to the jurisdiction of such court and to service of process by any means authorized by Illinois or U.S. federal law, and waive the right to transfer the venue of such litigation. Refer to Rule 905. In addition, the rule provides that clearing members irrevocably waive any grounds of sovereign immunity in any legal action with the Exchanges.

Additional General Requirements for OTC

1. The clearing member shall agree to guarantee and assume responsibility for all OTC derivatives trading activity executed via outside means and submitted for clearing to the Clearing House by any customer, broker or affiliate authorized by the clearing member.

2. A clearing member that will clear IRS and CDS must have appropriate risk management capabilities, operational infrastructure and experience to support their CDS or IRS clearing activity, as prescribed by the Clearing House.

Refer to CME Rule 8F04 (OTC Clearing Member Obligations and Qualifications), CME Rule 8G04 (IRS Clearing Member Obligations and Qualifications) and CME Rule 8H04 (CDS Clearing Member Obligations and Qualifications) for additional information.

Membership Requirements To become a CME clearing member, the firm must purchase and/or acquire by assignment seven CME memberships (i.e. 2 CME division, 2 IMM division, 2 IOM division and 1 GEM division). One CME, IMM, IOM and the GEM must be owned by the clearing member or parent company or individual owner with an acceptable proprietary interest of at least $500,000 in the clearing member (i.e. “firm owned”). The other CME, IMM and IOM memberships may be independently assigned.

To become a CBOT clearing member, the firm must purchase and/or acquire by assignment two Full/B-1 CBOT memberships, if the firm is registered with the CFTC as an FCM, or one Full/B-1 CBOT membership, if the firm is not registered as an FCM. If the firm is required to have two Full CBOT memberships, one Full membership must be owned by the clearing member or a person, including a parent company, with an acceptable proprietary interest of at April 2016 least $500,000 in the clearing member. The other may be independently assigned. If only one CBOT Full membership is required to be assigned for clearing membership, then that one membership must be owned by the clearing member or a person, including a parent company, with an acceptable proprietary interest of at least $500,000 in the clearing member.

To become a NYMEX clearing member, the firm must purchase and/or acquire by assignment two NYMEX memberships. One membership must be owned by the clearing member or parent company or individual owner with an acceptable interest of at least $500,000 in the clearing member. The other membership may be independently assigned.

To become a COMEX clearing member, the firm must purchase and/or acquire by assignment two COMEX memberships. One membership must be owned by the clearing member or parent company or individual owner with an acceptable proprietary interest of at least $500,000 in the clearing member. The other may be independently assigned.

Approved clearing member firms of CME, CBOT and/or NYMEX which also maintain CME Group Inc. shares in accordance with Exchange Rule 106.J. Equity Member Firm requirements are entitled to receive equity member rates on their proprietary trading. CME and CBOT clearing members who do not maintain CME Group Inc. shares are entitled to Rule 106.H. Trading Member Firm rates and NYMEX clearing member firms who do not maintain CME Group Inc.

shares are entitled to Non-Member rates on their proprietary trading activity. Approved COMEX clearing member receive equity member rates on their proprietary trading in accordance with Exchange Rule 106.J. Member Firms.

Guaranty Fund Requirements All clearing members must deposit with the clearing house a guaranty fund deposit for their obligations to the Clearing House.

The minimum guarantee fund deposit for a clearing member which will clear:

• Exchange-traded futures and options is $500,000 or its proportionate share of the Aggregate Guaranty Fund Deposit;

• Exchange-traded futures and options and OTC products (excluding CDS and IRS) and/or using ClearPort is $2,500,000 or its proportionate share of the Aggregate Guaranty Fund Deposit;

• CDS is the greater of $50,000,000 or the clearing member’s proportionate share of the two largest CDS Clearing Member’s losses as outlined in CME Rule 8H07; and

• IRS is the greater of $15,000,000 or the clearing member’s proportionate share of the two largest IRS Clearing Member’s losses as outlined in CME Rule 8G07.

The guaranty fund requirements of the Clearing House are stated in Exchange Rule 816 (Guaranty Fund Deposit) for Exchange-traded futures and options and OTC derivatives (excluding IRS and CDS) in CME Rule 8F07 (Guaranty Fund Deposit); for IRS products in CME Rule 8G07 (IRS Financial Safeguards and Guaranty Fund Deposit); and for CDS products in CME Rule 8H07. (CDS Financial Safeguards and Guaranty Fund Deposit).

April 2016 Default management procedures for exchange-traded futures and options and OTC products, excluding IRS and CDS, may be found in Exchange Rule 802: Protection of Clearing House.

The Clearing House has established separate guaranty funds for IRS and CDS which are separate and distinct from the guaranty fund for each and all other products. The IRS default management procedures may be found in CME Rule 8G.802 (Protection of Clearing House) at http://www.cmegroup.com/rulebook/CME/I/8G/8G.pdf and CDS default management procedures may be found in CME Rule 8H.802 (Protection of Clearing House) at http://www.cmegroup.com/rulebook/CME/I/8H/8H.pdf.

Guaranty fund minimums may be increased from time to time, depending on the mix of OTC asset classes for which the Clearing House provides clearing services.

The Clearing House Risk Committee, the IRS Risk Committee, CDS Risk Committee or the Clearing House may prescribe additional financial, including, but not limited to, increased guaranty fund and/or performance deposit, requirements or grant exemptions.

Capital Requirements Capital requirements for clearing members which are not Banks are specific to its exchange membership privileges and, if applicable, any OTC products that it will clear. For non-Bank clearing members, capital is defined as Adjusted Net Capital as computed in accordance with CFTC Regulation 1.17. For Bank clearing members, capital is defined as Tier I Capital, as defined in accordance with regulations applicable to the bank clearing member. The following

are the applicable capital requirements:

For a CME Clearing Member, the exchange capital requirement is the greater of the CFTC or

SEC capital requirement or:

For a non-Bank clearing member:

• $5,000,000 if it will clear only exchange-traded futures/options; or, • $50,000,000 if a clearing member will clear any OTC derivative product, including, but not limited to, FX OTC, CDS or IRS; or, • 20% of aggregate performance bond requirement for all customer and house accounts containing CME-cleared CDS and IRS positions.

For a Bank clearing member:

• $5,000,000,000 if it will clear exchange-traded futures/options; or, • $50,000,000 if it will clear only OTC derivative products, including, but not limited to, FX OTC, CDS or IRS; or • 20% of aggregate performance bond requirement for all proprietary and affiliate accounts containing CME-cleared CDS and IRS positions.

–  –  –

For a Bank clearing member:

• $5,000,000,000 if it will clear exchange-traded futures/options; or, • $50,000,000 if it will clear only OTC derivative products, including, but not limited to, agricultural OTC derivative products.

For a NYMEX Clearing Member, the exchange capital requirement is the greater of the CFTC or

SEC capital requirement or:

For a non-Bank clearing member:



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