[Federal Register: January 24, 2000 (Volume 65, Number 15)]
[Page 3669-3670]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



RIN 3038-ZA06

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.


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,\1\ based on
an electronic trading link between CME and the London International
Financial Futures Exchange (``LIFFE'').\2\ 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;
\3\ and an overview of the proposal's loss-sharing arrangement.

    \1\ The proposed amendments involve CME Rules 802 and 830.
Amended CME Rule 830 would, as proposed, add definitions
distinguishing between a ``Joint Cross-Margining Program,'' also
known as the ``one-pot'' approach, and a ``Guaranteed Cross-
Margining Program,'' also known as the ``two-pot'' approach. Both of
these approaches are described infra. Amendments to CME Rule 830
would also, among other things, delineate which Exchange members are
eligible to participate in a guaranteed cross-margining program.
Amended CME Rule 802, as proposed, would mandate how the obligations
of a cross-margining program participant would be discharged in the
event of default.
    \2\ CME submitted the proposed CME-LIFFE link to the Commission
by letters dated November 23, 1999 and December 14, 1999. The
Division informed CME that the CME-LIFFE link could become effective
without prior Commission approval, pursuant to Commission Regulation
1.41(c), by letter dated December 21, 1999. In brief, the program
permits individuals and firms with access to CME Globex terminals to
obtain cross-exchange access through Globex to the contracts listed
by LIFFE on LIFFE's electronic trading system, CONNECT, provided
they are approved by LIFFE as members (pursuant to a fast-track
procedure), affiliate with a clearing member of LCH to clear trades
made in LIFFE contracts, and agree to abide by LIFFE rules.
Likewise, individuals and firms with access to LIFFE CONNECT could
obtain cross-exchange access through CONNECT to the contracts listed
by CME on Globex, provided they are LIFFE members identified to CME,
affiliate with a clearing member of CME to clear trades made in CME
contracts, and agree to abide by the Globex trading rules of CME.
    \3\ The Division verbally requested a document of this nature
during an August 19, 1999 meeting with representatives from CME.

II. Description of the Proposed Cross-Margining Program

    Under the program, CME clearing members that either (1) are

[[Page 3670]]

members at both LCH and LIFFE, or (2) have affiliates that are clearing
members at both LCH and LIFFE,\4\ 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,\5\
the current proposal raises issues of transnational insolvency which
have not been previously considered in the cross-margining context.

    \4\ All LIFFE clearing members must also be members of LCH.
    \5\ July 2, 1999, letter to George F. Haase, Jr., NYCC
President, from David P. Van Wagner, Associate Director of the
Division of Trading and Markets.

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.
Sec. 552, and the Commission's regulations thereunder, 17 CFR Sec. 145
(1987), except to the extent they are entitled to confidential
treatment as set forth in 17 CFR Secs. 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 Secs. 145.7, 145.8.

    Issued in Washington, D.C. on January 14, 2000 by the
Alan L. Seifert,
Deputy Director.
[FR Doc. 00-1569 Filed 1-21-00; 8:45 am]

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