Ms. Jean A. Webb
November 21, 2005
Page 21 of 22

45231.B. Trading Unit

(Refer to Rule 45202.B Trading Unit.)

45231.C. Price Increments

Positions shall be marked in terms of the IMM Index, 100.00 minus the yield on an annual basis for a
360-day year. (A deposit rate of 7.20% shall be quoted as 92.80.)

1.

The Nearest Expiring Contracts with Terminations within 31 Days of the Trade Date

Minimum fluctuations of the IMM Index shall be in multiples of .0025 ($6.25). For each .0025
increase in the Index, the Clearing House shall credit ($6.25 per contract) those clearing members
holding open long positions and debit ($6.25 per contract) those clearing members holding open
short positions. For each .0025 decline in the Index, the Clearing House shall debit ($6.25 per
contract) those clearing members holding open long positions and credit ($6.25 per contract)
those clearing members holding open long positions.

All Expiring Contracts with Terminations Exceeding 31 Days from the Trade Date

Minimum fluctuations of the IMM Index shall be in multiples of .005 ($12.50). For each .005
increase in the Index the Clearing House shall credit ($12.50 per contract) those clearing
members holding open long positions and debit ($12.50 per contract those clearing members
holding open short positions. For each .005 decline in the Index the Clearing House shall debit
($12.50 per contract) those clearing members holding open long positions and credit ($12.50 per
contract) those clearing members holding open short positions.

45231.D. Position Accountability

(Refer to Rule 45202.D. Position Accountability)

45231.E. Accumulation of Positions

(Refer to Rule 45202.E. Accumulation of Positions)

45231.F. [Reserved]

45231.G. Termination of Trading

“Cleared only” futures contracts shall terminate at 11:00 a.m. (London Time)* on any London bank
business day that is also an Exchange business day, mutually agreed to by buyer and seller, other than
applicable standard termination dates in futures offered for “trading and clearing.”

*

This is 5:00 a.m. (Chicago Time) except when Daylight Savings Time is in effect in either, but
not both, London or Chicago.


Ms. Jean A. Webb
November 21, 2005
Page 15 of 22

45231.B. Trading Unit

(Refer to Rule 45202.B Trading Unit.)

45231.C. Price Increments

Positions shall be marked in terms of the IMM Index, 100.00 minus the yield on an annual basis for a

360-day year. (A deposit rate of 7.20% shall be quoted as 92.80.)

1.

The Nearest Expiring Contracts with Terminations within 31 Days of the Trade Date

Minimum fluctuations of the IMM Index shall be in multiples of .0025 ($6.25). For each .0025
increase in the Index, the Clearing House shall credit ($6.25 per contract) those clearing members
holding open long positions and debit ($6.25 per contract) those clearing members holding open
short positions. For each .0025 decline in the Index, the Clearing House shall debit ($6.25 per
contract) those clearing members holding open long positions and credit ($6.25 per contract)
those clearing members holding open long positions.

All Expiring Contracts with Terminations Exceeding 31 Days from the Trade Date

Minimum fluctuations of the IMM Index shall be in multiples of .005 ($12.50). For each .005
increase_in the Index the Clearing House shall credit ($12.50 per contract) those clearing
members holding open long positions and_ debit ($12.50 per contract those clearing members
holding open short positions. For each .005 decline in the Index the Clearing House shall debit
($12.50 per contract) those clearing members holding open long positions and credit ($12.50 per
contract) those clearing members holding open short positions.

45231.D. Position Accountability

(Refer to Rule 45202.D. Position Accountability)

45231.E. Accumulation of Positions

(Refer to Rule 45202.E. Accumulation of Positions)

45231.F. [Reserved

45231.G. Termination of Trading

“Cleared only” futures contracts shall terminate at_11:00 a.m. (London Time)* on any London bank

business day that is also an Exchange business day, mutually agreed to by buyer and seller, other than

applicable standard termination dates in futures offered for “trading and clearing.”

*

This is 5:00 a.m. (Chicago Time) except when Daylight Savings Time is in effect in either, but

not both, London or Chicago.


Ms. Jean A. Webb
November 21, 2005
Page 6 of 22

The Exchange intends to deploy cleared only futures in markets that enjoy tremendous
liquidity and activity including Eurodollar and currency futures. Tight spread relationships exist
between contracts maturing on different dates, enforced by a facile arbitrage. Thus, we
reasonably believe that risks in cleared-only futures “to-the-date” may readily be offset in
regularly listed IMM-dated Eurodollar and currency futures traded on CME.

Further, deep and liquid markets in “to the date” contracts are available on an OTC basis.
This is supported by data published by the Bank for International Settlements (BIS) regarding the
outstanding notional value and average daily turnover in OTC transacted currency derivatives
and interest rate Forward Rate Agreements (FRAs).

Note that there is some $29.6 trillion and $187.3 trillion in outstanding currency and
interest rate contracts, respectively in the OTC markets. By comparison, the outstanding
notional value of all exchange traded derivatives was $46.6 trillion with $19.1 trillion domiciled
at CME as of December 2004. Turnover in the OTC market is similarly impressive with an
average daily volume of $1.3 trillion in FX and $1.0 trillion in interest rate related contracts.

Outstanding Notional Value of Exchange Traded and OTC Derivatives
(Billions USD)

Dec-00 Dec-01 Dec-02 Dec-03 Jun-04 Dec-04
Exchange Traded Derivatives |__ 14,270 23,760 23,816 36,740 52,802 46,592
CME Contracts | 6,692 13,672 10,705 14,289 21,733 19,135

Total OTC Derivatives | 95,199 111,178 | 141,679 | 197,167 | 220,058 | 248,288
Foreign exchange contracts 15,666 16,748 18,460 24,475 26,997 29,575
Outright forwards, FX swaps |_ 10,134 10,336 10,719 12,387 13,926 15,242

Currency Swaps | __3,194 3,942 4,503 6,371 7,033 8,217
Options | __ 2,338 2,470 3,238 5,717 6,038 6,115

Interest rate contracts | 64,668 77,568 101,658 _| 141,991 164,626 187,340
Forward rate agreements | 6,423 7,737 8,792 10,769 13,144 12,805

Interest rate swaps | _ 48,768 58,897 79,120 111,209 _| 127,570 | 147,366
Options | __9,476 10,933 13,746 20,012 23,912 27,169
Equity-linked contracts | __1,891 1,881 2,309 3,787 4,521 4,385
Commodity Contracts 662 598 923 1,406 1,270 1,439

Source: Bank for International Settlements (BIS)

(However, as of November 2, 2005, the initial speculative performance bond requirements for standard Eurodollar
futures in months 13-44 was also $945.) These same considerations apply with equal force in the context of
currency futures-to-the-date which are likewise driven by cost of carry relationships and the differential between
interest rates in the two currencies represented in the contract. These procedures make suitable allowance for the
possibility of the lack of liquidity in futures-to-the-date to the extent that the close pricing relationships between
futures-to-the-date and standard IMM dated futures contracts permit facile risk layoff and settlement pricing.


is. Jean A. Webb
November 21, 2005
Page 22 of 22

45231.H. Contract Modifications
(Refer to Rule 45202.H. Contract Modifications)

45232. SETTLEMENT PROCEDURES
45232.A. Final Settlement Price
The final settlement price shall be 100 minus the British Bankers’ Association Interest Settlement
Rate for Three~Month Eurodollar Interbank Time Deposits, rounded to the nearest 1/10000th of a
percentage point, on the contract termination date. (Decimal fractions ending in a five (5) are
rounded up. For example, an average rate of 8-21/32% - 8.65625% - would be rounded to 8.6563 and
then subtracted from 100 to determine a final settlement price of 91.3437.) (The 16 reference banks
selected by the British Bankers’ Association to provide offered rates are major participants in the
London Eurodollar Market.)
45232.B. Final Settlement
(Refer to Rule 45203.B. Final Settlement)
45233. FAILURE TO PERFORM
(Refer to Rule 45204. FAILURE TO PERFORM)

45234. [RESERVED]

45235. EMERGENCIES, ACTS OF GOD, ACTS OF GOVERNMENT

(Refer to Rule 45206. EMERGENCIES, ACTS OF GOD, ACTS OF GOVERNMENT)

(End Chapter 452)


Ms. Jean A. Webb
November 21, 2005
Page 19 of 22

XXX31.G, Termination of Cleared Only Futures Contracts

“Cleared only” futures contracts shall terminate on any Exchange business day mutually agreed to by
buyer and seller, other than applicable standard termination dates in futures offered for “trading and
clearing.”

XXX31.H. Contract Modifications

(Refer to Rule XXX01.H. Contract Modifications)

XXX32. SETTLEMENT PROCEDURES (Chapters 251, 252, 253, 254, 255, 261 only)

XXX32.A. Physical Delivery of Cleared Only Futures Contracts

1.

Procedures

In addition to the procedures and requirements contained in this chapter, delivery procedures shall
be governed by the rules set forth in Chapter 7.

Delivery Days

Delivery shall be made on the second business day succeeding the termination date for the
respective “cleared only” futures contract. If that day is not a business day in the country of
delivery or is a bank holiday in either Chicago or New York City, then delivery shall be made on
the next day which is a business day in the country of delivery and is not a bank holiday in
Chicago or New York City.

For CME Rule 25232.A.2. Delivery Days for Canadian Dollar only:

2.

Delivery Days

Delivery shall be made on the first business day succeeding the termination date for the
respective “cleared only” futures contract. If that day is not a business day in the country of
delivery or is a bank holiday in either Chicago or New York City, then delivery shall be made on
the next day which is a business day in the country of delivery and is not a bank holiday in
Chicago or New York City.

XXX32.B. [Reserved]


Ms. Jean A. Webb
November 21, 2005
Page 11 of 22

Appendix 1: Rule Amendments

(Deletions are bracketed and overstruck, additions are underlined.)

537. {RESERVED} SUBSTITUTION OF FUTURES FOR FORWARDS (SUB)

(Ex-Pit or Ex-CME® Globex® Transactions). A substitution of futures contracts for over-the-counter
(OTC) forward instruments shall be permitted by arrangement between eligible contract participants and
comprised of two discrete transactions, where, the buyer and seller of the futures contract_must_be.
respectively, the buyer and seller of the forward instrument. The forward instrament component shall
involve the commodity underlying the futures contract (or a derivative, by-product or related product of
such commodity). The quantity covered by the forward instrument must be approximately equivalent to
the quantity covered by the futures contract. The forward instrament component of an SUB transaction
must comply with applicable CFTC forward regulatory requirements, if any. The Exchange shall
determine eligible futures contracts and over-the-counter instruments.

804. SUBSTITUTION

Except with respect to trades made pursuant to Rules 526, 537, 538, 719, 853 and transactions entered
into under CME AM and Rule 8D38, the Clearing House shall be substituted as, and assume the position
of, seller to the buyer and buyer to the seller of the relevant number of Exchange or Marketplace contracts
upon the successful matching of trade data submitted to the Exchange by the clearing members on the
long and short sides of a trade. With respect to contracts that are traded on and matched by another
exchange or market, the Clearing House shall be substituted as, and assume the position of, seller to buyer
and buyer to seller of the relevant number of such contracts upon matching of trade data submitted to and
accepted by the Exchange.

Upon such substitution, each clearing member shall be deemed to have bought the contracts from or sold
the contracts to the Clearing House, as the case may be, and the Clearing House shall have all the rights
and be subject to all the liabilities of such member with respect to such transaction. Such substitution
shall be effective in law for all purposes.

With regard to trades made pursuant to Rules 526, 537, 538, 719 and 853, the Clearing House shall be
substituted at the time payment of the first settlement variation and performance bond due for such trades
pursuant to Rules 814 and 815, respectively, is confirmed by the appropriate settlement bank for both
members.

With respect to trades made pursuant to Rule 8D38 (Finality), the Clearing House shall assume the
obligation to perform when the results of an Auction are final as set forth in the CME AM rules.


Ms. Jean A. Webb
November 21, 2005
Page 8 of 22

Continued Compliance with Core Principles - The Exchange submits that the initiative
described herein is compliant with DCO Core Principles as enumerated in Section 5b(c)(2) of the
CEA and Part 39 of Commission Regulations. In particular, Core Principle B requires a DCO to
demonstrate “adequate financial, operational, and managerial resources to discharge the
responsibilities of a derivatives clearing organization.” Core Principle D requires a DCO to
maintain “ability to manage the risks associated with discharging the responsibilities of a
derivatives clearing organization through the use of appropriate tools and procedures.”

Note that CME Clearing House will deploy the same systems, procedures, people and
processes to clear SUB transactions as currently utilized with other transactions cleared by CME.
The Clearing House is staffed by over 90 employees, including IT and Audits staff. In the first
six months of 2005, the CME Clearing House processed and cleared over 882.2 million
transactions on behalf of CME and CBOT with an estimated notional value of $272.3 trillion for
CME products alone.

CME Clearing House maintains substantial financial and default resources with a
financial safeguard package in excess of $4 billion. This package includes the market value of
CME securities pledged to the Clearing House, a $750 million temporary liquidity facility with a
consortium of domestic and international banks, $60 million in CME capital contribution, $1.07
billion in clearing member security deposits, and risk capital assessment powers estimated at
$2.94 billion.

An additional $43.7 billion collateral is held in the form of performance bonds as of June
30, 2005. Performance bond requirements are established at levels designed to cover 95%-99%
of all close-to-close market movements based upon study of market volatility. Periodic testing
and simulations are conducted to ensure adequate coverage. The Clearing House further
conducts variation analysis of positions on a real-time basis to monitor capital adequacy.
Positions are settled twice and we maintain the ability to require more frequent mark-to-markets
in the event of extreme volatility. Variation pays and collects of clearing members exceed $1.5
billion on a daily basis.

In the event of the default of a clearing member, the Clearing House will apply
performance bonds, security deposits and assets of the defaulting firm in satisfaction of the debt.
Should additional assets be required, the CME Clearing House would apply additional elements
of the financial safeguards package.

Risk management practices and procedures currently utilized to manage risks associated
with standard CME futures transactions will likewise be employed to manage risks associated
with contracts crated through the SUB facility. The Clearing Houses’s core risk management
functions incorporate ... daily risk monitoring; performance bond review and maintenance;
periodic risk monitoring and trend analysis; credit risk analysis; collateral and financial
safeguards; and, the application of the CME SPAN® system. Note that the SPAN system was
developed by CME in 1988 to assess risk on a comprehensive portfolio basis and has been
accepted by regulators and deployed by exchanges as the world standard for risk management.


Ms. Jean A. Webb
November 21, 2005
Page 7 of 22

BIS further estimates that $59,724 billion of outstanding OTC interest rate derivatives or
31.9% of the total outstanding value of $187,340 billion as of December 2004 is denominated in
U.S. Dollars (USD). While definitive data is unavailable, anecdotally, we may estimate that
10%-20% of that $59,724 billion in outstanding USD denominated OTC interest rate derivatives
are IMM-dated. Thus, perhaps 80%-90% of that $59,724 or $47.8-$53.8 billion in outstanding
OTC interest rate derivatives are non-IMM dated.

Turnover in OTC Derivatives Market
(Average daily turnover in April, Notional Value in Billions)

1995 1998 2001 2004
Foreign Exchange Turnover $688 $959 $853, $1,292
Outright forwards and FX swaps $643 $862 $786 $1,152
Currency Swaps $4 $10 $7 $21
Options $41 $87 $60 $117
Other $1 $0 $0. $2
Interest Rate Turnover $151 $265 $489 $1,025
Forwards (FRAs) $66 $74 $129 $233
Swaps $63 $155 $331 $621
Options $21 $36 $29 $171
Other $2 $0 $0 $0
TOTAL Derivatives Turnover $880 $1,265 $1,385 $2,410
Turnover at April 2004 exchange rates $825 $1,350 $1,600 $2,410
Exchange Traded derivatives $1,221 $1,382 $2,180 $4,657
Currency contracts $17 $u $10 $23
Interest rate contracts $1,204 $1,371 $2,170 $4,634

Source: Bank for International Settlements (BIS)

Similarly, BIS estimates that some $25,998 billion of the $29,575 billion in outstanding
OTC currency derivatives include USD as one side of the transaction, or 87.9%. Anecdotally,
we estimate that perhaps only 2-3% of all OTC currency derivatives are IMM-dated. Thus, some
97%-98% or $25,218-$25,478 billion in outstanding currency derivatives may be non-IMM
dated.

Thus, and in the event of a default associated with cleared only futures-to-the-date
contracts, CME’s Clearing House is confident in its ability to lay off risk in these contracts in the
relevant OTC markets. Or, CME may lay off risk in the cleared only contracts with offsetting
positions in its own regularly listed currency and interest rate contracts. CME does not anticipate
any particular operational problems associated with such risk-management activity to the extent
that any such activity in the context of futures-to-the-date is completely analogous to risk
Management activities associated with standard IMM-dated contracts, for which the CME
Clearing House is well prepared. Accordingly, these dynamically-listed futures “to the date”
shall be subject to normal CME margin requirements and to applicable CME Rules and CFTC
Regulations.


Ms. Jean A. Webb
November 21, 2005
Page 20 of 22

XXX32. SETTLEMENT PROCEDURES (Chapters 301 and 303 only)

XXX32.A. Physical Delivery of Cleared Only Futures Contracts

1,

Procedures

In addition to the procedures and requirements contained in this chapter, delivery procedures shall
be governed by the rules set forth in Chapter 7.

The Euro/ (enter either British pound or Japanese yen) cross-rates futures contracts assigned
pursuant to Chapter XXX shall be delivered in banks designated by the Exchange. Buyers of the
Euro/ (enter either British pound or Japanese yen) cross-rate futures contract shall deliver the
minimum-fluctuation currency (enter either British pound or Japanese yen) and receive the
trading-unit currency (Euro). Sellers of the Euro/ (enter cither British pound or Japanese yen)
cross-rate futures contract shall deliver the trading-unit currency (Euro) and receive. the
minimum-fluctuation currency (enter either British pound or Japanese yen).

Delivery Days

Delivery shall be made on the second business day succeeding the termination date for the
respective “cleared only” futures contract. If that day is not a business day in both countries of
delivery or is a bank holiday in either Chicago or New York City, then delivery shall be made on
the next day which is a business day in both countries of delivery and is not a bank holiday in
Chicago or New York City.

XXX33. EMERGENCIES, ACTS OF GOVERNMENT, ACTS OF GOD

(Refer to Rule XXX03. EMERGENCIES, ACTS OF GOVERNMENT, ACTS OF GOD)

CHAPTER 452
Three-month Eurodollar Futures

45230. SCOPE OF CLEARED ONLY FUTURES RULES

Unless otherwise noted below, the following Rules supersede the Rules presented earlier in this chapter.
All other contract specifications remain the same as presented earlier in this chapter.

45231.

CLEARED ONLY FUTURES CHARACTERISTICS

45231.A. Nature of Cleared Only Futures Contracts

“Cleared only” futures contracts shall be permitted for termination dates on any London bank
business day that is also an Exchange business day, other than applicable standard termination dates
in futures offered for “trading and clearing.” Cleared only contracts may be assigned to the Clearing
House only through the Substitution process per CME Rule 537., SUBSTITUTION OF FUTURES
FOR FORWARDS (SUB).


Ms. Jean A. Webb
November 21, 2005
Page 10 of 22

If you require any additional information regarding this matter, please do not hesitate to
contact me at 312-466-7469 or via e-mail at jlab@cme.com. Please reference our CME
Submission #05-103 on all future correspondence regarding this notification.

Sincerely,
_

Lo o
th be aa
/ Le

John W. Labuszewski, Managing Director
Research & Product Development

CC: Messrs. John Lawton, Duane Andresen, CFTC


cme @

Chicago Mercantile Exchange
20 South Wacker Drive 312/930.1000 tel
Chicago, It 60606-7499 312/466.4410 fax

www.cme.com

November 21, 2005

Ms. Jean A. Webb

Office of the Secretariat

Commodity Futures Trading Commission
Three Lafayette Centre

1155 21st Street, N.W.

Washington, DC 20581

RE: Exchange Certification of Substitution of Futures
for Forwards (SUB) Process. CME Submission #05-103.

Dear Ms. Webb:

Chicago Mercantile Exchange Inc. (“CME” or “the Exchange”) hereby certifies
amendments to its Rules which would provide for a Substitution of Futures for Forwards
(“SUB”) process. The Exchange’s Chairman of the Board, Chief Executive Officer and
President and Chief Operating Officer acting jointly, approved these amendments on October 21,
2005, per their delegated authority under Rule 230.j. We intend to make this action effective as
of a date to be determined and reported subsequently to the Commission.

The Exchange certifies that these actions neither violate nor are inconsistent with any
provision of the Commodity Exchange Act or of the rules thereunder.

Appendix 1 provides the text of the Rule amendments with additions underlined and
deletions bracketed and overstruck; Appendix 2 provides a clean copy of the Rules as amended.


Ms. Jean A. Webb
November 21, 2005
Page 13 of 22

XXX31.G. Termination of Cleared Only Futures Contracts

“Cleared only” futures contracts shall terminate on any Exchange business day mutually agreed to by

buyer and seller, other than applicable standard termination dates in futures offered for “trading and

clearing.”

XXX31.H. Contract Modifications

(Refer to Rule XXX01H. Contract Modifications)

XXX32. SETTLEMENT PROCEDURES (Chapters 251, 252, 253, 254, 255, 261 only)

XXX32.A. Physical Delivery of Cleared Only Futures Contracts

1.

Procedures

In addition to the procedures and requirements contained in this chapter, delivery procedures shall
be governed by the rules set forth in Chapter 7.

Delivery Days

Delivery shall be made on the second business day succeeding the termination date for the
respective “cleared only” futures contract. If that day is not_a business day in the country of
delivery or is a bank holiday in either Chicago or New York City, then delivery shall be made on
the next day which is a business day in the country of delivery and is not a bank holiday in

Chicago or New York City.

For CME Rule 25232.A.2. Delivery Days for Canadian Dollar only:

2.__Delivery Days

Delivery shall be made on the first business day succeeding the termination date for the
respective “cleared only” futures contract. If that day is not a business day in the country of
delivery or is a bank holiday in either Chicago or New York City, then delivery shall be made on
the next day which is a business day in the country of delivery and is not_a bank holiday in

Chicago or New York City.

XXX32.B. [Reserved


Ms. Jean A. Webb
November 21, 2005
Page 12 of 22

251.
252.
253.
254.
255.
261.
301.
303.

CHAPTERS 251, 252, 253, 254, 255, 261, 301, 303

British Pound

Canadian Dollar

Japanese Yen

Swiss Franc

Australian Dollar

Euro FX

Euro FX/British Pound Cross Rate
Euro FX/Japanese Yen Cross Rate

(Rule Numbers and Letters are Adjusted Appropriately for Individual Chapters)

XXX30. SCOPE OF CLEARED ONLY FUTURES RULES

Unless otherwise noted below, the following Rules supersede the Rules presented earlier in this chapter.

All other contract specifications remain the same as presented earlier in this chapter.

XXX31. CLEARED ONLY FUTURES CHARACTERISTICS

XXX31.A. Nature of Cleared Only Futures Contracts

“Cleared only” futures contracts shall be permitted for termination dates on any Exchange business
day, other than applicable standard termination dates in futures offered for “trading and clearing.”
Cleared only contracts may be assigned to the Clearing House only through the Substitution process
per CME Rule 537., SUBSTITUTION OF FUTURES FOR FORWARDS (SUB).

XXX31.B. Trading Unit

(Refer to Rule XXXO1LB. Trading Unit)

XXX31.C._ Price Increments

(Refer to Rule XXXO1.C. Price Increments)

XXX31.D. Position Accountability
(Refer to Rule XXX01.D Position Accountability)

XXX31.E. Accumulation of Positions

(Refer to Rule XXX01.E. Accumulation of Positions)

XXX31.F. [Reserved


Ms. Jean A. Webb
November 21, 2005
Page 9 of 22

Daily market risk is managed through the real-time matching and posting of trades, real-
time mark-to-market, and real-time stress testing. Market, operational, liquidity, and credit risks
are continuously and effectively monitored on a daily basis. The Clearing Service Customer
Support Group acts as the focal point of contact for back-office clearing member support and
operational issue support.

The CME Clearing House performs periodic risk monitoring and trend analysis including
hypothetical stress testing, liquidity analysis, open interest concentrations, new firm monitoring,
audit risk monitoring, and clearing member risk reviews.

The Clearing House routinely reviews the credit risk and credit rating of clearing member
firms and its settlement banks, as well as counterparty reviews. Lastly, the Clearing House
reviews the acceptability of different collateral types and applicable haircuts.

Market Benefits - CME believes that this facility will benefit the marketplace by providing
ECPs with the ability to meld the flexible negotiation and matching capabilities associated with
OTC markets with the financial sureties and capital efficiencies offered by CME’s multi-lateral
clearing facility. In particular, a centralized, multilateral clearing facility in the context of OTC
derivative markets promises many benefits which may be summarized as follows ...

“Swaps carry credit risk since they are subject to the default of the counterparty ... the main
drawback to swaps ... is ... non-fungibility ... and the absence of a centralized market. When an
investor wants to unwind his/her position, he/she has to either enter another swap and be exposed
to two default risks or reach an agreement with the original counterparty to close the swap [thus]
investing in swaps requires significant logistics [and] price transparency may be diminished ...
Going forward, we can expect the creation of a central clearing house that could alleviate these
problems. Marking to market swaps will reduce the liquidity risk, and creating standardized
products will improve the liquidity of the market.” *

Flexibility, or the capacity to tailor a contract to the risk-management needs of the
moment, has long been an important benefit associated with OTC derivative markets. The
deployment of the “futures-to-the-date” concept creates additional flexibility, extending the
utility of CME contracts as ECPs may more precisely hedge their cash positions with offsetting
futures positions that match closely in terms of date.

* Lehman Bros. Research Report, September 2000.


Ms. Jean A. Webb
November 21, 2005
Page 5 of 22

Note that arbitrage transactions may. readily be executed through CME’s standard
execution facilities (open outcry in the pit or through the Globex electronic trading platform)
which ensure that these contracts price pursuant to cost of carry considerations. Thus, settlement
prices may readily be derived mathematically for “to the date” futures offered on a “cleared
only” basis.? Further, CME intends to apply standard margining levels to cleared only futures
despite the likelihood that liquidity in these contracts may be diminished relative to traded and
cleared futures.*

? Note that CME intends to offer cleared only futures in the context of its currency and interest rate futures products.
These products typically trade closely in conformance with cost of carry considerations. In the context of currency
futures, that mathematical relationship may generally be modeled as ... Futures Price = Spot Price + Financing
(represented by domestic short-term rates) — Payouts (represented by foreign short-term rates). As such, the value of
a futures expiring on a non-IMM date is linearly related to standard IMM dated currency contracts. Similarly, the
value of an interest rate futures contract such as Eurodollars may be modeled mathematically by reference to the
formulae for Implied Forward Rates (IFR). An IFR may be used to identify the value of a forward rate agreement
(FRA) or interest rate futures contract based on a item delivered dI days in the future with a term of d3 days
provided one may reference the spot rate of an investment extending d1 days and the spot rate extending d2 days
(where d2=d1+d3).

IFR= 1 + Ry (42/360) . 1
(43/360) [ 14+Rg, (41/360) J (43/360)

For most practical purposes, the value of a non-IMM dated Eurodollar contract may generally be represented in a
linear relationship between the next available shorter-term IMM dated contract and the next available longer-term
IMM dated contract. CME Rule 813 provides for settlements by reference to observed spread relationships where
timely pricing information may be unavailable. In particular ... “if no sale occurs in the closing range, the
settlement price shall be set at a price which when compared to the settlement price of the next contract month
reflects the same differential that existed between the two contract months on the previous day, unless there is a
higher bid or lower offer in existence at the close. In such case, the higher bid or lower offer shall be the settlement
price ... if such settlement price is not consistent with sales in other months during the closing range or with market
information known to the designated Exchange official supervising the closing or to members of the Pit Committee,
the designated Exchange official, with the advice of the Pit Committee, may establish a settlement price at a level
consistent with such other sales or market information and shall prepare a written record setting forth the basis for
any modification of such settlement price.” Thus, there is ample information, and that CME has in place a workable
and sound framework and procedures, per which to identify reasonable and representative settlement prices in
cleared only futures where current transaction information may be unavailable.

> Performance bond requirements are designed to cover 95% to 99% of any close-to-close market movement based
upon studies of price volatility on a daily basis. CME Clearing House applies advanced quantitative methodologies
{including Extreme Value Theory, Exponentially Weighted Moving Average, Value at Risk and others) in the
process. The combination of these methods provides information accurately to evaluate historical and projected
market conditions using a minimum of four years of data. Performance bond levels are further evaluated routinely
through back testing of coverage levels vs. actual portfolio fluctuations. Changes approaching current margins are
identified in daily exception reporting and subject to review. The CME Clearing House conducts monthly risk
meetings that include the evaluation of price changes which exceed current margin requirement. Changes to
performance bond requirements are proposed, discussed, and approved by Clearing House senior management and
risk staff. Performance bonds may be changed between meetings when necessary. To illustrate, note that as of
November 2, 2005, the initial speculative performance bond requirement for Eurodollar futures in months 1-12 is
established at $945. Accordingly, the initial speculative performance bond requirement for a Eurodollar future-to-
the-date that falls, for example, between months 4 and 5 would likewise be $945. This is warranted to extent that a
Eurodollar future-to-the-date between months 4 and 5 will price very similarly to standard Eurodollar futures in
months 4 and 5 and in accordance with cost of carry relationships driven by the yield curve and amenable to well-
known mathematical formulae. Note that CME may establish different margin requirements for standard Eurodollar
futures in months 13-44 based upon our constant monitoring of market conditions and pricing relationships.



Ms. Jean A. Webb
November 21, 2005
Page 16 of 22

45231.H. Contract Modifications

(Refer to Rule 45202.H. Contract Modifications)

45232._ SETTLEMENT PROCEDURES
45232.A. Final Settlement Price

The final settlement price shall be 100 minus the British Bankers' Association Interest Settlement
Rate for Three-Month Eurodollar Interbank Time Deposits, rounded to the nearest _1/10000th of a
percentage point, on the contract termination date. (Decimal fractions ending in a five (5) are
rounded up. For example, an average rate of 8-21/32% - 8.65625% - would be rounded to 8.6563 and
then subtracted from 100 to determine a final settlement price of 91.3437.) (The 16 reference banks
selected by the British Bankers' Association to provide offered rates are major participants in the
London Eurodollar Market.)

45232.B. Final Settlement

(Refer to Rule 45203.B. Final Settlement)

45233. FAILURE TO PERFORM

(Refer to Rule 45204. FAILURE TO PERFORM)

45234. [RESERVED!
45235. EMERGENCIES, ACTS OF GOD, ACTS OF GOVERNMENT

(Refer to Rule 45206. EMERGENCIES, ACTS OF GOD, ACTS OF GOVERNMENT)

(End Chapter 452)


Ms. Jean A. Webb
November 21, 2005
Page 18 of 22

251

CHAPTERS 251, 252, 253, 254, 255, 261, 301, 303

. British Pound
252.
253.
254,
255.
261.
301.
303.

Canadian Dollar

Japanese Yen

Swiss Franc

Australian Dollar

Euro FX

Euro FX/British Pound Cross Rate
Euro FX/Japanese Yen Cross Rate

(Rule Numbers and Letters are Adjusted Appropriately for Individual Chapters)

XXX30. SCOPE OF CLEARED ONLY FUTURES RULES

Unless otherwise noted below, the following Rules supersede the Rules presented earlier in this chapter.
All other contract specifications remain the same as presented earlier in this chapter.

XXX31. CLEARED ONLY FUTURES CHARACTERISTICS

XXX31.A. Nature of Cleared Only Futures Contracts

“Cleared only” futures contracts shall be permitted for termination dates on any Exchange business
day, other than applicable standard termination dates in futures offered for “trading and clearing.”
Cleared only contracts may be assigned to the Clearing House only through the Substitution process
per CME Rule 537., SUBSTITUTION OF FUTURES FOR FORWARDS (SUB).

XXX31.B. Trading Unit

(Refer to Rule XXX01.B. Trading Unit)

XXX31.C. Price Increments

(Refer to Rule XXX01.C. Price Increments)

XXX31.D. Position Accountability

(Refer to Rule XXX01.D Position Accountability)

XXX31.E. Accumulation of Positions

(Refer to Rule XXX01.E. Accumulation of Positions)

XXX31.F. [Reserved]


Ms. Jean A. Webb
November 21, 2005
Page 4 of 22

Eligible Contracts - The Exchange intends to deploy this OTC clearing facility with respect to
certain designated futures contracts listed for trading and clearing; and, listed for clearing only.
The Exchange intends to offer this facility in the context of standard IMM-dated futures listed
for trading and clearing including Eurodollar and various currency futures contracts
(specifically, the British Pound, Canadian Dollar, Japanese Yen, Swiss Franc, Australian Dollar,
EuroFX, EuroFX/British Pound CrossRate and EuroFX/Japanese Yen CrossRate). The
Exchange further intends to offer this facility in the context of cleared-only “futures-to-the-date”
settled on non-IMM dates in the same contract markets.

The Exchange will further determine the nature and character of the initiating OTC
derivative transactions. In particular, the OTC instrument must parallel the futures contract in
terms of the underlying instrument, term and transaction quantity.

For example, an OTC Forward Rate Agreement (FRA) with a 3-month term with a $1
million face value may be deemed an acceptable substitutable for a CME Eurodollar futures
contract. Or, an OTC interest rate swap may be deemed substitutable for a strip or bundle of
CME Eurodollar futures of similar term. The Exchange will, from time to time, specify
acceptable OTC derivative instruments.

Cleared Only Futures — \n addition, the Exchange intends to permit the creation of futures in
specified futures markets with maturity dates that do not conform to current standard CME
expirations (“futures to the date”). These contracts may be tradable only through the process of
SUB. Le., they may be traded in an OTC environment and assigned to the CME CH for
purposes of clearing at which point they achieve the status of futures contacts and may be held in
segregated futures contracts. As such, we refer to these contracts as “cleared only” futures ...
as opposed to standard futures contracts offered on a “traded and cleared” basis.

Cleared only futures contracts would, at least initially, be limited to Eurodollar and
currency futures. Note, for example, that the Exchange lists as of this writing, Eurodollar futures
that mature in September 2005 with a standard International Monetary Market (“IMM”) maturity
date of 9/19/05; October 2005 on 10/17/05; November 2005 on 11/14/05; December 2005 on
12/19/05; March 2006 on 3/13/06; June 2006 on 6/19/06, etc. Using the SUB process, the
Exchange may create a “to the date” Eurodollar contract that matures on an alternate date that is
mutually agreed by the two counterparties to the bilateral transaction, e.g., 9/28/05. In the case
of Eurodollar futures, this date is restricted to normal Exchange and London bank business days.

Margining Cleared-Only Contracts - Cleared only futures will be settled on a daily basis per
CME Rule 813, which provides for settlement per observed spread relationships. This procedure
is adequate and appropriate to the extent that CME offers “traded and cleared” contracts in the
eligible contracts settled on standard IMM dates.


Ms. Jean A. Webb
November 21, 2005
Page 3 of 22

Substitution Process — CME intends to offer eligible contract participants (“ECPs”), as defined
in Section 1a(12)(C) of the CEA, the opportunity to execute, transact or match certain contracts
as OTC derivatives contracts on a bilateral basis between two ECPs. Thus, only matched
transactions, executed in a manner appropriate to any OTC transaction, may be presented to
CME for purposes of clearing. Subsequently, CME CH will permit the assignment of such
transactions to the CME CH.' In the process, the original bilateral contracts between the two
counterparties will be extinguished by the counterparties to the OTC derivative transaction and
replaced by futures contracts in a process we referred to as “Substitution of Futures for
Forwards” (“SUB”).

Substitution of Futures for Forwards (SUB) Process

OTC bilateral Party B

derivative transaction

>|
SUBSTITUTION of
FUTURES for FORWARDS
Party A CME Party A
Long Futures CLEARING Short Futures
Contract(s) HOUSE Contract(s)

Subsequent to the original SUB, the resulting futures contracts shall be subject to all
normal financial, reporting and regulatory requirements associated with CME futures contracts
created in any other manner. In particular, they may be offset by another futures transaction
created with the use of the SUB process or by conventional means including an offsetting
transaction in an open outcry environment, through the CME® Globex® electronic trading
platform, ex-pit transaction or through the delivery/cash settlement process, as applicable to the
specific contract in question.

* Note that any and all CME clearing members will be permitted to carry transactions established through the
Substitution process.


Ms. Jean A. Webb
November 21, 2005
Page 14 of 22

XXX32. SETTLEMENT PROCEDURES (Chapters 301 and 303 only)

XXX32.A. Physical Delivery of Cleared Only Futures Contracts

1.

Procedures

In addition to the procedures and requirements contained in this chapter, delivery procedures shall
be governed by the rules set forth in Chapter 7.

The Euro/ (enter either British pound or Japanese yen) cross-rates futures contracts assigned
pursuant to Chapter XXX shall be delivered in banks designated by the Exchange. Buyers of the
Euro/ (enter either British pound or Japanese yen) cross-rate futures contract shall deliver the
minimum-fluctuation currency (enter either British pound or Japanese_yen) and receive the
trading-unit currency (Euro). Sellers of the Euro/ (enter either British pound or Japanese yen)
cross-rate_futures contract_shall deliver the _trading-unit currency (Euro) and receive the
minimum-fluctuation currency (enter either British pound or Japanese yen).

Delivery Days

Delivery shall be made on the second business day succeeding the termination date for the
respective “cleared only” futures contract. If that day is not a business day in both countries of
delivery or is a bank holiday in either Chicago or New York City, then delivery shall be made on
the next day which is a business day in both countries of delivery and is not a bank holiday in

Chicago or New York City.

XXX33. EMERGENCIES, ACTS OF GOVERNMENT, ACTS OF GOD

(Refer to Rule XXX03. EMERGENCIES, ACTS OF GOVERNMENT, ACTS OF GOD)

CHAPTER 452
Three-month Eurodollar Futures

45230._ SCOPE OF CLEARED ONLY FUTURES RULES

Unless otherwise noted below, the following Rules supersede the Rules presented earlier in this chapter.

All other contract specifications remain the same as presented earlier in this chapter.

45231.

CLEARED ONLY FUTURES CHARACTERISTICS

45231.A. Nature of Cleared Only Futures Contracts

“Cleared only” futures contracts shall be permitted for termination dates on any London bank

business day that is also an Exchange business day, other than applicable standard termination dates

in futures offered for “trading and clearing.” Cleared only contracts may be assigned to the Clearing

House only through the Substitution process per CME Rule 537., SUBSTITUTION OF FUTURES

FOR FORWARDS (SUB).


Ms. Jean A. Webb
November 21, 2005
Page 17 of 22

Appendix 2: Clean Copy of Rules as Amended
537. SUBSTITUTION OF FUTURES FOR FORWARDS (SUB)

(Ex-Pit or Ex-CME® Globex® Transactions). A substitution of futures contracts for over-the-counter
(OTC) forward instruments shall be permitted by arrangement between eligible contract participants and
comprised of two discrete transactions, where, the buyer and seller of the futures contract must be,
respectively, the buyer and seller of the forward instrument. The forward instrument component shall
involve the commodity underlying the futures contract (or a derivative, by-product or related product of
such commodity). The quantity covered by the forward instrument must be approximately equivalent to
the quantity covered by the futures contract. The forward instrument component of an SUB transaction
must comply with applicable CFTC forward regulatory requirements, if any. The Exchange shall
determine eligible futures contracts and over-the-counter instruments.

804. SUBSTITUTION

Except with respect to trades made pursuant to Rules 526, 537, 538, 719, 853 and transactions entered
into under CME AM and Rule 8D38, the Clearing House shall be substituted as, and assume the position
of, seller to the buyer and buyer to the seller of the relevant number of Exchange or Marketplace contracts
upon the successful matching of trade data submitted to the Exchange by the clearing members on the
long and short sides of a trade. With respect to contracts that are traded on and matched by another
exchange or market, the Clearing House shall be substituted as, and assume the position of, seller to buyer
and buyer to seller of the relevant number of such contracts upon matching of trade data submitted to and
accepted by the Exchange.

Upon such substitution, each clearing member shall be deemed to have bought the contracts from or sold
the contracts to the Clearing House, as the case may be, and the Clearing House shall have all the rights
and be subject to all the liabilities of such member with respect to such transaction. .Such substitution
shall be effective in law for all purposes.

With regard to trades made pursuant to Rules 526, 537, 538, 719 and 853, the Clearing House shall be
substituted at the time payment of the first settlement variation and performance bond due for such trades
pursuant to Rules 814 and 815, respectively, is confirmed by the appropriate settlement bank for both
members.

With respect to trades made pursuant to Rule 8D38 (Finality), the Clearing House shall assume the
obligation to perform when the results of an Auction are final as set forth in the CME AM rules.