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: Petition for an Order Pursuant to 

Section 1a(12)(C) of the Commodity Exchange Act. 

CME Submission #05-105. 

Dear Ms. Webb: 

Chicago Mercantile Exchange Inc. (“CME” or “the Exchange”) hereby petitions the 

Commission for an Order which would permit Exchange floor brokers and floor traders 

(collectively “floor traders”) who are registered with the Commission, when acting in a 

proprietary trading capacity, to be “eligible contract participants” (“ECPs”) per Section 

1a(12)(C) of the Commodity Exchange Act (“the Act”). 1 

In particular, the Exchange requests the Commission to determine that, pursuant to 

certain terms and conditions, floor traders to be considered ECPs with respect to certain specified 

over-the-counter (“OTC”) transactions in excluded derivative items pursuant to Section 2(d)(1) 

of the Act. In order to participate, the trader must have its OTC trades guaranteed by, and 

cleared at, CME by an Exchange Clearing Member that is registered with the Commission as a 

Futures Commission Merchant (“FCM”). 

 

1 Please make reference to CME Submission #05-103 dated November 21, 2005 which certified various Rule 

amendments enabling a “Substitution” facility and “futures-to-the-date” trading in Eurodollar and currency futures, 

as described in section 1 of this document. As a further reference, we cite CME Submission #05-104 dated 

November 21, 2005 per which the Exchange petitioned the Commission for relief per Section 4d of the CEA. These 

submissions may be considered precursors to the current petition. In particular, we understand that the Commission 

will not act on the current petition until such time that relief might be granted by the Commission with respect to the 

Exchange’s request for relief per Section 4d of the CEA. 
Ms. Jean A. Webb 

November 21, 2005 

Page 2 of 18 

1. Background Information 

This section is intended to outline the concept that CME intends to initiate as discussed in 

its Rule Certification to the Commission.2

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, as that definition may be 

amended by the Commission per this Petition. 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.3

 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 

 

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. 

 

2 See CME Submission #05-103 dated November 21, 2005. 

3 Note that any and all CME clearing members will be permitted to carry transactions established through the 

Substitution process. 

Party A

Buys OTC 

Derivative 

Contract 

OTC bilateral 

 derivative transaction 

Party B

Sells OTC 

Derivative 

Contract 

SUBSTITUTION of 

FUTURES for FORWARDS 

Party A

Long Futures 

Contract(s)

Party A

Short Futures 

Contract(s)

CME 

CLEARING 

HOUSE
Ms. Jean A. Webb 

November 21, 2005 

Page 3 of 18 

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 – In 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. I.e., 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 4 of 18 

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.4 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.5

 

 

4 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 d1 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 + Rd2 (d2/360) ]____

(d3/360) [ 1+Rd1 (d1/360) ] - 1___ 

(d3/360) 

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. 5 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-tothe-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 wellknown 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 5 of 18 

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. 
Ms. Jean A. Webb 

November 21, 2005 

Page 6 of 18 

 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 $11 $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 7 of 18 

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 8 of 18 

Daily market risk is managed through the real-time matching and posting of trades, realtime 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.” 6

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. 

 

6

 Lehman Bros. Research Report, September 2000. 
Ms. Jean A. Webb 

November 21, 2005 

Page 9 of 18 

2. Regulatory Authority 

Section 1a(12) of the Act defines the term “eligible contract participant” or “ECP” by 

listing those entities and individuals considered to be ECPs.7 Per Sections 2(d)(1), 2(g) and 

2(h)(1) of the Act, OTC transactions8 entered into by ECPs in an “excluded” or “exempt” 

commodity, as defined in the Act,9

 are exempt from certain requirements of the Act.10 

Floor brokers and floor traders are included in the definition of ECPs but only to the 

extent that they act “in connection with any transaction that takes place on or through the 

facilities of a registered entity or an exempt board of trade, or any affiliate thereof, on which 

such person regularly trades” per Section 1a(12)(A)(x) of the Act. 

As documented in the section above, CME intends to implement a substitution procedure 

whereby an OTC transaction in designated excluded commodities may be assigned for purposes 

of clearance to the CME Clearing House. As such, these transactions will not explicitly take 

place on or through the facilities of CME, as prescribed by Section 1a(12)(A)(x) of the Act, but 

rather will be executed off exchange in an OTC environment. Accordingly, floor traders do not 

explicitly appear to qualify as ECPs in the context of these transactions. 

However, the Act provides the Commission with authority to expand the ECP definition 

as appropriate. Per Section 1a(12)(C), ECPs may include “any other person that the Commission 

determines to be eligible in light of the financial or other qualifications of the person.” 

 

7 ECPs generally include financial institutions; insurance companies and investment companies subject to regulation; 

commodity pools and employee benefit plans subject to regulation and asset requirements; other entities subject to 

asset requirements or whose obligations are guaranteed by an ECP that meets certain net worth requirements; 

government entities; brokers, dealers, and futures commission merchants (FCMs) subject to regulation and 

organized as other than natural persons or proprietorships subject to total asset requirements or whose obligations 

are guaranteed by an ECP that meets certain net worth requirements; floor brokers or floor traders subject to 

regulation in connection with transactions that take place on or through the facilities of a registered entity or an 

exempt board of trade; individuals subject to total asset requirements; an investment advisor or commodity trading 

advisor acting as an investment manager or fiduciary for another ECP, and any other person that the Commission 

deems eligible in light of the financial or other qualifications of the person. 

8 OTC transactions are transactions that are not executed on a trading facility. Per Section 1a(33)(A) of the Act, 

“trading facility” generally means “a person or group of persons that constitutes, maintains, or provides a physical or 

electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, 

or transactions by accepting bids and offers made by other participants that are open to multiple participants in the 

facility or system.” 

9 Section 1a(14) defines “exempt commodity” as a commodity that is not an excluded commodity or an agricultural 

commodity. Section 1a(13) defines “excluded commodity” as, amongst other things, an interest rate, exchange rate, 

currency, credit risk or measure, debt instrument, measure of inflation, or other macroeconomic index or measure. 

The term “agricultural commodity” is undefined in the Act although Section 1a(4) enumerates a non-exclusive list 

of several agricultural commodities. 

10 OTC transactions in excluded commodities entered into by ECPs per Section 2(d)(1) are generally not subject to 

the Act. OTC transactions in exempt or excluded commodities individually negotiated by ECPs per Section 2(g) are 

generally not subject to the Act. OTC transactions in exempt commodities entered into by ECPs per Section 2(h)(1) 

are generally not subject to the Act apart from anti-manipulation provisions and anti-fraud provisions in certain 

circumstances. 
Ms. Jean A. Webb 

November 21, 2005 

Page 10 of 18 

Thus, CME petitions the Commission to exercise its authority in this regard to designate 

Exchange floor brokers and floor traders as ECPs for purposes of executing certain OTC 

transactions that are subsequently assigned to the CME Clearing House for purposes of clearing 

as futures offered for “trading and clearing” and futures offered on a “cleared only” basis. 

Inclusion of floor traders and floor brokers is intended to serve the public interest 

generally by enhancing liquidity and opportunity. CME floor brokers and floor traders who 

utilize the SUB process to create positions in either “traded and cleared” or “cleared-only” 

Exchange markets will be leveraging their trading skills, experience and market expertise in such 

a manner as to attract additional activity and open interest onto the Exchange. In the process, 

they will likewise be expanding the pool of potential counterparties for OTC market participants 

and generally facilitating liquidity in the OTC marketplace as well. Accordingly, this 

strengthens the ties between, and enhances the utility of both, the exchange-traded and OTC 

derivatives marketplaces. 

Note that a precedent in this regard has been established by the CFTC with respect to 

activities on NYMEX’s Clearport platform. 11 

 

11 See Order of the Commodity Futures Trading Commission dated February 4, 2003 which “deems, subject to 

certain conditions, ... [NYMEX] ... floor brokers and floor traders, who are registered with the Commission, when 

acting in a proprietary trading capacity, to be ‘eligible contract participants’ ... [and] ... are permitted to enter into 

certain specified over-the-counter (OTC) transactions in exempt commodities pursuant to Section 2h(1) of the Act.” 

The Order of February 4, 2003 was granted for a two-year period. By subsequent Order dated February 8, 2005, the 

CFTC extended the original Order of February 4, 2003. We are aware that Section 2(h)(2) subjects the exempt 

commodities that are the subject of NYMEX’s initiative to anti-fraud and anti-manipulation strictures while the 

excluded commodities that are the subject of the current initiative are not so bound. Note that these excluded 

commodities, i.e., Eurodollars and currencies, are both extraordinarily liquid and extremely transparent, in both 

exchange traded and over-the-counter derivative trading forums. As such, we submit that no extraordinary measures 

are necessary in this context despite this apparent disparity. 
Ms. Jean A. Webb 

November 21, 2005 

Page 11 of 18 

3. Terms and Conditions 

 

 CME seeks an Order per the provisions of Section 1a(12)(A)(x) to designate Exchange 

floor brokers and floor traders as ECPs for purposes of executing OTC transactions, in excluded 

commodities, which are subsequently assigned to the CME Clearing House for purposes of 

clearing as futures offered for “trading and clearing” and futures offered on a “cleared only” 

basis subject to the following terms, conditions and representations.12

1. The contracts, agreements or transactions must be executed pursuant to Section 2(d)(1) of 

the Act. 

2. Permissible contracts, agreements or transactions are limited to the following CME 

contracts ... (i) Eurodollar futures; (ii) British Pound futures, (iii) Canadian Dollar 

futures, (iv) Japanese Yen futures, (v) Swiss Franc futures, (vi) Australian Dollar futures, 

(vii) EuroFX futures, (viii) EuroFX/British Pound CrossRate futures, and (ix) 

EuroFX/Japanese Yen CrossRate futures. Said contracts, agreements or transactions 

must be submitted for clearance by the CME Clearing House per CME Rule 537, 

SUBSTITUTION OF FUTURES FOR FORWARDS (SUB). 

3. The Exchange floor broker or floor trader must have obtained a financial guarantee for 

the contracts, agreements or transactions from a CME clearing member that is ... (i) 

registered with the Commission as a Futures Commission Merchant (FCM); and (ii) that 

clears the OTC contracts, agreements or transactions thus guaranteed. 

4. Exchange floor brokers or floor traders may not enter into OTC contracts, agreements or 

transactions where the counterparty is another Exchange floor broker or floor trader in 

contracts that are listed for trading and clearing. 

 

12 We are aware that the Commission’s Order dated February 4, 2003 with respect to NYMEX’s Clearport initiative 

was granted for a two-year period. By Order dated February 8, 2005, the CFTC extended the original Order of 

February 4, 2003 for a subsequent one-year period. However, we respectfully request that the Commission grant 

this Order on a permanent basis. In particular, we note NYMEX submitted an analysis of its experience during the 

initial two-year period as part of its Petition to extend the original order and did not report any negative 

consequences. The Commission further undertook a detailed cost-benefit analysis of NYMEX’s petition for an 

extension and could not report any negative consequences. Finally, we submit that the Commission likely would 

have granted a permanent extension had NYMEX so petitioned but NYMEX choose to pursue a limited term 

extension in light of its stated intentions to alter the regulatory structure per which it conducted such business 

activities. Further, we submit that, to the extent that CME proposes to extend this service in the context of highly 

liquid and competitive markets as opposed to narrowly constructed or specialized contracts, the necessity to proceed 

on a temporary basis is mitigated. 
Ms. Jean A. Webb 

November 21, 2005 

Page 12 of 18 

5. CME agrees to maintain appropriate compliance systems to monitor OTC contracts, 

agreements or transactions of its floor brokers and floor traders. 

6. This Order would permit registered floor brokers or floor traders to participate in the 

OTC markets, subject to a guarantee from an Exchange clearing member that is 

registered as an FCM and to Exchange oversight. 

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 #05-105 on all future correspondence regarding this notification. 

Sincerely, 

John W. Labuszewski, Managing Director 

Research & Product Development 

CC: Mr. Duane Andresen, CFTC 
Ms. Jean A. Webb 

November 21, 2005 

Page 13 of 18 

Appendix - 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 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. 
Ms. Jean A. Webb 

November 21, 2005 

Page 14 of 18 

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

251. British Pound 

252. Canadian Dollar 

253. Japanese Yen 

254. Swiss Franc 

255. Australian Dollar 

261. Euro FX 

301. Euro FX/British Pound Cross Rate 

303. 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 15 of 18 

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.

2. 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 16 of 18 

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).

2. 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 18 

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. 

2. 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 18 of 18 

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)