119 Grain Exchange Building 400 South 4th Street Minneapolis, MN 55415-1413 

lhopkins@mgex.com 800.827.4746 612.321.7143 Fax: 612.339.1155 equal opportunity employer

Via Portal Submission October 27, 2017 

 MGEX Submission No. 17-30 

Mr. Christopher Kirkpatrick 

Secretary of the Commission 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street NW 

Washington, DC 20581 

RE: Rule Certification Submission Pursuant to Regulation 40.6(a); Updates to 

MGEX Rules 

Dear Mr. Kirkpatrick: 

Pursuant to Commodity Exchange Act (“CEAct”) Section 5c and Commodity Futures 

Trading Commission (“CFTC” or “Commission”) Regulation 40.6(a), the Minneapolis 

Grain Exchange, Inc. (“MGEX” or “Exchange”) hereby certifies that amendment of the 

attached MGEX Rules complies with the CEAct and the Commission regulations 

promulgated thereunder. MGEX further certifies that the submission and pending 

changes to the MGEX Rules and Regulations have been posted on the Exchange website 

at the following link: http://www.mgex.com/regulation.html. 

The Exchange amended MGEX Rule 2105.00. to provide additional clarity regarding the 

amount of cash that a Clearing Member would receive should MGEX need to exercise its 

powers under this Rule and substitute cash with U.S. Treasuries. Specifically, the 

amendment provides that a Clearing Member will receive back the original amount of 

cash deposited regardless of the amount of cash received by the Clearing House after 

liquidating U.S. Treasuries. MGEX also removed certain actions it could take and made 

several housekeeping amendments. 

In addition, the Exchange amended MGEX Rule 2106.00. to (i) explicitly state that MGEX 

can apply excess proprietary funds and assets of a Defaulting Clearing Member following 

a default in a segregated customer account, as mandated by CFTC Regulation 39.16, 

and (ii) remove a provision regarding the allocation of positions in a default scenario 

because the Exchange does not impose any obligation on its Clearing Members to accept 

allocations. Both of these changes stem from discussions MGEX had with the Division 

of Clearing and Risk following a Rulebook Audit conducted earlier this year. Further 

housekeeping amendments were made in this Rule as well. 
All of the attached amendments are being made to enhance transparency and 

compliance with CFTC regulations. The Exchange has reviewed the core principles for 

derivatives clearing organizations (“DCO Core Principles”) and has determined that the 

amendments comply with the requirements of the following DCO Core Principles: 

• DCO Core Principle G – Default Rules and Procedures: The amendments address 

the actions the Exchange will take and allow following a default and thus augment 

MGEX’s default rules and procedures. 

• DCO Core Principle L – Public Information: Core Principle L requires DCOs to 

provide market participants with sufficient information to enable them to identify 

and evaluate accurately the risks and costs associated with using the services of 

the DCO and to have clear and comprehensive rules and procedures. The 

amendments enhance transparency with respect to the procedures MGEX would 

follow in a Liquidity Event and/or default and will be incorporated into MGEX’s 

publicly available Rulebook, thereby further ensuring that the information available 

to the public is accurate, clear, and comprehensive. 

• DCO Core Principle R – Legal Risk: Core Principle R requires DCOs to operate 

pursuant to a well-founded, transparent, and enforceable framework that describes 

the steps a DCO would take to address a default of a Clearing Member and other 

significant aspects of a DCO’s risk management procedures. As explained above, 

the amendments further address the actions the Exchange will take and allow 

following a Liquidity Event and/or a default of a Clearing Member, thereby 

enhancing the overall transparency of MGEX’s legal framework. 

Pursuant to MGEX Bylaw 204.01., the MGEX Board of Directors unanimously approved 

the attached amendments to the MGEX Rulebook. There were no substantive opposing 

views expressed by the Board of Directors, nor is the Exchange aware of any substantive 

opposing views with respect to this filing. 

The attached amendments are to be effective immediately after the 10th business day 

following the date of this submission. If there are any questions regarding this 

submission, please contact me at (612) 321-7143. Thank you for your attention to this 

matter. 

 

Sincerely, 

 

Lindsay R. Hopkins 

Clearing House Counsel 

 
EXHIBIT A 

The following MGEX Regulations are to be amended. Additions are underlined

while deletions are marked through. 

2105.00. LIQUIDITY EVENT. 

In order to satisfy CFTC Regulations and prudential liquidity standards, the Exchange has 

established this Ruleegulation. 

In the event the Clearing House requires liquidity to enable it to promptly meet all of its 

payment obligations to Clearing Members for same day settlement, the Clearing House 

will first attempt to obtain liquidity through the asset sale of pledged collateral, followed 

by the application of any uncommitted funding arrangements, and then through the use 

of its committed lines of credit and any committed repurchase agreements. In the event 

the Clearing House is unable to obtain sufficient funds and liquidity to promptly meet same 

day settlement and payment through such means, the Clearing House may declare the 

occurrence of a Liquidity Event. In such an event, the Clearing House has the authority 

in its sole discretion to take the following actions, in the order listed, to secure same day 

liquidity: 

A. Substitution of Guaranty Fund Cash. The Clearing House may substitute 

the cash deposited by one or more Clearing Members in a guaranty fund 

with U.S. Treasuries deposited as performance bond by the Clearing 

Member(s) that is(are) the initiating cause of the Liquidity Event. The 

amount of cash substituted shall be equivalent to U.S. Treasuries at a 

haircutted market value (determined by the Clearing House as of the prior 

day’s close of business utilizing a recognized third party source). Any U.S. 

Treasuries transferred pursuant to this Ruleegulation shall be applied as a 

guaranty fund deposit on behalf of any such Clearing Member whose cash 

was substituted and will be allocated pro rata among any Clearing Members 

with cash deposits who are not the initiating cause of the Liquidity Event. 

The substitution of U.S. Treasuries for the Clearing Member’s guaranty fund 

deposit will be limited to the size of the Clearing Member’s guaranty fund 

deposit at the time of the Liquidity Event. For any substitution of U.S. 

Treasuries for cash in a guaranty fund, the impacted Clearing Member may, 

within 24 hours of substitution, request that the Clearing House replace the 

cash within 29 business days of the date of the substitution. Any Clearing 

Member requesting cash replacement will receive the original amount of 

cash deposited and accessed by the Clearing House, regardless of the 

value of exact value in cash received by the Clearing House upon liquidation 

of the U.S. Treasuries. 

B. Substitution of Performance Bond Cash: The Clearing House may 

substitute the cash deposited by one or more Clearing Members as 

performance bond with U.S. Treasuries held as collateral by the Clearing 
House. The amount of cash substituted shall be equivalent to the U.S. 

Treasuries at a haircutted market value (determined by the Clearing House 

as of the prior day’s close of business utilizing a recognized third party 

source). Any U.S. Treasuries transferred pursuant to this Ruleegulation

shall be applied as a performance bond deposit on behalf of any such 

Clearing Member whose cash was substituted and will be allocated pro rata 

among any Clearing Members with cash deposits. The substitution of U.S. 

Treasuries for the Clearing Member’s performance bond held by the 

Exchange will be limited to the size of the Clearing Member’s performance 

bond at the time of the Liquidity Event. For any substitution of U.S. 

Treasuries for cash as performance bond, the impacted Clearing Member 

may, within 24 hours of substitution, request that the Clearing House 

replace the cash within 29 business days of the date of the substitution. 

Any Clearing Member requesting cash replacement will receive the original 

amount of cash deposited and accessed by the Clearing House, regardless 

of the value of exact value in cash received by the Clearing House upon 

liquidation of the U.S. Treasuries. 

In order to ensure the Clearing House can obtain sufficient cash from the 

above paragraphs, the Clearing House may notify any Clearing Member 

that is a U.S. Government Securities Broker-Dealer or has a U.S. 

Government Securities Broker-Dealer affiliate to replace its non-cash 

performance bond assets with cash within 60 minutes from the time of 

notification. To the extent that a Clearing Member(s) fails to provide cash 

within 60 minutes or the request occurs after 3:00 p.m. Central Time, the 

Clearing House may debit cash from that Clearing Member’s settlement 

bank account in the amount of the clearing member’s non-cash 

performance bond assets. 

C. U.S. Treasury Sale to Meet Settlement Variation Obligations. The 

Clearing House may offset its settlement variation obligations to any 

Clearing Member that is a U.S. Government Securities Broker-Dealer or 

has a U.S. Government Securities Broker-Dealer affiliate, up to the amount 

of such Clearing Member’s guaranty fund contribution, by selling U.S. 

Treasuries valued based on the prior day’s closing prices with a haircutted 

value in exchange for U.S. dollar cash from the Clearing Member. The U.S. 

Dollar cash received by the Exchange from the Clearing Member shall be 

in the form of the variation margin obligation owed by MGEX, and the 

Exchange shall deliver the purchased U.S. Treasury securities to the U.S. 

Government Securities Broker-Dealer. 

DC. Transfer or Disbursement of Collateral as Compensation for Portfolio 

Auction, Sale, or Transfer. In lieu of satisfying a payment owed from any 

auction, sale, or transfer of an insolvent, defaulted, or suspended Clearing 

Member’s or customer’s portfolio in cash to an auction winner, purchaser, 

or transferee, the Clearing House may satisfy such payment owed to such 
persons by transferring Federal Reserve discount window eligible securities 

with a haircutted market value (determined by the Clearing House as of the 

prior day’s close of business utilizing a recognized third party source) equal 

to the amount of such obligation. 

2106.00. PROTECTION OF CLEARING HOUSE: DEFAULT BY A CLEARING 

MEMBER. 

If a Clearing Member fails promptly to discharge any obligation to MGEX, its security 

deposits, its margins and performance bonds on deposit with MGEX, and any of its other 

assets available to the Exchange shall be applied by the Exchange to discharge the 

obligation, provided that MGEX will not apply any collateral held in segregated customer 

accounts to any payment obligations arising from a default in a Clearing Member’s 

proprietary account. Further, the Exchange may make immediate demand upon any 

guarantor of the Clearing Member. Upon demand and without waiting for application of 

all available assets of the Clearing Member or a formal accounting, such guarantor shall 

pay the Exchange by the time and date set by MGEX. Upon a Clearing Member Default, 

the Exchange may act immediately to attempt to transfer to alternate Clearing Members 

all customer positions and associated collateral (collateral held by the Exchange on behalf 

of the Defaulting Clearing Member for its customer). 

If a default occurs in a segregated customer account, then the Exchange has the right to 

liquidate and apply toward the default all open positions and customer performance bond 

deposits in the account of the Defaulting Clearing Member. Accordingly, positions and 

collateral deposited by customers not causing the default are at risk if there is a default in 

their Clearing Member’s segregated customer account. Following a default in a 

segregated customer account, MGEX can apply any excess proprietary funds and assets 

of the Defaulting Clearing Member.

The Clearing Member shall immediately make up any deficiencies in its security deposit 

resulting from the application of such funds prior to the close of business on the next 

banking day. The Exchange shall be under no obligation to forward any variation pays 

or settlement funds to a Defaulting Clearing Member. 

In addition to application of the available assets of the Defaulting Clearing Member (the 

priority of which is further described in Ruleegulation 2106.02.), the Exchange, President, 

Treasurer, Chief Risk Officer, or other designee may take any other actions that it 

determines necessary to protect MGEX or other Clearing Members. Such actions 

include, but are not limited to, actions authorized elsewhere within the MGEX Rules and 

Regulations, the suspension of clearing privileges until revoked or reinstated by the Board 

or its designee, pursuit of legal action, retention of variation pays, and request for 

additional security deposit and/or performance bonds. The detailed implementation of 

the process of finalizing losses with respect to a Clearing Member Default, including the 

liquidation, allocation, auction or sale of positions or assets of the Defaulting Clearing 

Member shall be conducted by the Exchange in its sole discretion. Any allocation of 

positions from a Defaulting Clearing Member to other non-Defaulting Clearing Members 
shall be proportional to the size of the participating or accepting Clearing Member’s 

positions. 

The Exchange, Board, committees, officers and employees, and any qualified third party, 

including another Clearing Member, authorized by the Exchange to act in the place of the 

Defaulting Clearing Member shall have no liability arising from a failure by a Clearing 

Member to discharge its liabilities; neither shall they be liable for actions taken pursuant 

to MGEX Rules and Regulations, procedures, or actions allowed by law. The 

appointment of a qualified third party does not absolve a Defaulting Clearing Member of 

any of its obligations, and the actions of such qualified third party will be binding upon the 

Defaulting Clearing Member. Neither the Board, committees, the Exchange, nor any of 

its officers, directors, or employees, shall be liable for any losses, damages, or costs, 

including direct, indirect, incidental, and consequential damages, arising out of the 

performance or decisions of the qualified third party or Defaulting Clearing Member. 

The Exchange may establish such procedures as necessary which prescribe in detail how 

the protections under the MGEX RulesRegulation 2106.00. and Chapter 21 will operate. 

Such procedures shall constitute part of the MGEX Rules and Regulations.