SUBMISSION COVER SHEET

IMPORTANT: Check box if Confidential Treatment is requested 

Registered Entity Identifier Code (optional): 23-301

Organization: Chicago Mercantile Exchange Inc. (“CME”)

Filing as a: DCM SEF DCO SDR 

Please note - only ONE choice allowed.

Filing Date (mm/dd/yy): 07/17/23 Filing Description: Request for Approval of Amended 

and Restated Cross-Margining Agreement and Service Level Agreement between Chicago 

Mercantile Exchange Inc. and Fixed Income Clearing Corporation

SPECIFY FILING TYPE 

Please note only ONE choice allowed per Submission.

Organization Rules and Rule Amendments

Certification § 40.6(a)

Approval § 40.5(a)

Notification § 40.6(d)

Advance Notice of SIDCO Rule Change § 40.10(a)

SIDCO Emergency Rule Change § 40.10(h)

Rule Numbers: See filing.

New Product Please note only ONE product per Submission.

Certification § 40.2(a) 

Certification Security Futures § 41.23(a)

Certification Swap Class § 40.2(d)

Approval § 40.3(a)

Approval Security Futures § 41.23(b)

Novel Derivative Product Notification § 40.12(a)

Swap Submission § 39.5

Official Product Name: 

Product Terms and Conditions (product related Rules and Rule Amendments)

Certification § 40.6(a) 

Certification Made Available to Trade Determination § 40.6(a)

Certification Security Futures § 41.24(a)

Delisting (No Open Interest) § 40.6(a) 

Approval § 40.5(a)

Approval Made Available to Trade Determination § 40.5(a)

Approval Security Futures § 41.24(c)

Approval Amendments to enumerated agricultural products § 40.4(a), § 40.5(a)

“Non-Material Agricultural Rule Change” § 40.4(b)(5)

Notification § 40.6(d)

Official Name(s) of Product(s) Affected: 

Rule Numbers: 
300 Vesey Street New York, NY 10282 T 212 299 2200 F 212 301 4645 christopher.bowen@cmegroup.com cmegroup.com

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Christopher Bowen 

Managing Director and Chief Regulatory Counsel

Legal Department

July 17, 2023

VIA ELECTRONIC PORTAL

Mr. Christopher J. Kirkpatrick

Office of the Secretariat

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, N.W.

Washington, D.C. 20581

Re: CFTC Regulation 40.5(a) Request for Approval. Amended and Restated CrossMargining Agreement and Service Level Agreement between Chicago Mercantile 

Exchange Inc. and Fixed Income Clearing Corporation.

CME Submission No. 23-301

Dear Mr. Kirkpatrick:

Pursuant to Commodity Futures Trading Commission (“CFTC” or “Commission”) Regulations 39.13(i) and 

40.5(a), Chicago Mercantile Exchange Inc. (“CME” or “CME Clearing”), a registered derivatives clearing 

organization (“DCO”) under the Commodity Exchange Act, as amended (“CEA” or “Act”) respectfully 

requests that the Commission approve its proposal to enter into an Amended and Restated CrossMargining Agreement (“Proposed XM Agreement”) between CME and Fixed Income Clearing Corporation 

(“FICC”) and a related CME-FICC Cross-Margining Service Level Agreement (“Service Level Agreement”) 

(the “Proposal”). Both Agreements are filed as Exhibit A and B, respectively, under separate cover and are 

subject to a request for confidential treatment. Separately, as a registered clearing agency, FICC must 

submit the Proposed XM Agreement and Service Level Agreement in a rule filing with the Securities and 

Exchange Commission (“SEC”). Thus, the Proposed XM Agreement and Service Level Agreement will not 

be executed and may not be implemented until approval is received from the SEC or they otherwise become 

effective under the Securities Exchange Act of 1934.

As further explained below, the Proposal will benefit clearing members and the overall financial markets by: 

(1) expanding the scope and efficiency of the margin offsets that are available to clearing members under 

the current cross-margining arrangement, thus reducing their trading costs and allowing for more efficient 

capital usage; (2) improving the efficiency and effectiveness of the existing default management framework;

and (3) encouraging greater utilization of clearing, thereby facilitating systemic risk reduction. This 

submission shall become effective on September 1, 2023. CME intends to implement the Proposal 

following the receipt of all required regulatory approvals by CME and FICC and upon a date agreed between 

CME and FICC.

I. Background

As the Commission is aware, CME and FICC currently have a cross-margining arrangement in place which 

is governed by a cross-margining agreement between CME and FICC dated January 2, 2004, as amended

(the “Current Agreement”).1 Under the Current Agreement, each of CME and FICC holds and manages its 

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 The Current Agreement has been amended by Amendment No. 1 dated October 11, 2005, Amendment No. 2 dated February 5, 

2007, Amendment [No. 3] dated February 28, 2011 and Amendment No. [4] dated June 9, 2014. Appendix A of the Current Agreement 

was most recently amended on June 9, 2014. The notice provisions of the Current Agreement for CME and FICC were amended on 

February 28, 2011, February 3, 2016 and March 11, 2016, respectively. The current version of the Current Agreement is available 

at www.dtcc.com/legal/rules-and-procedures.aspx.
300 Vesey Street New York, NY 10282 T 212 299 2200 F 212 301 4645 christopher.bowen@cmegroup.com cmegroup.com

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own positions and collateral, and independently determines the extent to which a cross-margining 

participant’s eligible positions will be made available for cross-margining after internal offsets (referred to 

as the “residual positions”). The Current Agreement contemplates such cross-margining participants to 

include both (i) entities that are clearing members of both FICC and CME (“Joint Clearing Members”) and 

(ii) pairs of clearing members where one is a clearing member of CME and has an affiliate that is a clearing 

member of FICC (“Cross-Margining Affiliates”). The offsetting residual positions are allocated to different 

“offset classes” (i.e., maturity buckets) specified separately for CME and FICC positions. A margin amount 

is calculated for the residual positions in each offset class by using the lower of the applicable CME or FICC 

margin rate.

2 A disallowance factor limits the amount of margin offset (reduction) allowed between a given 

CME and FICC offset class. Based on these disallowance factors, margin offsets are determined for each 

offset class. The sum of these margin offsets gives the amount by which a cross-margining participant’s 

margin requirement may be reduced at CME and at FICC, which amount is referred to as the crossmargining reduction. 

CME and FICC each guarantee a cross-margining participant’s performance to each other up to a specified 

maximum amount that relates back to the cross-margining reduction and the results of liquidating the 

participant’s positions and ultimately its collateral. The guaranty represents a contractual commitment each 

clearing organization has to the other. 

A default by a cross-margining participant triggers the loss sharing provisions of the Current Agreement

and determines the guaranty payments, if any, that will flow between the CME and FICC. These provisions

generally provide that if CME or FICC has a net loss (the “worse off party”) and the other party has a net 

gain, no loss or a smaller loss (the “better off party”), then the better off party must pay the worse off party 

the smallest of: (i) the worse-off party’s net loss; (ii) the better-off party’s net gain; or (iii) the amount required 

to equalize their gains or losses. 

The Current Agreement also contains a “cross-guaranty” provision which does not directly relate to crossmargining. This provision reflects the view that excess collateral of a defaulting cross-margining participant 

should initially remain with the clearing organizations, if needed, to cover all of their losses. Under this 

provision, if, after the cross-margining related guaranty payments described above are made, one of the 

clearing organizations has a remaining surplus and the other has a remaining loss, the surplus must be 

paid by the former to the latter.3

II. The Proposed XM Agreement

In general, CME and FICC are seeking to update the Current Agreement and arrangements to improve 

efficiency and reduce risk by: (x) enhancing the modeling and margining of correlation risk; (y) requiring 

more frequent exchange of position information to collateralize risk exposures; and (z) improving the default 

management process through joint liquidation of the combined portfolio. The primary changes contained in 

the Proposed XM Agreement and Service Level Agreement are as follows:

Margin calculation/better timing

The Proposed XM Agreement would revise the method for calculating the margin reduction that 

would apply to a cross-margining participant’s eligible positions. Like the Current Agreement, the 

Proposed XM Agreement covers both Joint Clearing Members and Cross-Margining Affiliates. 

2 CME and FICC use different margin rates to establish margin requirements for their respective eligible products. Margin reductions 

under the Current Agreement are always computed based on the lower of the applicable margin savings percentages. This 

methodology results in a potentially lesser benefit to the participant but ensures a more conservative result (i.e., more collateral held 

at the clearing organization) for CME and FICC.

3 Each clearing organization’s obligation to make such cross-guaranty payment is subject to its prior obligation to make payments 

under certain other loss sharing agreements to which it is a party.
300 Vesey Street New York, NY 10282 T 212 299 2200 F 212 301 4645 christopher.bowen@cmegroup.com cmegroup.com

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Under the Proposed XM Agreement, eligible positions will be identified separately from the rest of 

the participant’s positions at CME or FICC. CME and FICC would then calculate the difference 

between the margin that it would require a cross-margining participant to deposit with respect to its 

eligible positions in the absence of cross-margining and the amount of margin it would require such 

participant to deposit if the combined portfolio of the participant’s CME and FICC eligible positions 

were held in its account, with each clearing organization using its own margin methodology. CME 

and FICC will each determine the percentage of margin savings that would be derived by margining 

these positions as a combined portfolio and compare their respective margin savings percentages. 

CME and FICC will then reduce the amount of margin required to be deposited by such participant 

at CME and FICC, respectively, by the lower of such margin savings percentages, thereby applying 

a degree of conservatism in their approach.

Default Management 

Under the Proposed XM Agreement, CME and FICC would coordinate the liquidation of a CrossMargining Participant by applying the following default management process. First, CME and FICC 

would attempt to jointly liquidate the combined portfolio, and any losses or gains arising from such 

liquidation would be shared by CME and FICC in proportion to each clearing organization’s relative 

share of the cross-margin requirement in the manner described below. As a result, the default 

management process would be streamlined by making clear that a joint liquidation would be the 

preferred method used by the clearing organizations in the event of a member default. A joint 

liquidation is optimal because it maximizes the efficiency and effectiveness of the liquidation 

process by enabling each clearing organization to recognize reduced risk by offsetting risk positions 

together. If either CME or FICC determines that jointly liquidating the relevant positions is not 

feasible or advisable, such clearing organization (“X”) may, upon written notice to the other clearing 

organization (“Y”), offer to assume the relevant positions at the last settlement price for such 

positions immediately prior to the time such offer is made and receive any remaining collateral 

relating thereto from Y. If such an assumption occurs, then no further loss (or gain) sharing would 

be required under the Proposed XM Agreement. Finally, as a last resort if a clearing organization 

determines that neither of the foregoing are feasible or advisable, then the parties will liquidate the 

relevant positions separately and share any gains or losses in the manner described below. 

The Proposed XM Agreement also provides that if one clearing organization (the “first clearing 

organization”) suspends a defaulting cross-margining participant but the other clearing organization 

(the “second clearing organization”) determines not to do so, then the second clearing organization

must require the defaulting participant to pay the second clearing organization the sum of its margin 

reductions at both clearing organizations within one hour. If such payment is made, then the 

second clearing organization must pay the first clearing organization the amount of such 

participant’s margin reduction at the first clearing organization. After the second clearing 

organization makes such payment, the second clearing organization will not have any further loss 

sharing obligations to the first clearing organization under the Proposed XM Agreement. If the 

second clearing organization does not receive such amount from the defaulting participant within 

this timeframe, then the second clearing organization must also suspend the defaulting crossmargining participant. 

Loss Sharing

The Proposed XM Agreement provides for two types of loss sharing. First, the Proposed XM 

Agreement expressly provides that from the time a cross-margining participant defaults until the 

time such default is resolved, a clearing organization that owes variation margin to the defaulting 

participant with respect to its eligible positions may, under certain circumstances, be obligated to 

pay some or all of such amount to the other clearing organization to the extent such clearing 

organization is owed variation margin by the defaulting participant with respect to such positions. 

After a default is resolved, the Proposed XM Agreement provides for loss sharing arrangements, 

which vary depending upon whether the clearing organizations engage in a joint liquidation or 
300 Vesey Street New York, NY 10282 T 212 299 2200 F 212 301 4645 christopher.bowen@cmegroup.com cmegroup.com

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pursue separate liquidations. In a joint liquidation, the clearing organizations would determine 

whether the sum of their individual net gains and net losses result in a combined net gain or net 

loss. The clearing organizations would then allocate any combined net gain or net loss pro rata

based on each clearing organization’s share of the cross-margining requirement (i.e., the ratio of 

(i) the margin required for the XM account at the clearing organization to (ii) the total XM margin 

requirement across both clearing organizations). If a clearing organization determines that it is not 

feasible or advisable to resolve the default pursuant to a joint liquidation or a buy-out and the 

clearing organizations instead proceed to liquidate the respective positions separately, then gains 

or losses would be shared on a “better off/worse off” basis. Specifically, if CME or FICC has a net 

loss (the “worse off party”) and the other party has a net gain (the “better off party”), then the better 

off party must make a guaranty payment to the worse off party which is equal to the lesser of: (i) 

the worse-off party’s net loss; or (ii) the better-off party’s net gain. Under the foregoing scenarios, 

the defaulting cross-margining participant will become obligated to reimburse the guarantor 

clearing organization for the amount of the guaranty payment. Unlike the Current Agreement, the 

Proposed XM Agreement does not contain a general “cross-guaranty” provision. 

Eligible Positions

Under the Current Agreement, products eligible for cross-margining are those products agreed 

between the parties and identified within an appendix to the Current Agreement. The only interest 

rate futures and options contracts that are currently eligible for cross-margining under the Current 

Agreement are Eurodollar contracts listed on CME and certain U.S. Treasury contracts listed on 

the Chicago Board of Trade Incorporated. Under the Proposed XM Agreement, eligible products

will similarly be determined, and subject to amendment, by mutual agreement between the parties. 

However, initially, the Proposed XM Agreement will expand the list of eligible products to include 

additional interest rate futures cleared by CME, which are set forth in Exhibit A to the Proposed XM 

Agreement. Eligible products cleared at FICC would not change and would remain comprised of 

all U.S. Treasury securities cleared by FICC’s Government Securities Division (“GSD”), as set forth 

in Exhibit B to the Proposed XM Agreement. 

Clearing Member Agreements

Under the Current Agreement, eligible cross-margining participants are required to enter into a 

Proprietary Cross-Margin Account Agreement for Clearing Members—in the case of Joint Clearing 

Members—or Proprietary Cross-Margin Account Agreement (Pairs of Affiliated Clearing Members)

—in the case of Cross-Margining Affiliates (collectively, the “Participant Agreements”). Under these 

Participant Agreements, the Joint Clearing Member or Cross-Margining Affiliates agree to, among 

other things, be bound by CME’s and GSD’s applicable rules and by the provisions of the CrossMargining Agreement between FICC and CME, as any of the foregoing may be in effect from time 

to time. Under the Proposed XM Agreement, the Participant Agreements have been updated to 

make edits which are clarifying in nature and to conform the Participant Agreements to the 

Proposed XM Agreement. Further edits were made to ensure appropriate treatment of the parties 

under a default scenario. Existing participants will be required to sign new Participant Agreements. 

Service Level Agreement

Under the Current Agreement, CME and FICC share position and risk information once per day. 

Under the Proposed XM Agreement, CME and FICC will streamline their operational processes by 

entering into a separate Service Level Agreement to set forth the form and manner in which position 

and margin information must be communicated between the parties. Among other things, the 

Service Level Agreement will require more frequent and timely exchange of such information,

including on an intraday basis, which will help ensure that margin reductions are based on the most 

current information available. 
300 Vesey Street New York, NY 10282 T 212 299 2200 F 212 301 4645 christopher.bowen@cmegroup.com cmegroup.com

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CME Clearing has reviewed the derivatives clearing organization core principles (“Core Principles”) as set 

forth in the Commodity Exchange Act (“CEA” or “Act”) and identified that the updates reflected in the 

Proposed XM Agreement and the Service Level Agreement may have some bearing on the following 

principles:

• DCO Core Principle D – Risk Management: The Proposed XM Agreement would revise the 

method for calculating the margin reduction that would apply to a cross-margining participant’s 

eligible positions by utilizing calculations derived from CME and FICC’s approved risk models. 

This change represents an improvement over the current process because these models 

capture correlations at a more granular position level and dynamically adjust to capture changes 

in correlations over time. In addition, by utilizing the lesser of CME’s or FICC’s margin savings 

percentage as the basis for applying this reduction, this approach is designed to consistently 

yield prudential margin requirements in differing market environments. Further, the more timely 

and frequent information exchange requirements required under the Service Level Agreement

would ensure that the margin requirements generated under the Proposed XM Agreement are 

based on the most current position information available. As a result, the Proposed XM 

Agreement and Service Level Agreement are consistent with Core Principle D because they 

serve to enhance CME’s ability to manage the risks associated with cross-margining through 

the use of more effective risk management tools and procedures. 

• DCO Core Principle B – Financial Resources: The Proposed XM Agreement requires the 

parties to exchange variation margin that may be owed to a defaulting cross-margining 

participant under certain circumstances during the liquidation period. This provision thus 

enhances CME Clearing’s ability to manage its liquidity risk consistent with CFTC Regulation 

39.11(e). 

• DCO Core Principle G – Default Rules and Procedures: The Proposed XM Agreement promotes

compliance with Core Principle G by setting forth a specific default management waterfall which 

prioritizes the joint liquidation of a cross-margining participant’s eligible positions. Such joint 

liquidation would be conducted pursuant to default management guidelines adopted by CME 

and FICC which would require CME and FICC to conduct joint default management drills in 

order to confirm the efficacy of these guidelines. Further, CME’s buy-out option embedded in 

the default management waterfall may serve to reduce the adverse selection risk that is inherent 

in the liquidation of a portfolio during stressed market conditions by eliminating the need for a 

clearing organization to hedge its portfolio risk by effecting open market transactions. 

• DCO Core Principle R – Legal Risk: The revisions to the Proposed XM Agreement provide legal 

certainty as to the operation of the XM Program by reflecting the agreed operational processes 

between the parties in an efficient manner through the creation of the Service Level Agreement.

This will provide for more operational transparency between the parties and permit them to 

address their changing operational needs and capabilities in a more efficient manner.

CME Clearing has requested confidential treatment with respect to Proposed XM Agreement and the 

Service Level Agreement, which have been submitted concurrently with this submission under separate 

cover. The Proposed XM Agreement includes the following as exhibits: Proprietary Cross-Margin Account 

Agreement for Clearing Members (Joint Clearing Member) and the Proprietary Cross-Margin Account 

Agreement (Pairs of Affiliated Clearing Members).

Pursuant to Section 5c(c) of the CEA and CFTC Regulation 40.5(a), CME Clearing certifies that the 

Proposal complies with the Act and regulations thereunder. There were no substantive opposing views to 

the Proposal.
300 Vesey Street New York, NY 10282 T 212 299 2200 F 212 301 4645 christopher.bowen@cmegroup.com cmegroup.com

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CME Clearing certifies that this submission, with the confidential documents redacted, has been 

concurrently posted on the CME Group website at http://www.cmegroup.com/market-regulation/rulefilings.html.

Should you have any questions or require more information concerning the above, please contact me at 

212-299-2200 or via e-mail at CMEGSubmissionInquiry@cmegroup.com. 

Sincerely,

/s/ Christopher Bowen 

Managing Director and Chief Regulatory Counsel

Attachments: Exhibit A – Amended and Restated Cross-Margining Agreement (attached under 

separate cover and confidential treatment requested)

Exhibit B – CME-FICC Cross-Margining Service Level Agreement (attached under 

separate cover and confidential treatment requested)
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Exhibit A and Exhibit B

(CONFIDENTIAL TREATMENT REQUESTED)

(ATTACHED UNDER SEPARATE COVER)