May 24,2007 

VIA ELECTRONIC MAIL 

Eileen A. Donovan 

Acting Secretary 

Commodity Futures Trading 

Commission 

Three Lafayette Centre 

1155 21st Street, NW. 

Washington, DC 20581 

•·. 

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cme 

Chicago Mercantile Exchange 

20 South Wacker Dri11e 

Chicago, IL 60606-7499 

www.cme.com 

Received CfTC 

Records Section 

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COMMENT 

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Re: OCC Clearing Credit Default Options 

Dear Ms. Donovan: 

312/930.1000 tel 

312/466.4410 fax 

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The Chicago Mercantile Exchange Inc. ("CME") applauds the Commodity Futures 

Trading Commission's (the "Commission") decision to resolve jurisdictional issues and permit 

the exchange-based derivative industry to innovate and serve its customers. CME welcomes 

competition on a level playing field, as it has made clear in numerous recent filings with the 

Commission. The Notice of Proposed Order does, however, raise a number of issues that should 

be addressed before the Proposed Order is made final. 

CME was the first derivatives exchange to propose futures contracts based on the 

probability that a single reference entity would experience a defined credit event and first to 

propose a futures contract based on an index whose value depended on the probability that a 

credit event would be experienced by one or more of a defined set of reference entities. CBOE 

and OCC, who now seek relief from the Commission, previously employed considerable 

influence to eliminate CME's innovation from the marketplace and to appropriate those 

innovations for their own benefit. This was a clear case ofCBOE and OCC attempting to exploit 

the alleged uncertainties at the boundary of SEC and CFTC jurisdiction to gain a competitive 

advantage. 

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Ms. Eileen Donovan 

May 24,2006 

Page 2 of 3 

It would create an unfair playing field if CBOE and OCC were able to exploit the 

Commission's commitment to foster "responsible innovation and fair competition among boards 

of trade, other markets and market participants" (CEA § 3(b) of the Commodity Exchange Act 

(''CEA") to secure an exemption to advance their agenda, while continuing to bring pressure to 

bear to preclude CME from listing and clearing the products that were created by CME. At the 

very least, CBOE and OCC should be required to give their commitment to the Commission that 

they will withdraw their opposition, at the Commission and at the SEC, from CME's rules that 

will authorize it to trade and clear such products. 

We are also concerned that the Commission seems to accept CBOE's and OCC's 

characterization of the contracts as options. We do not believe that this characterization is 

accurate or necessary to permit the Commission to grant the requested relief. CME has been 

consistent and clear in its explanation that the proposed contracts constitute futures-not options. 

Among other things, options imply a degree of optionality. Upon payment of the premium, 

option buyers assume rights but no obligations; option sellers assume an opposite risk profile. 

While some options operate pursuant to an automatic exercise feature, such a feature may 

generally be overridden at the discretion ofthe buyer. Buyers and sellers of the these credit 

default contracts enjoy no such optionality. Moreover, the contracts do not involve any strike 

prices or premium payments. The payout is fixed in advance of listing the contract and does not 

vary in relation to the price of any security ofthe referenced entity. The index based contracts 

are most properly characterized as a cash-settled index futures contract based on a digital index 

of credit event risks. 

There are strong arguments that the proposed contracts are based on commodities, not 

securities. The events that may trigger a payment-bankruptcy or a failure to pay-are events 

that are non-dependent upon the price or value of a security. Indeed, the rules submitted by 

CBOE to the SEC do not provide for the future delivery of a security or, necessarily, for the 

delivery of any measure of value based on a security or an index of securities. While there is no 

final definition of an event of default, we can be confident that CBOE will include bankruptcy 

and restructuring within the definition when it comes time to list the product. Neither of those 

events can possibly be classified as a security, and they have been the events that most often 

trigger a payout on a credit default swap. 

CBOE's drafting of its rule disguises that issue and the Commission's characterization of 

the CBOE definition of a "Credit Event" as "an "Event of Default" on any debt security issued or 

guaranteed by a specified "Reference Entity" suggests that CBOE's efforts to characterize its 

product as based on a security has been effective. A careful reading of page 19 of CBOE's rule 

submission confirms that an "Event of Default" will be specified by CBOE at the time the option 

class is listed. We urge the Commission to review the CBOE rule filing and correct this 

erroneous characterization. 
Ms. Eileen Donovan 

May 24,2006 

Page 3 of 3 

Finally we are concerned that the Proposed Order is inconsistent with the requirements of 

Section 4(c)(2)(B)(i) of the CEA, which requires that the transaction "(i) Will be entered into 

solely between appropriate persons ... " Section 4(c)(3)(K) grants the Commission considerable 

leeway, but the tentative decision to extend the exemption to retail customers because their 

broker is regulated creates an exception that swallows the rule. The requirement that the trading 

be limited to appropriate persons would be abrogated if the CFTC looked only to the status of the 

intermediary. Congress gave no hint that appropriate person could be defined in terms of the 

status of that persons intermediary. 

CME appreciates the opportunity to respond to the Commission's Proposed Order. 

Please do not hesitate to contact me at 312-466-7469, John Nyhoff, Director, Research and 

Product Development, at 930-2310, or Matthew Kluchenek, Director and Associate General 

Counsel, at 312-338-2861. 

Sincerely, 

John W. Labuszewski, Managing Director 

Research & Product Development