Received CFTC .=~ CME G c.F.r.c. rd Section ~F} rOUJE)oE Of THE SECRETARIAT R!Cprap 

ACME/Chicago Board ofTrade/NYMEX ciuur JUL aa PM 3 2 i 7; ~ J7 

VIA ELECTRONIC MAIL 

David Stawick 

Secretary of the Commission 

July 21, 2009 

Cr<;Jig S. Donohue 

Chief Executive Officer 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW COMMENT 

Washington, DC 20581 

secretary@cftc. gov 

Re: Investment of Customer Funds and Funds Held in an Account for Foreign Futures and Foreign 

Options Transactions- 74 Fed. Reg. 23962 (May 22, 2009), RIN 3038-AC79 

Dear Mr. Stawick: 

CME Group Inc. ("CME Group"), on behalf of its four designated contract markets ("Exchanges" or 

"DCMs"), appreciates the opportunity to comment on the Commodity Futures Trading Commission's (the 

"CFTC" or "Commission") advance notice of proposed rulemaking ("Release") with respect to possible 

changes to its regulations regarding the investment of customer funds segregated ("Customer 

Segregated Funds") pursuant to Section 4d of the Commodity Exchange Act ("CEA") and funds held in 

an account subject to Commission Regulation 30.7 ("30.7 funds"). In the Release, the Commission noted 

that it may be significantly revising both the scope and character of permitted investments for Customer 

Segregated funds and for 30.7 funds and consequently indicated that it was seeking public comment 

before issuing any proposed amendments to Regulation 1.25 or to Regulation 30. 7. 

CME Group is the world's largest and most diverse derivatives marketplace. We operate four separate 

Exchanges, including Chicago Mercantile Exchange Inc. ("CME"), the Board of Trade of the City of 

Chicago, Inc. ("CBOT"), the New York Mercantile Exchange, Inc. ("NYMEX") and the Commodity 

Exchange, Inc. ("COMEX"). The CME Group Exchanges offer the widest range of benchmark products 

available across all major asset classes, including futures and options based on interest rates, equity 

indexes, foreign exchange, energy, metals, agricultural commodities, and alternative investment products. 

We also operate CME Clearing, one of the largest central counterparty clearing services in the world, 

which provides clearing and settlement services for exchange-traded contracts, as well as for over-thecounter derivatives transactions through CME ClearPort®. 

The CME Group Exchanges serve the hedging, risk management and trading needs of our global 

customer base by facilitating transactions through the CME Globex® electronic trading platform, our open 

outcry trading facilities in New York and Chicago, as well as through privately negotiated transactions. 
David Stawick, Commodity Futures Trading Commission 

July 21, 2009 

Page2 

I. Overview and Background 

CME Group commends the Commission for requesting public comment prior to undertaking potential 

revisions to Regulations 1.25 and 30.7. We recognize the importance of and fully support the prudential 

standards set forth in Regulation 1.25 that require all permitted investments of customer funds to be 

consistent with the objectives of preserving principal and maintaining liquidity. We also recognize that 

futures commission merchants ("FCMs") and DCOs operate in a globally competitive environment and 

that FCMs and their customers have an interest in generating investment income and attractive yields 

within these prudential standards. Consequently, we strongly encourage the Commission to provide 

substantial flexibility to FCMs and DCOs in terms of allowable permitted investments and we further 

encourage the Commission to be mindful of the degree of flexibility provided to foreign brokers under 

comparable regulatory regimes. 

We believe that money market funds are a critically important component of the array of investments 

permitted under Regulation 1.25, and we offer some general suggestions regarding possible 

enhancements to Regulation 1.25 in relation to money market funds. We are also offering some 

suggestions regarding the process by which the Commission may amend its list of permitted investments. 

Finally, we do support the harmonization of Regulation 1.25 and Regulation 30.7 on investment standards 

by extending the Regulation 1.25 standards to Regulation 30.7 

As background, CME's Clearing House clears, settles and guarantees the performance of all transactions 

matched through the CME Group execution facilities and from certain third party exchanges. CME 

Clearing's integrated clearing function is designed to ensure the safety and soundness of the markets. In 

2008, CME's Clearing House cleared an average of 11.0 million contracts daily and 3.0 billion contracts 

overall. As of December 31, 2008, CME's Clearing House acted as custodian for approximately $116.1 

billion in performance bond, security deposit and other collateral deposited by our clearing firms and, 

during 2008, CME's Clearing House transferred an average of approximately $4.4 billion a day in 

settlement funds through the clearing system. In addition, CME's Clearing House guarantees the 

performance of all contracts with a financial safeguards package of more than $8 billion (as of 

December 31, 2008). 

The clearing function provides three primary benefits to our markets: a reliable credit guarantee; efficient, 

high-volume transaction processing; and cost and capital efficiencies. The services CME's Clearing 

House provides can be broadly categorized as follows: 

• market protection and risk management; 

• transaction processing and position management; 

• settlement, collateral and delivery services; 

• cross-margining and mutual offset services; and 

• investment services. 
David Stawick, Commodity Futures Trading Commission 

July 21, 2009 

Page 3 

In light of our significant role in clearing and settling activity for exchange-traded and over-the-counter 

derivative transactions, as well as our role in providing collateral management and investment services 

for clearing members' proprietary and customer funds, CME Group believes it is uniquely qualified to 

comment on the CFTC's proposals. 

II. Permitted Investments under CFTC Regulation 1.25 

The Commission is specifically seeking comment with respect to which instruments should or should not 

continue to be permitted investments for customer segregated funds under Regulation 1.25. The reasons 

for this review by the Commission include a 2007 CFTC study of FCM and DCO investment strategies 

and practices under Regulation 1.25, as well as the market events of September 2008. 

Originally, under Section 4d(a)(2) of the CEA, the investment of Customer Segregated funds was limited 

in scope to obligations of the United States and obligations fully guaranteed as to interest and principal by 

the United States (i.e., U.S. Government Securities), and general obligations of any State or of any 

political subdivision thereof (i.e., municipal securities). As set forth in the Release, the Commission 

expanded the list of permitted investments by amending Regulation 1.25 in December 2000, February 

2004 and May 2005. As a result of these modifications of Regulation 1.25, the Commission now allows 

investments in general obligations issued by any enterprise sponsored by the United States, bank 

certificates of deposit, commercial paper, corporate notes, general obligations of a sovereign nation, 

interests in money market mutual funds as well as certain repurchase agreements and investments with 

embedded derivatives. 

Recent actions taken by the Treasury Department, the Federal Reserve and other governmental 

agencies have brought needed stability back to the credit markets and the financial services sector. 

However, in order to learn from experiences gained as a result of the credit issues that transpired last 

year, CME Group applauds the efforts of the Commission to perform a detailed analysis of the different 

collateral classes that customer funds may be invested in under Regulation 1.25. As part of its analysis, 

we anticipate that the Commission will also weigh and consider the benefits of diversification afforded 

DCOs and clearing firms when there are a variety of collateral classes available for investing customer 

funds. An important lesson learned from last year's financial crisis is that risk reduction achieved through 

diversification can be an important goal, particularly in uncertain and volatile times. 

Currently, Regulation 1.25 contains a large number of asset classes that are permitted investments for 

Customer Segregated funds. CME Group's experience, based on its own information as well as 

information received from various FCMs, indicates that a small subset of the complete list of Regulation 

1.25 permitted investments are actually used by the industry when customer funds are invested. CME 

Group recognizes the CFTC will conduct its own research and analysis with respect to permitted asset 

classes under Regulation 1 .25. If the CFTC determines that certain permitted asset classes available 

pursuant to Regulation 1.25 are not being utilized to a material extent, CME Group suggests that the 

Commission may then wish to consider whether such asset classes should be eliminated from the 

regulation. 
David Stawick, Commodity Futures Trading Commission 

July 21, 2009 

Page4 

CME Clearing's collateral guidelines are set forth below and CME Group recommends that, at a 

minimum, these asset classes be maintained in Regulation 1.25. Acceptable Collateral for CME's 

Clearing House includes: 

• Cash (including FX) 

• Foreign Sovereign Debt 

• US Treasuries 

• US Government Agencies 

• Select Mortgage Backed Securities 

• Money Market Mutual Funds 

• Letters of Credit 

• US Equities (sub-set of S&P 500) 

• IEF 3 & IEF 4 (typically allowing for the acceptance of high grade Corporate Debt and Municipal 

Debt in restricted amounts) and 

• IEF 5 (an account at CME-approved banks that pays a monthly "hard dollar" benefit for member 

firm cash on the books of that bank's trust ledger) 

Additionally, the Release indicates that the CFTC is "considering a significant revision" to the scope and 

character of permitted investments for Customer Segregated funds. In the event the CFTC expands the 

list of eligible asset classes under Regulation 1.25, modifies the concentration limits of available asset 

classes or makes other material changes to the regulation, CME Clearing reserves the right to adopt 

more restrictive requirements than those ultimately adopted by the CFTC. The ability to maintain such 

flexibility is important to CME Clearing for purposes of maintaining appropriate risk management and 

financial safeguards standards. 

i. Concentration Limits 

Regulation 1.25 sets forth concentration limits only for certain forms of collateral that are held in 

segregation by an FCM and a DCO. For example, section (b)(4) of Regulation 1.25 states that "securities 

of any single issuer of government sponsored enterprise securities held by an FCM or DCO may not 

exceed 25 percent of total assets held in segregation by the FCM and DCO." In addition, "securities of 

any single issuer of municipal securities, certificates of deposit, commercial paper or corporate notes or 

bonds held by an FCM or DCO may not exceed 5 percent of total assets held in segregation by the FCM 

and DCO." 

CME Group believes the CFTC should have the flexibility to modify its list of acceptable collateral and its 

concentration limits in a simple and expeditious manner based on market events. For example, 

concentration limits could be linked to specific asset class market conditions such as price volatility, 

secondary market depth and trading volume. If the CFTC had the ability to make such changes in 

accordance with the regulations, it could act quickly to notify the public about changes to the list of 

acceptable collateral and potentially provide greater protection for customers whose funds are invested 

by FCMs and DCOs. In addition, the Commission should consider a procedure in the regulations to add 
David Stawick, Commodity Futures Trading Commission 

July 21, 2009 

Page 5 

liquid and safe asset classes on an expedited basis in extreme circumstances. An example of such a 

product made available by the federal government in an emergency situation is FDIC Insured Corporate 

Debt. 

ii. Money Market Mutual Funds 

The ability of FCMs and DCOs to invest customer funds in an expanded list of asset classes was first 

introduced in December 2000. The expanded asset classes included money market mutual funds 

("MMMFs"), commercial paper, certificates of deposit as well as several other asset classes. In the 

Federal Register release issued by the CFTC in 2000, it was stated that "the Commission believes that an 

expanded list of permitted investments could enhance the yield available to FCMs, clearing organizations 

and their customers, without compromising the safety of customer funds." 

CME Group continues to concur with that position. As part of our comments regarding the expanded list 

of asset classes for customer funds, CME, as well as NYMEX, stated they each would need to make their 

own determination as to the types of assets that would be accepted by the clearing organizations. The 

Commission responded by recognizing that a self-regulatory organization may adopt more restrictive 

requirements than those set forth in Rule 1.25 for its member FCMs. 

CME Group allows certain MMMFs for use as performance bond collateral through its Interest Earning 

Facility 2 Program ("IEF2"), which began in 2001. The IEF 2 Program allows both FCMs and CME 

Clearing to diversify its collateral holdings of customer funds by investing in MMMFs. In addition, 

investments in MMMFs offer flexibility and ease of use while enhancing the yield available to FCMs and 

DCOs. CME Group has designed the IEF2 Program in a conservative manner so that the safety of 

customer funds is not compromised. CME Group believes that MMMFs should remain in the list of 

available asset classes offered as an investment option for customer funds subject to certain 

concentration and diversification measures that would be comparable to CME Group's existing IEF2 

Program. 

The diversification and concentration policies of the IEF 2 Program are set forth below for review and 

consideration by the CFTC in connection with its review of Regulation 1.25. The combined investment of 

Customer Segregated and house non-segregated performance bond cash for each clearing member thus 

would be subject to the following: 

1. Diversification 

• With total investments of less than $100 million, no diversification requirements. 

• With total investments of greater than $1 00 million, but less than $200 million, 

there is a maximum investment limit of $100 million in any one fund. 

• For investments greater than or equal to $200 million, there is a 50% maximum 

investment in any one fund. 
David Stawick, Commodity Futures Trading Commission 

July 21, 2009 

Page 6 

2. Concentration 

• A clearing member will be prohibited from investing an amount which will create 

a position that is greater than 5% of the specific fund's total assets. The 

percentage limit is calculated on a monthly basis and is based on the fund's 

reported asset balances. 

• The aggregate limit of any one fund of IEF2 deposits as held by CME must not 

exceed 15% of a fund's total assets. If this threshold is met, CME will reduce or 

reject the investment of the last clearing member's deposit. 

In addition to these diversification guidelines, CME Group proposes that the Commission consider these 

additional enhancements to MMMFs allowed under Regulation 1.25. We believe these conditions are 

consistent with the SEC's proposed changes to Rule 2a. 7: 

• Minimum daily liquidity standards: at least 10% in cash or cash equivalents for institutional class 

funds. 

• Minimum weekly liquidity standards: at least 30% in instruments maturing in five business days 

for institutional class funds. 

• Standard monthly reporting of all assets and counterparties. 

• Reducing the Weighted Average Maturity ("WAM") to 60 days for rated funds. We believe that 

securities that have a shorter maturity exhibit lower price volatility and lower interest rate risk. A 

shorter WAM puts a fund in a better position to withstand material redemptions. 

Ill. Funds Held in an Account for Foreign Futures and Foreign Options Transactions 

The Commission is also seeking public input regarding the application of the investment requirements of 

Regulation 1.25, including any prospective amendments, to investments of Commission Regulation 30.7 

funds. CME Group is not aware of any business reason or risk related reason to require different 

standards between Regulation 1.25 and Regulation 30.7 investments and encourages the CFTC to 

harmonize the two investment standards. 

IV. Additional Opportunity to Comment 

The Release indicates that the Commission will be conducting its own research and analysis before 

suggesting specific changes to the regulations. CME Group looks forward to the opportunity to provide 

more specific comments in the event that the Commission publishes any proposals for revisions to its 

regulations on the investment of customer funds. 
David Stawick, Commodity Futures Trading Commission 

July 21, 2009 

Page 7 

V. Conclusion 

In conclusion, CME Group commends the Commission for requesting public comment prior to considering 

potential revisions to Regulations 1.25 and 30.7. We continue to fully support the prudential standards 

set forth in Regulation 1.25. We also encourage the Commission to provide substantial flexibility to FCMs 

and DCOs in terms of allowable permitted investments and to be mindful of the degree of flexibility 

available under comparable regulatory regimes. Money market funds are a critically important component 

of the array of investments permitted under Regulation 1.25, and we have provided some general 

suggestions regarding possible enhancements to Regulation 1.25 in relation to such investments. Finally, 

we support the harmonization of Regulations 1.25 and 30.7 on investment standards. 

CME Group thanks the Commission for the opportunity to comment on this matter. We would be happy to 

discuss any of these issues with Commission staff. If you have any comments or questions, please feel 

free to contact me at (312) 930-8275 or Craig.Donohue@cmegroup.com; or Stephen Szarmack, Director 

and Associate General Counsel, at (312) 648-5422 or Stephen.Szarmack@cmegroup.com. 

CSD/7477 CFTC Comment Letter 

cc: Chairman Gary Gensler 

Commissioner Michael Dunn 

Commissioner Bart Chilton 

Commissioner Jill Sommers 

Thelma Diaz 

Sincerely, 

&~j' f QIM~ Craig S. Donohue