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P.ECEIVED 

C.F. T.C . ® =~:~ ........ CMEG ·3.1 rOUp 1m1 OEC 26 PH 5: 15 John P. Davidson Ill 

Managing Director 

ACME/Chicago Board of Trade Company Chief Corporal<" Development Officer 

RECO OS (~ : CT!OH 

December 18, 2007 

Commissioner Michael V. Dunn 

Commodities Future Trading Commission.._ 

Three Lafayette Centre 

1155 21st Street, NW 

Washington DC 20581 

Commissioner Bart Chilton 

US Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington DC 20581 

Dear Commissioners Dunn and Chilton: 

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COMMENT 

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On December 12, 2007, you met with Leo Melamed and Bo Chambliss to discuss Chicago 

Mercantile Exchange Inc.'s ("CME") order routing and super-clearing arrangement with the 

China Foreign Exchange Trade System and National Interbank Funding Center ("CFETS"). At 

the close of the meeting, you sought clarification of a number of issues, which is provided 

below. 

(i) Promotion of economic or financial innovation and fair competition 

The Agreement for Order Routing and Super-Clearing ("Agreement") between CME and CFETS 

states that CME will provide extensive education and training to CFETS with respect to the 

operations and regulation of the futures industry. The purpose of the training is to familiarize 

CFETS with the trading conventions and regulatory environment in the Unites States. CME is 

expending substantial financial and human capital to meet its commitment to CFETS. We 

expect that U.S. businesses, including FCMs, bookkeeping services, technology companies and 

others will reap long-term benefits from the exposure to CFETS, CFETS member banks, 

Chinese regulatory authorities, the Peoples Bank of China ("PBC") and the country of China as 

a result of the education and training provided by CME. 

The training and education provided by CME to CFETS to date has been broad-based and 

comprehensive. CFETS' staff has received training on the operations and risk management 

procedures of an exchange and a clearing house. CFETS staff has also met with 

representatives of the CFTC and the National Futures Association to gain a better 

understanding of the regulatory roles these entities play in the derivatives industry. CFETS 

business and technology staff has received training in Shanghai by CME focusing on margin 

procedures, segregation requirements and high level trading, order-routing, clearing and risk 

management functions. CME has also met with Chinese banking and regulatory officials to 

discuss exchange management, market surveillance and regulation. The training and education 

received by CFETS in connection with the super-clearing arrangement will lead to further 

financial and economic innovation in China. CFETS will receive additional education and 

training in the future as the relationship between the parties matures. 

20 South Wacker Dnve Chicago. IllinoiS 60606 T 312 930 3175 F 312 634 8652 Ohn on cmegroup om cm.,group.tom 

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December 18, 2007 

Page 2 

To emphasize the importance of this relationship to the U.S. government's on-going efforts to 

foster a relationship with China, on June 8, 2004, as a precursor to the Agreement, CME and 

CFETS executed a Memorandum of Understanding ("MOU"). At that time, Treasury Secretary 

Snow stated that "this cooperative initiative is an outstanding example of the kinds of exchangerate-related technical cooperation efforts Treasury has consistently advocated as part of our ongoing technical cooperation program with China's financial sector and financial regulators." 

The MOU and the subsequent execution of the Agreement represent a commitment by China to 

strengthen its financial system and to become more integrated into the world capital markets. In 

addition, the technological cooperation between CME, CFETS and other third party vendors, 

necessitated by the arrangement, will provide benefits to other entities that transact business in 

China now and in the future. CME believes thatthe technology and education provided through 

the super-clearing arrangement will assist other entities to further innovate in China. 

China has demonstrated a willingness to become more open to the world's capital markets. In 

fact, a recent press release indicated that J.P. Morgan Chase & Co. won governmental approval 

in China to form a joint venture with a Chinese futures-brokerage firm. The press coverage 

states that, "the U.S.-based bank's venture comes as international investment banks are 

scouring China for joint-venture partners to take advantage of growing global interest in the 

country's exchanges. The partnership with Zhongshan Futures Co. a futures brokerage based 

in southern Guangdong province, gives J.P. Morgan the ability to trade on China's commodities 

exchanges, which feed China's huge and growing appetite for commodities and influence prices . 

on global markets."1 

The Agreement between CME and CFETS is limited to a narrow group of financial products 

which include certain foreign currency and interest rate products. The Chinese entities that will 

participate in the super-clearing arrangement are entities that would not otherwise be able to 

trade regulated foreign currency and interest rate products in the United States. Through the 

super-clearing arrangement, member banks of CFETS will be exposed to, and gain experience 

in, trading U.S. derivative products. This experience in trading and financial market operations 

will ultimately benefit the entire U.S. futures industry and all of its participants as the regulatory 

environment in China continue to evolve and become more open to U.S. businesses. As 

Chinese entities gain experience and expertise in trading the narrow group of derivative 

products that are included within the Agreement, they will likely seek assistance from other U.S. 

businesses in the future in order to trade different derivative products under more complex 

trading strategies. The Agreement and the relationship between CME and CFETS is an 

important step in that maturation process. 

(ii) FCM Registration 

CFETS is not separately capitalized and does not have a separate balance sheet because it is a 

sub-institution of PBC. In addition, CME has been informed by CFETS that its "parent," the 

PBC, will not allow CFETS to register as an FCM in the United States or to create a separate 

FCM entity. However, as discussed in previous filings with the CFTC, CFETS will be subject to 

all of the non-capital CME rules applicable to every other CME clearing member. CFETS will, 

for example: 

1 Toehold in China Futures, Dow Jones Newswire, Rick Carew (September 26, 2007). 

20 Souti1 'Nacher Dri~e Chicego. Illinois 60606 T3l2 930 3175 F3l2 634 8652 john.p.davidson@cmegroup.com cmegroup.com 
December 18, 2007 

Page 3 

i. Satisfy CME's security deposit requirement ($500,000 minimum which may be 

risk adjusted upward as necessary). 

ii. Satisfy the financial equivalent of CME's membership and share requirement 

for clearing members and maintain such collateral in a CME account in the 

U.S. 

iii. Comply with all applicable settlement and performance bond payments through 

aCME-approved bank domiciled in the U.S. 

iv. Be subject to daily mark-to-market and margining of its CME positions. 

v. Be subject to CME's real-time position and price information at the superclearing and individual CFETS member level. 

vi. Be subject to CME's large trader reporting and account monitoring systems. 

vii. Be subject to on-going surveillance and audit activities of CME Clearing and 

on-going review by the CME Clearing House Risk Committee, the primary 

governing body for CME Clearing risk management policies and programs. 

Accordingly, CFETS will be subject to virtually all of the risk management and financial oversight 

requirements that any other "registered" FCM is subject to with the exception of certain capital 

requirements it is not able to meet given the structure of the PBC. 

(iii) Performance guarantee 

CME has been provided with a legal opinion from King & Wood, a Chinese law firm, that states 

in part that: 

i. CFETS has the power and authority to execute, deliver and perform all of its 

obligations under the Agreement, 

ii. The signing of the Agreement by CFETS does not violate any laws, rules or 

regulations of the PBC, 

iii. The obligations and responsibilities of CFETS that are set forth in the Agreement are 

legally binding and enforceable against CFETS pursuant to the laws, rules and 

regulations of the PBC, and 

iv. The performance by CFETS of its obligations under the agreement does not violate 

any laws, rules or regulations of the PBC. 

The Agreement between CME and CFETS is governed by U.S. law, and, in addition, CFETS 

will be subject to all applicable CME Rules. If CFETS defaults on its obligations under the 

Agreement, U.S. law and CME Rules will be applicable to such default and, as the King & Wood 

legal opinion provides, "the obligations and responsibilities of CFETS that are set forth in the 

Agreement are legally binding and enforceable against CFETS." 

20 Sowlh Wacker Drive Chicago, Illinois 60606 T 312 930 3175 r 3l2 634 8652 ohn p.david on-· megroup.com cm.,group.com 
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December 18, 2007 

Page4 

Notwithstanding the above, the Federal Register release dated August 23, 2007, which 

discusses the CFETS petition contains a number of conditions to be imposed on the 

arrangement including a condition that CME and CFETS will be jointly and severally liable for 

any Commission enforcement action relating to compliance with any order issued by the 

Commission. Accordingly, CME is highly motivated from a financial perspective to have robust 

risk management, large trader and other protections in place to greatly reduce any potential joint 

and several liability to the CFTC. Further, it is unlikely that PBC would be willing to suffer the 

reputational risk associated with letting CFETS fail given that PBC has foreign currency 

reserves in excess of $1.3 trillion and any trading associated with the Agreement is anticipated 

to be very mode~t. 

If you have any further questions regarding the Agreement or any other aspects of the 

arrangement between CME and CFETS, please let me know. 

Very truly yours, 

cc: Honorable Walter Lukken, Acting Chairman 

Honorable Jill E. Sommers, Commissioner 

Ananda Radakrishnan, Director, Division of Clearing 

and Intermediary Oversight 

Jacqueline Hamra Mesa, Director, Division of International Affairs 

6505 

i'O South Wacker Drive Chicago. Illinois 60606 T312 930 3175 r 312 634 8652 ohn. davi d~o @c gr .com cmegroup.com