Clearing for Agricultural 

OTC SwapsCommodity Futures TradingAgricultural Advisory CommitteeJuly 29, 2008
© 2007 CME Group Inc. All rights reserved

Fundamental Changes in Commod

• Basic supply and demand principles in commodity market

higher prices and greater price volatility: 

• Weather and disease limiting supply• Growing demand from developing countries• Falling U.S. dollar• Higher input costs related to increasing 

energy prices 

• Agricultural markets are undergoing tremendous change, 

adjustment. Traditional risk management tools have been crop years. 

• Higher risk resulted in market participants looking toward 

management tools and longer-term protection. 

• Hedging needs have also become more individualistic and 

satisfied by standardized futures contracts where contract standardized and liquidity is concentrated within the first c

• Instead, some market participants have looked to specializ

over-the-counter (OTC) market. 

• Biofuel producti• Limited addition• Restrictive expo

major exporters
© 2007 CME Group Inc. All rights reserved

Benefits of Ag OTC Products

• Commodity forwards, swaps, and options are being transa

on a variety of enumerated commodities including corn, sand meat. 

• Since OTC swaps are not guaranteed by centralized cleari

participants can be at risk for default. One potential solut

to have centralized clearing for these OTC swaps. 

• Market participants are turning to CME Group and asking 

counterparty clearing for these types of OTC instruments sector. 

• Currently CFTC Rules prohibit exchanges from clearing ag

If the CFTC grants exemptions to exchanges to clear agricthese tools can be available to more market participants wcounterparty default.

• Introduction of cleared ag OTC products will provide mark

new products to help them manage increasingly volatile bexposure, and counterparty risk. 
© 2007 CME Group Inc. All rights reserved

Amounts Outstanding of OTC “OthCommodity Forwards, Swaps, and (including energy)

$0

$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

2005 2006 

Amount outstanding in $ Trillions

• 65% growth in OTC commodities in 2 years • OTC commodity market is estimated at 5 times the 

size of the exchange traded commodity market

Sourc
© 2007 CME Group Inc. All rights reserved

Definition of a Swap 

• A swap is an agreement between counterparties to exchan

some period of time. The oldest and most popular swaps interest rates. 

• A commodity swap is similar to an interest rate swap, but 

exchanging a fixed price for a commodity with a floating ocommodity. 

• Ethanol producer agrees to pay the farmer a fixed price of 

In return, farmer agrees to pay ethanol producer a variable example, the price of CBOT Corn futures on the day the sw

• Assuming the swap expires on April 30, on that day the eth

the farmer $5 per bushel for corn and the farmer will pay thsettlement price on May CBOT Corn futures on April 30. 

• Commodity swaps are usually settled financially and there 

Farmer Ethanol

Producer

Fixed: $5 per Bushel

Variable: May Corn Futures

Plain Vanilla Commodity Swap between a Farmer and Ethanol Producer
© 2007 CME Group Inc. All rights reserved

Product Example: Corn Basis SwaContract Specs (Northeastern Iowa

Clearing Unit: 5,000 bushelsMonths Cleared: MonthlyPrice Basis: cents and 1⁄4 cents per bushelLast Day of Clearing - The last day of clearing in Northeastern 

deliverable in the current delivery month shall be two businescalendar day of the delivery month.

Final Settlement Price – The final settlement price shall be dete

clearing day. Final settlement shall be the average of the dacash price index minus the settlement price of the corresponcontract over the last five clearing days.

Daily Settlement – Daily settlement other than settlement on the 

described in Regulation XX42.03) or during the last five days preliminary Northeastern Iowa corn cash price index minus tcorresponding CBOT Corn futures contract on that day.
© 2007 CME Group Inc. All rights reserved

Exchange Product and Service Off

• These products will continue to trade as OTC products wit

between eligible counterparties or between a market partic

broker. The OTC trades can then be brought to the CME G

• Pending an exemption from CFTC, CME Group will offer c

following OTC agricultural swaps:

• Corn, Wheat, and Soybean calendar swaps• Northeastern Iowa, Northwestern Iowa, Southern Iowa, Ea

South Dakota, and Southern Minnesota Corn basis swaps 

• The Exchange and/or CME Clearing will:

• Publish daily settlement prices• Distribute daily volume and open interest for all swaps liste• Adopt position accountability levels for single months and a

these OTC swap contracts and establish reportable levels 

• Conduct financial surveillance and oversight of FCMs clear• Utilize SPAN margining system to establish margin levels• Perform daily and final mark-to-market on contracts 
© 2007 CME Group Inc. All rights reserved

CME Clearing Guarantee

• CME Clearing will act as central counterparty for all swaps 

clearing. 

• CME Clearing will guarantee performance for cleared swap 

utilize mark-to-market and the establishment of clearing lerequirements (“margin”) as key risk management tools to services. 

• CME Clearing intends to maintain flexibility in offering clea

cleared swap products, and, depending on the structure oparticular cleared swap products, plans to provide the foll

• Multi-lateral netting• Post trade give-up• Real time trade confirmation• Risk offsets against other highly correlated products as a p

• Total financial safeguards package available through CME 

Billion.
© 2007 CME Group Inc. All rights reserved
© 2007 CME Group Inc. All rights reserved

Benefits of Cleared Ag Swaps• Bridge unregulated OTC markets with regulated Exchange• Increased transparency through public reporting of volum

and settlement prices

• Enhanced market surveillance of OTC activity by requiring 

accountability and reportable levels of 25 contracts

• Increased safety and soundness of the markets since CME 

eliminates counterparty risk

• Added margin benefits to customers who can offset with e

positions held at CME Clearing

• Enhanced risk management for agricultural commodities s

can be managed in addition to flat price risk

• Improves capital efficiency through daily mark-to-market m• Provides benefits of centralized clearing for bespoke OTC 

too small to support an efficient, liquid exchange-tradedfutures contract