Margin Credit SWAP (MC

CFT

C Agricultural Advisory Comm

July 29, 2008
Executing the SWAP

Grain Elevator

B

Farmer

A

Broker (FCM)

C 2A

2

2B

1

T

Credit 

Provider

E

SWAP 

Counterparty

3A

3

3B

4

Merchants 

Exchange

SWAP Clearing Member

(CME/MGEX/KCBT/others)

F

1 Forward contract between A+B @ $ 6.00/bu 2 Hedge: B sells Dec08 Contract @ $ 6.30/bu 

- 2A: C order to sell Dec08 Contract @ $ 6.30/bu- 2B: D fills Dec08 Contract @ $ 6.30/bu
Maintaining the SWAP

Farmer

A

Broker (FCM)

C 5C

5

5 Margin call for $ 0.20/bu

-5A: Margin Payment of $ 0.20/bu

-5B:Margin Collect of $ 0.20/bu

-5C: Margin Payment of $ 0.20/bu

T

SWAP 

Counterparty

E

Credit 

Provider

5 5A

5B

Assumption: Prices increase from $ 6.30/bu to $ 6.50/

Grain Elevator

B

Merchants 

Exchange

SWAP Clearing Member

(CME/MGEX/KCBT/others)

F
Liquidating the SWAP

Grain Elevator

B

Farmer

A

Broker (FCM)

C

7

8A

7

8B

6A

6 Physical delivery

-6A: A delivers grain to B

-6B: B ships grain to G

-6C: G pays B for grain

-6D: B pays A for grain

T

SWAP 

Counterparty

E

Credit 

Provider

8

9

6B

6D 6C

Closing SWAP -7: B orders C to lift SWAP-7A: C notifies E to close SWAP

-7B:E confirms to C SWAP is closed

-9: C closes SWAP at F-10: F returns margin credit to E plus fee

Merchants 

Exchange

SWAP Clearing Member

(CME/MGEX/KCBT/others)

F

7A

7B

10

9

10
Elevator-Hedger

sells at $6.30 : buys MCS at $6.30Farmerforward sells at $6.00

Credit Provider-Speculatorbuys at $6.30 : sells MCS at $6.30

$.20 los

C

$.20 gai

Elevator-Hedgermargin payment of $.50 on futuresmargin collect of $.50 on MCSCredit Provider-Speculatormargin collect of $.50 on futuresmargin payment of $.50 on MCS
Short Hedge Unaffected by Margin Cre

Date Cash Market Futures Market May Forward purchase 

corn @$6.00/bu 

Sell Dec Corn @$6.30/bu 

Price increase 

Oct Sell cash corn 

@$7.00/bu 

Buy Dec Corn futures @$7.00/bu 

Change $1.00/bu gain $0.70/bu loss 

Prices decrease

Oct Sell cash corn 

@$5.00/bu 

Buy Dec Corn futures @$5.00/bu 

Change $1.00/bu loss $1.30/bu gain 
Short Hedge Flow of Variation M

Variation Margin 

Date

Reference 

Price Pay Collect

$1,500 

Initial 

Margin 

Account

Jun 2 643.25 $ - $ - $ 1,500.00 Jun 3 636.25 $ - $ 350.00 $ 1,500.00 Jun 4 643.00 $ (337.50) $ - $ 1,500.00 Jun 5 670.75 $(1,387.50) $ - $ 1,500.00 Jun 6 677.75 $ (350.00) $ - $ 1,500.00 Jun 9 685.25 $ (375.00) $ - $ 1,500.00 

Jun 10 702.75 $ (875.00) $ - $ 1,500.00 Jun 11 732.75 $(1,500.00) $ - $ 1,500.00 Jun 12 739.50 $ (337.50) $ - $ 1,500.00 Jun 13 765.00 $(1,275.00) $ - $ 1,500.00 Jun 16 765.00 $ - $ - $ 1,500.00 Jun 17 776.00 $ (550.00) $ - $ 1,500.00 Jun 18 780.00 $ (200.00) $ - $ 1,500.00 Jun 19 761.50 $ - $ 925.00 $ 1,500.00 Jun 20 755.50 $ - $ 300.00 $ 1,500.00 Jun 23 759.25 $ (187.50) $ - $ 1,500.00 Jun 24 747.50 $ - $ 587.50 $ 1,500.00 Jun 25 765.00 $ (875.00) $ - $ 1,500.00 Jun 26 788.00 $(1,150.00) $ - $ 1,500.00 Jun 27 787.00 $ - $ 50.00 $ 1,500.00 
Short Hedge Margin Credit Balance with 

5%

Date

MCS

Reference 

Price Margin Credit

MCS Int

erest

Payment

Cumulative 

Paymen

(cents/bu

Jun 2 613.25 $ 1,500.00 $ 0.21 0.00 Jun 3 636.25 $ 1,150.00 $ 0.16 0.01 Jun 4 643.00 $ 1,487.50 $ 0.20 0.01 Jun 5 670.75 $ 2,875.00 $ 0.39 0.02 Jun 6 677.75 $ 3,225.00 $ 1.33 0.05 Jun 9 685.25 $ 3,600.00 $ 0.49 0.06 

Jun 10 702.75 $ 4,475.00 $ 0.61 0.07 Jun 11 732.75 $ 5,975.00 $ 0.82 0.08 Jun 12 739.50 $ 6,312.50 $ 0.86 0.10 Jun 13 765.00 $ 7,587.50 $ 3.12 0.16 Jun 16 765.00 $ 7,587.50 $ 1.04 0.18 Jun 17 776.00 $ 8,137.50 $ 1.11 0.21 Jun 18 780.00 $ 8,337.50 $ 1.14 0.23 Jun 19 761.50 $ 7,412.50 $ 1.02 0.25 Jun 20 755.50 $ 7,112.50 $ 2.92 0.31 Jun 23 759.25 $ 7,300.00 $ 1.00 0.33 Jun 24 747.50 $ 6,712.50 $ 0.92 0.35 Jun 25 765.00 $ 7,587.50 $ 1.04 0.37 Jun 26 788.00 $ 8,737.50 $ 1.20 0.39 Jun 27 787.00 $ 8,687.50 $ 3.57 0.46 Jun 30 613.25 $ - $ - 0.46
Enhance liquidity in core products: 2 3

- Facilitates Hedge;- Brings new OTC Business.

4 

1 Market place solution

- Merchants support;- Commercial lending support; - Fund support.

Clearing Houses

CME

MGEX

KCBT

Merchants Exchange Group

Swap contract Industry Marg

Broker

Clearing Member

Brok

Clearing Memb

Hedge 

Clearing the Hedge / Margin Credit S
Risk Matrix 

RISK

A 

Farmer

C

Broker (FCM)

D

Futures CM

E

Cre

Prov

Risk type

(cash/swap)

Production

failure

Farmer default /

Credit provider default

Elevator 

default

--- CM d

When at risk?

(cash/swap) At delivery At delivery / Daily Daily, At settlement --- At sett

Risk exposure

(cash/swap)

Whole contract 

value

Contract value /

Cumulative change

Cumulative

change over

term of SWAP

---

Cumu

chang

term of 

Risk mitigation

(cash/swap) Crop insurance Charge farmer a fee / Post capital Proportional maintenance margin --- Clea

mem

guara

Risk type

(futures)

--- Credit provider default Elevator default Broker default --

When at risk?

(futures)

--- Daily Daily Hourly --

Risk exposure

(futures)

--- Daily change Daily change Hourly change --

Risk mitigation

(futures) --- Multiple lines of credit/ Curtail business Maintenance margin Maintenance margin, letter of credit --

B

Grain Elevator