cme/cbot common clearing link workshop futures industry association expo november 2003

CME/CBOT Common Clearing Link Workshop

Futures Industry Association ExpoNovember 2003

© Chicago Mercantile Exchange Inc. All rights reserved. 2

CME/CBOT Common Clearing Link

•We’ve spent the last six months explaining the details and benefits of the CCL to the industry

•Today we want to hit the high points in a few key areas:

Performance bond and capital savings

Collateral enhancements

New deliveries systems

Testing recap

Industry communications initiatives


CCL Savings to Our Industry

•Industry savings from clearing firms’ and customers’ perspective:

Provides cross-market risk offsets without the operational challenges of traditional cross-margining programs

Industry participants will free up more than $1.4 billion in performance bond collateral

Risk capital contributions

Industry participants will free up $200 million in capital

Transactional/ancillary fees

Industry savings of more than $1 million in ancillary fees

Operational efficiencies


Impact on Collateral and Margins

•Collateral expansion for performance bond (margin) purposes

Expansion of sovereign debt program Issuances from France, U.K. and Germany

“IEF4” to be launched; allows firms to pledge Corporate securities, including corporate notes Commercial paper CDs Asset-backed, mortgage-backed securities Municipal bonds/notes

Enhanced acceptance of “stripped” Treasury securities

Risk Committee approval for direct acceptance of mortgage backed securities

Must work through administrative details with custodians


Impact on Collateral and Margins

•CME collateral program enhancements driven by a number of factors:

Risk Committee guidance Commitments to CBOT Clearing firm feedback

•Even with all that has been done, CME collateral programs will continue to evolve to meet the changing needs of clearing firms. For example:

Expanded acceptance of sovereign issues Risk offsets for certain collateral classes


Electronic Delivery System (“EDS”)

•One major aspect of the CCL was to build a new electronic delivery system

•CME/CBOT Delivery Team worked closely with the Delivery Task Force and FIA to design a new EDS which encompasses improvements over the existing EDS

•New EDS offers firms major enhancements: Web-based system instead of mainframe provides for:

A more user friendly application

Scalability

Flexibility

Access from any computer with access to the CME Portal

New reports for clearing firms that enable easier end-of-day balancing

Real time inquiry/update of long date data and certificate data

Online invoicing data including firm pay/collect by product


EDS Interest Rate Delivery Improvements

• Substantial improvements for financial deliveries include:

Invoicing will include a list for all deliverable securities for each contract with CUSIPs and will also allow for “what if” invoicing scenarios prior to confirming invoices

Limit on the number of contracts/invoice has been increased from 1,000 to 99,999, which can drastically decrease the number of invoices that a firm must process

3 invoice alternatives offers firms the flexibility to customize their invoices, thereby drastically reducing the amount of lead time needed for back office processing

By counterparty

Per intent

Across multiple intents


EDS Interest Rate Delivery Improvements

•Substantial improvements for financial deliveries include:

New real-time online reports allow firms receiving deliveries to quickly summarize the quantities they are receiving and pass information onto the trading desks prior to the close of the cash market

Banking instructions can now be exchanged online between clearing firms rather than by phone/fax


CCL Testing Efforts

•Multiple testing efforts are designed to ensure smooth transition/conversion of volume, data, open interest and collateral on November 24, 2003 and January 2, 2004

Involves all CME project teams, CBOT project teams, clearing member firms and service bureaus

100% firm participation in testing

Most clearing programs have already migrated to production

•Beginning in November, we will allow clearing firms to enter a small amount of CBOT trades into CME clearing production systems to test connectivity


Clearing Firm Communications

•One-on-one firm visits

All firms presented a personal overview of the CCL Link

Additional visits to all firms in September and October to present firm margin and security deposit savings

Seminars held in Chicago and New York to present testing schedule and cost savings

•Advisory group meetings

Operational, bookkeeping, deliveries and business advisory groups meet mostly on a weekly basis

FIA-sponsored industry conference call

•Relationship managers

All firms are assigned a CBOT and CME relationship manager to assist through the end-to-end testing effort


CME/CBOT Common Clearing Link

•Everyone in the room has a pretty good idea of what the Common Clearing Link is

•With less than 1 month until implementation, we are focusing our discussion today not only on what the CCL Link is about, but also on what it is NOTNOT about

•Sometimes, discussing what you are NOTNOT is even more telling than discussing what you AREARE


The CCL is NOT About

Regulatory Uncertainty


Rather…

CFTC has approved:

•the CCL open interest transfer process

•the CBOT DCO application

•the CBOT rules to support CCL

•the CME rules to support CCL

Industry has no doubt where it stands.Industry has no doubt where it stands.



Unsubstantiated Savings


Rather…

•Spread savings of up to 80% in highly correlated interest rate products

•Spread savings of up to 95% in highly correlated equity index products

•Industry savings estimated at $1.4 billion from current BOTCC margin requirements based on real positions as of Oct. 3

•Firm ability to select enhanced portfolio margining options

Immediate, substantial industry savings.Immediate, substantial industry savings.



Capital Intensiveness


Rather…

•Performance bond savings at clearing level

•Customers eligible for performance bond savings

•$200 million in risk capital reductions from eliminating the need to hold BOTCC stock now used to support CBOT business

Capital commitments significantly reduced - Capital commitments significantly reduced - $200 million business opportunity $200 million business opportunity

for clearing members.for clearing members.



Operational Complexity


Rather…

•Single clearing interface

•Standardized business practices

•Single set of collateral policies

•Elimination of Saturday processing

•Elimination of option origins

•Web-based deliveries system

•Single settlement cycle

Easier and cheaper to do business in Easier and cheaper to do business in Chicago.Chicago.



Business Speculation


Rather...

•85% of U.S. futures and options business under consolidated clearing umbrella

•34.1 million CBOT and CME open positions

•4.4 million contracts in CME and CBOT Average Daily Volume

•Highly successful history of creating liquidity pools

Industry gains immediate and real benefits Industry gains immediate and real benefits from the CCL.from the CCL.



Unrealistic Implementation

Expectations


Rather…

Months to Launch

77

April 16April 16CCLAnnounced

April 30April 30Groupclearingmeetingsbegin

66

May 16May 16All functionalbusinessrequirementscompleted

May 22May 22First OperationalTask Forcemeeting held

55

June 5June 5First BusinessAdvisory groupmeeting held

44

July 3July 3End-to-endfirm testingplanspublished

July 16July 16CFTC approvesopen interesttransfer rules

33

Aug 23Aug 23Firms beginto submitcombinedPCS to CME

22

Sept 2Sept 2End-to-endtestingbegins

11

Oct 7Oct 7CFTC approvesCBOT’s DCOapplication

Oct 27Oct 27Implementationguide published

NovemberNovember2424

Phase 1Phase 1LaunchLaunch

The Street was informed and included in The Street was informed and included in entire implementation.entire implementation.



Incomplete Information


Rather…

•Detailed Q&A released at launch announcement

•Group member and clearing member meetings in April/May

•Multiple rounds of individual firm visits beginning in May/June

•Multiple rounds of savings estimates

• Industry advisory groups actively involved

•Transparent meeting records and documentation on CCL Web site

•Key Account Managers worked closely with firmsClearing member information and feedback Clearing member information and feedback

was central to the CCL philosophy.was central to the CCL philosophy.



A CME/CBOT Only

Effort


Rather…

•Significant industry input to requirements and planning process

61 industry members served on Business Advisory Group, Operational Task Force, Deliveries Task Force and Back Office Software Vendor Task Force

•Extensive industry commitment to Beta testing End-to-end testing Production testing Simulation testing

CME and CBOT wish to thank the industry CME and CBOT wish to thank the industry members who have worked so tirelessly to members who have worked so tirelessly to

make the link a reality – and to make it make the link a reality – and to make it even better than we envisioned.even better than we envisioned.



FIA Washington

Support


Rather…

•Initial reaction of FIA in Washington was to voice doubts and call for additional details

•It soon became clear that Industry participants were fully informed of

the details of the link General FIA membership supported the goals

of the link

•FIA Chicago and FIA Futures Services Division in New York have been phenomenal in their support of the link

An industry organization is not always An industry organization is not always better than the sum of its parts.better than the sum of its parts.


Q&A?

Again, CME and CBOT wish to thank the Again, CME and CBOT wish to thank the industry participants and vendors who industry participants and vendors who have devoted time and energy to make have devoted time and energy to make the CME/CBOT Common Clearing Link a the CME/CBOT Common Clearing Link a

success.success.

cme/cbot common clearing link workshop futures industry association expo november 2003

Documents

firms th

firms major enhancements

existing eds new eds

ccl savings

cme collateral programs

delivery task force

direct acceptance of

industryindustry savings