Financial Safeguards Financial Safeguards

CME Group

clearing

2 CME Group

CME Clearing is an operating division of CME Group.

Our clearing function ensures the safety and soundness of our markets, and serves the risk management needs of customers around the globe by offering clearing services for the widest range of benchmark financial products. CME Clearing continues to structure its services, safeguards, and registration status to best serve the evolving markets to which it provides clearing services. This includes CME Group, FXMarketSpace, OneChicago, and OTC transactions through CME Clearing360™, which will also include CME Swaps on Swapstream when they are launched later in 2008. In 2007 we cleared more than 2.8 billion contracts.

Consistent with the enactment of the Commodity Futures Modernization Act of 2000 (CFMA) and the introduction of the Division of Clearing & Intermediary Oversight (DCIO) on July 1, 2002, CME attained Derivatives Clearing Organization (DCO) status. In June 2007, the United Kingdom’s Financial Services Authority (FSA) granted CME the status of a Recognised Overseas Clearing House (ROCH). ROCH status enables CME to offer clearing services for non-CME products in the UK jurisdiction including FXMarketSpace.

With CME Clearing substituted as the counterparty to every trade matched or submitted in the clearing process, the risk of default is greatly reduced. The financial integrity of CME Clearing is a foremost consideration of CME Group’s Board of Directors, Clearing House Risk Committee, and management. CME Group is vitally aware of its role in international financial markets and believes that its financial safeguard system, designed for the benefit and protection of both clearing members and their customers, is second to none.

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OVERVIEW OF THE SYSTEM

Risk management and financial CME Clearing’s financial safeguard system surveillance are the two primary functions is constantly being updated to reflect the of CME Clearing’s financial safeguard most advanced risk management and system. The system is designed to provide financial surveillance techniques. The the highest level of safety and the early financial safeguard system is operated detection of unsound financial practices by a “Risk Management Team,” which is on the part of any clearing member. directed by senior management from the Its purpose is to protect all clearing Audit, Clearing, Finance, Legal, Market members and their customers from the Regulation, Risk Management, and consequences of a default by a participant Executive areas of CME Group. in the clearing process.

Clearing members may obtain clearing privileges for all or a subset of cleared products. Requirements may vary with clearing privileges obtained but generally include risk based capital requirements.

1 Effective July 12, 2007, CBOT Holdings, Inc. merged with and into Chicago Mercantile Exchange Holdings Inc. Immediately following the merger; the combined company was renamed CME Group Inc. Chicago Mercantile Exchange Holdings Inc. and CBOT Holdings, Inc. remain two separate subsidiaries of CME Group. Additionally, each entity maintains its Self Regulatory Organization (SRO) status.

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FINANCIAL INTEGRITY OF CME CLEARING

The accounts of individual members, CME Clearing does not look to individual clearing firms, and non-member customers for performance or attempt to customers must be carried and guaranteed evaluate their creditworthiness or market to CME Clearing by a clearing member. qualifications. CME Clearing monitors For every transaction received by or clearing member firms for the adequacy of matched through its facilities, CME credit monitoring and risk management Clearing is substituted as the counterparty, of their customers. CME Clearing looks guaranteeing performance on the opposite solely to the clearing member firm side. Clearing members assume full carrying and guaranteeing the account to financial and performance responsibility secure all payments and performance bond for all transactions executed through them obligations. Clearing members providing and all positions they carry. CME Clearing, a clearing guarantee to an individual dealing exclusively with clearing members, acting as a broker for orders emanating holds each clearing member accountable from multiple clearing members is the for every position it carries regardless of guarantor of last resort for all resulting whether the position is being carried for trades. the account of an individual member, for the account of a non-member customer, or for the clearing member’s own customer account. Conversely, as the contra-side to every position, CME Clearing is held accountable to the clearing members for the net settlement from all transactions on which it has been substituted as provided in the Rules.

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THE SAFEGUARDS

The financial safeguards package These techniques are consistent with Two distinct processes occur during encompasses all activity cleared by CME risk management recommendations and a settlement cycle. Initially, at each Group to maximize capital efficiencies. As industry best practice standards such as settlement cycle, all new trades are CME Clearing has begun to offer clearing those promulgated by CPSS/IOSCO Task captured, cleared and marked-to-market. services to regulated and OTC markets, Force on Securities Settlement Systems All open positions are marked-to-market financial safeguards standards have been and the Group of Thirty. at this time. Cash settlement flow occurs aligned to best serve the unique attributes for the mark-to-market on open futures Mark-to-Market of each market. In spite of market positions and the option premium CME Clearing derives its financial differences, CME Clearing employs associated with new option positions. stability in large part by removing debt mark-to-market, performance bond The mark-to-market on open option obligations among market participants requirements, and account identification positions and FXMarketSpace positions as they occur. This is accomplished by as standard risk management practices for can be satisfied with collateral as part of determining a marking price at the close all markets served. performance bond requirements. The of each settlement cycle daily, for each resulting cash flows between clearing The risk management and financial contract and marking all open positions to member firms and CME Clearing are surveillance techniques employed by that price. Debt obligations from option known as settlement variation. CME Clearing are comprehensive and contracts are also immediately removed, specifically designed to: since the purchaser of an option must pay Simultaneously, forward looking collateral the premium (cost of the option) in full at requirements are re-evaluated for all • Anticipate potential market exposures the time of purchase. open positions. The combination of • Ensure that sufficient resources are these two processes – the cash payments Each business day, CME Clearing available to cover future obligations that move between CME Clearing and performs two full settlement cycles, our clearing members and the resetting • Result in the prompt detection of marking to the market once in the late of performance bond coverage – ensure financial and operational weaknesses morning and once in the late afternoon. that all accumulated debt obligations Actual settlement of the late morning • Allow swift and appropriate action are removed from the system, and that mark-to-market occurs at mid-day and to be taken to rectify any financial CME Clearing holds sufficient collateral actual settlement of the late afternoon problems and protect the clearing to protect against any losses clearing mark-to-market occurs in the very early system members may accumulate prior to the morning hours of the next day. subsequent settlement cycle. • Prevent the accumulation of losses

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In times of extreme price volatility, information. Performance bond levels one-day price moves of at least 95% -99% CME Clearing has the authority to vary by product and are adjusted to reflect of the days during these time periods. The perform additional mark-to-market changes in price volatility and other actual performance bond requirements calculations on open positions and call factors. Maintenance performance bond may exceed this level for some products. for immediate payment of settlement levels represent the minimum amount Performance bond requirements for variation. Settlement variation payments of protection against potential losses at options reflect movements in the through CME Clearing averaged $2.2 which the Exchange will allow a clearing underlying futures price, volatility, time million per day in 2007, and reached a member to carry a position or portfolio. to expiration and other risk factors, and peak of $12.8 billion on January 23, 2008. Initial performance bond reflects the adjust automatically each day to reflect the minimum deposit a clearing member must unique and changing risk characteristics CME Clearing’s mark-to-market settlement obtain from a customer opening a new of each option series. In addition, long system stands in direct contrast to the position. Should performance bonds on options must be paid for in full. CME traditional settlement systems implemented deposit at the customer level fall below Clearing also mandates stringent minimum by many other financial markets which are the maintenance level, exchange rules performance bonds for short option not centrally cleared, including the legacy require that the account be re-margined positions. Option sellers are assessed risk interbank, Treasury securities, over-the- at the required higher initial performance requirements as determined by CME SPAN counter foreign exchange and debt, options, bond level. Initial performance bond in addition to the value of the option. and equities markets, where participants enables a customer to absorb some losses regularly assume credit exposure to each CME Clearing calculates performance bonds before issuance of another performance other. In those markets, the failure of using a system developed and implemented bond call. Clearing members may impose one participant can have a ripple effect by CME in 1988 called Standard Portfolio more stringent performance bond on the solvency of the other participants. Analysis of Risk™ (CME SPAN®). CME requirements than the minimums set Conversely, CME Clearing’s mark-to-market SPAN bases performance bond requirements by the exchanges. At the CME Clearing system does not allow losses to accumulate on the overall risk of the portfolios using level, clearing members must post at least over time or allow a market participant the parameters as determined by CME Clearing, the maintenance performance bonds for opportunity to defer losses associated with and represents a significant improvement all positions carried. This requirement market positions. over other performance bond systems, most applies to positions of individual members, notably those that are “strategy-based” or Performance Bonds non-member customers and the clearing “delta-based.” CME SPAN simulates the Performance bond requirements are good member itself. effects of changing market conditions and faith deposits to guarantee performance In setting performance bond levels, CME uses standard options pricing models to on open positions and are often referred Clearing monitors both current and determine a portfolio’s overall risk. It treats to as “margin.” CME Clearing establishes historical price and volatility movements all products uniformly while recognizing minimum initial and maintenance covering short-, intermediate- and longer- the unique features of options. In standard performance bond levels for all products term data. CME Clearing uses several options pricing models, three factors most cleared through its facilities. CME Clearing different methods of statistical parametric strongly affect options values: the underlying bases these requirements on historical and non-parametric analyses, which price, volatility (variability of the underlying and implied price volatilities, market typically establish futures maintenance price), and time to expiration. As these composition, current and anticipated performance bond levels covering expected factors change, positions may gain or lose market conditions, and other relevant

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value. CME SPAN constructs scenarios bond requirements using a wide variety of Cross-Margining of price and volatility changes to simulate collateral, including: In recognition of the growing linkages what the entire portfolio might reasonably among the markets for exchange-traded • Cash (USD & selected foreign currency) lose over a one day time horizon. The equity derivative products, as well as resulting CME SPAN performance bond • U.S. Treasury Securities the need to promote efficient clearing requirement covers this potential loss. procedures and to focus on the true • Letters of Credit CME has licensed CME SPAN to exchanges inter-market risk exposure of clearing and clearing organizations around the • Stocks selected from the Standard & members, CME Clearing, in conjunction world and has successfully established Poor’s 500® Stock Price Index with The Options Clearing Corporation CME SPAN as the industry’s standard (OCC) offer a cross-margining program • Selected Sovereign Debt performance bond system. with respect to market professionals • Selected Agencies and Mortgage Backed and proprietary accounts. Combining CME Clearing requires “gross” Securities the positions of joint or affiliated performance bonds for customer clearing members in certain broad-based segregated positions in CME products. • Selected Money Market Mutual Funds equity index futures and options into The clearing member must deposit • Bank Sponsored Cash Management a single portfolio, and utilizing the performance bonds for each open position Program, through selected banks sophisticated risk-based margining (long or short) held at each clearing systems of each clearing organization, cycle, with appropriate allowances for Securities are revalued every day and are results in a single performance bond spreads. CME Clearing allows for optimal subject to prudent haircuts. Additionally, requirement across both markets. The margining for customer segregated foreign cash is subject to haircuts in clearing organizations jointly hold a positions in CBOT products as a selected circumstances. Various forms first lien on and security interest in the continuation of the market practices for of collateral are also subject to limits. positions in cross-margined accounts. All those products, giving clearing member CME Clearing also offers a choice of performance bond deposits associated firms the choice of modified “net” several different collateral management with these accounts are jointly held. The performance bonds which excludes long programs, providing efficient and cost cross-margining program significantly option value or “gross” performance bonds effective solutions for clearing member enhances both the efficiency and which includes long option value. CME firms collateral management needs. For financial integrity of the clearing system Clearing allows for “net” performance a complete list of acceptable collateral, by allowing gains accruing to futures bonds for non-segregated or proprietary please refer to: http://www.cme.com/ or options positions to be immediately positions. If a clearing member does clearing/fm/ac/index.html. available to meet the requirements for not have sufficient performance bond Concentration Performance funds from losing positions. collateral on deposit with CME Clearing, Bond then the clearing member must meet a In the event that a clearing organization CME Clearing also maintains a call for cash performance bond deposits by suspends a cross-margining member, the Concentration Performance Bond the designated time after each settlement positions in the cross-margin accounts Program, which allows CME Clearing cycle, which results in a direct debit to would be liquidated and all performance to charge additional performance bond the clearing member’s account at one of bond collateral would be converted to requirements when clearing firms’ CME Clearing’s settlement banks. Active cash and applied toward each clearing potential market exposures become large clearing members may meet performance organization’s costs of liquidating the relative to the financial resources available cross-margin accounts. CME Clearing and to support those exposures. the OCC are each entitled to half of any

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surplus to apply toward other obligations customer positions and monies extend to CME Group and the CFTC have adopted of the clearing member; if one clearing CME Clearing. Based on specific written a risk-based capital requirement as the organization did not need its entire share instructions from a clearing member, CME regulatory minimum capital requirement. of the surplus, the excess would be made Clearing maintains separate accounting of This requirement is computed as 8% available to the other clearing organization. the aggregate positions and monies of the of domestic and foreign domiciled clearing member’s customers. customer and 4% of non-customer Clearing also maintains cross-margin (excluding proprietary) risk maintenance agreements with the LCH Clearnet, the CME Group’s Audit Department routinely performance bond requirements for all Fixed Income Clearing Corporation, and inspects the books and records of clearing domestic and foreign futures and options the New York Mercantile Exchange. These members to ensure, among other things, on futures contracts excluding the risk programs involve the cross-margining of their compliance with segregation margin associated with naked long option selected short-term interest rate, fixed requirements. The integrity of segregation positions. income and commodity products. The relies on the accuracy and timeliness of design of these cross-margin programs the information provided to CME Clearing ANC is computed based on the following differ from the above mentioned OCC by member firms. Violations by a clearing formula: program in that performance bond member of its segregation requirements Current Assets – Adjusted Liabilities – collateral is held separately at each are considered serious infractions and can Capital Charges = Adjusted Net Capital respective clearing organization. In the result in major penalties imposed by the event that a clearing organization suspends governing exchange. Current Assets: Cash and other assets that a cross-margining participant, the cross- are reasonably expected to be realized Cleared OTC markets are unregulated and, margined positions would be liquidated as cash, or sold, during the next twelve therefore, are not subject to segregation and performance bond collateral would months. However, certain assets such as of customer funds. However, cleared OTC be converted to cash at each respective prepaid expenses, deferred charges, and markets are subject to CME Clearing’s clearing organization. If as a result of the unsecured receivables from customers, standard risk management practices. liquidation of cross-margined positions and non-customers, subsidiaries and affiliates, performance bond there is a resulting cross- Capital Requirements for which would be classified as current under margin loss, there will be a cross-margin Clearing Members generally accepted accounting principles, guarantee payment from one clearing CME Clearing Members that are subject to are deemed non-current. Exchange organization to the other to share the loss. CFTC regulation are required to maintain memberships and assigned shares are also Adjusted Net Capital (ANC) at prescribed reflected as non-current assets. Segregation of Customer Funds levels. All Class A clearing members, except Regulations governing the U.S. futures Adjusted Liabilities: The clearing member’s inactive clearing members, must maintain and options on futures markets require total liabilities less the liabilities which have Adjusted Net Capital in excess of the that customer positions and monies be been subordinated to the claims of general greatest of : separately accounted for and segregated creditors. from the positions and monies of the • $2,500,000; or clearing member. The regulations are • CFTC minimum regulatory capital designed to protect customers in the event requirements (see below); or of the insolvency or financial instability of the clearing member through which • SEC minimum regulatory capital they conduct business. The requirements requirements of separate accounting and segregation of

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Capital Charges: Regulatory capital two IOM memberships, at least one Financial Surveillance charges primarily encompass percentage GEM membership, and at least 8,000 Recognizing the need to monitor the deductions (“haircuts”) on the following: CME Group Class A Shares assigned to financial condition of clearing members, the clearing member. To obtain clearing the CME Group Audit Department, in • Speculative proprietary futures and privileges for only CBOT products, a conjunction with other self-regulatory options positions clearing member must grant to CME organizations, operates a sophisticated • Proprietary inventories, fixed price a first priority and unencumbered financial surveillance program. The commitments and forward contracts lien on two full CBOT membership program has several important aspects, as interests and 8,000 CME Group Class outlined below: • Under-margined customer, non- A shares . To obtain clearing privileges customer and omnibus accounts Reporting: Clearing members must for FXMarketSpace products, a clearing calculate segregation requirements • Marketable securities member shall maintain on deposit with and ensure compliance with capital CME a membership deposit collateral pool CME Group’s risk-based capital requirements on a daily basis. In of $5 million. requirements are identical to those addition, firms must submit to the Audit imposed by the CFTC, except inactive Clearing member classes that are only Department full financial statements clearing members are not subject to able to trade OTC markets such as monthly, provide certified financial risk-based capital requirements. Capital FXMarketSpace must be in compliance statements once a year, and make more requirements are monitored by CME with their regulatory capital requirements, frequent reports (daily) as directed. Group’s Audit Department. ANC subject to a minimum tier 1 capital of $1 Notification: Clearing members requirements vary to reflect the risk billion with potential for increased capital are required to report any failure to of each clearing member’s positions as requirements or other restriction based on meet segregation or minimum capital well as CME Group’s assessment of each country of domicile. requirements. Clearing member firms clearing member’s internal controls, risk Finally, CME Group rules generally must notify CME Clearing prior to management policies and back office require owners of five percent or more of any significant business transaction or operations. the equity securities of a clearing member significant change in operations. CME Group Class A Clearing Members to guarantee obligations arising out of Inspection: Generally each clearing must have two CME Memberships, house (non-customer and proprietary) member is subject to a financial/ two IMM memberships, two IOM accounts of the clearing member to operational review every year. The reviews memberships, one GEM membership, the extent of their ownership interest. are tailored to focus on the specific risks of two full CBOT membership interests, Owners of 50% or more must guarantee the clearing member. All such inspections and 12,000 CME Group Class A shares. 100% of the house obligations. This are performed on a surprise basis. To obtain clearing privileges for only parent guarantee provides a high level CME products, a clearing member shall of assurance that obligations arising out Information Sharing: CME Clearing have at least two CME Memberships, of trades made and positions held by participates in formal agreements at least two IMM memberships, at least owners of clearing members are promptly with other clearing and self-regulatory discharged. organizations, domestic and foreign,

Except in the case of a sole-proprietorship where the requirement is one full CBOT membership interest and 8,000 CME Group Class A shares.

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regularly exchanging financial and CME Clearing conducts stress testing Clearing Member Risk Reviews operational information about joint of clearing member positions on a daily CME Clearing periodically visits clearing common clearing members with other basis. Numerous stress scenarios have member firms to review financial, participating markets. Recognizing that the been modeled to reflect a diverse set of operational, credit, and market risk financial marketplace spans the globe, CME possible market events. Stress results are management procedures and capabilities. Clearing was instrumental in developing evaluated against performance bond on Senior CME Clearing professionals the International Information Sharing deposit and also with clearing member evaluate how well each firm’s procedures Memorandum of Understanding, which adjusted net capital. Results of stress tests and capabilities correspond to its line established a framework for 65 exchanges may lead CME Clearing to request that of business. Senior professionals from and clearing organizations worldwide to the clearing member provide additional Audit, Clearing, Risk Management, and share information relevant to managing information about its customer accounts Market Regulation follow up with the global market emergencies. CME Clearing such as whether there are non-CME Group clearing member’s senior management if also seeks broader cooperation between offsetting positions in other markets. In there are deficiencies found in their risk clearing organizations through such some cases stress test results may cause management procedures and capabilities. industry forums as the Unified Clearing CME Clearing to increase a clearing Group, the Joint Audit Committee, CCP member’s performance bond requirement 12, the Intermarket Financial Surveillance or reduce or transfer positions. Group and the DCO Risk Committee. Market Regulation Intra-Day Monitoring Through CME Group’s Division of Market CME Clearing monitors intra-day price Regulation, the risk management team has movements throughout the trading session. daily access to specific account position To assess the impact of these price changes information regarding individual members, on clearing members, intra-day mark- non-member customers and clearing to-market calculations are performed on members, all of which is maintained on clearing member positions and reviewed a highly confidential basis. Such critical by CME Clearing throughout the day and information allows the identification of overnight. Large or concentrated positions concentrated positions as they arise and the on the losing side of the market receive aggregation of positions that may be owned special attention. CME Clearing monitors by common principals through several its clearing member firms’ settlement different clearing members. Knowledge of variation and performance bond activities concentrated or high-risk positions, coupled at non-CME cleared exchanges and clearing with information routinely gathered on organizations daily. The risk management the cash and/or related derivative markets, team may contact the exchanges or enables CME Clearing to respond rapidly clearing organizations to follow up on to market situations that might adversely this activity. The Audit Department may affect the clearing system and/or the either contact or visit a clearing firm to financial stability of a clearing member. determine whether proper performance Account level information is monitored for bonds have been collected for positions and both regulated and non-regulated activity. to determine their impact on the clearing member’s capital position and liquidity.

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DEFAULT BY A CLEARING MEMBER

CME Clearing continues to maintain the • Take control of or liquidate the • Take control of or liquidate involved financial safeguards system and general positions in the house account customer positions and house default procedures for both regulated and positions • Apply the clearing member’s security OTC markets. Additionally, bankruptcy deposit and house performance bond • Apply the clearing member’s security provisions have been reviewed to deposits to the failed obligation deposit and house performance bond remain consistent with the application deposits to the failed obligation to each class of clearing member. While • Attach all other assets of the clearing the risk management and financial member that are available to the • Attach all other assets of the surveillance techniques of CME Clearing Exchange (e.g., shares and memberships) clearing member that are available are specifically designed to prevent a to the Exchange (e.g., shares and • Invoke any applicable parent clearing member firm from defaulting memberships) guarantee on its obligations, CME Clearing, by rule Although CME Clearing segregates and by operational practice, has prepared Customer segregated assets (positions customer performance bond deposits contingencies to expeditiously deal with and/or monies) on deposit with or in the from the clearing member’s proprietary such an event. The following summarizes control of CME Clearing may not be used performance bond deposits, the the steps that may be taken in the event or impaired by CME Clearing in the case customer performance bond deposits for a clearing member failed to meet its of a clearing member default resulting each clearing member are held in the financial obligations to CME Clearing. from house account activity. aggregate, without identifying specific Proprietary Account Default Customer Account Default ownership of the deposits. If a default If a clearing member were unable to If a clearing member were unable to occurred in the clearing member’s meet its financial obligations to CME meet its financial obligations to CME customer account, CME Clearing has Clearing and a default occurred in its Clearing and a default occurred in its the right to apply toward the default all house (proprietary, non-customer, or customer account, CME Clearing may customer performance bond deposits non-regulated OTC) account, CME act immediately to: and positions in the defaulting clearing Clearing may act immediately to: member’s customer account at CME • Attempt to transfer non-involved Clearing. Accordingly, positions and • Attempt to transfer all segregated customer positions and monies to performance bonds deposited by customer positions and monies to another clearing member customers not causing the default are another clearing member potentially at risk if there is a default in the customer account of their clearing

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member. Additionally, customer account wholly owned subsidiary of CME Group, If the default continued to remain positions are held in aggregate without would next apply its surplus funds and the unsatisfied after the surplus funds and identifying which positions are held by security deposits of the clearing members. aggregate security deposits were applied, specific customers. CME Clearing has the CME Clearing stands out among CME Clearing would then invoke its right to liquidate all customer positions clearing organizations with regard to this right to assess clearing members for any and collateral. Accordingly, positions and utilization of both internal and external unsatisfied obligations. The balance of the collateral of customers not causing the financial resources. unsatisfied default would then be allocated default may be liquidated. among the clearing membership up to Each month, the Chief Financial Officer an amount equal to 275 percent of the Temporary Liquidity Facility determines the maximum amount of aggregate security deposit requirement CME Clearing has an $800,000,000 surplus funds that CME Clearing could across all clearing members. The allocation fully secured, confirmed line of credit contribute to satisfy any remaining default would be based on each clearing member’s agreement with a consortium of domestic obligation, while retaining a prudential share of the Security Deposit Pool. and international banks that is expandable amount of working capital for continuing to $1 billion under an accordion feature. Exchange operations. The amount is Insolvency Law Protections Under the terms of the credit agreement, targeted at a minimum of $60 million. In the case of a bankruptcy of a full CME Clearing may borrow up to the full clearing member (typically an FCM or CME Clearing’s rules are designed to amount, by giving notice no later than Broker-Dealer), the U.S. Bankruptcy Code maximize the liquidity and safety of the 3:45 p.m. Chicago time. The credit facility and CFTC regulations contain a number pool of security deposits. In general, each may be utilized if there is a temporary of provisions that provide preferential clearing member is required to maintain problem with the domestic payments treatment to a clearing member’s public a security deposit equal to the greater of system that would delay payments of customers and to CME Clearing. Recent $500,000 or the results of a formula under settlement variation between CME history has highlighted the advantage which 84.25% of the total requirement Clearing and clearing members, or in that customers of a centrally cleared and is based on the clearing member’s the unlikely event of a clearing member regulated entity hold. In a bankruptcy proportionate contribution to aggregate default. The Line of Credit thus provides situation, CME Clearing member firms’ risk performance bond requirements over a high level of assurance that CME customers are afforded the protections the preceding three months, 15% is based Clearing has the capacity to pay settlement of a CFTC regulated central clearing on the clearing member’s contribution to variation to all clearing members even if a counterparty, while customers of any risk-weighted volume over the preceding clearing member may have failed to meet non-centrally cleared and regulated entity three months, and 0.75% is based on its financial obligations to CME Clearing. are not guaranteed this treatment. These foreign currency settlement requirements provisions include special priority rules Unsatisfied Obligation . CME Clearing calculates clearing for distribution of property to customers hould the defaulting clearing member’s member security deposit requirements and certain exceptions to the automatic obligation not be fully satisfied by CME at the beginning of each quarter . As of stay and voidability provisions of the U.S. Clearing activity previously discussed, September 30, 2007, the total security Bankruptcy Code. Set forth below is a Chicago Mercantile Exchange Inc., a deposit requirement totaled $1.29 billion. general overview of these provisions.

FXMarketSpace clearing members are required to maintain a security deposit minimum of $1.5 million. Certain clearing members with restricted clearing privileges are subject to lower minimum security deposit requirements.

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The Bankruptcy Code offers a number Act (“CEA”) and CFTC segregation In the event of an insolvency of an of protections to CME Clearing requirements. Customer classes are FXMarketSpace Clearing Member, when a clearing member is bankrupt further divided by account class as: different laws and procedures will apply. regardless of whether the bankrupt futures accounts, foreign futures FXMarketSpace Clearing Members will clearing member holds public customer accounts, leverage accounts, or delivery typically be either domestic or foreign accounts or only clears proprietary accounts. banks. An insolvency of a domestic trades. For example, a trustee may bank would be controlled by the The Bankruptcy Code affords claims of not void pre-bankruptcy payments of Federal Deposit Insurance Corporation public customers the highest priority, original performance bond or settlement (“FDIC”) or a receiver appointed subject only to the payment of claims variation made to CME Clearing by the Comptroller of the Currency relating to the administration of (except in the event of a fraudulent (“Comptroller”) depending on the type of customer property. First, the customer transfer). In addition, the filing of a banking services provided by the clearing segregated property of the bankrupt bankruptcy petition will not stay a member bank. If the clearing member is clearing member is to be distributed pro setoff by CME Clearing of claims for a retail depository bank, and therefore rata among the clearing member’s public original performance bond or settlement insured by the FDIC, its insolvency customers. In determining the pro rata variation payments owed by a clearing would be administered under the Federal distribution, all property segregated member against cash, securities or other Deposit Insurance Act (“FDIA”) with on behalf of, or otherwise traceable to, property of a clearing member that CME the FDIC as receiver. A non-depository a particular account class is allocated Clearing holds. These provisions establish bank would not be subject to the FDIA, to that class. Property is distributed a priority for CME Clearing with respect and its insolvency would be controlled by pro rata notwithstanding that it can be to performance bond deposits, which the Comptroller as the licensing agency. specifically identifiable to particular protect all clearing members. Further, Such insolvency is governed by the customers. the Bankruptcy Code provides that National Banking Act. neither a clearing member’s bankruptcy Second, if the segregated assets are CME Clearing’s outside counsel has nor any order of a bankruptcy court can insufficient to satisfy all public customer indicated that based on the FDIA and the prevent CME Clearing from exercising claims in full, the clearing member’s Federal Deposit Insurance Corporation any contractual right it has to liquidate a remaining assets are to be used to satisfy Act of 1991 (“FIDICIA”) there is strong commodity contract. such claims before they are available for legal support for contractual netting distribution to the clearing member’s With respect to distribution of customer among a clearing organization such as general creditors. After the claims of property, the CFTC’s bankruptcy rules CME Clearing and its members, including public customers are paid in full, the classify a clearing member’s customers U.S. banks. FIDICIA generally provides same allocation formula is applied to as either “public” or “non-public.” that the covered contractual payment distribute any remaining property to Non-public customers include certain obligations and the covered contract non-public customers. account holders that are affiliated with payment entitlements of a member of or related to the clearing member such as The applicability of these and other a clearing organization to and from all the clearing member officers, directors, bankruptcy-related provisions will other members of a clearing organization general partners or ten (10) percent or depend on the circumstances of each shall be netted. In addition, the FDIA greater owners. All other customers are situation. has provisions that are similar to the considered “public,” and their property Bankruptcy Code in permitting broad on deposit with the clearing member cross-product netting and allowing is subject to the Commodity Exchange prompt liquidation of contracts with an insolvent bank. 14 CME Group

Foreign banks that are FXMarketSpace Clearing Members will fall within one of three relevant categories. If the foreign bank has assets but no subsidiaries or branches in the U.S., it would be subject to the U.S. Bankruptcy Code because it would not be engaged in banking in the U.S. Second, a foreign bank could establish a subsidiary bank in the U.S., either as a retail depository bank subject to FDIC regulations or as a non-depository bank that must be licensed by the Comptroller. The subsidiary’s insolvency would be processed in the same manner as a U.S. bank. Finally, the foreign bank could set up branches rather than a bank subsidiary in the U.S. Such branches would not be permitted to accept retail deposits, and therefore the Comptroller, which would license the branches, would be the federal regulator rather than the FDIC. A receiver appointed by the Comptroller would administer the insolvency process in the U.S.

CME Clearing’s outside counsel has indicated that in no instance of an insolvency of a foreign bank clearing member would CME Clearing be subject to an obstacle preventing immediate termination of all contracts with the defaulting bank, liquidation of all obligations on a broad netting basis and satisfaction of any net obligations to CME Clearing from the bank’s security deposits.

As discussed above, the applicability of these various laws will be fact specific and depend on the entities involved.

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SUMMARY OF RESOURCES BACKING THE CME CLEARING SYSTEM

Under no circumstances will customer In the event of a default, as of December segregated performance bond deposits 31, 2007, CME Group may draw on all held by CME Clearing for one clearing or a portion of the following resources to member be used to cover either a house satisfy the outstanding obligation: or customer default of another clearing member. Customers doing business Aggregate Performance Bond Deposits $57,500,000,000 through a clearing member not involved Market Value of CME Pledged Shares/Trading Rights $1,476,000,000 in a default are insulated from losses incurred by the failure of another Surplus Funds $60,000,000 clearing member. Security Deposit Requirement $1,387,000,000 Assessment Power $3,814,000,000

Total $64,237,000,000

16 CME Group

CUSTOMER PROTECTION

Customers face credit risk in doing business through any particular clearing member. Consequently, the selection process for a suitable clearing member is important. While the policies applicable to segregation of customer monies for products traded in regulated markets are specifically designed to protect customers from the consequences of a clearing member’s failure, they do not always provide complete protection should the default be caused by another customer at that firm. Protection against a customer-caused default rests primarily with the management of the clearing member and the importance placed on its internal risk management controls. Generally, a clearing organization’s role in the customer protection process is to require all customers to post adequate performance bonds, to administer financial surveillance programs designed to monitor the financial viability of clearing members and, when necessary, to impose specific remedies in an effort to avert the consequences of financial deterioration.

17 Financial Safeguards

DISASTER RECOVERY AND BUSINESS CONTINUITY

CME Clearing maintains and routinely • Physical dispersion of operations- tests a comprehensive Disaster Recovery oriented staff & Business Continuity Plan designed • Multiple electricity feeds as well as to provide protection against a broad back-up generator capability spectrum of physical disaster types and to guarantee the survivability of core trading • Redundant voice telecommunications and clearing functions. Key components lines with automatic switching to of the plan include: backup facilities

• Multiple-redundant systems The plan provides survivability even components, maintained at separate, in the event of complete destruction geographically-dispersed facilities of CME Group’s primary facilities in downtown Chicago. Routinely-tested • Multiple-redundant network scenarios include both the completion of connectivity between clearing the daily clearing cycle on the day of such firms and CME Clearing, into those a physical disaster, and the resumption separate, geographically-dispersed of normal clearing processing on the facilities following business day. • Real-time mirroring of data storage between separate facilities

Only the performance bond deposits of the defaulting firm would be available to CME. Because performance bond deposits reflect position risk, a larger outstanding obligation typically would be met by a larger share of these aggregate deposits The market value of CME pledged shares/memberships represents the minimum number of specified memberships and the 8,000 shares of our Class A common stock required to be pledged to our clearing house by a firm clearing only CME products as of December 31, 2007. The market value of the memberships is based on the average of the bid and offer for CME and CBOT memberships at December 31, 2007. The market value of the Class A shares is based on the closing price of $686.00 on the New York Stock Exchange on December 31, 2007. Effective as of February 1, 2007, the requirement to pledge shares of our Class A common stock was decreased from 15,000 to 8,000. This decrease represents our third decrease in the requirement. Subsequent to the liquidation of the defaulting firm’s performance bond collateral, the following resources would be the minimum available to satisfy any unmet obligations of a defaulting firm able to clear CME Group products (Surplus Funds + Security Deposit + Assessment Power + Market Value of Pledged Shares and Memberships of defaulting firm). As of 9/30/07 this was equal to $4,917,000,000.

18 CME Group

SUMMARY

CME Clearing’s financial safeguard system failure of a clearing member resulting in is comprised of critical risk management a loss of customer funds. This system has and financial surveillance techniques been remarkably successful in periods designed for the protection of the of tremendous volatility in the financial clearing membership and its customers. markets. Nonetheless, the Exchange The keystones of the system are CME continuously strives to improve and Clearing’s ability to detect unsound strengthen its financial safeguard system. practices and the financial backing of its clearing members. This combination provides unparalleled safeguards for the protection and benefit of all participants in markets cleared by CME Clearing. In the 159 year history of CME Group and its predecessor organizations, there has never been a failure by a clearing member to pay settlement variation to CME Clearing; there has never been a failure by a clearing member to meet a performance bond call; there has never been a failure by a clearing member to deliver resulting from the exercise or assignment of an option contract; there has never been a failure by a clearing member to meet its delivery obligations; and, there has never been a

19 Financial Safeguards

CME Group Class A Clearing Members (as of 12/31/07)

Note: Firms listed with ## are not Fortis Clearing Americas LLC RBC Capital Markets Corporation actively clearing. Gelber Group, LLC Ronin Capital, LLC ADM Investor Services, Inc. Goldman, Sachs & Co. Rosenthal Collins Group, L.L.C. Advantage Futures, LLC Goldman Sachs Execution & Clearing, SMW Trading Company, Inc. A.G. Edwards & Sons, Inc. L.P. Timber Hill LLC ^AIG Clearing Corporation Greenwich Capital Markets, Inc. TradeLink L.L.C. Alaron Trading Corporation HSBC Securities (USA) Inc. TransMarket Group L.L.C. ## Banc of America Securities LLC J.P. Morgan Futures, Inc. UBS Securities LLC Barclays Capital Inc. Jump Trading, LLC CME Only Clearing Bear, Stearns Securities Corp. Kottke Associates, L.L.C. Members BNP Paribas Securities Corp. Lehman Brothers Inc. Cadent Financial Services LLC

Calyon Financial Inc. Merrill Lynch, Pierce, Fenner & Smith Wachovia Capital Markets, LLC ## Incorporated Cantor Fitzgerald & Co. CBOT Only Clearing MF Global Inc. Citigroup Global Markets Inc. Members Mizuho Securities USA Inc. ARI Grain Co. Credit Suisse Securities (USA) LLC Morgan Stanley & Co. Incorporated Bradley Dean Kolton Commodities Daiwa Securities America Inc. Nomura Securities International, Inc. Bunge Chicago, Inc. Deutsche Bank Securities Inc. Penson GHCO Crossland LLC Dorman Trading, L.L.C. Prudential Bache Commodities, LLC Cunningham Commodities, Inc. Enskilda Futures Limited Rand Financial Serviecs Inc. Eagle Market Makers, Inc. FC Stone, L.L.C. R.J. O’Brien & Associates, LLC Hagerty Grain Co., Inc. FIMAT USA LLC Iowa Grain Company

20 CME Group

Jemm Grain CTC Holdings, L.L.C. Sumitomo Mitsui Banking Corporation

Jerry Manne d/b/a Alaska Commodities D.E. Shaw Composite Portfolios, L.L.C. Sun Holdings LLC

Joseph McNealy & Associates Drawbridge Global Macro Master Fund Susquehanna Clearing, LLC Ltd. Keep Clearing Corp LLC The Bank of Tokyo-Mitsubishi UFJ, Ltd. DRW Holdings, LLC Longwood Trading Thor Optima Fund, Ltd. Gator Trading Partners LLC Mitsui & Co. (USA), Inc. Tudor Investment Corporation Getco Holding Company, LLC Patrick S. Hillegass W.H. Trading, L.L.C. Graham Fed Policy Ltd. RB Trading Wolverine Trading, LLC Harrison Trading Group, LLC RDG Trading Infinium Capital Management, LLC Shatkin Arbor, Inc. International Trading Group, L.L.C. Swank Trading Co. KC-CO II, LLC TENCO, Inc. Kingstree Trading, LLC Term Commodities Inc. London Diversified Fund Limited Triland USA Inc. M&N Trading, L.L.C. FXMarketSpace/OTC Only Clearing Members Madison Tyler, LLC ABN AMRO Bank N.V. Marquette Partners, L.P.

The Royal Bank of Scotland plc Medallion Trading

Class A – Inactive Millennium Partners, L.P.

Clearing Members Mizuho Financial Group, Inc. Allston Trading, LLC Moore Macro Fund, L.P. AQR Absolute Return Master Account, L.P. Optiver US, LLC Atlas Master Fund, Ltd Peak6 Futures, LLC Blue Capital Group LLC Q1 Partners, LP BlueCrest Capital International Limited Quantum Partners LDC Brevan Howard Master Fund Ltd. Quiet Light Securities, LLC CIBC World Markets Corp. Rho Trading Securities, LLC Citadel Derivatives Group LLC S.A.C. International Equities, LLC Crabel Fund, L.P.

21 Financial Safeguards

The Globe Logo, CHICAGO MERCANTILE EXCHANGE®, CME®, GLOBEX®, and CME SPAN® are trademarks of Chicago Mercantile Exchange Inc. (CME), registered in the U.S. Patent and Trademark Office. All other trademarks are the property of their respective owners.

The information within this brochure has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.

All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME Group rules. Current CME Group rules should be consulted in all cases concerning contract specifications.

23 CME Group headquarters CME Group global offices

20 South Wacker Drive Chicago Hong Kong London Chicago, Illinois 60606 312 930 1000 852 3101 7696 44 20 7796 7100 cmegroup.com [email protected] [email protected] [email protected]

Sydney Tokyo Washington D.C. 61 2 9231 7475 81 3 5403 4828 312 930 1000 [email protected] [email protected] [email protected]