The Clearing Corporation

A History: Trusting, Growing, Leading, Clearing

“The Chicago Board adopted a motion suggesting that it establish a modern clearinghouse. Probably no more progressive and far-reaching step was ever taken to insure prices accurately reflecting supply and demand. I believe it will be effective.”

Secretary of Agriculture William Jardine in a Report to President Calvin Coolidge, 1925

Introduction

In the history of the world’s financial markets, perhaps no single entity has had a greater impact on the safety and soundness of the clearing process than The Clearing Corporation (CCorp). Based on a tradition of independence, integrity, and innovation, The Clearing Corporation has established itself as the model for the majority of the world’s clearinghouses.

September 3, 1925 is among the most important dates in the history of the futures industry. It was on that day, more than 75 years ago, that the Board of Trade Clearing Corporation, now named The Clearing Corporation, was founded by the Chicago Board of Trade (CBOT®) membership.

The Clearing Corporation is one of the oldest independent clearinghouses in the world. It has not only survived, but flourished, through the Great Depression and periods of recession, war, and rapid technological and economic change. Its world-class standing has been and will continue to be built upon three fundamental concepts: Independence, Integrity, and Innovation.

The importance of its independence as a corporate entity cannot be overestimated. This quality has allowed The Clearing Corporation to make objective decisions during periods of substantial stress with one goal in mind– financial integrity for the clearing and settlement process.

Integrity goes hand-in-hand with independence. Clearing members know that The Clearing Corporation makes decisions based on safety and soundness for the marketplace and nothing else.

The financial integrity of the marketplace also has been aided through The Clearing Corporation’s commitment to innovation since its founding. This commitment is evidenced by its history as an industry leader–from its first use of computers in 1963 to the development of on-line trade entry and risk analysis systems. The Clearing Corporation continues to make every effort to enhance the clearing and settlement process for its members.

Through the unique combination of these three characteristics, The Clearing Corporation has profoundly influenced the direction and identity of the futures industry. It has established an unequaled reputation for financial integrity and unparalleled service while maintaining the lowest clearing costs in the industry.

To understand The Clearing Corporation’s overwhelming impact and its role as one of the oldest independent clearinghouses in the world, it is important to understand its origins. To do this, we must go back in time 270 years . . .

Clearing and Direct Settlement

One of the oldest and most basic clearing methods was termed “direct settlement” and can be traced back to 1733 with the trading of metal warrants of the East India Company. Direct settlement dictated that each trader wanting to offset a trade or group of trades, his “position,” had to do so with each trade’s original counterparty. This was a cumbersome and inefficient practice.

Disputes between traders were common at that time and were resolved through expensive court proceedings that made it difficult for some to participate in the markets. The need for an impartial body to inexpensively arbitrate disputes gave rise to trading associations. These associations were organized around common products and/or geographic locations. Membership was not mandatory, but associations were nevertheless effective in bringing some order to the chaos of these early markets.

In England, the Liverpool Association used direct settlement. Traders in Liverpool bought and sold what were then termed “to arrive” contracts on cotton. While initially successful, direct settlement was both inefficient and ineffective during volatile periods such as the 1860s with the wild commodity speculation that occurred as a result of the U.S. Civil War. To help prevent nonperformance of contracts, steps were taken by the Liverpool Association to make the contracts more fungible, or interchangeable, through the standardization of contract terms.

Through time, direct settlement evolved to provide more security for market participants through the inclusion of provisions that called for margin deposits, a sort of collateral, and suspension of trading privileges or expulsion from the exchange upon contract nonperformance.

With the organization of trading associations and increased contract fungibility, direct settlement proved to be a fairly effective system. However, as worldwide trading volume increased toward the end of the 19th century, there was a need for a more flexible settlement method. It was determined that the best way to do this was to allow participants to close trading positions without having to do so with their original counterparties.

The system that developed was termed “ring settlement.” Under this system, “rings” of buyers and sellers were linked together to settle their accounts. This was a major step toward the multi-party clearing system used by The Clearing Corporation today. As an example of “ringing,” Adams sells to Brooks who sells to Campbell who sells to Adams. Adams’ trading position is even, as the original sale to Brooks is negated through the purchase from Campbell. By not limiting trades to original counterparties, simultaneous contract settlement was made possible.

The benefits of ring settlement were numerous. Settlements for large volumes of contracts could occur instantly, the costs of maintaining an open position were lowered and, most importantly, counterparty risk was diminished.

Clearing in Chicago

The Board of Trade of the City of Chicago, founded in 1848, was the first incarnation of the modern open-outcry futures exchange and employed the ring system in the latter half of the 19th century. In order to facilitate the administration of ring trading’s complex multi-party settlement in the face of increasing volume, the Exchange opened its own internal ring trading clearinghouse on September 23, 1883.

A wholly owned division of the CBOT, the clearinghouse initially acted solely as a common fund, taking payments of member debits and paying out member credits. Even in its limited role, the clearinghouse’s success in handling the demands of ring trading was immediate and astounding. With the clearinghouse in place, member back-office work was cut drastically.

On December 3, 1883, the Chicago Tribune newspaper reported that, over the span of the first fourteen weeks of the clearinghouse’s operation, it processed 26,986 member checks. Without it, that number would have been 260,000. This ratio held true, with 76,500 checks processed over the first nine months, not 740,000 as would have been the case previously. The CBOT saw the clearinghouse’s effectiveness in this area and gradually gave it responsibilities in other areas to promote a more efficient trading process.

The first of these areas was trade registration, which was deemed too slow and inefficient by the Exchange because it occurred after the trading day. To address the problem, the CBOT gave the clearinghouse the responsibility to register trades at the time of their execution.

In addition to increasing market efficiency, this method of trade registration for the first time gave the clearinghouse the ability to track its member firms’ outstanding contract obligations. It was at this point that the role of the clearinghouse was expanded to address the safety and soundness of the marketplace.

The ring system, combined with the clearinghouse’s new role, was successful in reducing counterparty risk. However, potentially disastrous strings of defaults upon the failure of just one link in the ring were still possible. Such a situation occurred in 1902 when a CBOT trader went bankrupt. His bankruptcy affected the accounts of 748 members, representing more than 40% of CBOT membership at the time.

A 1903 CBOT rule change attempted to address this problem. It stated that any losses from defaulted contracts must be paid through the clearinghouse in order to have an equitable distribution of funds. The clearinghouse used the default information to develop performance records of its clearing members, so it could more effectively ensure safety and soundness.

Although the ring system’s problems of counterparty risk diminished with the introduction of the clearinghouse and its increasing role in the market, credit risk was still a concern for the CBOT membership. They wanted a clearing organization that could offer two things: equal counterparty risk on every trade; and a level of institutional integrity not seen in the world’s futures markets of the time.

For equal counterparty risk on all trades, the CBOT membership wanted a clearinghouse that utilized a new settlement system called “complete clearing.” This system called for the clearinghouse to act as the common counterparty for every trade—the buyer to every clearing company seller and the seller to every clearing company buyer. Universal CBOT member participation in the clearinghouse would be required.

Of equal importance, members had to be assured of the clearinghouse’s institutional integrity. The marketplace demanded assurances as to the clearinghouse’s financial stability and that any clearinghouse actions were focused on the needs of its members and the financial integrity of the marketplace. In order to achieve these ends, the CBOT membership determined that an independent entity operating under clearing member oversight was the best solution.

The Call for Independent Clearing

A 1903 petition calling for a complete clearing organization with universal participation and total independence from the CBOT was submitted by representatives of the Exchange membership. There were five votes from that time until the new system was approved in 1925. Two issues influenced the introduction of complete clearing.

The first issue was related to the anti-gaming laws in Illinois. These laws stated that all trading without intent to receive or make delivery was in effect gambling and illegal. Because the clearinghouse, as envisioned, would obviously not have the intent of delivery, many market participants felt that its role as common counterparty would be in direct conflict with these statutes.

In the case of the Board of Trade v. The Christie Grain and Stock Company, the United States Supreme Court officially settled the issue. In May of 1905, Justice Oliver Wendell Holmes stated that the “intent of delivery” terms for futures were sufficient to distinguish the contract from a wager. This landmark decision partially opened the door for the establishment of The Clearing Corporation.

The second issue was the CBOT members’ belief that the confidentiality of trading activity was a vital part of maintaining market integrity. The Grain Futures Administration, established as part of the 1922 Grain Futures Act signed by President Warren G. Harding, required the reporting of CBOT members’ aggregate trades. In the absence of a clearinghouse, traders would have to submit their trading activity directly to the government without anonymity. Anonymity and the administrative savings of having another firm file activity reports made the argument for a complete clearing organization even more compelling.

Once those two issues were resolved, the door was fully opened and there began a more widespread movement for the establishment of an independent, complete clearinghouse for the Chicago Board of Trade. The membership showed their support for this initiative in two ways: by approving a new cotton contract (no longer traded) in 1924 that called for the formation of a complete clearinghouse, the Chicago Cotton Clearing Corporation; and by submitting a complete clearing referendum petition on July 1, 1925.

In response to the demand, the CBOT distributed a questionnaire to its 1,600 members asking for input on the subject. Complete clearing conducted by a clearinghouse independent of the Exchange received overwhelming support.

On September 3, 1925, the CBOT membership voted two-to-one in favor of complete clearing performed by an independent organization. Following that vote, The Clearing Corporation was incorporated on October 5, 1925 as an independent entity operating under clearing member oversight.

This bold move created an independent financial corporation that would establish itself as the model for providing financial integrity and innovation for clearing and settlement services through the most exciting times of the twentieth century.

The Early Years of The Clearing Corporation

In its early years, The Clearing Corporation weathered the Great Depression. Through the banking failures, despair, and uncertainty of that time, the young institution was a rock of financial integrity. It provided certainty to market participants when they looked to the future. Through a period that tried and shaped the character of The Clearing Corporation as much as it did that of the nation, no customer lost money as a result of clearing member default, and its financial obligations were always met on time.

Beginning in 1930, The Clearing Corporation leveraged its integrity in a time of great market upheaval as it began clearing equities, bonds, and government securities. The securities of many well-known corporations were traded at the CBOT, including William Wrigley, Jr.; Walgreen Company; Studebaker; American Cyanamid; Armour & Co.; and divisions of Ford Motor Company and Standard Oil.

The Clearing Corporation’s steadfastness and discipline were perhaps even more important during the 1930s and into World War II. Trading volume at the CBOT reached more than 9 million contracts in 1929. During the 1930s, contract volume dramatically fluctuated from that level to just 1.9 million in 1942 and 1943. That decline, caused by wartime rationing and price controls, could have dealt a mortal blow to an exchange or clearing organization without a firm foundation.

Through it all, however, The Clearing Corporation maintained its financial and institutional integrity, remaining a viable institution as the markets regained their strength.

Challenges Met with Leadership and Innovation

The post-war years were good for the United States markets and market institutions, and The Clearing Corporation was no exception. CBOT volume climbed back and surpassed previous levels, reaching as much as 11 million contracts per year in the 1950s, and more than 17 million in 1961. These higher volumes posed a challenge to The Clearing Corporation’s established traditions of accuracy and cost-efficiency.

In 1963, The Clearing Corporation met that challenge and showed its bold leadership when it purchased its first computer to increase efficiency in the face of the soaring volume.

Despite their significant expense, computers proved to be extremely efficient at lowering clearing members’ administrative clearing costs. In the first year of computerization, trade checking was completed by sundown instead of sunup and members saved money by not needing staff to check every trade. This kept clearing costs low. In 1941, the per-contract clearing cost was 25¢; by 1963 it was only 5¢. The Clearing Corporation used the computers to reinforce its standing as the most cost-effective clearinghouse among the major futures markets.

As the scope of what technology could offer its members expanded, The Clearing Corporation actively investigated new possibilities to offer the best services of any clearinghouse in the world.

These new technological capabilities unleashed its innovative spirit. Consequently, in the 1960s, its membership experienced an explosion of innovation, one of the building blocks that would shape The Clearing Corporation over the next three decades. New products and services in trade entry, matching, and processing, as well as information management, came in rapid succession.

In addition to clearing, the area in which the first CCorp computers were best able to aid members was bookkeeping. The potential of automation was first tapped when members were presented with a way to efficiently calculate their trading positions during a period of increasing volume.

The new system, Transaction Accounting and Bookkeeping Service (TABS®), introduced in 1966, was the first of its kind in the industry. In keeping with The Clearing Corporation's commitment to cost-effectiveness, it ran at night when the computers would have otherwise been idle. Initially, it was used by independent traders who provided all-important contract liquidity for the growing CBOT but did not have a back-office staff to track their trades. Larger firms also began to use TABS, but they had needs in the area of trade entry, as well.

Trade entry was traditionally the most labor-intensive portion of a trading firm’s operations, and as volume increased phenomenally through the 1970s, it became even more of a strain on clearing members’ back-office staff. Tens of thousands of computer punch cards were produced by members each day and fed manually into The Clearing Corporation’s systems.

The need for a paperless clearing system was the next obvious challenge. The first step was the On-line Transaction Information System (OTIS®). Developed in 1981, it was the industry’s first cost-effective, on-line system for entering, editing, and distributing trade information. By 1985, it had facilitated the development of an incredibly efficient paperless clearing process.

OTIS also was the first trade entry system to continuously match trade input. It enabled firms to print trade reports throughout the day, and traders to print trade status reports on the trading floor. This facilitated the timely detection and correction of errors, as well as the same-day collection and payment of variation settlements.

OTIS was equally important when options were introduced in 1982. Options on futures represented a complex type of contract in which the buyer acquired the right to either buy or sell a futures contract during the life of the option contract. Clearing this type of contract was complex, as well–so complex that, when the Kansas City Board of Trade (KCBT) introduced options based on its Value Line® Index futures, that Exchange’s clearing system was unable to clear and settle the trades. The Clearing Corporation successfully stepped in to do so.

With the flexibility offered by options, the futures markets became much more effective as risk management tools, and the new contracts were quickly accepted in the marketplace. As this development brought more users to futures markets, the industry became increasingly global in its reach. Exchanges that offered risk management products on foreign interest rates, currencies, and stock indices were introduced in Europe, the Pacific Rim, and Latin America. As more and more CCorp members joined the new exchanges, their trade entry and bookkeeping systems required increasingly complex capabilities. In addition, some exchanges began to require member firms to submit trades electronically without having offered automated trade-entry systems to do so.

To resolve the problems created by these developments, The Clearing Corporation introduced the Trade Entry and Matching service (TEAM®) in 1986. TEAM gave Clearing Corporation members increased back-office capabilities by offering a single trade entry system that supported multiple exchanges. It also gave clearing members the ability to download trades from other exchanges to TABS. This made it easier for member firms to monitor their activity across multiple markets.

In the mid-1980s, The Clearing Corporation began developing the Shared Market Information System (SHAMIS™) because it felt that the U.S. clearinghouse community needed a system to monitor its members’ combined market positions across multiple exchanges. In October of 1987, when the stock market suffered its most severe fall since the 1929 Crash, it became alarmingly apparent that this was the case.

SHAMIS was introduced shortly thereafter, in May 1988. Backed by The Clearing Corporation’s reputation for market integrity and its tradition of innovation, the system instantly became the industry standard for communicating risk and financial information on common clearing firms to participating clearinghouses. It helped clearinghouses across the country assess the impact of price volatility on clearing members’ positions, profit and loss, and margin requirements across all participating exchanges.

In addition to The Clearing Corporation, SHAMIS is currently utilized by all futures clearinghouses and The Options Clearing Corporation. The National Futures Association (NFA) also uses SHAMIS to perform risk management services for other exchanges.

While SHAMIS gave the industry a tool to monitor members’ risk exposure, The Clearing Corporation recognized its members’ need to perform complicated portfolio analysis on their own risk exposure.

It introduced the Simulated Analysis of Financial Exposure (SAFE®) system to give members that capability. SAFE is a quantitative system that estimates, classifies, and measures risk exposure, as well as evaluating the financial impact of market movements on a customer’s account. The system remains an integral part of The Clearing Corporation’s risk management practices.

In the late 1980s and early 1990s, another development in the futures industry caused already robust exchange volumes to skyrocket once again. Experienced traders established managed futures funds or became Commodity Trading Advisors (CTAs). These funds and CTAs serviced individuals and institutional investors who increasingly recognized that using futures was an effective way to transfer portfolio risk, but had neither the time nor the experience to trade these markets directly. Managed funds and CTAs controlled billions of dollars and traded contract quantities that rarely had been seen before.

This institutionalization of the futures market led to the combination of market participants’ trading activity, not all of which would always be executed through the customer’s clearing firm or at the same time or price. In response, The Clearing Corporation initiated a number of practices to streamline the process. For example, the Give-up system was introduced in 1990. This system made it possible to move market participants’ positions from the trade execution clearing firm to the position-carrying clearing firm more efficiently.

To make the execution process even more efficient, in June 1992 The Clearing Corporation implemented the Average Price System (APS). If a particular trade was executed at multiple prices, clearing members could opt to average them in order to facilitate a fair and equitable allocation of the combined trades across multiple customer accounts. In 1994, The Clearing Corporation introduced APS “Plus Five,” creating a consistent, industry-wide standard for calculating and processing average price trades for clearing and bookkeeping systems.

In response to requests from the Futures Industry Association (FIA) in 2000, the derivatives industry’s governing body, the Commodity Futures Trading Commission (CFTC), announced that it would no longer require firms to use an exchange-supported average price system; rather, firms could calculate the average price through their own bookkeeping systems. As a result, The Clearing Corporation went on to direct its energies and resources to enhancing the clearing system by developing Single Line Entry of Differential Spreads (SLEDS) and, later, the Allocation and Claim Transaction (ACT™) system for processing of EFPs, misclears, transfers, and give-ups. These innovations streamlined trade entry. For example, rather than both the buying and selling clearing firms entering their side of an EFP, only one side would enter the essential trade elements and the opposite side would accept the transaction.

As member firms, managed futures funds, and CTAs began looking beyond U.S. borders for risk transfer opportunities, the CBOT entered into a cooperative effort with the Tokyo Stock Exchange (TSE) to offer futures contracts on the Japanese Government Bond and the TOPIX stock index. To help simplify bookkeeping, The Clearing Corporation became the first U.S. clearinghouse with the capability to clear contracts in denominations of a foreign currency and to provide for delivery through a foreign banking system. Although this initiative with the TSE was short-lived, it was proof that, yet again, The Clearing Corporation was at the forefront of industry innovation.

Perhaps the most dramatic example of the internationalization of futures trading occurred when the CBOT initiated an evening trading session for its financial futures and options. This was the first time that an open-outcry session was designed to trade during the business hours of another time zone. It coincided with the opening of Pacific Rim trading, considered to be the start of the international trading day. This meant that The Clearing Corporation had to deal with the possibility of two distinct opening and closing periods, forever changing how to define the trading day, opening and closing prices, and the calculation of open interest. It met these challenges by developing systems to more quickly assess market exposure before the opening of a new trading session.

Throughout this period of tremendous change, The Clearing Corporation maintained its commitment to cost-effectiveness. Clearing fees remained the lowest in the industry and The Clearing Corporation implemented several new services designed to reduce its members’ and shareholders’ administrative costs.

An example was the Automated Transfer of Money (ATOM®) system, developed in 1992. Designed to directly debit broker fees from clearing members and credit the respective brokerage accounts, this service greatly reduced the number of commission transactions. (For example, rather than a floor broker obtaining a check from each firm he transacts business for, he would receive a single bank credit transfer; rather than a firm cutting 35 checks to 35 brokers, it would have a single debit.) ATOM became the industry standard by 1993, and today is used to collect and pay brokerage commissions by the CBOT, CME, NYMEX/COMEX, and NYBOT.

To meet increased member demands while controlling costs, The Clearing Corporation partnered with the Chicago Mercantile Exchange to develop the Give-up Automated Invoicing System (GAINS™). GAINS, introduced in 1996, allows for the automatic generation of give-up execution services invoices and other related bank transactions, again reducing the number of transactions.

Demands of a Changing Marketplace

The last decade of the twentieth century was a remarkable time for The Clearing Corporation as it met the unparalleled demands of the changing marketplace, and combined its integrity with technology to further establish its premier position in the financial industry. Such market changes as the globalization of the futures industry, the increased proliferation of electronic trading, new and growing exchanges, and over-the-counter market activity, required The Clearing Corporation to not only adjust and react, but to be aggressively proactive in designing services tailored to meet the rapidly evolving needs of its members.

As markets became increasingly global, exchanges began to form international alliances or linkages to expand the trading day for contracts with global appeal. While these links provided tremendous new trading opportunities, they also brought great challenges in clearing and risk management.

One of the world’s most expansive and comprehensive international links was developed between the CBOT and the London International Financial Futures and Options Exchange (LIFFE). In May 1997, the CBOT began trading LIFFE’s German Government Bond contract, while LIFFE began trading the CBOT’s U.S. Treasury Bond, both among the world’s largest and most liquid contracts at the time. The Clearing Corporation cleared LIFFE contracts traded at the CBOT and transferred open interest to LIFFE at the end of Chicago’s trading day. At the end of London’s trading day, positions on CBOT contracts traded at LIFFE were transferred to The Clearing Corporation, which held the open interest.

The clearing process worked seamlessly. Volume initially was very promising, but the timing of the link occurred when electronic markets were influencing the venues for trading. Due to lower cost and easier access, the open outcry concept of the link was replaced with electronic marketplaces as the Bund volume shifted from LIFFE to Eurex. The trading link, however, was an excellent proof of concept for future international links.

Another market development that significantly altered financial futures trading was the enormous growth in the trading of cash market government securities. While many of the transactions in the cash market could be hedged easily through trading futures at the CBOT, there was a need to more perfectly blend the trading needs of both markets.

The Clearing Corporation met this challenge head-on by establishing a wholly owned subsidiary, the “Clearing Corporation for Options and Securities” (CCOS), a securities clearing organization authorized by and under the oversight of the Securities and Exchange Commission. Through a subsidiary of the CBOT, “Chicago Board Brokerage” (CBB), the Exchange developed an electronic trading system that gave clearing and exchange members expanded opportunities to execute outright cash trades and various cash/futures transactions. CCOS cleared CBB trades through new clearing systems developed by The Clearing Corporation for this purpose.

Perhaps one of the most important catalysts of change for the futures and options markets was the explosion of over-the-counter (OTC) derivatives trading in the 1990s. The OTC market had many of the same issues affecting it as did the 19th century markets. In neither was there a common body acting as buyer or seller of equal credit to every trade. In neither were contracts interchangeable, nor was overall risk exposure measured. The OTC industry was, however, directly related to today’s futures and options markets in that OTC participants use exchange-traded contracts to offset risk.

The Technology Front

As past history has proven, The Clearing Corporation has always utilized technology to enhance its own and its members’ ability to process and clear trades as efficiently as possible. Many of its historical technological breakthroughs have been to increase “off-floor” or back-office efficiency for its clearing member firms. But The Clearing Corporation also has addressed the needs of the trading floor successfully, making open-outcry markets even more responsive to meeting the demands for increased efficiency and market integrity. This was never more apparent than during the 1987 Crash. The Clearing Corporation was able to maintain financial integrity even as its systems handled excessive volume and increased market volatility without a problem.

Today, trading is done both in trading pits and on electronic trading systems, but The Clearing Corporation seamlessly supports the unique aspects of both marketplaces. The computerized clearing process occurs on a 24-hour basis. Transactions are sent to The Clearing Corporation through real-time computer networks. As the processing and clearing procedures are completed, the member firms’ positions are instantaneously sent through those networks back to their risk management systems. Also, many brokers in the trading pits use electronic “trading cards” that immediately communicate the size and quantity of the trade directly to the member firms and to The Clearing Corporation.

As new and sophisticated electronic trading platforms and trading mechanisms were developed, and new products were offered, The Clearing Corporation upgraded its capabilities to interface with those systems and to clear the new products.

In 1993, the Board of Trade introduced Project A®, its electronic trading network. Trades executed on Project A were sent directly to The Clearing Corporation for settlement. While Project A was successful for the CBOT, it eventually became clear that, to expand into overseas markets, the Exchange needed a different trading platform.

In 2000, the CBOT and Eurex formed a joint venture company to operate a single global electronic trading system. This alliance was the first of its scale and created the world's most advanced trading network, giving members and customers the opportunity to trade the most active futures and options products in the world from a single screen. The CBOT migrated from Project A to the new CBOT-EUREX platform, known as a/c/e (Alliance/CBOT/EUREX). The Clearing Corporation developed an interface that accepted the position transaction record from a/c/e and converted it to a recognizable trade record format to be processed by Clearing and its member firms. By utilizing real-time messaging protocol for these transactions, The Clearing Corporation provided member firms with the efficiencies of straight-through processing. The trading platform enables the CBOT and Eurex to share the same network and distribution capabilities, offering the benchmark products of both exchanges to an expansive global trading community. With this platform, The Clearing Corporation receives all CBOT product trades from the Eurex trading host, and matches and settles them. As future CBOT initiatives unfold, The Clearing Corporation will continue to upgrade its capabilities to provide optimal support to the exchange's electronic trading platform.

Perhaps the best example of The Clearing Corporation’s immediate responsiveness to technology needs was the issue of Year 2000 readiness. Not only was The Clearing Corporation the first in the industry to begin testing its systems (in 1998) for Y2K, but it took the lead in providing guidance, expertise, and direction to others in the industry. As it became evident that the turn of a new century would not disrupt the flow of information, services, and clearing, The Clearing Corporation proved to the world that its reputation for consistent, excellent service was well deserved.

In the mid-1980s The Clearing Corporation realized that new technology, while increasing efficiency, also increased the need to ensure maximum system availability and business processing continuity under all possible circumstances. To that end, The Clearing Corporation began developing an aggressive disaster recovery strategy.

Currently, The Clearing Corporation operates a disaster recovery facility outside of the Chicago metropolitan area. Rigorous testing is conducted at regular intervals to guarantee seamless operations if it becomes necessary to close the Chicago and New York offices. The Clearing Corporation's business continuity solution set is recognized industry-wide as “best practice” in disaster recovery.

The Clearing Corporation and e-Commerce

The Internet has spurred a significant change in the transfer of information and development of electronic trading platforms. As a result, the financial marketplace experienced a dramatic change in the way it conducted business.

With electronic trading platforms being introduced for a wide range of products at a rapid pace, the development of related clearing and settlement systems was lagging behind. Given the absence of the clearing component, industry participants were concerned about the financial credibility of new systems.

To address the growth of exchanges spurred by the Internet, The Clearing Corporation began to think about redefining itself. In addition to the total overhaul of its systems, The Clearing Corporation decided to offer its services to the B2B exchanges and OTC markets–in short, creating a new identity.

As these new markets and their clearing requirements evolved, The Clearing Corporation was poised to provide a full complement of clearing services. Moving away from mainframe technology toward browser-based systems, in 1999 The Clearing Corporation made real-time pay/collect available via the Internet, which allowed member firms to check their positions throughout the trading day. Also in 1999, The Clearing Corporation began offering member firms access to their clearing reports over the Internet, thus enhancing the ability of member firms to access their trading data. The following year, The Clearing Corporation rolled out Allocation and Claim Transaction (ACT™), a real-time system designed to create a standardized process for one-sided back-office transactions such as transfers, exchange for physicals (EFPs), and give-ups.

In 2001, The Clearing Corporation began providing online access to its systems through its website (www.clearingcorp.com). Member firms can access the OTIS, GAINS, and ATOM systems. Additionally, The Clearing Corporation migrated to a paperless environment by providing electronic dissemination of all reports. This program is highly secure and makes these applications available in a user-friendly, web-based environment. Once more, The Clearing Corporation broke new ground as the first in the industry to offer complete Internet-based information services.

In order to deliver the best state-of-the-art technology, The Clearing Corporation recognized that it had to continue to bolster its processing abilities in all areas of its operations. The primary goal was to continue its ability to clear new exchanges and products through the current clearing system without the extensive programming and development work this type of effort typically required. Under an agreement with OM Technology in 2000, The Clearing Corporation secured portions of OM’s SECUR software and made modifications to it so it could be integrated into The Clearing Corporation’s systems. These changes enhanced The Clearing Corporation's back-end processing capabilities and enhance its ability to support new products beyond the traditional futures and options.

New Ventures

While The Clearing Corporation was ramping up its technological capabilities, it was not neglecting other ways to bolster market efficiency.

Because of the growing global presence of Chicago's markets, The Clearing Corporation began to accept G-7 sovereign debt as original margin collateral in March 2000. Previously, original margin collateral deposits were restricted to cash, letters of credit, equity securities and U.S. government securities. This program creates more flexibility for its international members and their customers. A more significant advancement in original margin practices occurred in 2001, when The Clearing Corporation became the first U.S. clearinghouse to accept money market mutual fund shares as collateral for original margin, again allowing customers to increase their flexibility in this area.

In March 2001, an agreement with the Government Securities Clearing Corporation (GSCC) was signed, providing a cross-margining arrangement for Treasury futures and options on futures contracts, and corresponding cash and repo U.S. government securities. The cross-margining program allows participants to reduce capital costs to maintain their portfolios more efficiently.

In 2000, The Clearing Corporation expanded its clearing activities to exchanges such as Merchants’ Exchange. Clearing that exchange’s barge freight rate futures contracts gave The Clearing Corporation the opportunity to perform a broad range of clearing functions for an exchange outside of its existing relationship with the CBOT.

At the same time, The Clearing Corporation was pursuing opportunities arising from e-commerce ventures. In November 2001, The Clearing Corporation began processing futures contracts traded through the BrokerTec Futures Exchange. Formed by a consortium of some of the world's largest financial services companies, BrokerTec Global operates as an electronic inter-dealer broker for fixed income transactions in both cash and futures contracts on government securities. BrokerTec selected The Clearing Corporation as its processing partner based on The Clearing Corporation’s independence and technological capabilities.

Joint collateral management was another innovation. Under this program, The Clearing Corporation effectively outsources the day-to-day management of collateral to BNY. BNY ensures that a sufficient amount is on deposit in member firms' accounts at all times, never dropping below the specified level, while allowing member firms the flexibility to substitute securities held in their accounts at any time throughout the business day.

Yesterday, Today, and Tomorrow

Over almost three centuries, futures and options clearing has undergone profound change. From Direct Settlement to Ring Settlement to Complete Clearing, this industry has proven to be among the most dynamic in the world. Since The Clearing Corporation was founded on September 3, 1925, it has built upon its past successes with a view toward the future needs of its customers.

In so doing, The Clearing Corporation has established itself as the world’s model of a modern clearinghouse. Time and again, in terms of market efficiency and cost-effectiveness The Clearing Corporation has been consistently ranked by the global financial community as the industry leader.

Cost savings and efficiencies mean little however, if the highest standards of safety and soundness are not present. These standards have historically been the foundation for The Clearing Corporation’s business operations, and have ensured that it has always met its financial obligations on time, and has never experienced a loss resulting from a clearing member default.

As the 21st century unfolds, and the markets continue to evolve, The Clearing Corporation stands firm in its pledge to deliver the most efficient, cost-effective clearing services available, while at the same time ensuring the safety and soundness of the world’s financial markets.

The Clearing Corporation thanks The University of Illinois at Chicago for access to the Chicago Board of Trade archives maintained by the Special Collections Department of The University Library and permission to use the materials and photo reproductions from that collection. The Clearing Corporation also wishes to recognize the historical scholarship of James T. Moser of the Federal Reserve Bank of Chicago on the origins of modern exchange clearinghouses and gratefully acknowledges the opportunity to use his paper, Origins of the Modern Exchange Clearinghouse: A History of Early Clearing and Settlement Methods at Futures Exchanges Working Papers Series Issues in Financial Regulation Research Department Federal Reserve Bank of Chicago April 1994 (WP-94-3) in presenting this history of The Clearing Corporation.

ACT is a trademark of The Clearing Corporation

ATOM is a registered trademark of The Clearing Corporation

CBB is a trademark of the Board of Trade of the City of Chicago

CBOT is a registered trademark of the Board of Trade of the

City of Chicago

CCOS is a trademark of The Clearing Corporation

GAINS is a trademark of The Clearing Corporation and the Chicago Mercantile Exchange

OTIS is a registered trademark of The Clearing Corporation

SAFE is a registered trademark of The Clearing Corporation

SHAMIS is a trademark of The Clearing Corporation

TABS is a registered trademark of The Clearing Corporation

TEAM is a registered trademark of The Clearing Corporation

MISSION STATEMENT