Clearing Firms Battle Move To Lift CBOT Emergency Fund

A decision to bolster the Chicago Board of Trade's emergency fundhas sparked an outcry among several clearing firms, including chargesof waste and extravagance.

The controversy revolves around an obscure affiliate of the CBOT,the Board of Trade Clearing Corp., a back office operation thatsettles the exchange's trades and is responsible for safety.

Earlier this year, the CBOT moved to bolster its reserve fundsand make other changes in the wake of the crisis that took placeearlier this year when Barings Bank rogue trader Nick Leeson lost $1billion, jeopardizing the Singapore International Monetary Exchange.

Specifically, the BOTCC voted to phase out the practice ofallowing CBOT clearing members to deposit clearing corporation stockto meet margin requirements. Instead, clearing members next yearwill be required to keep cash in reserve, lessening the possibilityof collapse caused by stock devaluation.

Burt Gutterman, a BOTCC governor, last month wrote a letterblasting that proposal as arrogant and called for an overhaul of theorganization.

"They have a concentration of power that they have abused,"Gutterman said. "They've dictated a policy, and the process shouldbe open."

Since its formation 70 years ago, the BOTCC has been technicallyseparate from the CBOT, owned by its clearing members, although theLa Salle Street exchange is its only customer and the twoinstitutions are closely intertwined.

Gutterman said he wanted that governance to change, arguing thatthe BOTCC's payroll has swelled in the last eight years and is morebloated and inefficient than its counterpart at the ChicagoMercantile Exchange. He also complained that the clearingcorporation charges members too much in fees, pays too much in taxesand duplicates tasks the exchange already performs.

"The BOTCC structure remains a legacy of the past," he wrote.

Added Leslie Rosenthal, who runs a CBOT clearing firm: "Youshouldn't have a militant (BOTCC) board of governors saying theydon't care what's in the best interests of the Chicago Board ofTrade."

John Hiatt, president of the BOTCC, insisted his operation wasefficient, and he cited favorable results of a member survey. Headded that the effort to tighten the safety requirements is part of aroutine evaluation that began two years ago after he took over aspresident.

Although only three of the BOTCC's 126 members keep all of theirreserve as stock, more than half use stock for a portion of theirmargin. Hiatt said he moved to abolish the practice because it ispotentially destabilizing to the exchange.

"Our net worth is the ultimate line of defense," Hiatt said."And if every clearing member met 100 percent of their marginrequirement with stock, we would necessarily have no margin in thehouse or no net worth."