CME Group Office Memorandum

To: Duffy, Terrence; Gill, Phupinder; Taylor, Kimberly From: Madden, Julia Subject: CME Group Business Analysis and CME Clearing Proposal Date: October 10th, 2013

As an independent management consultant, I have noticed many things about the way this organization runs and have been able to gain a good understanding of the business. CME Group Inc. is the worlds largest futures exchange. CME Group Inc. was officially formed in 2007 by the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade, but the history of both of those organizations dates back to the 1800s. The Chicago Board of Trade (CBOT) started the first futures exchange in Chicago in 1848, and offered the first forward contract in 1851 (CME Group website). The CBOT offered the first futures contract in 1865 (CME Group website). The Chicago Mercantile Exchange started out as the Chicago Butter and Egg Board in 1898, and would be known as the Chicago Mercantile Exchange starting in 1919 (CME Group website). After merging in 2007, CME Group acquired NYMEX Holdings, Inc., the parent company of the New York Mercantile Exchange and Commodity Exchange (COMEX) in 2008, and the Kansas City Board of Trade (KCBT) in 2012 (CME Group website). CME Group also owns 90% of the Dow Jones Indexes, including the Dow Jones Industrial Average (CME Group website). CME Group is one of the most diverse exchanges in the world, covering not only futures and options, but all major asset classes. CME Group is known for its derivatives trading, meaning the trading of contracts that are dependent upon the fluctuation of value of the asset to which the contract applies (Investopedia). The most common purpose of a derivative is to hedge risk, which is why risk management is such a huge part of the business of CME Group, and specifically CME Clearing. CME Clearing acts as the central counterparty in every trade, becoming the buyer to every seller, and the seller to every buyer. This eliminates the inherent risk in trading for the customers who trade through CME Clearing. This is achieved by a process called contract novation, which ends the contract between the two original parties in the trade, and creates two new contracts, one between the seller and CME Clearing and another between the buyer and CME Clearing (CME Group website). By this process, CME Clearing absorbs the risk for the two original parties in case one of them is unable to fulfill the legal obligations of the trade. While interacting with the members of the Financial unit of the CME Clearing House, I noticed something stunning. They seemed to be spending a large amount of their time away from their desks, in the copy room. This room contained the two large printers for the floor they sat on. One of the printers had a giant stack of paper already on it, and whatever was being printed was still printing. It had to be 500 pages already. As I was looking around this room, I heard one of the analysts telling their new intern that

they once calculated about how much paper they use in a year, and it ended up being the rough equivalent of six trees. This was astounding to me, and I began thinking of whether that was the only downside of all the printing they did. With the days I was assigned to this client, I took notice of how much time the employees seemed to be spending in the copy room printing and doing printing-related tasks (i.e., stapling documents they had just printed and fixing jams with the printers, which happened quite frequently). On average, with variation between members of the group I was working with, it seemed as though some members spent about forty-five minutes to a full hour each day doing printing-related tasks. This seemed to me like a lot of time that could have been spent doing actual work. This is one place where I could see the use of sustainable business practices paying off, for both the company and the environment. In a paper written by Heather Sarantis, she cites several reasons that cutting out paper could help a business, and I could see how these benefits could apply to CME Clearing. One way in which businesses could cut costs by going paperless is by a having an electronic system for filing and archiving documents rather than filing cabinets, to both save space that is often taken up by those filing cabinets and to prevent documents from being lost (Sarantis, 3). For most of the day-to-day activities that the unit I was working with did, the documents that they were printing out included items like account reconciliation spreadsheets and bank statements, which were already stored on either the Clearing Houses hard drive, or in various databases. The only reason that some of these items are printed is because they needed to be signed off on. If CME Clearing found a way to sign off on these documents electronically, there would be significantly less documents that actually needed to be printed out, which would not only be better for the environment, but would also be better for CME Groups bottom line. CME Group offers the most diverse products of any exchange company, and also has a strong focus on risk management, which is how they stay competitive in an extremely competitive market. CME Group has been increasing its trading volume greatly in the past year, and the state of the company indicates that CME Group will continue to grow in the future.

Sources: CME Group Website Links: CME History: http://www.cmegroup.com/company/history/timeline-of-achievements.html CME Dow Jones Ownership: http://www.cmegroup.com/international/partnership-resources/dji-oncmegroup.html CME Clearing: http://www.cmegroup.com/clearing/cme-clearing-overview/about-centralcounterparties.html Derivatives. Investopedia. http://www.investopedia.com/terms/d/derivative.asp Sarantis, Heather. Business Guide to Paper Reduction. Tufts University. September 2002. http://sustainability.tufts.edu/wp-content/uploads/BusinessGuidetoPaperReduction.pdf