Application of Funds

Default Management. In the event of a Clearing Member default, all such Clearing Member's segregated customer accounts shall be auctioned according to Clearinghouse procedures. The financial amounts, if any, resulting from such auction shall be applied as follows to reduce or any eliminate any financial shortfall:

1. Defaulting Clearing Member. First, the financial amounts generated from the auction shall be applied to cover the shortfall. The Clearinghouse may make immediate demand upon any guarantor of the defaulting Clearing Member.

2. Clearinghouse. Second, the Clearinghouse Guaranty Fund contribution shall be applied to cover any remaining shortfall.

3. Non-Defaulting Clearing Members. Third, each non-defaulting Clearing Member's guaranty fund contribution, if any, shall be assessed up to a maximum of $1,000,000 of the remaining shortfall and Guaranty Fund replenishment based on each Clearing Member's pro rata share of Margin requirements in relation to the Clearinghouse's aggregate Margin requirements. A Clearing Member that does not satisfy any such assessment shall be in default.

4. Contract Extinguishment. Fourth, the Clearinghouse may partially or fully extinguish Contracts.

Segregated Customer Collateral. The Clearinghouse shall not apply segregated customer collateral to any payment obligations or losses arising from a default in any proprietary account or a different customer account class.

1. Customer Segregated Accounts. Customer funds deposited with the Clearinghouse on behalf of Customers protected by CFTC Rule 1.20 shall be held in accordance with the CEA and CFTC Rule 1.20 in an account identified as "Customer Segregated." Such Customer funds shall be segregated by the Clearinghouse and treated as belonging to the Customers of the Clearing Member. Pursuant to this Rule, a Clearing Member shall satisfy the segregation acknowledgement letter requirement of Rule 806, the CEA, and CFTC Rule 1.20 for Customer deposits held at the Clearinghouse. A Clearing Member fully authorizes the Clearinghouse to comply with all requirements of CFTC Rule 1.20 with regards to its Customer Segregated Account.

2. Cleared Swaps Customer Accounts. Cleared Swaps Customer Collateral deposited with the Clearinghouse on behalf of cleared swaps Customers shall be held in accordance with Part 22 of the CFTC Rules in an account identified as "Cleared Swaps Customer Collateral." Such Cleared Swaps Customer Collateral shall be segregated by the Clearinghouse and treated as belonging to such Customers of the Clearing Member. Pursuant to this Rule, a Clearing Member shall satisfy the Cleared Swaps Customer Account acknowledgement letter requirement of Rule 806, the CEA, and CFTC Rule 22.5 for Customer deposits held at the Clearinghouse. A Clearing Member fully authorizes the Clearinghouse to comply with all requirements of CFTC Rule 22.5 with regards to its Cleared Swaps Customer Account.

Fully Collateralized Swaps. For Fully Collateralized Swaps, the Clearinghouse shall hold, at all times, funds in the form of the required payment sufficient to cover the maximum possible loss that a party or counterparty could incur upon liquidation or expiration of the contract. The default management waterfall specified in Section 1 and Guaranty Fund do not apply to Fully Collateralized Swaps.