[Federal Register Volume 77, Number 163 (Wednesday, August 22, 2012)]
[Notices]
[Pages 50730-50733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-20566]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67650; File No. SR-CME-2012-22]


Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Amend Rules To Facilitate Customer Portfolio Margining 
of Interest Rate Futures and Interest Rate Swaps

August 14, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 7, 2012, the Chicago Mercantile Exchange, Inc. (``CME'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule changes described in Items I and II, below, which Items 
have been prepared primarily by CME. The Commission is publishing this 
Notice and Order to solicit comments on the proposed rule changes from 
interested persons, and to approve the proposed rule changes on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CME proposes to amend rules related to its interest rate swaps 
(``IRS'') and interest rate futures clearing offerings by establishing 
a portfolio margining program for customer portfolios containing IRS 
and interest rate futures positions. The text of the proposed rule 
changes is available on the CME's Web site at http://www.cmegroup.com, 
at the principal office of CME, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CME included statements 
concerning the purpose of and basis for the proposed rule changes and 
discussed

[[Page 50731]]

any comments it received on the proposed rule changes. The text of 
these statements and comments may be examined at the places specified 
in Item III below. CME has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of these statements.\3\
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    \3\ The Commission has modified the text of the summaries 
provided by CME.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose of the Proposed Rule Change
    CME is registered as a derivatives clearing organization with the 
Commodity Futures Trading Commission (``CFTC''), and currently operates 
a substantial business clearing both IRS and interest rate futures 
contracts. The changes that are the subject of this filing are proposed 
rules that would establish a portfolio margining program for customer 
portfolios containing cleared IRS and interest rate futures positions. 
More specifically, the proposed rule amendments consist of revisions to 
CME Rule 8G831 (Commingling of Eligible Futures and Swaps Positions) 
and certain corresponding changes to the CME IRS Clearing House Manual 
of Operations.
    CME believes the rule changes will benefit customers and the 
overall derivatives markets by: (1) Enabling customers who clear trades 
through CME to obtain the benefit of margin offsets between interest 
rate futures and IRS, thus reducing their trading costs and allowing 
for more efficient capital usage; (2) improving the efficiency and 
effectiveness of risk management; and (3) encouraging greater 
utilization of clearing, thereby facilitating systemic risk reduction.
    CME notes that it has also submitted the proposed rule changes that 
are the subject of this filing to its primary regulator, the CFTC, in 
CME Submission 12-151, and is awaiting the CFTC's approval for the 
proposal.\4\ As described below, CME believes there is good cause for 
the Commission to grant approval for the proposed rule changes on an 
accelerated basis by August 31, 2012 to ensure the proposed rule 
changes can be implemented immediately when CFTC approval is obtained.
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    \4\ CFTC rules permit self-regulatory organizations like CME 
voluntarily to request approval of proposed rule changes. See 17 CFR 
40.5.
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a. CME's Proposed Portfolio Margining Program for Eligible Interest 
Rate Futures Products and IRS; Commingling of Related Positions
    CME has considerable experience clearing and managing the risks of 
interest rate futures, and has been clearing IRS since October 2010. 
CME notes that it previously implemented a portfolio margining program 
for interest rate futures and IRS products in proprietary or ``house'' 
accounts of clearing member firms.\5\
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    \5\ See SR-CME-2012-05, Securities Exchange Act Release No. 34-
66641 (Mar. 21, 2012), 77 FR 18288 (Mar. 27, 2012).
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i. Eligible Products
    CME's IRS offering currently includes seven currencies--viz., USD, 
EUR, GBP, CAD, AUD, JPY, and CHF--each with varying contract 
attributes. CME identified the following interest rate futures that 
will initially be eligible for commingling with IRS in CFTC 4d(f) 
accounts (i.e., customer cleared swaps accounts): Eurodollar Futures 
and Treasury Futures, including U.S. Treasury Bonds and 2-, 5- and 10-
Year Treasury Notes. These particular futures products were identified 
as eligible for commingling based on their exposure to similar or 
correlated risk factors as IRS, thus allowing for margin offsets. In 
accordance with the proposed amendments to Rule 8G831, interest rate 
futures may be commingled with IRS in 4d(f) accounts only if the 
futures are risk reducing.
ii. Clearing Firm Eligibility
    To be permitted to commingle interest rate futures and IRS under 
CME's program, a clearing firm must be a futures commission merchant 
(``FCM'') registered with the CFTC and an IRS clearing member of CME, 
and it must also be a clearing member of CME, the Chicago Board of 
Trade (``CBOT''), or both in order to clear interest rate futures. FCM 
clearing members must also satisfy minimum regulatory capital 
requirements under applicable law (including CFTC regulations and CME/
CBOT rules) and must also be in compliance with CME's operational and 
risk-management rules and requirements for IRS and CME/CBOT clearing 
members.
iii. Margin Methodology
    Pursuant to the proposed changes to CME Rule 8G831, interest rate 
futures residing with IRS in CFTC 4d(f) accounts held at CME will be 
subject to the margin model developed by CME for IRS. This model is 
based on an Historical Value at Risk (HVaR) methodology with 
Exponentially Weighted Moving Average (EWMA) volatility forecasting. 
CME's margin model for IRS covers at least 99 percent of potential 
losses over any five-day period in a large universe of portfolios, 
covering 99 percent of market moves.
    HVaR was selected both for its scalability across multiple 
currencies and its transparency to market participants: it is a 
standard, well understood model and is easily replicable. CME has 
enhanced the multi-currency HVaR model to address risks arising from 
rate risk and foreign exchange conversion risks. The model is designed 
to mitigate the rate risks created by additional currencies, correlated 
yield curves, and differing liquidity profiles. The model also takes 
into account foreign exchange conversion rates and their implication on 
collateral liquidation for multi-currency losses. In addition, the HVaR 
model provides margin offsets for multi-currency portfolios.
iv. Default Scenarios
    CME has considered issues involved with the default of a clearing 
member and/or the default by one or more of a clearing member's cleared 
swaps customers with a commingled account. Because the commingled 
positions would reside in CFTC 4d(f) accounts, these customer 
commingled interest rate futures and IRS (and collateral associated 
therewith) would be part of the customer ``cleared swaps'' account 
class under the CFTC's Part 190 Bankruptcy Rules. This means these 
positions would be treated in accordance with the CFTC's Part 22 
regulations providing for legal segregation of customer funds with 
operational commingling, which become effective on November 8, 2012.
    Any default by an IRS clearing member--including a default 
involving customer commingled positions--would also be governed by 
CME's rules and default management procedures for IRS (including CME 
Rules 8G802, 8G814, and 8G975). These rules and procedures are based on 
input from IRS clearing members and market participants, as well as 
CME's depth of default management experience from many years as a 
derivatives clearing house. CME's default management rules and 
procedures are reviewed and updated as circumstances warrant. CME 
Clearing makes these updates in consultation with the CME IRS Risk 
Committee and the CME IRS Default Management Committee.

[[Page 50732]]

2. Statutory Basis
    CME believes the proposed rule changes are consistent with the 
requirements of the Act, including Section 17A,\6\ and the rules and 
regulations thereunder applicable to CME. CME observes that the 
proposed rule changes involve improvements and efficiencies that are 
related to CME's interest rate futures and swap product offerings for 
investors. Accordingly, CME believes the proposed rule changes will 
benefit customers in the following ways: (i) By enabling customers who 
clear trades through CME to obtain the benefit of margin offsets 
between interest rate futures and IRS, thus reducing their trading 
costs and allowing for more efficient capital usage; (ii) by improving 
the efficiency and effectiveness of risk management; and (iii) by 
encouraging greater utilization of clearing, thereby facilitating 
systemic risk reduction. CME contends that the proposed changes are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and derivatives agreements, contracts and 
transactions; to assure the safeguarding of securities and funds that 
are in CME's custody or control; and, in general, to help to protect 
investors and the public interest.
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    \6\ 15 U.S.C. 78q-1.
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    Furthermore, CME points out that the proposed rule changes are 
limited to the clearing of futures and swaps, and thus relate solely to 
CME's futures and swaps clearing activities pursuant to its 
registration as a derivatives clearing organization under the Commodity 
Exchange Act (``CEA''). CME thus asserts that the proposed rule changes 
do not significantly affect any of CME's securities clearing operations 
or any related rights or obligations of CME or persons using such 
service. CME notes that the policies of the CEA with respect to 
clearing are comparable to a number of the policies underlying the Act, 
such as promoting market transparency for over-the-counter derivatives 
markets, promoting the prompt and accurate clearance of transactions, 
and protecting investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the proposed rule changes will have any 
impact, or impose any burden, on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    CME has not solicited, and does not intend to solicit, comments 
regarding these proposed rule changes. CME has not received any 
unsolicited written comments from interested parties.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
changes are consistent with the Act. Comments may be submitted by any 
of the following methods:
     Electronic comments may be submitted by using the 
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or by sending an email to [email protected]. Please 
include File No. SR-CME-2012-22 on the subject line.
     Paper comments should be sent in triplicate to Elizabeth 
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CME-2012-22. To help 
the Commission process and review your comments more efficiently, 
please use only one method of submission. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule changes that 
are filed with the Commission, and all written communications relating 
to the proposed rule changes between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE., Washington, DC 20549, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of such filings also will be 
available for inspection and copying at the principal office of CME. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.
    All submissions should refer to File Number SR-CME-2012-22 and 
should be submitted on or before September 12, 2012.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    Section 19(b) of the Act \7\ directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. The Commission concludes that the proposed rule changes 
are consistent with the requirements of the Act, in particular with the 
requirements of Section 17A of the Act,\8\ and the rules and 
regulations thereunder applicable to CME. In particular, the Commission 
concludes that the proposed rule changes are consistent with Section 
17A(b)(3)(F) of the Act,\9\ which requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of derivative agreements, contracts 
and transactions. It is the Commission's view that the proposed rule 
changes should allow CME to enhance its services in clearing IRS and 
interest rate futures products, thereby promoting the prompt and 
accurate clearance and settlement of derivative agreements, contracts 
and transactions.
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    \7\ 15 U.S.C. 78s(b).
    \8\ 15 U.S.C. 78q-1. In approving these proposed rule changes, 
the Commission has considered the proposed rule changes' impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    In its filing, CME requested that the Commission approve these 
proposed rule changes on an accelerated basis, so they can become 
effective prior to August 31, 2012. CME has articulated three reasons 
for granting its request for accelerated approval. One, the products 
covered by this filing, and CME's operations as a derivatives clearing 
organization for such products, are regulated by the CFTC under the 
CEA. Two, the proposed rule changes affect the IRS swaps and interest 
rate futures that CME clears, and therefore relate solely to its swaps 
and futures clearing activities, and do not significantly relate to 
CME's functions as a clearing agency for security-based swaps. Three, 
CME believes the rules will benefit customers and the overall 
derivatives markets in the following ways: (i) By enabling customers 
who clear trades through CME to obtain the benefit of margin offsets 
between interest rate futures and IRS, thus reducing their trading 
costs and allowing for more efficient capital usage; (ii) by improving 
the efficiency and effectiveness of risk management;

[[Page 50733]]

and (iii) by encouraging greater utilization of clearing, thereby 
facilitating systemic risk reduction. CME contends that, as a result, 
the proposed rule changes will help to protect investors and the public 
interest.
    The Commission concludes that there is good cause, pursuant to 
Section 19(b)(2) of the Act,\10\ for approving the proposed rule 
changes prior to the thirtieth day after the date of publication of 
notice in the Federal Register because: (i) The proposed rule changes 
do not significantly affect any of CME's securities clearing operations 
(whether in existence or contemplated by its rules) or any related 
rights or obligations of CME or persons using such service; and (ii) 
the activity relating to CME's non-security clearing operations for 
which CME is seeking approval is subject to regulation by another 
federal regulator.
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    \10\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-CME-2012-22) be, and hereby is, 
APPROVED on an accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20566 Filed 8-21-12; 8:45 am]
BILLING CODE 8011-01-P