[Federal Register Volume 77, Number 213 (Friday, November 2, 2012)]
[Notices]
[Pages 66211-66214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-26861]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68121; File No. SR-CME-2012-26]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing of Proposed Rule Change To Amend Rules in Connection 
With Status as a ``Deemed Registered'' Clearing Agency

October 29, 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 October 15, 2012, Chicago Mercantile Exchange, Inc. (``CME'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared primarily by CME. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(2).
    \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 is proposing to amend certain rules in connection with its 
status as a ``deemed registered'' clearing agency for purposes of 
clearing security-based swap products. The proposed changes are 
designed to comply with certain requirements in the Act. The text of 
the proposed 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 change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. CME has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by CME.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

Background--CME's Credit Default Swap Business and ``Deemed 
Registered'' Status

    CME began clearing credit default swaps prior to the passage of the 
Dodd-Frank Act. These activities were facilitated by temporary 
exemptive relief granted by the Commission to CME. This temporary 
exemptive relief expired on July 16, 2011. At that time, certain 
provisions in the Dodd-Frank Act became effective that were intended to 
ensure that derivatives clearing organizations such as CME that were 
clearing credit default swaps prior to the passage of Dodd-Frank based 
on exemptions granted by the Commission could continue to do so without 
interruption. These provisions provided that CME became ``deemed 
registered'' as a clearing agency solely for the limited purpose of 
clearing security-based swaps. Commission staff has interpreted this 
Dodd-Frank ``deemed registered'' provision to mean that CME Inc., the 
legal entity that houses all of CME's futures and swap businesses, is 
generally subject to all of the requirements of the Act that apply to 
clearing agencies, including the obligation to submit rule filings of 
CME Inc. under SEC Rule 19b-4.
    To-date, CME has not offered any products for clearing that fall 
under the Commission's jurisdiction since the passage of the Dodd-Frank 
Act.\4\ CME has made over sixty rule filings under Rule 19b-4 since 
Dodd-Frank became effective, certain of which relate to CME's current 
broad-based credit default swap clearing business. CME is currently 
seeking approval from the Commission to offer single name credit 
default swaps for clearing; however, to date, CME has not received 
approval to do so.
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    \4\ CME currently offers clearing for certain credit default 
swap index products based on broad based indices that are under the 
exclusive jurisdiction of the Commodity Futures Trading Commission. 
More specifically, CME currently clears Markit CDX North American 
Investment Grade Index Series 8, 9, 10, 11, 12, 13, 14, 15, 17, 18 
and 19 and for Markit CDX North American High Yield Index Series 11, 
12, 13, 14, 15, 16, 17, 18 and 19.
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Summary of Proposed Rule Changes

    Commission staff has reviewed CME's rulebook and requested that CME 
make certain changes in accordance with existing Commission 
interpretive guidance.\5\ The changes that are included in this filing 
are intended to address these requests. The proposed rule changes are 
found within Chapter 8H of the CME rulebook. The changes can be 
summarized as follows:
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    \5\ See Regulation of Clearing Agencies, Exchange Act Release 
No. 16900 (Jun. 17, 1980).
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    Changes to Rule 8H04: The changes to Rule 8H04, which sets forth 
CDS Clearing Member obligations and qualifications, are intended to 
address Section 17A(b)(3)(B) of the Exchange Act. The proposed changes 
explain that CME may approve an application for CDS Clearing Membership 
to permit the clearing of security-based swaps submitted by any 
corporation, partnership, limited liability company, or any other type 
of entity, provided that it determines such applicant satisfies 
applicable requirements and that applicants within one of the 
enumerated categories of participants in Section 17A(b)(3)(B) of the 
Securities Act of 1934 are specifically eligible to become CDS Clearing 
Members for the purpose of clearing security-based swaps. Further, 
separate revisions to Rule 8H04 are proposed that would make clear that 
CME may deny an application for CDS clearing membership to any person 
subject to a statutory disqualification as such term is defined by the 
Act.
    Change to 8H07 and 8H802.B: The proposed changes to Rule 8H07, 
which governs CDS financial safeguards and guaranty fund deposit 
matters, would require CME to notify clearing members regarding both 
the amount of and reasons for any charges to the guaranty fund for any 
reason other than to satisfy a clearing loss attributable to a clearing 
member solely from that clearing member's guaranty fund deposit. Other 
proposed changes to Rule 8H802.B would specify that CME would provide 
notice to CDS Clearing Members as required by the Act regarding any 
amounts charged to the CDS Guaranty Fund due to losses incurred. 
Finally, proposed changes would also clarify that CME would apply Rule 
8H07 on a uniform and non-discriminatory basis when determining minimum 
guaranty fund deposits.
    Change to 8H930. One proposed change to Rule 8H930 highlights the 
fact that CME will apply Rule 8H930 on a uniform and non-discriminatory 
basis when determining performance bond requirements. Additional new 
language will also explain that (i) Acceptable performance bond assets 
for security-based swaps and the applicable haircuts related to such 
assets will be set forth on a public Web site and that CME will have 
discretion to make adjustments to asset haircuts at any time; (ii) any 
such adjustment to the applicable asset haircut will be promptly 
communicated to CDS Clearing Members; (iii) any

[[Page 66212]]

adjustments to the applicable asset haircut schedule for security based 
swap clearing activities must be based on an analysis of appropriate 
factors including, for example, historical and implied price 
volatilities, market composition, current and anticipated market 
conditions, and other relevant information; and (iv) the Clearing House 
will conduct regular reviews of its then-current haircut schedules and 
make any necessary adjustments.
    New Rule 8H820. New rule 8H820 will specify that performance bond 
requirements will be as determined by CME staff from time to time and 
as set forth in Rule 820. With respect to performance bond requirements 
that apply to security-based swap clearing activities, CME will be 
required under Rule 8H20 to determine that each item that is enumerated 
as being acceptable performance bond pursuant to CME Rule 820 has been 
determined to assure the safety and liquidity of the Clearing House as 
is required by Section 17A(b)(3)(F) of the Act.
    New Rule 8H931. New Rule 8H931 would be added. This Rule would 
state that rules that relate to CME's activities as a clearing agency 
clearing security-based swaps will be adopted, altered, amended or 
repealed in accordance with the applicable requirements of Section 
19(b) of the Act. Under the Rule, CME would promptly notify all CDS 
Clearing Members of any proposal it has made to change, revise, add or 
repeal any rule that relates to its activities as a securities clearing 
agency. Such notice would have to include the text or a brief 
description of any such proposed rule change, along with its purpose 
and effect, in accordance with the requirements of the Act. CDS 
Clearing Members would be required to submit comments with respect to 
any such proposal in accordance with the applicable SEC rules.
    New Rule 8H932. New Rule 8H932 will require CME to maintain records 
of any disciplinary proceeding related to the activities of a CDS 
Clearing Member involving security-based swaps in accordance with the 
requirements of the Act and Rule 17a-1 thereunder.
    New Rule 8H933. New Rule 8H933 would add rule language to Chapter 
8H that would require CME to notify the Commission and any appropriate 
regulatory agency, as such term is defined by Section 3(a)(34) of the 
Act, regarding any final disciplinary sanction, denial of 
participation, prohibition or limitation with respect to access and/or 
summary suspension taken against a CDS Clearing Member relating to 
activities involving security-based swaps.
    New Rule 8H934. New Rule 8H934 would obligate CME to, as soon as 
practicable after the end of each calendar year, make available 
financial statements audited by independent public accountants to all 
CDS Clearing Members engaged in security-based swap clearing 
activities. CME would also be required under this rule to make 
available to CDS Clearing Members clearing security-based swaps a 
report by independent public accountants regarding CME Group's system 
of internal accounting control, describing any material weaknesses 
discovered and any corrective action taken or proposed to be taken.
    The financial statements would, at a minimum include: (i) The 
balance of the clearing fund and the breakdown of the fund balance 
between the various forms of contributions to the fund, e.g., cash and 
secured open account indebtedness; (ii) the types and amounts of 
investments made with respect to the cash balance; (iii) the amounts 
charged to the clearing fund during the year in excess of a defaulting 
clearing member's Guaranty Fund contribution; and (iv) any other 
charges to the fund during the year not directly related and chargeable 
to a specific clearing member's Guaranty Fund contribution. CME also 
would make available to CDS Clearing Members clearing security-based 
swaps a report of CME Group Inc. by independent public accountant 
regarding its system of internal accounting control, describing any 
material weaknesses discovered and any corrective action taken or 
proposed to be taken.
    CME would also furnish to all CDS Clearing Members engaged in 
security-based swap clearing activities, within 40 days following the 
close of each fiscal quarter, unaudited quarterly financial statements. 
These unaudited quarterly financial statements shall at a minimum 
consist of: (i) A statement of financial position as of the end of the 
most recent fiscal quarter and as of the end of the corresponding 
period of the preceding fiscal year; (ii) a statement of changes in 
financial position for the period between the end of the last fiscal 
year and the end of the most recent fiscal quarter and for the 
corresponding period of the preceding fiscal year; and (iii) a 
statement of results of operations, which may be condensed, for the 
most recent fiscal quarter and for the period between the end of the 
last fiscal year and the end of the most recent fiscal quarter and for 
the corresponding periods of the preceding fiscal year.
    New Rule 8H935. New Rule 8H935 would limit CME's ability to invest 
the cash portion of the CDS Guaranty Fund and CDS Clearing Member 
performance bond contributions by only allowing investments in 
accordance with the requirements of CFTC Regulation 1.25, including 
U.S. Government obligations or such other investments as the rules of 
CME may provide which assure safety and liquidity. CME would also be 
required to limit its use of CDS Guaranty Fund and performance bond 
contributions related to security based swap activities to the purposes 
permitted by the Act under the proposed rule language.
    New Rule 8H936. New Rule 8H935 would specify that CME would perform 
periodic risk assessments of CME's operations and its data processing 
systems and facilities, and provide CME's Board with such reports, and 
supervise the establishment, maintenance, and updating of operations 
and data processing safeguards while reporting periodically to the 
Board concerning strengths and weaknesses in CME's system of 
safeguards. In addition, the new Rule would make clear that CME was 
obligated to consider the impact that new or expanded service or volume 
increases would have on CME's processing capacity, both physical, 
including personnel, and systemic risk.
    New Rule 8H938. Under new Rule 8H938, CME would only summarily 
suspend and close the accounts of a CDS Clearing Member engaged in 
security-based swap clearing activities that (i) has been and is 
expelled or suspended from any self-regulatory organization, (ii) is in 
default of any delivery of funds or securities to the clearing agency, 
or (iii) is in such financial operating difficulty that the clearing 
agency determines and so notifies the appropriate regulatory agency for 
the member that such suspension and closing of accounts are necessary 
for the protection of the clearing agency, its members, creditors, or 
investors.

Fair Representation Requirement

    Commission staff has asked CME to provide an explanation of how 
CME's current governance arrangements relating to its CDS clearing 
offering should be viewed in light of the requirements of Section 
17A(b)(3)(C) of the Act. This provision requires that the rules of a 
clearing agency assure a ``fair representation'' of its participants in 
the selection of its directors and administration of its affairs.
    As an initial matter, CME notes that the Board of Directors of the 
CME Group Inc., the parent of CME, also serves as the Board of the CME. 
CME Group is a public company whose stock is listed on

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the Nasdaq Stock Market (``Nasdaq'') and thus is subject to board 
composition requirements under Nasdaq listing standards. In addition, 
any member of the public is afforded the opportunity to purchase shares 
in the CME Group and influence the selection of directors and 
administration of its affairs on that basis, subject to applicable 
law.\6\
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    \6\ As noted in a 1980 SEC Release providing staff guidance 
regarding the requirements of Section 17A of the Act (Securities 
Exchange Act of 1934, Release No. 16900, June 17, 1980), the SEC may 
find ``fair representation'' with respect to clearing agency 
participants if such participants are afforded an opportunity to 
acquire voting stock of the clearing agency in proportion to their 
use of its facilities.
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    CME is also subject to governance and conflict of interest 
provisions under the core principles set out in the Commodity Exchange 
Act (``CEA'') for a derivatives clearing organization (``DCO''). The 
CFTC reviews CME for compliance with these principles. For example, 
Section 5b(c)(2)(O) of the CEA sets out governance fitness standards 
that apply to DCOs, including transparent governance arrangements, that 
are designed to ensure the consideration of views of owners and 
participants. Further, Section 5b(c)(2)(Q) of the CEA requires a DCO's 
board to include market participants. CFTC regulations also require a 
DCO's governance arrangements to be clear and transparent and ``to 
support the objectives of relevant stakeholders''.
    CME also believes it is relevant that CDS participants will have a 
meaningful input into decisions affecting the clearing operations for 
CDS through participation on the CME CDS Risk Committee. Under CME Rule 
8H27, the CDS Risk Committee was formed to provide guidance and 
oversight to CME Clearing on matters relating to CDS Products. The CDS 
Risk Committee, among other things, is responsible for reviewing CDS 
financial safeguards, and CDS clearing member requirements, risk 
management policies and practices, review of CDS rule changes, etc.
    The Charter of the CDS Risk Committee sets forth certain 
composition requirements that ensure the perspectives of CDS Clearing 
Members are represented. More specifically, the Charter requires that 
at all times the CDS Risk Committee is populated with up to nine and no 
fewer than five individuals who are representative of CDS Clearing 
Members. Because of these composition requirements of the CDS Risk 
Committee, and the scope of its responsibilities, CME believes the 
Commission could find that its current governance arrangements meet the 
requirements of the Act.
    Further, CME also notes that the Charter of the CDS Risk Committee 
specifically provides that its Chairman shall be a member of the CME 
Inc. Board of Directors. In this capacity, the Chairman of the CDS Risk 
Committee serves as a liason to the full board of directors of CME. He 
or she can relay any concerns addressed by the CDS Risk Committee to 
the full CME Board. CME notes that the CDS Risk Committee is required 
to reassess the adequacy of this Charter on an annual basis and submit 
any recommended changes to the full CME Board for approval. CME 
believes these features provide a concrete nexus between the activities 
of the CDS Risk Committee and the full CME Board and ensure that there 
will be a ``fair representation'' of CDS Clearing Members in accordance 
with the spirit and letter of the Act.
    The CME believes the proposed rule changes are consistent with the 
requirements of the Act, including Section 17A of the Act. The changes 
are specifically designed to meet Section 17A requirements as 
interpreted by Commission staff for clearing agencies.

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

    CME does not believe that the proposed rule change 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 presented these proposed changes to the representatives of 
its CDS Risk Committee. CME has not otherwise solicited, and does not 
intend to solicit, comments regarding this proposed rule change. CME 
has not received any unsolicited written comments from interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CME-2012-42 on the subject line.

Paper Comments

    Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CME-2012-26. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. 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 change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change 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 filing also will be available for inspection 
and copying at the principal office of CME and on the CME's Web site at 
http://www.cmegroup.com.
    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-2012-26 
and should be submitted on or before November 23, 2012.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-26861 Filed 11-1-12; 8:45 am]
BILLING CODE 8011-01-P