[Federal Register Volume 79, Number 120 (Monday, June 23, 2014)]
[Notices]
[Pages 35607-35609]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14539]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72413; File No. SR-CME-2014-22]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Physical Delivery of CLS-Eligible Foreign Currencies

June 17, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on June 9, 2014, Chicago Mercantile Exchange Inc. 
(``CME'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change described in Items I and II 
below, which Items have been prepared primarily by CME. CME filed the 
proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-
4(f)(4)(ii) \4\ thereunder, so that the proposal was effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CME is filing the proposed rule change that is limited to its 
business as a derivatives clearing organization. More specifically, the 
proposed rule change would make amendments to its current procedures 
for facilitating physical delivery of CLS-eligible foreign currencies.

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 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.

[[Page 35608]]

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

    CME is registered as a DCO with the Commodity Futures Trading 
Commission (``CFTC'') and offers clearing services for many different 
futures and swaps products. The proposed rule change that is the 
subject of this filing is limited to CME's business as a DCO offering 
clearing services for CFTC-regulated products. More specifically, the 
change is limited to the delivery processing timelines for CME FX 
futures paired delivery contracts. As discussed below, the proposed 
change, which would facilitate continued physical delivery of CLS-
eligible foreign currencies, would not materially affect the nature or 
level of risks presented to CME and its clearing members.
    The operation and purpose of the proposed change is as follows. 
Currently, CME facilitates physical deliveries for CLS eligible 
currencies through a CME account at CLS Settlement Member banks for the 
purpose of efficiently matching CLS instructions. To facilitate this 
arrangement, CME has an agreement as a 3rd party customer with a CLS 
settlement member bank, henceforth termed as CLS agent bank. CME 
maintains accounts with two CLS agent banks for operational redundancy. 
The CLS agent bank plays an operational role in the CLS process. CME 
clearing members use their own CLS settlement banks or affiliates to 
physically settle currency deliveries within CLS.
    Currently, in a failure of physical settlement, CME would 
administer the failure under current CME Rule 702. CME would be under 
no obligation to secure the failed currency; it may, however, 
facilitate the purchase of the currency for impacted clearing firm due 
to the fact that the currency of the impacted firm would be in the 
account of the CME at the CLS agent bank. Under CME rules, CME will 
remove any failed transactions from the CLS settlement process and 
resolve the failed physical settlements as set out under current CME 
Rule 743.B.
    CME's CLS agent banks have expressed an intention to discontinue 
providing such services to central counterparties, such as CME, beyond 
September 2014. To maintain the orderly functioning of the CME FX 
Futures market and to avoid disruption to CME clearing members and 
market participants, it is required for CME to migrate away from the 
current operational mechanism described above to the ``paired 
delivery'' model for the September 2014 FX delivery cycle for CLS 
eligible currencies. Given the long history of operating under the 
current operational mechanism, it is important to provide the clearing 
members with an orderly migration path with an initial pilot physical 
delivery for the CAD/USD contract in the June 2014 delivery cycle.
    As a result, CME is amending the process for physical delivery of 
CLS-eligible foreign currencies to a paired delivery process, which is 
similar to that currently used for CME's physically settled products in 
the Treasury complex. The operation of the paired delivery process is 
as follows. The process is an assignment-based process where clearing 
members with open long and short positions at the termination of 
trading on expiration of the contract will be matched against one 
another in order to facilitate the delivery. The assignment algorithm 
first matches delivery positions within a clearing firm. The algorithm 
then matches remaining positions across clearing firms. The algorithm 
for matching across clearing firms is designed to reduce the 
concentration of physical settlement. The migration to the Paired 
Delivery model does not impact or change the Clearing Member's ability 
to use their existing CLS access arrangements. The paired delivery 
process simplifies the physical delivery process and provides more 
transparency and certainty in the event of a failure in physical 
settlement. The physical settlement transactions continue to receive 
the same level of guarantee as defined under CME Rule 702.
    Aside from the change described above, nothing will otherwise 
change from an operational or risk perspective. Consequently, the 
proposed change does not materially affect the nature or level of risks 
presented to CME and its clearing members.
    After implementation of the proposed change, CME teams would 
continue to monitor clearing members going through delivery to assess 
their ability to perform for their house and client accounts; this is 
comparable to the process currently used for Treasury deliveries. 
Moreover, for FX futures, clearing members would be able to continue to 
use their existing CLS arrangements for currency deliveries. This is 
comparable to the current CME Treasury delivery process; in that 
process, clearing members are able to utilize their own banking 
relationships provided the relationship meets the standards outlined in 
applicable CME rules. Clearing members can also continue to use the 
offset benefit they currently get with the spot FX physical settlements 
through CLS. As noted above, the physical settlement transactions 
continue to receive the same level of guarantee as defined under CME 
Rule 702.
    The removal of the CLS agent banks from the delivery process would 
not result in the reduction of liquidity from the delivery process. 
Under the agreements, CME's CLS agent banks are under no contractual 
obligation to provide services to secure the alternate currency.
    To facilitate an orderly transition to the new process, CME will 
move FX futures currency pairings on a staggered basis to the new 
paired delivery process beginning with the CAD/USD contract for the 
June 2014 FX delivery cycle. Additional currencies will be moved to the 
new process for the September 2014 and December 2014 FX delivery 
cycles.
    The change described in this filing is limited to CME's business as 
a DCO clearing products under the exclusive jurisdiction of the CFTC 
and does not materially impact CME's security-based swap or futures 
clearing business in any way. The change will become effective 
immediately but will be operationalized beginning June 18, 2014 and on 
a staggered basis over the next few currency delivery cycles. CME notes 
that it has also certified the proposed rule change that is the subject 
of this filing to its primary regulator, the CFTC, in a separate 
filing, CME Submission No. 14-165.
    CME believes the proposed rule change is consistent with the 
requirements of the Exchange Act including Section 17A of the Exchange 
Act.\5\ Currently, CME facilitates physical deliveries for CLS-eligible 
currencies through a CME account at third party banks that are members 
of CLS for the purpose of efficiently matching CLS instructions for all 
CLS-eligible currencies. These banks have expressed an intention to 
discontinue providing such services to central counterparties, such as 
CME, beyond September 2014. The amendments would facilitate physical 
delivery of CLS-eligible foreign currencies by amending the process for 
physical delivery of CLS-eligible foreign currencies to an assignment 
based paired delivery process where clearing members with open long and 
short positions at the end of trading on last trade date will be 
matched against one another in order to facilitate a delivery. These 
proposed amendments are designed to continue the ability to offer 
physical delivery of CLS-eligible foreign currencies and as such are 
designed to promote the prompt and accurate

[[Page 35609]]

clearance and settlement of securities transactions and, to the extent 
applicable, derivatives agreements, contracts, and transactions, to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible, and, in general, to protect investors and the public 
interest consistent with Section 17A(b)(3)(F) of the Exchange Act.\6\
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Furthermore, the proposed change is limited in its effect to 
products offered under CME's authority to act as a DCO. The products 
that are the subject of this filing are under the exclusive 
jurisdiction of the CFTC. As such, the proposed CME change is limited 
to CME's activities as a DCO clearing futures that are not security 
futures and swaps that are not security-based swaps and forwards that 
are not security forwards; CME notes that the policies of the CFTC with 
respect to administering the Commodity Exchange Act are comparable to a 
number of the policies underlying the Exchange 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.
    Because the proposed change is limited in its effect to products 
offered under CME's authority to act as a DCO, the proposed change is 
properly classified as effecting a change in an existing service of CME 
that:
    (a) Primarily affects the clearing operations of CME with respect 
to products that are not securities, including futures that are not 
security futures, swaps that are not security-based swaps or mixed 
swaps; and forwards that are not security forwards; and
    (b) does not significantly affect any securities clearing 
operations of CME or any rights or obligations of CME with respect to 
securities clearing or persons using such securities-clearing service.

As such, the change is therefore consistent with the requirements of 
Section 17A of the Exchange Act \7\ and is properly filed under Section 
19(b)(3)(A) \8\ and Rule 19b-4(f)(4)(ii) \9\ thereunder.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1.
    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(4)(ii).
---------------------------------------------------------------------------

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. Currently, CME 
facilitates physical deliveries for CLS-eligible currencies through a 
CME account at third party banks that are members of CLS for the 
purpose of efficiently matching CLS instructions for all CLS-eligible 
currencies. These banks have expressed an intention to discontinue 
providing such services to central counterparties, such as CME, beyond 
September 2014. The amendments would facilitate physical delivery of 
CLS-eligible foreign currencies by amending the process for physical 
delivery of CLS-eligible foreign currencies to an assignment based 
paired delivery process where clearing members with open long and short 
positions at the end of trading on last trade date will be matched 
against one another in order to facilitate a delivery. These proposed 
amendments are designed to continue the ability to offer physical 
delivery of CLS-eligible foreign currencies and should not be seen to 
impact 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 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \10\ of the Act and Rule 19b-4(f)(4)(ii) \11\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(4)(ii).
---------------------------------------------------------------------------

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 No. SR-CME-2014-22 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CME-2014-22. 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 CME's 
Web site at http://www.cmegroup.com/market-regulation/rule-filings.html.
    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-2014-22 and 
should be submitted on or before July 14, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14539 Filed 6-20-14; 8:45 am]
BILLING CODE 8011-01-P