[Federal Register Volume 79, Number 203 (Tuesday, October 21, 2014)]
[Notices]
[Pages 62998-63000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24951]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73365; File No. SR-CME-2014-40]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Regarding Its Collateral Acceptance Practices for Its Base Guaranty 
Fund

October 15, 2014.
    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 3, 2014, 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. 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 proposes to make certain changes to its collateral acceptance 
practices. The proposed changes would not impact CME's collateral 
acceptance practices relating to its CDS Guaranty Fund; the changes 
would only affect CME's Base Fund. More specifically, CME is 
introducing a new and limited exemption from CME limits on the value of 
letters of credit clearing members are eligible to deposit on behalf of 
qualifying customers in satisfaction of the clearing members' core 
performance bond requirements with respect to CME's Base Fund (the 
``Exemption''). The text of the proposed rule change is immediately 
below. Italicized text indicates additions; bracketed text indicates 
deletions.
* * * * *
Collateral Types Accepted for Futures, Options, Forwards, OTC FX & 
Commodity Swaps (available at http://www.cmegroup.com/clearing/financial-and-collateral-management/)
* * * * *

----------------------------------------------------------------------------------------------------------------
                New                                                  Category 3 & 4 Capped at $7bn Per Firm
----------------------------------------------------------------------------------------------------------------
             Category 1                     Category 2                Category 3*              Category 4**
----------------------------------------------------------------------------------------------------------------
Cash U.S. Treasuries                 IEF5 (Interest Bearing    U.S. Government Agencies  IEF2[dagger] (Money
                                      Cash) Letters of          Strips TIPS (capped at    Market Mutual Funds).
                                      Credit.*                  $1bn per firm).          Gold (capped at $500mm
                                                               Select MBS..............   per firm).
                                                                                         Stocks (capped at $1bn
                                                                                          per firm).
                                                                                         IEF4 (corporate bonds).
                                                                                         Foreign Sovereign Debt
                                                                                          (capped at $1bn per
                                                                                          firm).
                                                                                         .......................
                                     * LOCs are capped at the  * Capped at 40% of core   ** Capped at 40% of
                                      lesser of 25% of core     requirement per           core requirement per
                                      requirement per           currency requirement      currency requirement
                                      currency requirement or   per firm.                 per firm or $5 billion
                                      $500M per firm.                                     per firm, the lesser
                                      Clearing members that                               of the two.
                                      wish to post additional                            [dagger]Not included in
                                      LOCs on behalf of                                   the 40% requirement.
                                      qualifying commercial
                                      end users may be
                                      eligible for a limited
                                      exemption from this
                                      cap.# LOCs are not
                                      permitted to meet house
                                      performance bond
                                      requirements for
                                      financial affiliated
                                      clearing members.
----------------------------------------------------------------------------------------------------------------

* * * * *
    # Please contact the clearing house at [email protected] if 
you would like to learn more about this exemption.
* * * * *
CME Group Acceptable Performance Bond Collateral for Futures, Options, 
Forwards, OTC FX, and Commodity Swaps (available at http://www.cmegroup.com/clearing/files/acceptable-collateral-futures-options-select-forwards.pdf)

[[Page 62999]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                               Requirement type
                                  eligibility                                          Eligible for      Eligible for     Eligible for
         Asset class                (core,          Description         Haircut        cleared swaps       customer          house            Notes
                               concentration or                        schedule          customer         segregated     (proprietary)
                                Guaranty Fund)                                         requirements      requirements     requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
Letters of Credit............  Core 25%           Letters  0%..............  No..............  Yes............  Yes............  
                                Concentration     of Credit for                                                                           Letters of
                                100% Guaranty     Performance                                                                             Credit are not
                                Fund 0%.          Bond.                                                                                   accepted for
                                                                                                                                          Forwards and
                                                                                                                                          Commodity
                                                                                                                                          Swaps.
                                                                                                                                          Capped
                                                                                                                                          at the lesser
                                                                                                                                          of 25% of core
                                                                                                                                          requirement or
                                                                                                                                          $500 million
                                                                                                                                          per clearing
                                                                                                                                          member.#
                                                                                                                                         
                                                                                                                                          Category 2
                                                                                                                                          Asset**.
--------------------------------------------------------------------------------------------------------------------------------------------------------
# Clearing members that wish to post additional LOCs on behalf of qualifying commercial end users may be eligible for a limited exemption from this cap.
  Please contact the clearing house at [email protected] if you would like to learn more about this exemption.

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 these statements.

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

    CME is registered as a derivatives clearing organization with the 
Commodity Futures Trading Commission (''CFTC'') and operates a 
substantial business clearing futures and swaps contracts subject to 
the jurisdiction of the CFTC. CME is proposing to make certain changes 
to its collateral acceptance practices. The proposed changes would not 
impact CME's collateral acceptance practices relating to its CDS 
Guaranty Fund; the changes would only affect CME's Base Fund.
    More specifically, CME is introducing a new and limited exemption 
from CME limits on the value of letters of credit clearing members are 
eligible to deposit on behalf of qualifying customers in satisfaction 
of the clearing members' core performance bond requirements with 
respect to CME's Base Fund (the ``Exemption''). The Exemption would be 
narrowly tailored and would only apply to certain non-financial 
customers and their clearing members. The Exemption would increase the 
value of letters of credit a clearing member would be able to post in 
satisfaction of the clearing member's core requirement to two times the 
lesser of: (a) 25% of a total clearing member's collateral on deposit 
for its core requirement; or (b) US$500 million (``Exemption Limit''); 
provided that, any letter of credit deposits above the Non-exempt Limit 
would only be able to be used to margin qualifying customers. The 
current default limits for letters of credit are the lesser of 25% of 
each clearing member's core performance bond requirement per currency 
requirement or US$500 million per clearing member. CME notes that 
letters of credit are not permitted to meet performance bond 
requirements for credit default swaps.
    By way of example, a clearing member with a US$600 million core 
requirement would normally be able to deposit up to US$150 million in 
letters of credit as performance bond. Under the Exemption, the 
clearing member would be able to use up to US$300 million in letters of 
credit to meet its core requirement so long as all amounts above US$150 
million were deposited on behalf of qualifying customers or affiliates 
of qualifying customers that meet the Exemption requirements. A 
clearing member with greater than US$2 billion in performance bond on 
deposit for its core requirement would be limited to two times the 
US$500 million limit, or US$1 billion under the Exemption.
    The allocation of the excess letter of credit capacity to 
qualifying customers under the Exemption would be at the sole 
discretion of the clearing member and the Exemption Limit would be 
capped at two times the clearing member's CME Clearing-designated 
letter of credit limit, no matter how many qualifying customers utilize 
the Exemption. CME Clearing, at its sole discretion, would be able to 
terminate the Exemption upon reasonable notice to the clearing member 
and its qualifying customer(s).
    As highlighted above, the proposed changes in this filing are 
limited to CME's Base Guaranty Fund and therefore do not impact CME's 
CDS Guaranty Fund. CME accepts a narrower range of collateral for CDS 
clearing and does not currently accept letters of credit, stocks or 
corporate bonds as acceptable collateral for CDS. The proposed rule 
change in this filing would not impact these current practices. The 
proposed rule change would become effective immediately but would be 
operationalized on October 8, 2014.
    CME believes the proposed rule change is consistent with the 
requirements of the Exchange Act including Section 17A of the Exchange 
Act.\5\ The proposed changes would amend CME's collateral acceptance 
practices by introducing a limited exemption from CME limits on the 
value of letters of credit clearing members are eligible to deposit on 
behalf of qualifying customers in satisfaction of the clearing members' 
core performance bond requirements with respect to CME's Base Fund. The 
proposed Exemption would not impact CME's ability to manage risk in 
regard to its qualifying customers and their clearing members. CME 
determined the amount of letters of credit eligible to be posted under 
the Exemption reflect an appropriate limitation on the

[[Page 63000]]

concentration of assets posted as initial margin. The proposed 
Exemption is narrowly tailored and will provide CME with flexibility 
for the operational management of limits for these collateral types and 
therefore should be seen to promote the prompt and accurate 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 changes are limited to CME's Base 
Guaranty Fund, which means the proposed changes are limited in their 
effect to products that are under the exclusive jurisdiction of the 
CFTC. As such, the proposed CME changes are limited to CME's activities 
as a DCO clearing products that are not security-based swaps. 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 changes are limited in their effect to 
products that are under the exclusive jurisdiction of the CFTC and are 
therefore offered under CME's authority to act as a DCO, the proposed 
changes are 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 changes are therefore consistent with the requirements 
of Section 17A of the Exchange Act \7\ and are 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. The proposed changes 
provide a narrowly tailored exemption to certain practices that will 
provide CME with more flexibility for the operational management of 
limits for these collateral types. Further, the changes described in 
the submission relate only to products that fall under the exclusive 
jurisdiction of the CFTC. As such, these proposed changes do not affect 
the security-based swap clearing activities of CME in any way and 
therefore do not impose any burden on competition that is inappropriate 
in furtherance of the purposes of the Act.

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 upon filing 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 Number SR-CME-2014-40 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-2014-40. 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 filings will also 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-2014-40 
and should be submitted on or before November 12, 2014.
---------------------------------------------------------------------------

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

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24951 Filed 10-20-14; 8:45 am]
BILLING CODE 8011-01-P