
[Federal Register Volume 77, Number 21 (Wednesday, February 1, 2012)]
[Notices]
[Pages 5070-5072]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2133]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66250; File No. SR-CME-2012-01]


Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Amend Rules Relating to 
Credit Default Swap Guaranty Fund

January 26, 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 January 23, 2012, Chicago Mercantile Exchange Inc. (``CME'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change 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)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    The text of the proposed rule change is below. Italicized text 
indicates additions; bracketed text indicates deletions.
* * * * *
CHICAGO MERCANTILE EXCHANGE INC. RULEBOOK
    Rule 100--Rule 8H06--No Change.
* * * * *
Rule 8H07. CDS FINANCIAL SAFEGUARDS AND GUARANTY FUND DEPOSIT
    Rule 8H07.1(i)--No Change.
    Rule 8H07.1(ii). (ii) Each CDS Clearing Member's required 
contribution to the CDS Guaranty Fund shall be the greater of: (a) such 
CDS Clearing Member's proportionate share of the largest two losses 
described in 8H07.1(i)(a) above, each CDS Clearing Member's 
proportionate share being based on the 90-day trailing average of its 
[aggregate performance requirements] potential residual loss (``PRL'') 
and the 90-day trailing average gross notional open interest 
outstanding at the Clearing House (or, in either case, such other 
shorter time interval determined by the CDS Risk Committee); and (b) 
$50,000,000.
* * * * *
    Rule 8H07.2--End--No Change.
* * * * *

[[Page 5071]]

CME CDS MANUAL OF OPERATIONS
    CHAPTERS 1--9--No Change.
CHAPTER 10--CDS GUARANTY FUND CALCULATION

Separate CDS Guaranty Fund

    CME Clearing shall establish an additional CDS Guaranty Fund as 
described in Rule 8H07.

Guaranty Fund Calculation

    Each CDS Clearing Member's Guaranty Fund contribution to the 
Financial Safeguards Package will be equal to the greater of:
    (1) 50MM; and
    (2) An amount using stress test methodology equal to such Clearing 
Member's proportionate share of the overall CDS Guaranty Fund based on 
a 90 day trailing average of such Clearing Member's [performance bond] 
PRL performance bond requirement (95% weight) and its average CDS gross 
notional open interest at the CME (5% weight), as further set forth in 
Rule 8H07.
    Once the overall financial safeguards pool size has been determined 
using the stress testing described below, the guaranty fund calculation 
is calculated as per the example below:

------------------------------------------------------------------------
  Determine overall financial safeguards
   pool size based on net debtor stress             Time Period X
              testing results
------------------------------------------------------------------------
Aggregate
    1st Largest Net Debtor stress test....                  $500,000,000
    2nd Largest Net Debtor stress test....                  $400,000,000
    Required Guaranty Fund Size (Sum of 2                   $900,000,000
     Largest Net Debtor stress tests).....
                                            ............................
Hypothetical CDS Clearing Member's
 Guaranty Fund Contribution
    [performance bond] PRL Component--95%
     weight...............................
    Total average aggregate CDS                          $10,000,000,000
     [performance bond] PRL over trailing
     90 days at CME.......................
    Clearing member XYZ's average 90-day[,                  $800,000,000
     performance bond requirement] PRL....
    Clearing member XYZ's % of aggregate..                            8%
    Clearing member XYZ's calculated                         $72,000,000
     contribution to the CDS guaranty fund
     ($900M Target x 8%)..................
    Clearing member XYZ's weighted (95%)                     $68,400,000
     [performance bond] PRL contribution
     to the CDS guaranty fund.............
Open Interest (Gross Notional) Component--
 5% weight
    Total average aggregate CDS gross                   $100,000,000,000
     notional over trailing 90 days at CME
    Clearing member XYZ's average 90-day                   7,000,000,000
     CDS gross notional...................
    Clearing member XYZ's open interest %                             7%
     of aggregate.........................
    Clearing member XYZ's open interest                      $63,000,000
     component of the CDS guaranty fund
     ($900M Target x 7%)..................
    Clearing member XYZ's weighted (5%)                       $3,150,000
     open interest component of the CDS
     guaranty fund........................
    Clearing member XYZ's [performance                       $68,400,000
     bond] PRL component of the CDS
     guaranty fund........................
    Clearing member XYZ's gross notional                      $3,150,000
     component of the CDS guaranty fund...
        Total clearing member XYZ's                          $71,550,000
         calculated guaranty fund
         contribution.....................
------------------------------------------------------------------------

* * * * *

II. Self-Regulatory Organization's Statement of 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.

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

    CME offers clearing services for certain credit default swap index 
products. Current CME Rule 8H07 provides that each CDS Clearing 
Member's allocation to the CDS Guaranty Fund will be the greater of (i) 
$50,000,000 and (ii) its proportionate share of the 90-day trailing 
average of its aggregate performance bond requirements and average 
gross notional open interest outstanding at the Clearing House. The 
rule change that is the subject of this filing would replace the 
``aggregate performance bond requirement'' standard with a new standard 
that CME believes better allocates tail risk. CME is also proposing to 
make conforming changes to its CDS Manual of Operations.
    CME believes the current ``aggregate performance bond requirement'' 
standard set forth in Rule 8H07 is designed to provide for margin 
requirements that adequately cover day-to-day P/L moves, however, CME 
believes changes could be made to provide for a more accurate 
allocation of potential tail risk. Therefore, in order to more 
accurately align the allocation of the CDS Guaranty Fund to each CDS 
Clearing Member, consistent with the CDS Guaranty Fund's purpose of 
covering tail risk events, CME proposes certain rule changes so that 
the allocation will be made on the basis of each CDS Clearing Member's 
potential residual loss (``PRL''). PRL is a stress test of the tail 
risk CDS Clearing Member portfolios bring to the market.
    CME notes that it will also submit the proposed rule changes that 
are the subject of this filing to its primary regulator, the Commodity 
Futures Trading Commission (``CFTC''). The text of the CME proposed 
rule amendments is noted in Section I above, with additions italicized 
and deletions in brackets.
    CME believes the proposed rule changes are consistent with the 
requirements of the Exchange Act including Section 17A of the Exchange 
Act. Currently, the only swaps CME clears are CFTC-regulated swaps and 
therefore the proposed rule changes will only directly affect CME's 
swaps clearing activities pursuant to its registration as a derivatives 
clearing organization under the Commodity Exchange Act (``CEA'').\3\ 
CME notes that the policies of the CEA with respect to clearing 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. CME believes the 
proposed rule changes accomplish these objectives by more accurately 
aligning the allocation of its CDS Guaranty Fund to each CDS Clearing 
Member.
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    \3\ The staff notes that the PRL allocation will apply to any 
security-based swaps CME may clear in the future.

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[[Page 5072]]

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 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

    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 may be submitted by using the 
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an email to rule-comments@sec.gov. Please include 
File No. SR-CME-2012-01 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 20549-1090.
    All submissions should refer to File Number SR-CME-2012-01. 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 
a.m. and 3 p.m. Copies of such filing 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-2012-01 and 
should be submitted on or before February 22, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2133 Filed 1-31-12; 8:45 am]
BILLING CODE 8011-01-P


