
[Federal Register Volume 77, Number 30 (Tuesday, February 14, 2012)]
[Notices]
[Pages 8318-8321]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3329]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66354; File No. SR-CME-2012-03]


Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change to Amend Certain Aspects of the Performance Bond Regime 
Applicable to Cleared Only OTC FX Swaps

February 8, 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 30, 2012, the 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. The Commission is publishing this 
Notice and Order to solicit comments on the proposed rule change from 
interested persons and to approve the proposed rule change 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 Terms of Substance of 
the Proposed Rule Change

    CME proposes to make certain changes that are related to its 
current cleared-only OTC foreign currency (``FX'') product offering. 
The proposed rule changes \3\ would add Price Alignment Interest 
(``PAI'') functionality to current ``cash mark-to-market'' performance 
bond regime that applies to CME's cleared-only OTC FX offering.
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    \3\ The text of the proposed changes does not appear in CME's 
rulebook but is available on CME's Web site at http://www.cmegroup.com/rulebook/files/s_6105_otc_fx_pai_cash_mk_to_mkt_ser_020112_revised.pdf.
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    A description of the revised performance bond regime with the 
addition of PAI is included below:
* * * * *

CME Forwards With Cash Mark-To-Market

    In accordance with customer demand CME has begun clearing 
privately-negotiated transactions in forwards with cash mark-to-market.
    Until October 18, 2011, all forwards cleared by CME had a 
collateralized mark-to-market. Each day, for each open forward trade, 
mark-to-market is calculated, from original trade price to the current 
end-of-day settlement price. These amounts are netted together and 
``collateralized''. In other words, if a negative number (a loss), they 
increase the initial margin (performance bond) requirement, thereby 
increasing the amount of collateral that must be posted to meet that 
margin requirement. If a positive number (a gain), they decrease the 
initial margin requirement.
    With cash mark-to-market implemented on October 18, 2011, the mark-
to-market value for the previous clearing business date is subtracted 
from the mark-to-market amount for the current clearing date. These 
amounts are netted down and become part of the total banked cash flow 
for the currency in which they are denominated. It is a very simple 
change for this cash mark-to-market as opposed to collateralized mark-
to-market.
    There is an additional feature for FX forwards, and in particular 
for non-deliverable forwards (NDF's)--forwards where one currency of 
the pair is not bankable. We call this a forward where the cash mark-
to-market is flipped, or inverted.
    Take for example a forward on the exchange rate between the US 
Dollar (USD) and the Chilean Peso (CLP). The quantity is specified in 
USD, and the price is quoted as a specified amount of CLP per one USD. 
Normally, the mark-to-market amount would be denominated in CLP, also 
referred to as the contra currency. But with the flipped mark-to-
market, the amount is converted to USD by dividing by today's end-of-
day settlement price for the contract.

Calculating Mark-to-Market and Change in Mark-to-Market

    In the normal case, the mark-to-market amount for a forward is 
calculated as:
     Subtract the original trade price from the end-of-day 
settlement price.
     Express the trade quantity as a positive number for a buy 
or a negative number for a sell.
     Take the product of the price difference, the trade 
quantity, the contract value factor, and the discount factor.
     Round normally to the normal precision of the currency in 
which the mark-to-market amount is denominated. (the contra currency 
for an FX forward)
    In other words:

(S - T) * Q * CVF * DF

Where:

S is the end-of-day settlement price
T is the original trade price
Q is the trade quantity
CVF is the contract value factor
DF is the discount factor

    In the inverse case, the mark-to-market amount is calculated in the 
exact same way, except that it includes a division by the daily 
settlement price:
     Subtract the original trade price from the end-of-day 
settlement price.
     Express the trade quantity as a positive number for a buy 
or a negative number for a sell.
     Take the product of the price difference, the trade 
quantity, the contract value factor, and the discount factor.
     Divide this result by the end-of-day settlement price.
     Round normally to the normal precision of the currency in 
which the mark-to-market amount is denominated. (the primary currency 
for an FX forward)
    In other words:

[(S - T) * Q * CVF * DF]/S

    In either case, the settlement variation amount to be banked is 
calculated by subtracting the mark-to-market amount for the previous 
clearing business date from the amount for the current business date.

Cash-Settled and Physically-Delivered Forwards

    At maturity, forwards with cash mark-to-market can be either cash-
settled or physically-delivered, exactly as for forwards with 
collateralized mark-to-market.
    For a cash-settled forward, at contract maturity (end-of-day on the 
``clearing settlement date''):
     The mark-to-market amount is set to zero.
     We then calculate the settlement variation amount to be 
banked exactly as on any other day--by subtracting the previous day's 
value for mark-to-market from the current day's (zero) value.
     The mark-to-market amount is then calculated one final 
time--from original

[[Page 8319]]

trade price to the final settlement price and banked as part of the 
final settlement of the contract.
     The initial margin requirement is also set to zero, 
exactly as for any other cash-settled forward or future.
     The next morning the cash moves at the bank, and any 
collateral deposited to meet the initial margin requirement may be 
withdrawn.
    For a physically-delivered forward, at contract maturity (end-of-
day on the clearing settlement date):
     The mark-to-market amount is set to zero.
     We then calculate the settlement variation amount to be 
banked exactly as on any other day--by subtracting the previous day's 
value for mark-to-market from the current day's (zero) value.
     The invoice amount, calculated at original trade price, is 
included in the total amount to be banked.
     On the value date for physical delivery, the position is 
removed. This causes the initial margin requirement to be set to zero, 
and any collateral deposited to meet it may be withdrawn.
    PAI is now a second additional feature for FX forwards and it 
applies to both (1) non-deliverable forwards (NDF's)--cash-settlement 
forwards where one currency of the pair is not bankable and (2) cash-
settlement WM/Reuters OTC FX forwards.
    CME Clearing is introducing PAI to ensure settlement variation 
amounts for cleared OTC FX forwards are treated consistently with those 
of CME's cleared interest-rate swaps and credit-default swaps. PAI is 
consistent and appropriate for all of these cleared products with daily 
mark-to-market amounts settled in cash.
    If the forward has positive net present value, the position holder 
pays price alignment interest, and conversely if the forward has 
negative net present value, the position holder receives price 
alignment interest. The amount is calculated on the net realized cash 
flow, from the banking business day on which that amount was realized, 
to the next banking business day, and is annualized on an actual/360 
day basis.

Data Formats

    Exactly as before, a forward is denoted with a product type code of 
FWD, and the settlement method is denoted as either CASH (for cash-
settled) or DELIV (for physically-delivered).
    There are now three possible values for the ``valuation method'' 
for forwards:
     The existing value FWD will continue to mean that mark-to-
market amounts are collateralized.
     A new value FWDB (``forward banked'') means a forward with 
cash mark-to-market.
     A second new value FWDBI (``forward banked inverse'') will 
be used for FX forwards with cash mark-to-market where the value is 
flipped from the contra currency to the primary currency.
    Exactly as before, the FinalSettlCcy attribute denotes the currency 
in which the mark-to-market amount is denominated, and the Ccy 
attribute on Amt elements also specifies the currency.
    Exactly as before, the FMTM amount type will denote mark-to-market. 
For forwards with cash mark-to-market, a new IMTM amount type--
``incremental mark-to-market''--denotes the change in mark-to-market 
from the previous clearing business date--in other words, the 
settlement variation amount.
    Exactly as before, the DLV amount type represents either the final 
mark-to-market amount to be banked (for cash settled contracts) or the 
invoice amount (for physically-delivered contracts.)
    To simplify bookkeeping system processing, a new BANK amount 
element represents the total cash to be banked, and a new COLAT amount 
element represents the total amount to be collateralized. (For forwards 
with cash mark-to-market, the COLAT element will always have a value of 
zero.)

Margining in SPAN

    There are no changes to how performance bond (initial margin) 
requirements are calculated in SPAN for portfolios including forwards 
with cash mark-to-market. Simply divide the true notional position by 
the equivalent position factor for the product, round the result up 
(away from zero) to the nearest integer, and feed the resulting 
``marginable positions'' to SPAN, exactly as before.

Production Ready

    Forwards with cash mark-to-market and the PAI enhancement are now 
available in CME's ``Production'' environment. For more information 
please contact CME Clearing at 312-207-2525.
* * * * *
    The text of the proposed changes is also available at 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 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 III 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 currently offers clearing for certain OTC FX cleared-only 
products. In a previous filing, CME adopted a ``cash mark-to-market'' 
performance bond regime for its cleared-only OTC FX products. These 
changes were applicable to all then currently listed and future product 
rollouts (which now include 12 cleared, cash-settlement OTC FX non-
deliverable forwards (``NDFs'') and 26 cleared, cash-settlement CME WM/
Reuters OTC Spot, Forward and Swaps).\4\ With this filing, CME proposes 
to enhance this current ``cash mark-to-market'' performance bond regime 
by adding PAI functionality, which will bring CME's centrally cleared 
OTC FX products in line with typical bilaterally held OTC FX 
transactions.
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    \4\ See Securities Exchange Act Release No. 34-65636 (October 
26, 2011), 76 FR 67514 (November 1, 2011) [SR-CME-2011-14].
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    CME uses its SPAN system to establish performance bond or 
``margin'' requirements for CME's OTC FX cleared-only products. Initial 
performance bond requirements are established at levels that are 
consistent with observed levels of volatility in the particular 
currency pairing and generally aligned with initial margin levels 
applied to current CME FX futures and option contracts, where 
applicable. Variation margins may be satisfied with the posting of 
appropriate amounts of collateral, where CME collects and pays in cash 
between the counterparties each day. CME accepts as collateral cash or 
any other instruments currently designated as approved collateral for 
posting for performance bonds. In order to calculate variation 
requirements, settlement prices are established for each contract and 
for each delivery date referencing data collected from a variety of 
market sources. None of these risk components of the clearing system 
would be changed with the proposed implementation of

[[Page 8320]]

PAI to the ``cash mark-to-market'' performance bond regime.
    The addition of PAI, which is appropriate for cleared-only 
derivatives products with daily mark-to-market amounts settled in cash 
like OTC FX, would simply enhance the current performance bond 
administration operational procedures. Under PAI, if the contract has 
positive net present value, the position holder pays price alignment 
interest and, conversely, if the contract has negative net present 
value, the position holder receives price alignment interest. The 
amount is calculated on the net realized cash flow, from the banking 
business day on which that amount was realized, to the next business 
day, and is annualized on an actual/360 basis. Therefore, when market 
participants are required to post a cash mark-to-market amount for a 
cleared OTC FX forward position, that market participant will be 
reimbursed the interest equivalent on those newly posted funds. 
Similarly, those market participants receiving the cash mark-to-market 
amount for a cleared OTC FX forward position are charged the interest 
equivalent on those newly credited funds to their account. This PAI 
performance bond mechanism adjustment makes the CME cleared OTC FX 
market more aligned with the underlying OTC FX forward market.
    Pursuant to Commodity Futures Trading Commission (``CFTC'') 
regulations, the changes in the applicable performance bond regime have 
been interpreted by CME as being subject to CFTC Regulation 40.6(d), 
requiring a self certification filing to the CFTC, although no change 
to text of the CME rulebook is required. As such, the changes that are 
the subject of this filing and that are necessary to add the PAI 
functionality to CME's ``cash mark to market'' performance bond regime 
are changes to CME operational procedures only. CME notes that it has 
already certified the proposed changes that are the subject of this 
filing to its primary regulator, the CFTC. The text of the proposed 
changes is noted above.
    CME believes the proposed changes are consistent with the 
requirements of the Exchange Act including Section 17A of the Exchange 
Act because they involve clearing of swaps and thus relate solely to 
the CME's swaps clearing activities pursuant to its registration as a 
derivatives clearing organization under the Commodity Exchange Act 
(``CEA'') and do not significantly affect any securities clearing 
operations of the clearing agency or any related rights or obligations 
of the clearing agency or persons using such service. CME further 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. The proposed rule changes accomplish 
those objectives by offering investors clearing for a range of FX OTC 
swap products.

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. 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-2012-03 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-2012-03. 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. 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-2012-03 and should be 
submitted on or before March 6, 2012.

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

    In its filing, CME requested that the Commission approve this 
request on an accelerated basis, for good cause shown. CME has 
articulated three reasons for granting this request on an accelerated 
basis. 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 relate solely 
to FX swap products and therefore relate solely to its swaps clearing 
activities and do not significantly relate to CME's functions as a 
clearing agency for security-based swaps. Three, not approving this 
request on an accelerated basis will have a significant impact on the 
swap clearing business of CME as a designated clearing organization.
    Section 19(b) of the Act \5\ 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 finds that the proposed rule changes is 
consistent with the requirements of the Act, in particular the 
requirements of Section 17A of the Act,\6\ and the rules and 
regulations thereunder applicable to CME. Specifically, the Commission 
finds that the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act which requires, among other things, that the 
rules of a clearing agency be designed to promote the prompt and 
accurate clearance and

[[Page 8321]]

settlement of derivative agreements, contracts, and transactions 
because it should allow CME to enhance its services in clearing foreign 
currency contracts, thereby promoting the prompt and accurate clearance 
and settlement of derivative agreements, contracts, and 
transactions.\7\
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    \5\ 15 U.S.C. 78s(b).
    \6\ 15 U.S.C. 78q-1. In approving this proposed rule change, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds good cause for accelerating approval because: 
(i) The proposed rule change does not significantly affect any 
securities clearing operations of the clearing agency (whether in 
existence or contemplated by its rules) or any related rights or 
obligations of the clearing agency or persons using such service; (ii) 
CME has indicated that not providing accelerated approval would have a 
significant impact on the foreign currency contracts clearing business 
of CME as a designated clearing organization; and (iii) the activity 
relating to the non-security clearing operations of the clearing agency 
for which the clearing agency is seeking approval is subject to 
regulation by another regulator.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-CME-2012-03) is approved on an 
accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3329 Filed 2-13-12; 8:45 am]
BILLING CODE 8011-01-P


