
[Federal Register Volume 77, Number 59 (Tuesday, March 27, 2012)]
[Notices]
[Pages 18288-18290]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-7279]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66641; File No. SR-CME-2012-05]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Amend Its Rules Relating to Interest Rate Swaps Clearing

March 21, 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 March 8, 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 amend rules related to its interest rate swaps and 
interest rate futures currency businesses by establishing a portfolio 
margining program for proprietary portfolios containing interest rate 
swaps and futures positions. The text of the proposed rule change is 
available at CME's Web site at http://www.cmegroup.com/market-regulation/rule-filings.html.

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 is registered as a derivatives clearing organization (``DCO'') 
with the Commodity Futures Trading Commission (``CFTC'') and currently 
operates a substantial business clearing both interest rate swaps 
(``IRS'') and interest rate futures contracts. The changes that are the 
subject of this filing are proposed rules that would establish a 
portfolio margining program for proprietary portfolios containing IRS 
and interest rate futures positions. More specifically, the proposed 
changes include: new rules regarding portfolio margining; amendments to 
existing CME rules relating to its IRS Guaranty Fund Allocation rules; 
IRS Guaranty Fund Application rule amendments; and amendments to rules 
dealing with outsourcing to third parties. CME will also make 
corresponding changes to its Manual of Operations for CME Cleared 
Interest Rate Swaps. The specific rule amendments are discussed in more 
detail below.
    CME notes that it has also submitted the proposed changes that are 
the subject of this filing to its primary regulator, the CFTC. CME 
expects that the proposed changes will be effective with the CFTC as of 
March 14, 2012. As described more below, CME believes there is good 
cause for the Commission to grant approval for the proposed rule 
changes on an accelerated basis so that they become effective with the 
Commission as of March 30, 2012.
1. Portfolio Margining Among Eligible Futures Products and IRS; 
Comingling of Related Positions
    The proposed CME rule amendments would establish a portfolio 
margining program (``Program'') for portfolios containing IRS and 
Interest Rate Futures positions in order for eligible clearing members 
to receive risk offsets across CME's listed interest rate futures and 
cleared interest rate swap product suite. These amendments will appear 
in CME Rule 8G831 and certain related changes to existing CME Rule 802.
    To participate in the Program a Clearing Member must under the 
proposed rules be both an IRS Clearing Member and a CME Clearing 
Member. The listed interest rate products that will be eligible for 
this program will be those with price risks that are

[[Page 18289]]

significantly and reliably correlated and initially will be Eurodollar 
and Treasury futures. Additionally, under the proposed rules, the CME 
Clearing House has the right to ask a participant to move futures 
positions in eligible products back to the participant's futures 
account if it is not risk reducing.
    The 99% 5-day Historical VaR margin model with EWMA weighting that 
is currently used for IRS products will be extended to include the same 
level of coverage for commingled portfolios, and the existing default 
management process for interest rate swaps will be extended to 
portfolios which have commingled positions. Any losses for commingled 
portfolios exceeding the margin on hand of a defaulted member will be 
backed by CME's financial safeguards package for Interest Rate Swaps.
2. CME Rule 8G07.1--Changes to IRS Guaranty Fund Allocation
    CME is also proposing to implement certain amendments to CME Rule 
8G07.1 that would include changes to the allocation of the IRS Guaranty 
Fund among IRS Clearing Members. Currently the IRS Guaranty Fund is 
calculated monthly and is proportionally allocated to each IRS Clearing 
Member on the basis of its 90-day trailing average of its potential 
residual loss and 90-day trailing average of its gross notional open 
interest outstanding at the Clearing House. CME Clearing is proposing 
to change the measurement period from 90 days to 30 days in order for 
the IRS Guaranty Fund to more quickly react to an IRS Clearing Member's 
current activity and to align the measurement period with the frequency 
of Guaranty Fund calculations.
    Additionally, each IRS Clearing Member's contribution to the IRS 
Guaranty Fund is currently the greater of its proportional share of the 
IRS Guaranty Fund as described above or a $50 million minimum 
contribution. The minimum was established to ensure that each IRS 
Clearing Member has an appropriate stake in proper default management 
regardless of the firm's position and incentivize a better default 
auction process. The result of the minimum requirement is that the IRS 
Guaranty fund is over-collateralized above the conservative estimates 
of our IRS Guaranty Fund methodology. The proposed amendments would 
size the IRS Guaranty Fund to the shortfall brought by the two largest 
net debtors and adjust each firm's contribution on that basis.
3. Rule 8G802.B--Seniorization and Subordination of IRS Guaranty Fund
    In order to provide appropriate incentive for IRS Clearing Members 
to submit aggressive bids during an auction for a defaulted IRS 
Clearing Member's portfolio, CME is proposing to make amendments to 
Rule 8G802.B to modify the application of the IRS Guaranty Fund on the 
basis of each IRS Clearing Member's bidding during the auction process. 
Where a defaulted IRS Clearing Member has a portfolio of IRS 
denominated in multiple currencies, CME will split such portfolio by 
currency and separately hedge and auction the resulting split 
portfolios. IRS Clearing Members with open interest in a currency being 
auctioned are required to provide a bid for the auctioned portfolio. 
Each bid will be assessed for quality within the respective auction and 
a portion (or all) of such IRS Clearing Member's deposit to the IRS 
Guaranty Fund will be subject to seniorization (if such IRS Clearing 
Member provides the winning bid) and subordination (if such IRS 
Clearing Member provided an off market price). The amount subject to 
such seniorization/subordination for an auction will be based on a 
percentage determined for such IRS Clearing Member at the time of the 
related auction in accordance with our IRS default management 
procedures. Any IRS Guaranty Fund deposits that are subordinated will 
be allocated pro rata to IRS Losses after the CME corporate 
contribution and prior to any non-subordinated/seniorized deposits. Any 
contributions that are not seniorized or subordinated in accordance 
with above formula will be allocated pro rata to IRS losses after all 
subordinated amounts and prior to any seniorized amounts.
4. New Rule 8G04.3--Outsourcing to Third Parties
    In connection with the CFTC's final rules for Derivatives Clearing 
Organization General Provisions and Core Principles relating to Core 
Principle G (Default Rules and Procedures) the CFTC implemented CFTC 
Regulation 39.16 which includes a requirement that DCOs permit clearing 
members to outsource certain obligations to qualified third parties. To 
codify CME's practice of permitting eligible arrangements for IRS, CME 
is adopting new CME Rule 8G04.3.
    CME believes the proposed rule change is consistent with the 
requirements of the Act and particularly with Section 17A of the Act 
because it involves clearing of swaps and futures contracts and thus 
relate solely to CME's swaps and futures clearing activities pursuant 
to its registration as a derivatives clearing organization under the 
Commodity Exchange Act (``CEA'') and does 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 and futures markets, promoting the prompt and 
accurate clearance of transactions, and protecting investors and the 
public interest. The proposed rule changes accomplish those objectives 
by facilitating portfolio margining of interest rate swaps and interest 
rate futures at CME.

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-2012-05 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-2012-05. 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/

[[Page 18290]]

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 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-
2012-05 and should be submitted on or before April 17, 2012.

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

    Section 19(b) of the Act \3\ 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 change is 
consistent with the requirements of the Act, in particular with the 
requirements of Section 17A of the Act,\4\ 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 settlement of derivative agreements, contracts, 
and transactions because it should allow CME to enhance its services in 
clearing IRS and Interest Rate Futures products, thereby promoting the 
prompt and accurate clearance and settlement of derivative agreements, 
contracts, and transactions.\5\
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    \3\ 15 U.S.C. 78s(b).
    \4\ 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).
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    In its filing, CME requested that the Commission approve this 
proposed rule change on an accelerated basis. CME has articulated three 
reasons for granting approval 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 change relates solely to IRS and 
Interest Rate Futures products and therefore relate solely to CME's 
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.
    The Commission finds good cause for granting approval of the 
proposed rule change before the thirtieth day after publication of the 
notice of its filing 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) the clearing agency has indicated that not providing 
accelerated approval would have a significant impact on its IRS 
clearing business 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 federal regulator.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-CME-2012-05) is approved on an 
accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-7279 Filed 3-26-12; 8:45 am]
BILLING CODE 8011-01-P


