
[Federal Register Volume 77, Number 77 (Friday, April 20, 2012)]
[Notices]
[Pages 23768-23770]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9527]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66813; File No. SR-CME-2012-11]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Facilitate Changing its Methodology for Calculation of 
the ``Cash Mark-to-Market'' Performance Bonds for Cleared OTC FX Swaps 
From SPAN[supreg] to HVaR

April 16, 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 April 2, 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.
---------------------------------------------------------------------------

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

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 Cleared Over-the-Counter (``OTC'') foreign 
currency (``FX'') product offering to facilitate changing its 
methodology for calculation of the ``cash mark-to-market'' performance 
bonds for OTC FX Swaps from Standard Portfolio Analysis 
(``SPAN[supreg]'') to Historical Value at Risk (``HVaR''). 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.

[[Page 23769]]

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

    CME proposes a rule change that would facilitate changing its 
methodology for calculation of the ``cash mark-to-market'' performance 
bonds for OTC FX Spot, Forward, and Swap transactions from SPAN[supreg] 
to HVaR. This action is consistent with an analogous migration in 
performance bond methodology for CME Group's cleared OTC Interest Rate 
Swaps (``IRS'') completed in 2011.
    CME currently has a total of thirty-eight (38) OTC FX products 
listed for clearing (twelve non-deliverable forward FX pairs and 
twenty-six CME WM/Reuters OTC Cash-Settlement Forwards FX pairs).\3\ 
CME Rule 930.A. ``Performance Bond System,'' would be amended to note 
cleared OTC FX transactions will use the HVaR Performance Bond System 
for margining. The proposed rule change would be effective on April 16, 
2012, when CME intends to migrate all 38 OTC FX pairs currently listed 
for clearing from the current SPAN to HVaR methodology for determining 
performance bonds.
---------------------------------------------------------------------------

    \3\ These 38 products include twelve (``12'') cleared OTC non-
deliverable forward or ``NDFs,'' namely, U.S. Dollar/Brazilian Real 
(``USD/BRL''), U.S. Dollar/Chinese Renminbi (``USD/RMB'' aka, 
``CNY''), U.S. Dollar/Malaysian Ringgit (``USD/MYR''), U.S. Dollar/
Indonesian Rupiah (``USD/IDR''), U.S. Dollar/Indian Rupee (``USD/
INR''), U.S. Dollar/Korean Won (``USD/KRW''), U.S. Dollar/Philippine 
Peso (``USD/PHP''), U.S. Dollar/Taiwan Dollar (``USD/TWD''), U.S. 
Dollar/Chilean Peso (``USD/CLP''), U.S. Dollar/Colombian Peso 
(``USD/COP''), U.S. Dollar/Peruvian New Sol (``USD/PEN'') and U.S. 
Dollar/Russian Ruble (``USD/RUB'') non-deliverable forwards 
(``NDFs''); and twenty-six (``26'') CME WM/Reuters OTC FX Cash-
Settlement Forwards, namely, Australian Dollar/U.S. Dollar (``AUD/
USD''), U.S. Dollar/Swiss Franc (``USD/CHF''), U.S. Dollar/Canadian 
Dollar (``USD/CAD''), New Zealand Dollar/U.S. Dollar (``NZD/USD''), 
U.S. Dollar/Norwegian Krone (``USD/NOK''), U.S. Dollar/Swedish Krona 
(``USD/SEK''), U.S. Dollar/Denmark Krone (``USD/DKK''), Euro/U.S. 
Dollar (``EUR/USD''), U.S. Dollar/Japanese Yen (``USD/JPY''), Great 
British Pound/U.S. Dollar (``GBP/USD''), U.S. Dollar/Mexican Peso 
(``USD/MXN''), U.S. Dollar/Singapore Dollar (``USD/SGD''), U.S. 
Dollar/Polish Zloty (``USD/PLN''), U.S. Dollar/South African Rand 
(``USD/ZAR''), Australian Dollar/Japanese Yen (``AUD/JPY''), Euro/
Australian Dollar (``EUR/AUD''), Canadian Dollar/Japanese Yen 
(``CAD/JPY''), Euro/Great British Pound (``EUR/GBP''), Euro/Japanese 
Yen (``EUR/JPY''), Euro/Swiss Franc (``EUR/CHF''), U.S. Dollar/Czech 
Koruna (``USD/CZK''), U.S. Dollar/Hungarian Forint (``USD/HUF''), 
U.S. Dollar/Turkish Lira (``USD/TRY''), U.S. Dollar/Israeli Shekel 
(``USD/ILS''), U.S. Dollar/Thailand Baht (``USD/THB''), and U.S. 
Dollar/Hong Kong Dollar (``USD/HKD'').
---------------------------------------------------------------------------

    Consistent with best practices recommendations, CME's margin model 
covers losses over any 5-day period in a large universe of portfolios 
during 99% of days. HVaR methodology is the model of choice for the 
risk departments of most if not all financial services firms and is 
widely considered to be a proxy for market risk. It is also well-
understood and easily replicable. In the HVaR framework, past events 
are used for coming up with possible scenarios in the future. This 
approach implicitly assumes that historical data series provide rich 
sample sets of the possible probability distribution of the relevant 
financial variable. CME has arranged for receipt of FX historical data 
by FX pair by maturity curve from Super Derivatives. In depth analysis 
and stress testing of sample FX portfolios will be done upon receipt of 
data.
    The margin methodology, at a high level, follows these four steps:
    1. Generate matrix of historical returns
    2. Compute volatility scaling factors and apply them individually 
to each tenor in each scenario
    3. Generate scenarios by applying the scaled return matrix to 
today's forward curve and compute the profit (loss) of the portfolio in 
each scenario.
    4. Rank the scenarios by maximum loss to maximum gain and take the 
required percentile as a margin. In our model, we chose to take the 4th 
largest loss over the 5-year period, which corresponds to approximately 
99.7% confidence interval.
    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 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 offering investors 
enhancements in relation to its FX OTC swap product offering 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-2012-11 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-2012-11. 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 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

[[Page 23770]]

should refer to File Number SR-CME-2012-11 and should be submitted on 
or before May 11, 2012.

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

    Section 19(b) of the Act \4\ 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,\5\ 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 assure the safeguarding of 
securities and funds which are in the possession or control of the 
clearing agency or for which it is responsible and to protect investors 
and the public interest because it should allow CME to enhance its 
margin evaluation and collection related to clearing FX products.\6\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b).
    \5\ 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).
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In its filing CME requested that the Commission approve this 
proposed rule change prior to the thirtieth day after the date of 
publication of the notice of the filing. CME has articulated three 
reasons for so granting approval. 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 FX 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 prior to 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 FX 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-2012-11) is approved on an 
accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2012-9527 Filed 4-19-12; 8:45 am]
BILLING CODE 8011-01-P


