
[Federal Register Volume 77, Number 93 (Monday, May 14, 2012)]
[Notices]
[Pages 28416-28417]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11533]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66941; File No. SR-CME-2012-06]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Order Approving Proposed Rule Change To Amend Rules Related to Credit 
Default Swap Guaranty Fund Allocations, End-of-Day Pricing Procedures, 
Daily Submission Deadlines, Holiday Accrual Processing, and the Price 
Alignment Interest Payment Timeline

May 8, 2012.

I. Introduction

    On March 9, 2012, Chicago Mercantile Exchange (``CME'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-CME-2012-06 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The 
proposed rule change was published for comment in the Federal Register 
on March 29, 2012.\3\ The Commission received no comment letters 
regarding this proposal. For the

[[Page 28417]]

reasons discussion below, the Commission is granting approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Release No. 34-66646 (March 22, 2012), 77 FR 19045 (March 
29, 2012).
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II. Description

    CME currently offers clearing services for certain credit default 
swap (``CDS'') index products. CME proposes to amend certain of its 
rules that would generally affect its CDS clearing offering and to make 
corresponding amendments to certain sections of its Manual of 
Operations for CME Cleared Credit Default Swaps (``CDS Manual''). The 
rule amendments would modify CME's CDS guaranty fund allocation 
methodology, end-of-day pricing procedures, daily submission deadlines, 
holiday accrual processing, and the timeline for price alignment 
interest (``PAI'') payment timeline.
    The proposed changes to text in the CME rulebook would amend 
current requirements found in CME Rule 8H07.1 relating to the 
allocation of the CDS guaranty fund requirements among CDS clearing 
members. Currently, CME calculates its guaranty fund monthly and 
proportionally allocates to each CDS clearing member a guaranty fund 
requirement based on the CDS clearing member's 90-day trailing average 
of its potential residual loss and 90-day trailing average of its gross 
notional open interest outstanding at CME. CME is proposing to change 
the measurement period from 90 days to 30 days so that a CME clearing 
member's CDS guaranty fund requirement more quickly react to the CDS 
clearing member's current activity and to align the measurement period 
with the frequency of CDS guaranty fund calculations.
    The proposed changes to the text of the CDS Manual would modify 
end-of-day pricing procedures including procedures for CDS price 
submissions, crossing, and auction procedures that CME uses to arrive 
at the settlement price for CDS contracts. Currently, CME requires CDS 
clearing members to submit price levels for the full term structures of 
all indices and single-name reference entities by seniority, 
restructuring type, and currency eligible for clearing. If a CDS 
clearing member chooses to submit price levels on a cleared contract in 
which it does not hold open interest, CME hold that price submission as 
tradable if a cross occurs and the submitted instrument is selected 
pursuant to the auction process. However, under CME's current 
procedures, submitted price levels for non-cleared instruments are 
never actionable (i.e., tradable). CME is proposing to change it CDS 
Manual to require CDS clearing members to submit price levels for all 
cleared contracts in which they or their customers hold open interest. 
For indices where CDS clearing members are required to submit the full 
clearing eligible tenors of all indices, CME will only cross CDS 
clearing members on the tenors in which the CDS clearing members or 
their customers hold open interest. For single-name CDS, CME will 
require CDS clearing members to submit mid price levels for the full 
term structures for the 0, 0.5-, 1-, 2-, 3-, 4-, 5-, 7- and 10-year 
tenors. However, CME may cross the CDS clearing members on any single-
name reference entity in which the CDS clearing members or their 
customer(s) hold open interest irrespective of tenor.
    CME is also amending its CDS Manual to change (1) the daily 
submission deadlines for CDS, (2) the CDS holiday accrual processing, 
and (3) the PAI payment timeline. With respect to operations timelines 
and reports, CME would move up the trade submission deadline for 
current day trades from 7:59 p.m. ET to 6:59 p.m. ET. With respect to 
position management, money calculations, and collateral, the revisions 
to the CDS Manual would require on bank holidays in the country of 
which the swap is denominated (e.g., Independence Day for U.S. Dollar 
denominated CDS contracts), accrual processing would be included in the 
processing for the next business day and would not occur on the 
relevant bank holiday. In addition, CME would calculate and pay PAI for 
CDS contracts on a daily basis as opposed to monthly.

III. Discussion

    Section 19(b)(2)(C) of the Act 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.\4\ In particular, Section 17A(b)(3)(F) \5\ of the Act 
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 custody or control of the clearing agency or for which it is 
responsible. By making CDS clearing members' guaranty fund requirements 
be based on relatively more recent histories, the proposed amended rule 
governing guaranty fund allocations should improve CME's ability to 
react to CDS market dynamics and thereby should help CME better assure 
the safeguarding of securities and funds which are in its custody or 
control or for which it is responsible. As such, the proposed rule 
change is consistent with the requirements of Section 17A(b)(3)(F) of 
the Act. Also, the requirement that CDS clearing members submit pricing 
for all tenors of clearing-eligible indices and for the full term 
structure for single-name CDS should enhance CME's ability to derive 
end-of-day settlement prices. In addition, because the operational 
changes CME is proposing would generally require clearing members to 
made trade submissions more promptly, require CME to calculate price 
alignment more frequently, and clarify when price accrual processing 
occurs in the event of a bank holiday, such a change should promote the 
prompt and accurate clearance and settlement of securities transactions 
and derivative agreements, contracts, and transactions and therefore is 
consistent with the requirements of Section 17A(b)(3)(F) of the Act.
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    \4\ 15 U.S.C. 78s(b)(2)(C).
    \5\ 15 U.S.C. 78q-1(B)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds the proposal is 
consistent with the requirements of the Act and in particular with the 
requirements of 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-CME-2012-06), be, and hereby 
is, approved.\6\
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    \6\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11533 Filed 5-11-12; 8:45 am]
BILLING CODE 8011-01-P


