
[Federal Register Volume 77, Number 156 (Monday, August 13, 2012)]
[Notices]
[Pages 48192-48193]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19743]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67610; File No. SR-CME-2012-28]


Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Related to the Liquidity 
Factor of Its Credit Default Swap Margin Methodology

August 7, 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 July 25, 2012, the Chicago Mercantile Exchange, Inc. (``CME'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed change as 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 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 the Terms of Substance 
of the Proposed Rule Change

    CME proposes to make an adjustment to one particular component of 
its current credit default swap (``CDS'') margin model. The adjustment 
would apply only to non-customer positions.\3\
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    \3\ Telephone conference between Timothy Elliott, Director and 
Associate General Counsel, CME, and Marta Chaffee, Assistant 
Director, and Gena Lai, Senior Special Counsel, Securities and 
Exchange Commission, Division of Trading and Markets, on July 30, 
2012.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CME included statements 
concerning the purpose of 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 these 
statements.

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

    CME's currently approved credit default swap margin methodology 
utilizes a ``multi-factor'' portfolio model to determine margin 
requirements for credit default swap (``CDS'') instruments. The model 
incorporates risk-based factors that are designed to represent the 
different risks inherent to CDS products. The factors are aggregated to 
determine the total amount of margin required to protect a portfolio 
against exposures resulting from daily changes in CDS spreads. For both 
total and minimum margin calculations, CME evaluates each CDS contract 
held within a portfolio. These positions are distinguished by the 
single name of the underlying entity, the CDS tenor, the notional 
amount of the position, and the fixed spread or coupon rate. For 
consistency, margins for CDS indexes in a portfolio are handled based 
on the required margin for each of the underlying components of the 
index.
    CME proposes to make an adjustment to one particular component of 
its current CDS margin model. The liquidity margin component of the CME 
CDS margin model is designed to capture the risk associated with bid/
ask spreads and concentration inherent in the process of liquidating a 
portfolio of a CDS Clearing Member. The current methodology for the 
liquidity factor is a function of a portfolio's gross notional value, 
the current bid/ask of the 5 year tenor of the ``on the run'' contract, 
the Duration/Series/Tenor (``DST'') factor, and a concentration factor 
based upon the gross notional for each of the CDX IG and CDX HY 
contracts. The total liquidity margin for a portfolio is the sum of the 
liquidity margins of the CDX IG and CDX HY CDS Contracts in the CDS 
Clearing Member portfolio.
    The specific proposed change that is the subject of this filing 
relates only to the methodology used for the DST factor of the CDX IG 
and HY families. Under current methods, every DST calculation is 
calibrated separately for each index family. Further, the maximum DST 
value is used. The proposal is to change the DST factor so that it will 
apply to the specific series and tenor for each CDX IG and CDX HY CDS 
contract in a

[[Page 48193]]

portfolio. The revision is designed to more closely align the DST 
factor with the liquidity profile of the CDS contracts in a portfolio.
    The proposed adjustment does not require any changes to rule text 
in the CME rulebook and does not necessitate any changes to CME's CDS 
Manual of Operations. The change will be announced to CDS market 
participants in an advisory notice that will be issued prior to 
implementation but after approval for the change is obtained from the 
Commission.
    The CME believes the proposed rule changes are consistent with the 
requirements of the Exchange Act including Section 17A of the Exchange 
Act. The enhancements to CME's current margin methodology will 
facilitate the prompt and accurate settlement of security-based swaps 
and contribute to the safeguarding of securities and funds associated 
with security-based swap transactions. The proposed rule changes 
accomplish those objectives because the changes are designed to better 
align the margin methodology with the liquidity profile of the 
instruments in the portfolio.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the proposed rule change would 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

     Use the Commissions Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CME-2012-28 on the subject line.

Paper Comments

     Send paper comments 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-2012-28. 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 Section, 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 and 
on CME's Web site at http://www.cmegroup.com/market-regulation/files/SEC_19B-4_12-28.pdf.
    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-2012-28 
and should be submitted on or before September 4, 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. 2012-19743 Filed 8-10-12; 8:45 am]
BILLING CODE 8011-01-P


