
[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75454-75459]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30648]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68441; File No. SR-CME-2012-26]


 Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Order Approving Proposed Rule Change To Amend Rules in Connection With 
Status as a ``Deemed Registered'' Clearing Agency

December 14, 2012.

I. Introduction

    On October 15, 2012, Chicago Mercantile Exchange Inc. (``CME'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change (SR-CME-2012-26) 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 November 2, 2012.\3\ The Commission received no 
comment letters regarding the proposal. For the reasons discussed 
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\ Securities Exchange Act Release No. 68121 (Oct. 29, 2012), 
77 FR 66211 (Nov. 2, 2012).
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II. Description

A. Background--CME's Credit Default Swap Business and ``Deemed 
Registered'' Status

    CME began clearing credit default swaps prior to the passage of the 
Dodd-Frank Act.\4\ These activities were facilitated by temporary 
exemptive relief granted by the Commission to

[[Page 75455]]

CME.\5\ Upon the passage of the Dodd-Frank Act, on July 16, 2011, this 
temporary relief expired.\6\ To ensure that entities that were clearing 
credit default swaps prior to the passage of Dodd-Frank based on 
exemptions granted by the Commission could continue to do so without 
interruption, Section 763(b) of the Dodd-Frank Act \7\ provided that 
(i) a depository institution registered with the Commodities Futures 
Trading Commission (``CFTC'') that cleared swaps as a multilateral 
clearing organization prior to the date of enactment of the Dodd-Frank 
Act and (ii) a derivatives clearing organization (``DCO'') registered 
with the CFTC that cleared swaps pursuant to an exemption from 
registration as a clearing agency prior to the date of enactment of the 
Dodd-Frank Act will be deemed registered with the Commission as a 
clearing agency solely for the purpose of clearing security-based swaps 
(``Deemed Registered Provision'').\8\ On July 16, 2011, the Deemed 
Registered Provision, along with other general provisions under Title 
VII of the Dodd-Frank Act, became effective,\9\ thereby requiring each 
affected clearing agency, including CME, to comply with all 
requirements of the Act and the rules and regulations thereunder 
applicable to clearing agencies registered with the Commission under 
the Act.
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    \4\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat.1376 (2010).
    \5\ See generally Securities Exchange Act Release Nos. 59578 
(Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 
74 FR 67258 (Dec. 18, 2009), and 61803 (Mar. 30, 2010), 75 FR 17181 
(Apr. 5, 2010) (temporary exemptions in connection with CDS clearing 
by Chicago Mercantile Exchange Inc.). In addition, the Commission 
issued interim final temporary rules that provide exemptions under 
the Securities Act of 1933 and the Securities Exchange Act of 1934 
for CDS to facilitate the operation of central counterparties for 
the CDS market. See Securities Act Release Nos. 8999 (Jan. 14, 
2009), 74 FR 3967 (Jan. 22, 2009) (initial approval), 9063 (Sep. 14, 
2009), 74 FR 47719 (Sep. 17, 2009) (extension until Nov. 30, 2010), 
and 9158 (Nov. 30, 2010) (extension until Jul. 16, 2011).
    \6\ Securities Exchange Act Release No. 61803 (Mar. 30, 2010), 
75 FR 17181 (Apr. 5, 2010).
    \7\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat.1376 (2010).
    \8\ See Section 763(b) of the Dodd-Frank Act (adding new Section 
17A(l) to the Exchange Act, 15 U.S.C. 78q-1(1)). Under this Deemed 
Registered Provision, CME became a registered clearing agency solely 
for the purpose of clearing security-based swaps.
    \9\ Section 774 of the Dodd-Frank Act states, ``[u]nless 
otherwise provided, the provisions of this subtitle shall take 
effect on the later of 360 days after the date of the enactment of 
this subtitle or, to the extent a provision of this subtitle 
requires a rulemaking, not less than 60 days after publication of 
the final rule or regulation implementing such provision of this 
subtitle.''
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B. Proposed Changes in Furtherance of Compliance With the Act

    In light of CME's requirement to comply with the Act and the rules 
and regulations thereunder, CME proposed rule changes concerning 
membership participation standards, administrative practices, and 
financial safety, and provided a description of CME's governance 
arrangements in the context of the fair representation requirement in 
Section 17A(b)(3)(C) of the Act, as they relate to the CDS portion of 
CME's clearing activities. The proposed changes are found within 
Chapter 8H of the CME Rulebook and are summarized and discussed in 
detail below. The text of the proposed changes is available on the 
CME's Web site at http://www.cmegroup.com, at the principal office of 
CME, and at the Commission's Public Reference Room.

III. Discussion

A. Statutory Standard

    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.\10\ In particular, Section 17A(b) of the Act requires 
that, among other things, the rules of a clearing agency:
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    \10\ 15 U.S.C. 78s(b)(2)(C).

     Subject to the provisions of Section 17A(b)(4) of the 
Act,\11\ provide that any (i) registered broker or dealer, (ii) 
other registered clearing agency, (iii) registered investment 
company, (iv) bank, (v) insurance company, or (vi) other person or 
class of persons as the Commission, by rule, may from time to time 
designate as appropriate to the development of a national system for 
the prompt and accurate clearance and settlement of securities 
transactions may become a participant in such clearing agency; \12\
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    \11\ 15 U.S.C. 78q-1(b)(4).
    \12\ 15 U.S.C. 78q-1(b)(3)(B).
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     Provide for fair representation of the clearing 
agency's shareholders (or members) and participants in the selection 
of its directors and administration of its affairs; \13\
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    \13\ 15 U.S.C. 78q-1(b)(3)(C).
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     Are designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the 
extent applicable, derivative agreements, contracts, and 
transactions, to assure the safeguarding of securities and funds 
which are in the custody or control of the clearing agency and for 
which it is responsible, to foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions, to remove impediments to and perfect the mechanism of 
a national system for the prompt and accurate clearance and 
settlement of securities transactions, and, in general, to protect 
investors and the public interest; and are not designed to permit 
unfair discrimination in the admission of participants or among 
participants in the use of the clearing agency, or to regulate by 
virtue of any authority conferred by the Act matters not related to 
the purposes of this section or the administration of the clearing 
agency; \14\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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     Provide that (subject to any rule or order of the 
Commission pursuant to section 17(d) or 19(g)(2) of the Act) its 
participants shall be appropriately disciplined for violation of any 
provision of the rules of the clearing agency by expulsion, 
suspension, limitation of activities, functions, and operations, 
fine, censure, or any other fitting sanction; \15\ and
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    \15\ 15 U.S.C. 78q-1(b)(4)(G).
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     Are in accordance with the provisions of Section 
17A(b)(5) of the Act,\16\ and, in general, provide a fair procedure 
with respect to the disciplining of participants, the denial of 
participation to any persons seeking participation therein, and the 
prohibition or limitation by the clearing agency of any person with 
respect to access to services offered by the clearing agency.\17\
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    \16\ 15 U.S.C. 78q-1(b)(5).
    \17\ 15 U.S.C. 78q-1(b)(4)(H).
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B. Summary of Proposed Rule Changes

1. Membership Participation Standards
    CME Rule 8H04, CDS Clearing Member Obligations and Qualifications. 
CME Rule 8H04 sets forth CDS Clearing Member obligations and 
qualifications. CME has proposed changes to this rule to provide 
specifically that CME may approve an application for CDS Clearing 
Membership to permit the clearing of security-based swaps submitted by 
any corporation, partnership, limited liability company, or any other 
type of entity, provided that CME determines such applicant satisfies 
applicable requirements. CME has also proposed to state in this rule 
that applicants within one of the enumerated categories of participants 
in Section 17A(b)(3)(B) of the Act \18\ are specifically eligible to 
become CDS Clearing Members for the purpose of clearing security-based 
swaps. Further, additional revisions to CME Rule 8H04 would make clear 
that CME may, and in cases in which the Commission by order directs, 
shall, deny an application for CDS Clearing Membership to any person 
subject to a statutory disqualification, as such term is defined by the 
Act.
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    \18\ 15 U.S.C. 78q-1(b)(3)(B).
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    The Commission believes that these proposed changes to CME Rule 
8H04 are consistent with Sections 17A(b)(3)(B) \19\ and 17A(b)(4)(B) 
\20\ of the Act, which provide that a registered clearing agency shall 
provide in its rules that the

[[Page 75456]]

categories of applicants enumerated in Section 17A(b)(3)(B) of the Act 
\21\ may become a participant in the registered clearing agency, 
subject to meeting the standards of financial responsibility, 
operational capability, experience, and competence prescribed by the 
rules of the clearing agency, among other things.\22\ The Commission 
believes the proposed changes relating to CME's authority and 
obligation to restrict the membership and activities of persons subject 
to a statutory disqualification are consistent with Section 
17A(b)(4)(A),\23\ which provides, among other things, that a registered 
clearing agency may, and in cases in which the Commission, by order, 
directs as appropriate in the public interest shall, deny participation 
to any person subject to a statutory disqualification. In addition, the 
Commission finds that these proposed changes are consistent with 
Section 17A(b)(3)(F) of the Act,\24\ which requires, among other 
things, that a registered clearing agency's rules not be designed to 
permit unfair discrimination in the admission of participants or among 
participants in the use of the clearing agency.
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    \19\ 15 U.S.C. 78s(b)(2)(B).
    \20\ 15 U.S.C. 78s(b)(4).
    \21\ 15 U.S.C. 78s(b)(2)(B).
    \22\ The Commission is not making a determination whether this 
proposed rule change or any other proposed rule change discussed in 
this Order is sufficient for full compliance with the statute, rule, 
or regulation with which they are consistent.
    \23\ 15 U.S.C. 78s(b)(4)(A).
    \24\ 15 U.S.C. 78s(b)(3)(F).
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2. Administrative Practices
    New CME Rule 8H931. CME has proposed to add new CME Rule 8H931, 
which would state that rules that relate to CME's activities as a 
clearing agency clearing security-based swaps will be adopted, altered, 
amended or repealed in accordance with the applicable requirements of 
Section 19(b) of the Act. Under this rule, CME would promptly notify 
all CDS Clearing Members of any proposal it has made to change, revise, 
add or repeal any rule that relates to its activities as a securities 
clearing agency. Such notice would include the text or a brief 
description of any such proposed rule change, along with its purpose 
and effect, in accordance with the requirements of the Act. CDS 
Clearing Members would have the opportunity to submit comments with 
respect to any such proposal in accordance with the applicable 
Commission rules. The Commission believes that proposed CME Rule 8H931 
is consistent with CME's obligations as a clearing agency registered 
under the Act to file its proposed rule changes pursuant to Section 
19(b) of the Act and Rule 19b-4 thereunder.\25\
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    \25\ The Commission is not making a determination whether this 
proposed rule change or any other proposed rule change discussed in 
this Order is sufficient for full compliance with the statute, rule, 
or regulation with which they are consistent.
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    New CME Rule 8H932, Records Relating to Disciplinary Proceedings 
and Security-Based Swaps. Proposed CME Rule 8H932 would require CME to 
maintain records of any disciplinary proceeding related to the 
activities of a CDS Clearing Member involving security-based swaps in 
accordance with the requirements of the Act and Rule 17a-1 thereunder. 
The Commission believes that proposed CME Rule 8H932 is consistent with 
CME's obligation as a clearing agency under Section 17(a) \26\ and Rule 
17a-1 thereunder \27\ to maintain records made or received by it in the 
course of its business as such and in the conduct of its self-
regulatory activity.\28\
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    \26\ 15 U.S.C. 78q(a).
    \27\ 17 CFR 240.17a-1.
    \28\ The Commission is not making a determination whether this 
proposed rule change or any other proposed rule change discussed in 
this Order is sufficient for full compliance with the statute, rule, 
or regulation with which they are consistent.
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    New CME Rule 8H933, Notice Regarding Certain Disciplinary Matters 
Related to Security-Based Swaps. Proposed CME Rule 8H933 would add 
language to Chapter 8H that would require CME to notify the Commission 
and any appropriate regulatory agency, as such term is defined by 
Section 3(a)(34) of the Act, regarding any final disciplinary sanction, 
denial of participation, prohibition or limitation with respect to 
access, and/or summary suspension taken against a CDS Clearing Member 
relating to activities involving security-based swaps. The Commission 
believes that proposed CME Rule 8H933 is consistent with Section 
19(d)(1) of the Act, which requires a self-regulatory organization that 
imposes any final disciplinary sanction on any of its members or 
participants, denies membership or participation to any applicant, or 
prohibits or limits any person in respect to access to services it 
offers, promptly to file notice with the appropriate regulatory agency 
for the self-regulatory organization and (if other than the appropriate 
regulatory agency for the self-regulatory organization) the appropriate 
regulatory agency for such member, participant, applicant, or other 
person.\29\ The Commission also believes that proposed CME Rule 8H933 
is consistent with Section 17A(b)(3)(H) of the Act,\30\ which requires 
that the rules of a clearing agency provide a fair procedure with 
respect to the disciplining of participants, the denial of 
participation to any persons seeking participation therein, and the 
prohibition or limitation by the clearing agency of any person with 
respect to access to services offered by the clearing agency.\31\
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    \29\ 15 U.S.C. 78s(d)(1).
    \30\ 15 U.S.C. 78q-1(b)(3)(H).
    \31\ The Commission is not making a determination whether this 
proposed rule change or any other proposed rule change discussed in 
this Order is sufficient for full compliance with the statute, rule, 
or regulation with which they are consistent.
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    New CME Rule 8H938, Summary Suspensions Relating to Security-Based 
Swap Activities. Under proposed CME Rule 8H938, CME would only 
summarily suspend and close the accounts of a CDS Clearing Member 
engaged in security-based swap clearing activities that (i) has been 
and is expelled or suspended from any self-regulatory organization, 
(ii) is in default of any delivery of funds or securities to the 
clearing agency, or (iii) is in such financial operating difficulty 
that the clearing agency determines and so notifies the appropriate 
regulatory agency for the member that such suspension and closing of 
accounts are necessary for the protection of the clearing agency, its 
members, creditors, or investors.
    The Commission views summary suspensions, as discussed in Section 
17A(b)(5)(C) of the Act,\32\ as an exception to the general provisions 
Sections 17A(b)(5)(A) \33\ and 17A(b)(5)(B) \34\ of the Act, which 
require a clearing agency to adhere to specific processes prior to 
certain disciplinary actions taking place. The effect of the exception 
of Section 17A(b)(5)(C) is to allow registered clearing agencies to 
summarily suspend and close a participant's accounts only in the 
limited circumstances and in accordance with the minimum procedural 
requirements set forth in Section 17A(b)(5)(C). Thus, the Commission 
believes that proposed CME Rule 8H938 is consistent with Section 
17A(b)(5)(C) of the Act, as well as Sections 17A(b)(3)(G) \35\ and (H) 
\36\ of the Act, which require the rules of the clearing agency provide 
that its participants shall be appropriately disciplined for violations 
of any provisions of those rules and to provide fair procedures for 
disciplining participants, denying participation in the clearing agency 
to any person, and prohibiting or limiting access to the

[[Page 75457]]

clearing agency's services, among other things.
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    \32\ 15 U.S.C. 78q-1(b)(5)(C).
    \33\ 15 U.S.C. 78q-1(b)(5)(A).
    \34\ 15 U.S.C. 78q-1(b)(5)(B).
    \35\ 15 U.S.C. 78q-1(b)(3)(G).
    \36\ 15 U.S.C. 78q-1(b)(3)(H).
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3. Financial Safety
    Change to CME Rule 8H07, CDS Financial Safeguards and Guaranty Fund 
Deposit, and 8H802.B, Satisfaction of Clearing House Obligations. CME 
has proposed changes to CME Rule 8H07, governing CDS financial 
safeguards and Guaranty Fund deposit matters, that would require CME to 
notify CDS Clearing Members regarding both the amount of and reasons 
for any charges to the CDS Guaranty Fund (``CDS Guaranty Fund,'' or 
``Guaranty Fund'') for any reason other than to satisfy a clearing loss 
attributable to a CDS Clearing Member solely from that Clearing 
Member's Guaranty Fund deposit. CME has proposed changes to Rule 
8H802.B that would specify that CME would provide notice to CDS 
Clearing Members as required by the Act regarding any amounts charged 
to the CDS Guaranty Fund due to losses incurred. By providing 
additional transparency to CDS Clearing Members regarding the use of 
the CDS Guaranty Fund, these proposed changes facilitate CDS Clearing 
Member monitoring of CME's financial condition as well as CME's 
accountability with regard to the CDS Guaranty Fund. The Commission 
thus believes that these proposed changes to CME Rule 8H07 and 8H802.B 
are consistent with Section 17A(b)(3)(F) of the Act,\37\ which requires 
that the rules of a registered clearing agency be designed, among other 
things, 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.
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    \37\ 15 U.S.C. 78s(b)(3)(F).
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    Further, additional proposed changes would also clarify that CME 
would apply CME Rule 8H07 on a uniform and non-discriminatory basis 
when determining minimum Guaranty Fund deposits. The Commission finds 
these changes to CME Rule 8H07 are consistent with Section 17A(b)(3)(F) 
of the Act, which, among other things, requires that a clearing 
agency's rules not be designed to permit unfair discrimination among 
participants in the use of the clearing agency.\38\
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    \38\ 15 U.S.C. 78s(b)(3)(F).
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    New CME Rule 8H820, Performance Bond for Security-Based Swaps, and 
Changes to CME Rule 8H930, CDS Performance Bond Requirements. Proposed 
CME Rule 8H820 would specify that CDS performance bond requirements 
will be as determined by CME staff from time to time and as set forth 
in CME Rule 820. Further, the proposed rule would provide that, with 
respect to performance bond requirements that apply to security-based 
swap clearing activities, CME would be required under new CME Rule 8H20 
to determine that each item that is enumerated as being acceptable 
performance bond pursuant to CME Rule 820 has been determined to assure 
the safety and liquidity of the clearing agency. New language in CME 
Rule 8H930 also would explain that (i) acceptable performance bond 
assets for security-based swaps and the applicable haircuts related to 
such assets will be set forth on a public Web site and that CME will 
have discretion to make adjustments to asset haircuts at any time; (ii) 
any such adjustment to the applicable asset haircut will be promptly 
communicated to CDS Clearing Members; (iii) any adjustments to the 
applicable asset haircut schedule for security-based swap clearing 
activities must be based on an analysis of appropriate factors 
including, for example, historical and implied price volatilities, 
market composition, current and anticipated market conditions, and 
other relevant information; and (iv) the Clearing House will conduct 
regular reviews of its then-current haircut schedules and make any 
necessary adjustments. CME also has proposed to revise CME Rule 8H930 
to provide that CME will apply CME Rule 8H930 on a uniform and non-
discriminatory basis when determining performance bond requirements.
    By providing additional transparency concerning CME's process for 
determining CDS performance bond requirements as described above, the 
Commission believes that CME Rule 8H820 and the revisions to CME Rule 
8H930 should provide guidance and an increased level of predictability 
to CME's CDS Clearing Members concerning performance bond requirements 
without compromising CME's ability to adjust them as market conditions 
warrant. CME Rule 8H975 continues to permit CME to require additional 
performance bond to be deposited to CME and/or to take any other action 
necessary to protect the financial integrity of CME in emergency 
situations as defined under CME Rule 8H975. With increased transparency 
and predictability concerning performance bond requirements, CDS 
Clearing Members should be better able to anticipate and manage amounts 
due to CME, which may translate into less risk that CME would not be 
able to collect on such requirements and ultimately, improved financial 
stability for CME as well as its CDS Clearing Members. In addition, the 
requirement in CME Rule 820 that each item enumerated as being 
acceptable performance bond has been determined by CME to assure the 
safety and liquidity of the clearing agency should also provide 
additional assurance to Clearing Members that CME performs the 
diligence necessary to select appropriate performance bond assets in 
support of the CME's CDS clearing activities. Thus, the Commission 
believes the addition of CME Rule 820 and the revisions to CME Rule 
H930 described above to be consistent with Section 17A(b)(3)(F),\39\ 
which requires that a clearing agency's rules be designed, among other 
things, 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, and to promote the prompt and accurate clearance and 
settlement of securities transactions and, to the extent applicable, 
derivative agreements, contracts, and transactions. The Commission also 
believes the changes to CME Rule 8H930 providing that CME will 
determine performance bond requirements in a uniform and non-
discriminatory manner among members are consistent with Section 
17A(b)(3)(F) of the Act,\40\ which, among other things, requires that a 
clearing agency's rules not be designed to permit unfair discrimination 
among participants in the use of the clearing agency.
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    \39\ Id.
    \40\ Id.
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    New CME Rule 8H934, Reports to CDS Clearing Members. Proposed CME 
Rule 8H934 would obligate CME to, as soon as practicable after the end 
of each calendar year, make available financial statements audited by 
independent public accountants to all CDS Clearing Members engaged in 
security-based swap clearing activities. CME would also be required 
under this rule to make available to CDS Clearing Members clearing 
security-based swaps a report by independent public accountants 
regarding the system of internal accounting control of CME Group Inc. 
(``CME Group''), CME's parent company, in describing any material 
weaknesses discovered and any corrective action taken or proposed to be 
taken.
    The financial statements would, at a minimum include: (i) The 
balance of the Guaranty Fund, and the breakdown of the fund balance 
between the various forms of contributions to the fund, e.g., cash and 
secured open account indebtedness; (ii) the types and amounts of 
investments made with respect to the cash balance; (iii) the amounts 
charged

[[Page 75458]]

to the Guaranty Fund during the year in excess of a defaulting CDS 
Clearing Member's Guaranty Fund contribution; and (iv) any other 
charges to the fund during the year not directly related and chargeable 
to a specific CDS Clearing Member's Guaranty Fund contribution. CME 
also would make available to CDS Clearing Members clearing security-
based swaps a report of CME Group by independent public accountant 
regarding its system of internal accounting control, describing any 
material weaknesses discovered and any corrective action taken or 
proposed to be taken.
    CME would also furnish to all CDS Clearing Members engaged in 
security-based swap clearing activities, within 40 days following the 
close of each fiscal quarter, unaudited quarterly financial statements. 
These unaudited quarterly financial statements shall at a minimum 
consist of: (i) A statement of financial position as of the end of the 
most recent fiscal quarter and as of the end of the corresponding 
period of the preceding fiscal year; (ii) a statement of changes in 
financial position for the period between the end of the last fiscal 
year and the end of the most recent fiscal quarter and for the 
corresponding period of the preceding fiscal year; and (iii) a 
statement of results of operations, which may be condensed, for the 
most recent fiscal quarter and for the period between the end of the 
last fiscal year and the end of the most recent fiscal quarter and for 
the corresponding periods of the preceding fiscal year.
    The Commission believes that CME Rule 8H934, requiring CME to 
provide to all CDS Clearing Members engaged in security-based swap 
activities financial statements of CME and reports regarding CME 
Group's system of internal accounting control, as described above, is 
consistent with Section 17A(b)(3)(F) of the Act,\41\ which provides 
that the rules of a registered clearing agency should be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions and, to the extent applicable, derivative agreements, 
contracts, and transactions, 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.
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    \41\ Id.
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    New CME Rule 8H935, Use of Assets. Proposed CME Rule 8H935 would 
limit CME's ability to invest the cash portion of the CDS Guaranty Fund 
and CDS Clearing Member performance bond contributions by only allowing 
investments in accordance with the requirements of CFTC Regulation 
1.25, including U.S. Government obligations or such other investments 
as the rules of CME may provide which assure safety and liquidity. CME 
would also be required to limit its use of CDS Guaranty Fund and 
performance bond contributions related to security-based swap 
activities to the purposes permitted by the Act under the proposed rule 
language. CDS Guaranty Fund and performance bond contributions shall 
not be permitted to be used to account for clearing agency losses 
attributable to day-to-day operating expenses.
    The Commission expects that proposed CME Rule 8H935 should provide 
additional assurance as to the safety and liquidity of acceptable 
performance bond for security-based swaps positions. Thus, the 
Commission believes CME Rule 8H935 is consistent with Section 
17A(b)(3)(F) of the Act,\42\ which provides that the rules of a 
registered clearing agency should be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions, 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.\43\
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    \42\ Id.
    \43\ The Commission is not making a determination whether this 
proposed rule change or any other proposed rule change discussed in 
this Order is sufficient for full compliance with the statute, rule, 
or regulation with which they are consistent.
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    New CME Rule 8H936, Capacity Reviews. Proposed CME Rule 8H936 would 
specify that CME would perform periodic risk assessments of CME's 
operations and its data processing systems and facilities, and provide 
CME's Board of Directors or its designee, such as a Board Committee, 
with such reports, and supervise the establishment, maintenance, and 
updating of operations and data processing safeguards while reporting 
periodically to the Board or its designee concerning strengths and 
weaknesses in CME's system of safeguards. In addition, Rule 8H936 would 
make clear that CME is obligated to consider, and advise the Board of, 
the impact that new or expanded service or volume increases would have 
on CME's processing capacity, both physical, including personnel, and 
systemic risk.
    The Commission believes that proposed CME Rule 8H936 is consistent 
with Section 17A(b)(3)(F) of the Act,\44\ which provides that the rules 
of a registered clearing agency should be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions, 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.
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    \44\ Id.
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4. Fair Representation Requirement
    Commission staff asked CME to provide an explanation of how CME's 
current governance arrangements relating to its CDS clearing offering 
should be viewed in light of the requirements of Section 17A(b)(3)(C) 
of the Act.\45\ This provision requires that the rules of a clearing 
agency provide for fair representation of the clearing agency's 
shareholders (or members) and participants in the selection of its 
directors and administration of its affairs.
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    \45\ 15 U.S.C. 78q-1(b)(3)(C).
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    CME responded that the Board of Directors of the CME Group, the 
parent company of CME, also serves as the Board of Directors of CME. 
CME Group is a public company whose stock is listed on the Nasdaq Stock 
Market (``Nasdaq'') and thus is subject to board composition 
requirements under Nasdaq listing standards. In addition, any member of 
the public is afforded the opportunity to purchase shares in CME Group 
and influence the selection of directors and administration of its 
affairs on that basis, subject to applicable law. CME cited Commission 
staff guidance in asserting that the Commission may find fair 
representation with respect to clearing agency participants if such 
participants are afforded an opportunity to acquire voting stock of the 
clearing agency in proportion to their use of its facilities.\46\
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    \46\ See Regulation of Clearing Agencies, supra note 10. Rather 
than prescribing a single method, Commission staff guidance has 
stated that the Commission will evaluate a clearing agency's 
procedures with regard to the fair representation requirement on a 
case-by-case basis. Id.
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    In addition, CME noted that it is also subject to governance and 
conflict of interest provisions under the core principles set out in 
the CEA for a DCO. The CFTC reviews CME for compliance with these 
principles. For example, Section 5b(c)(2)(O) of the CEA sets out 
governance fitness standards that apply to DCOs, including transparent 
governance arrangements, that are designed to ensure the consideration 
of views of owners and participants. Further, Section 5b(c)(2)(Q) of 
the CEA requires a DCO's board to include market participants. CFTC 
regulations also require a DCO's governance arrangements to be clear 
and transparent

[[Page 75459]]

and ``to support the objectives of relevant stakeholders.'' \47\
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    \47\ The Commission notes that compliance with the requirements 
of other regulatory authorities does not necessarily substitute for 
compliance with the Exchange Act and the rules and regulations 
thereunder.
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    CME also stated that it believes CDS participants will have a 
meaningful input into decisions affecting the clearing operations for 
CDS through participation on the CME CDS Risk Committee. CME noted that 
the CDS Risk Committee was formed under CME Rule 8H27 to provide 
guidance and oversight to CME on matters relating to CDS products. The 
CDS Risk Committee, among other things, is responsible for reviewing 
CDS-related financial safeguards, clearing member requirements, risk 
management policies and practices, and rule changes, among other 
things.
    CME noted that the Charter of the CDS Risk Committee sets forth 
certain composition requirements that ensure the perspectives of CDS 
Clearing Members are represented. More specifically, the Charter 
requires that at all times the CDS Risk Committee is populated with up 
to nine and no fewer than five individuals who are representative of 
CDS Clearing Members. Because of these composition requirements of the 
CDS Risk Committee, and the scope of its responsibilities, CME stated 
that it believed the Commission could find that its current governance 
arrangements meet the fair representation requirement of the Act.
    Further, CME also noted that the Charter of the CDS Risk Committee 
specifically provides that its Chairman shall be a member of the CME 
Board of Directors. In this capacity, the Chairman of the CDS Risk 
Committee serves as a liaison to the full Board of Directors of CME. He 
or she can relay any concerns addressed by the CDS Risk Committee to 
the full CME Board of Directors. CME noted that the CDS Risk Committee 
is required to reassess the adequacy of this Charter on an annual basis 
and submit any recommended changes to the full CME Board of Directors 
for approval. CME believes these features provide a concrete nexus 
between the activities of the CDS Risk Committee and the full CME Board 
of Directors and ensure that there will be a fair representation of CDS 
Clearing Members in accordance with the spirit and letter of the Act.
    Based on the representations made by CME, as described above, the 
Commission believes that CME's governance structure could accommodate 
fair representation of the clearing agency's shareholders (or members) 
and participants in the selection of CME's directors and administration 
of its affairs, consistent with Section 17A(b)(3)(C) of the Act.\48\ 
The Commission intends to monitor these governance arrangements over 
time for consistency with fair representation requirement, taking into 
consideration the interaction between the CDS Risk Committee, including 
its Chairman, with the CME Board of Directors, any changes to the 
composition of the CDS Risk Committee relative to that of the CME Board 
of Directors, the scope and proportion of CME's CDS clearing relative 
to its other activities, and other facts and circumstances as 
appropriate.
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    \48\ 15 U.S.C. 78q-1(b)(3)(C).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \49\ and the 
rules and regulations thereunder. It is therefore ordered, pursuant to 
Section 19(b)(2) of the Act,\50\ that the proposed rule change (File 
No. SR-CME-2012-26) be, and hereby is, approved.\51\
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    \49\ 15 U.S.C. 78q-1.
    \50\ 15 U.S.C. 78s(b)(2).
    \51\ 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).
    \52\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30648 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P


