
[Federal Register Volume 78, Number 138 (Thursday, July 18, 2013)]
[Notices]
[Pages 42992-42994]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-17195]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69981; File No. SR-CME-2013-08]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Regarding Existing CDS Credit Limits

July 12, 2013.
    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 June 28, 2013, Chicago Mercantile Exchange Inc. (``CME'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change described in Items I, II and III below, which Items have 
been prepared primarily by CME. CME filed the proposed rule change 
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(1) \4\ 
thereunder, so that the proposal was effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The text of the proposed change is below. Italicized text indicates 
additions; bracketed text indicates deletions.
* * * * *
TO: Clearing Member Firms; Back Office Managers
FROM: CME Clearing
DATE: June ----, 2013
ADVISORY : 13-XXX
SUBJECT: CDS Clearing Member Risk Limits

    Effective July 15, 2013, CME Clearing will use technology 
automation to impose risk limits on Clearing Members for Credit Default 
Swap (CDS) Products. Pre-trade credit limits for CDS trade submission 
at the Clearing Member Firm level will now be automated. As you know, 
Clearing Member Firms currently have the ability to set CME-hosted 
credit limits for CDS on a customer account by customer account basis. 
With this change, CME Group will automate CDS credit limits on a 
Clearing Member Firm level, in addition to continuing to allow clearing 
member firms to maintain customer account by customer account credit 
limits. This is similar to the process that CME Clearing has in place 
for its interest rate swap offering, except this limit is based on 
margin.
    CME Clearing will determine one maintenance margin limit for each 
Clearing Member Firm's customer and house origins. The utilization of 
this limit will be based on the same margin methodology that CME 
Clearing currently uses on a daily basis to calculate margin for each 
clearing member firm.
    Please note that this limit will be a daily limit and will be based 
on trades executed for the current trade date only. In other words, the 
calculation is reset daily, and it does not reflect the exposure of any 
open trades prior to the current trade date.
    Three hypothetical examples of the calculation of the utilization 
are outlined below:
    Trade 1: Customer A executes a buy-protection $100M notional 
CDXHY20 5yr trade with Clearing Member Firm B equivalent to $5M in 
margin for the current trade date.
    Trade 2: Customer C then executes a sell-protection $100M notional 
CDXHY20 5yr trade with Clearing Member Firm B for the current trade 
date.
    Example 1: Credit Utilization--Same Trade Dates

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                                                   After trade 1                     After trade 2
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Clearing Member Firm B House Origin.........                      $5M  $0M (offsetting).
Clearing Member Firm B Customer Origin......                       5M  0M (offsetting).
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    Now, if the 2nd trade was executed on the following trade date:
    Example 2: Credit Utilization--Different Trade Dates

[[Page 42993]]



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                                                   After trade 1                    After trade 2 *
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Clearing Member Firm B House Origin.........                      $5M  $5M (not offsetting).
Clearing Member Firm B Customer Origin......                       5M  5M (not offsetting).
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* Assuming the margin on the buy-protection trade and sell-protection trade are equivalent.

    Further, using the original 2 trades above as the base case, if the 
2nd trade was now buy-protection (instead of sell-protection):
    Example 3: Credit Utilization--Same Trade Dates--Directional

----------------------------------------------------------------------------------------------------------------
                                                                     After trade 1           After trade 2 **
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Clearing Member Firm B House Origin...........................                      $5M                     $10M
Clearing Member Firm B Customer Origin........................                       5M                      10M
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** Assuming the portfolio margin of trades 1 and 2 combined is 10M.

    A consequence of pre-trade credit limit automation is that CDS 
transactions that exceed the daily limit will be rejected for clearing. 
We will continue to communicate via email and telephone to work with 
your firm if your utilizations are approaching their limits. In the 
future, we will provide firms with access to a separate view in RAV 
Manager with the ability to view your Clearing Member Firm and Origin 
level limits and utilizations.
    If you have questions about the calculation or the specific limit 
in place for your Clearing Member Firm, please contact the CME Clearing 
Risk at clearing.riskmanagement@cmegroup.com or 312-648-3888.
    For all other questions, please contact the CME Client Services 
Team at onboarding@cmegroup.com or 312-338-7112.
* * * * *

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

    In its filing with the Commission, the self-regulatory organization 
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 IV below. The self-regulatory organization 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 the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On May 7, 2012, CME implemented risk limits that apply to clearing 
members clearing credit default swaps in compliance with CFTC 
Regulation 39(h)(1).\5\ CME has been enforcing those limits manually 
since that date.
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    \5\ The Commission believes, and CME has confirmed, that CME 
intended to reference CFTC Regulation 39.13(h)(1).
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    CME now proposes to issue a notice announcing CME's intention to 
begin enforcing these same limits through automated means. More 
specifically, the CME Clearing Advisory Notice would inform clearing 
members and market participants that CME Clearing will, beginning on 
July 15, 2013, automate the manner in which it imposes clearing member 
risk limits for credit default swap transactions, a process that is 
intended to result in a more effective and efficient imposition of 
clearing member risk limits for credit default swap transactions. Thus, 
CDS transactions that exceed the limits will now be automatically 
rejected for clearing based on the new pre-trade credit limit 
automation.
    The proposed rule changes that are the subject of this filing will 
become immediately effective. CME notes that it has also certified the 
proposed rule changes that are the subject of this filing to its 
primary regulator, the Commodity Futures Trading Commission (``CFTC'').
    CME believes the proposed rule changes are consistent with the 
requirements of the Exchange Act including Section 17A of the Exchange 
Act. The proposed rule changes are designed to result in a more 
effective and efficient imposition of clearing member risk limits for 
credit default swap transactions, and as such are designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions and derivatives agreements, contracts and transactions, 
and to assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency and, in general, help to 
protect investors and the public interest. Furthermore, the proposed 
change does not announce new credit limits but rather new automated 
means of enforcing existing credit limits. As such, the proposed 
amendments constitute a stated policy, practice, or interpretation with 
respect to the meaning, administration, or enforcement of an existing 
CME rule. Therefore, the proposed rule change is therefore properly 
filed under Section 19(b)(3)(A) and Rule 19b-4(f)(1) thereunder.

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. The proposed change 
informs market participants that CDS transactions that exceed the 
currently applicable credit limits will now be automatically rejected 
for clearing. Imposing automated means of enforcing an existing rule 
should not be seen to have any competitive impact.

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

    The foregoing rule change has been filed pursuant to Section 
19(b)(3)(A) \6\ of the Act and paragraph (f)(1) of Rule 19b-4 \7\ 
thereunder and will become effective on filing. At any time within 60 
days of the filing of the proposed rule change, the Commission 
summarily may temporarily suspend such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of

[[Page 42994]]

investors, or otherwise in furtherance of the purposes of the Act.
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    \6\ Supra note 3.
    \7\ Supra note 4.
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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 Commission's 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-2013-08 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-2013-08. 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 
10:00 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 (http://www.cmegroup.com/market-regulation/files/sec_19b-4_13-08.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-2013-08 
and should be submitted on or before August 8, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-17195 Filed 7-17-13; 8:45 am]
BILLING CODE 8011-01-P


