
[Federal Register Volume 78, Number 192 (Thursday, October 3, 2013)]
[Notices]
[Pages 61437-61439]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24242]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70558; File No. SR-CME-2013-22]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to the Liquidity Factor of CME's CDS Margin Methodology

September 30, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on September 19, 2013, 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. CME filed the 
proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-
4(f)(4)(ii) thereunder,\4\ 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 for 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)(4)(ii).
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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 CDS margin model. The proposed rule change is described 
below. Italicized text indicates additions; bracketed text indicates 
deletions.
* * * * *

CME CDS Liquidity Margin Factor Calculation Methodology

    The Liquidity Factor will be calculated as the sum of two 
components:
    (1) A concentration charge for market exposure as a function of 
absolute Spread DV01 (a portfolio sensitivity to 1% par spread shock); 
and
    (2) A concentration charge for portfolio basis exposure as a 
function of Residual Spread DV01 (which is the difference between the 
Gross Spread DV01 and the Net Spread DV01 of the portfolio).
    CME will also establish a floor component to the Liquidity Factor 
using the current Gross Notional Function with the following 
modifications: (1) the concentration scalar will be removed; and (2) 
the maximum DST would be replaced by series-tenor specific DST values 
based on the series and tenor of the relevant HY and IG positions, as 
applicable.
* * * * *

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 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 such 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 the credit default swap (``CDS'') index products 
accepted for clearing at CME. 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

[[Page 61438]]

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 risk factor. This CDS 
margin model component is designed to capture the risk that 
concentrated positions may be difficult or costly to unwind following 
the default of a CDS clearing member. The adjustment will only affect 
the margining of CDS index products at CME which are under the 
exclusive jurisdiction of the Commodity Futures Trading Commission 
(``CFTC'').
The Liquidity Risk Factor in CME's Current CDS Margin Model
    The current liquidity/concentration factor (the ``Liquidity 
Factor'') of CME's margin methodology for a portfolio of CDS indices is 
the product of (1) the gross notional amount for each family (i.e., CDX 
IG or CDX HY) of CDS positions in a portfolio (2) the current bid/ask 
of the 5 year tenor of the ``on the run'' (OTR) contract (3) the 
Duration/Series/Tenor (``DST'') factor and (4) a concentration factor 
based upon the gross notional for each of the CDX IG and CDX HY 
contracts (the ``Gross Notional Function''). The associated margin for 
a CDS portfolio attributed to the Liquidity Factor is the sum of the 
Liquidity Factor calculations for each family of CDS positions in the 
portfolio.
    The calculation of the Liquidity Factor is based on the premise 
that the 5-year OTR index is the most liquid CDS index product. As 
such, the methodology is designed to evaluate the liquidity exposure of 
each position in a CDS portfolio relative to the 5-year OTR index.
    For each index family (i.e., CDX IG and CDX HY), a DST matrix is 
calculated based on the historical bid-ask averages of each cleared 
position relative to the OTR 5-year historical bid-ask averages. Then, 
the maximum DST values are used as the DST factors. Such maximum DST 
factors are then applied to the product of 5-year OTR bid-ask spread 
(adjusted for duration for CDX IG only) and the Gross Notional of all 
positions within each index family. The resulting products are further 
scaled by concentration factors in order to account for oversized (as 
measured by Gross Notional) portfolios. The concentration factors are 
based on exponential functions of the Gross Notional of each index 
family in a given portfolio.
Proposed Changes to the Liquidity Risk Factor
    As liquidation costs are dependent on the risk in a portfolio, CME 
is proposing to use an index portfolio's market risk rather than its 
gross notional as the basis for determining the margins associated with 
the Liquidity Factor. The proposed changes would calculate the 
Liquidity Factor as the sum of two components:
    (1) A concentration charge for market exposure as a function of 
absolute Spread DV01 (a portfolio sensitivity to 1% par spread shock); 
and
    (2) A concentration charge for portfolio basis exposure as a 
function of Residual Spread DV01 (which is the difference between the 
Gross Spread DV01 and the Net Spread DV01 of the portfolio).
    CME expects that these proposed changes would not generally impact 
smaller portfolios whose liquidation costs are driven by the market 
bid/ask spread rather than by the cost of hedging, and are therefore 
adequately captured by the existing Liquidity Factor methodology. To 
account for the risks associated with such smaller portfolios, CME also 
proposes to establish a floor component to the Liquidity Factor using 
the current Gross Notional Function described above with the following 
modifications: (1) The concentration scalar would be removed as 
concentration risk would already be accounted for by the concentration 
charge component outlined above; and (2) the maximum DST would be 
replaced by series-tenor specific DST values based on the series and 
tenor of the relevant HY and IG positions, as applicable. CME expects 
that large (by notional amount) portfolios will be impacted by the 
proposed changes more than smaller portfolios.
    The changes only affect CME's broad-based CDS index clearing 
offering and do not materially impact CME's security-based swap 
clearing business. The proposed liquidity risk factor model adjustments 
do not require any changes to rule text in the CME rulebook and do 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. CME also notes that it has also 
submitted the proposed rule changes that are the subject of this filing 
to its primary regulator, the CFTC, in a separate filing.
    CME believes the proposed rule changes are consistent with the 
requirements of the Exchange Act including Section 17A of the Exchange 
Act.\5\ The proposed rule changes involve enhancements to CME's current 
CDS margin methodology and are therefore designed to promote the prompt 
and accurate clearance and settlement of securities transactions and, 
to the extent applicable, derivatives 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, and, in general, to protect investors and the public 
interest consistent with Section 17A(b)(3)(F) of the Exchange Act.\6\ 
The proposed rule changes accomplish these objectives because the 
changes are intended to incorporate how the liquidity risk factor is 
affected by not only portfolio concentration based on gross notional, 
but also the composition of the portfolio based on an underlying 
strategy. The proposed rule changes help to better align CME's margin 
methodology with the liquidity profile of the actual instruments in a 
given portfolio and as such contribute to the safeguarding of 
securities and funds in CME's custody or control or for which CME is 
responsible and the protection of investors.
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    \5\ 15 U.S.C. 78q-1.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    Furthermore, the proposed changes are limited in their effect to 
swaps products offered under CME's authority to act as a derivatives 
clearing organization. These products are under the exclusive 
jurisdiction of the CFTC. As such, the proposed CME changes are limited 
to CME's activities as a derivatives clearing organization clearing 
swaps that are not security-based swaps; CME notes that the policies of 
the CFTC with respect to administering the Commodity Exchange Act are 
comparable to a number of the policies underlying the Exchange Act, 
such as promoting market transparency for over-the-counter derivatives 
markets, promoting the prompt and accurate clearance of transactions 
and protecting investors and the public interest.
    Because the proposed changes are limited in their effect to swaps 
products offered under CME's authority to act as a derivatives clearing 
organization, the proposed changes are properly classified as effecting 
a change in an existing service of CME that:
    (a) Primarily affects the clearing operations of CME with respect 
to products that are not securities, including futures that are not 
security futures, and swaps that are not security-based swaps or mixed 
swaps; and
    (b) Does not significantly affect any securities clearing 
operations of CME or

[[Page 61439]]

any rights or obligations of CME with respect to securities clearing or 
persons using such securities-clearing service.
    As such, the changes are therefore consistent with the requirements 
of Section 17A of the Exchange Act \7\ and are properly filed under 
Section 19(b)(3)(A) \8\ and Rule 19b-4(f)(4)(ii) \9\ thereunder.
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    \7\ 15 U.S.C. 78q-1.
    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(4)(ii).
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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 rule changes 
simply involve enhancements to CME's current CDS margin methodology.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    CME has not solicited 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 become effective upon filing pursuant 
to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(4)(ii) \11\ 
thereunder. 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 investors, or 
otherwise in furtherance of the purposes of the Act.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(4)(ii).
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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-2013-22 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-2013-22. 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 or 
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/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 should refer to File Number SR-CME-2013-22 
and should be submitted on or before October 24, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24242 Filed 10-2-13; 8:45 am]
BILLING CODE 8011-01-P


