
[Federal Register Volume 79, Number 159 (Monday, August 18, 2014)]
[Notices]
[Pages 48797-48801]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19526]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72833; File No. SR-CME-2014-31]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing of Proposed Rule Change Related to Clearing of Certain 
iTraxx Europe Index Untranched CDS Contracts on Indices Administered by 
Markit

August 13, 2014.
    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 August 11, 2014, 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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed changes to CME's clearing rules (the 
``CDS Product Rules'') is to enable CME to offer clearing of certain 
iTraxx Europe index untranched CDS contracts on indices administered by 
Markit (``iTraxx Contracts''). All capitalized terms not defined herein 
shall have the meaning given to them in the CDS Product Rules.
    CME is submitting the proposed amendments to the iTraxx Chapters 
(as defined in Item II, paragraph 2 below) to become effective on 
September 22, 2014, subject to receiving all regulatory approvals. The 
effectiveness of the 2014 iTraxx Chapters (also as defined in Item II, 
paragraph 2 below) is intended to coincide with the date on which the 
credit derivatives market transitions to the 2014 Credit Derivatives 
Definitions published by ISDA (the ``2014 ISDA Definitions''), which is 
currently anticipated to be September 22, 2014. As such, CME is 
submitting the

[[Page 48798]]

proposed amendments to the 2014 iTraxx Chapters to become effective on 
September 22, 2014, subject to receiving all regulatory approvals, or 
on such later date that CME otherwise determines. To the extent that 
the credit derivatives market does not transition to the 2014 ISDA 
Definitions, the proposed 2014 iTraxx Chapters may not become 
effective.
    The text of the proposed change is also available at the CME's Web 
site at http://www.cmegroup.com, at the principal office of CME, and at 
the Commission's Public Reference Room.

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

1. Description of the Current CDS Product Rules
    CME is registered as a DCO with the Commodity Futures Trading 
Commission (``CFTC'') and offers clearing services for many different 
futures and swaps products, including certain CDS index products. 
Currently, CME offers clearing of (i) the Markit CDX North American 
Investment Grade Index Series 8 and forward and (ii) the Markit CDX 
North American High Yield Index Series 13 and forward ((i) and (ii) 
collectively, the ``CDX Contracts'').
    The primary purpose and effect of the proposed changes to the CDS 
Product Rules is to enable CME to offer clearing of iTraxx Contracts 
under CME's authority to act as a DCO. iTraxx Contracts have similar 
terms to CDX Contracts currently cleared by CME. Accordingly, the 
proposed rules largely mirror the CME rules for CDX Contracts, with 
certain modifications that reflect the differing underlying reference 
entities, different standard currencies and other logistical 
differences in how the markets and documentation for iTraxx Contracts 
operate. The iTraxx Contracts reference the iTraxx Europe index, the 
current series of which consists of 125 European corporate reference 
entities. The credit protection offered by iTraxx Contracts and any 
Restructuring European Single Name CDS Contract consistent with market 
convention and widely used standard terms documentation, can be 
triggered by credit events, including failure to pay, bankruptcy, 
restructuring and, in respect of transactions that will reference the 
2014 ISDA Definitions (such transactions, ``2014 Definitions 
Transactions'') governmental intervention. iTraxx Contracts will be 
denominated in Euro.
    CME notes that upon the occurrence of a restructuring credit event 
with respect to a reference entity that is a component of an iTraxx 
Contract, such reference entity will be ``spun out'' and maintained as 
a separate single-name CDS contract (a ``Restructuring European Single 
Name CDS Contract'') until settlement. If neither of the counterparties 
elects to trigger settlement, the positions in the Restructuring 
European Single Name CDS Contract will be maintained at CME until 
maturity of the index or the occurrence of a subsequent credit event 
for the same reference entity. However, CME will not permit market 
participants to increase, close out (other than due to the occurrence 
of a credit event) or otherwise affect the size of a position in a 
Restructuring European Single Name CDS Contract and CME has included 
language in its proposed rule change to this effect. CME notes that it 
may impose an increase or decrease in the position of a Restructuring 
European Single Name CDS Contract through its PQA process or its 
default management process.
    To the extent that a Restructuring European Single Name CDS 
Contract is created, CME will either (i) obtain any relief needed to 
permit a clearing member to maintain customer money, securities, and 
property received by the clearing member to margin, guarantee, or 
secure customer positions in cleared CDS Contracts, which include both 
swaps and security-based swaps, in a segregated account established and 
maintained in accordance with Section 4d(f) of the Commodity Exchange 
Act (``CEA'') and the rules thereunder for the purpose of clearing such 
positions under a program to comingle and portfolio margin CDS, or (ii) 
will hold customer positions in Restructuring European Single Name CDS 
Contracts and any margin in connection with such Restructuring European 
Single Name CDS Contracts in segregated accounts or take any other 
action required in order to comply with the provisions of the Exchange 
Act or any order or relief thereunder.
2. Description of the Proposed Changes to the CDS Product Rules
    CME is proposing to amend its CDS Product Rules by amending Chapter 
801 and adding new Chapters 800: Part B, 804: Part B, 805: Part C, 806: 
Part B and Appendix 805: Part B (collectively, the ``iTraxx 
Chapters''). CME is also proposing to add new Chapters 805: Part B, 
806: Part A and Appendix 805: Part A (together, the ``2014 iTraxx 
Chapters''). CME also proposes to make corresponding changes to its CDS 
Manual of Operations to provide for the clearance of iTraxx Contracts.
    CME will update its list of products eligible for clearing which is 
available on its Web site at http://www.cmegroup.com/trading/cds/cleared-cds-product-specs.xls, to incorporate the additional cleared 
products. Upon Commission approval, CME intends to provide for the 
clearance of the following European Indices: Markit iTraxx Europe Main 
3Y: Series 17 and all subsequent Series, up to and including the 
current on-the-run Series, Markit iTraxx Europe Main 5Y: Series 17 and 
all subsequent Series, up to and including the current on-the-run 
Series, Markit iTraxx Europe Main 7Y: Series 17 and all subsequent 
Series, up to and including the current on-the-run Series, Markit 
iTraxx Europe Main 10Y: Series 17 and all subsequent Series, up to and 
including the current on-the-run Series, and Markit iTraxx Europe 
Crossover 5Y: Series 17 and all subsequent Series, up to and including 
the current on-the-run Series.
    Certain iTraxx Contracts which CME proposes to clear will, 
following the implementation date of the 2014 ISDA Definitions, be 
bifurcated such that certain component transactions will continue to 
reference the 2003 Credit Derivatives Definitions published by ISDA, as 
supplemented in 2009 (the ``2003 ISDA Definitions'') (such 
transactions, ``2003 Definitions Transactions''), and certain other 
component transactions will be 2014 Definitions Transactions. As a 
result of the abovementioned bifurcation, CME proposes to split 
Chapters 800, 804 and 805 of its current rules into separate sub-parts 
and to introduce a new Chapter 806 and a new Appendix to Chapter 805 
(each of which will also be split into sub-parts) to allow for the 
separate treatment of iTraxx component transactions depending on 
whether such transactions are 2014 Definitions Transactions or 2003 
Definitions Transactions.

[[Page 48799]]

2.1 Chapter 800 (Credit Default Swaps: Part B)
    CME proposes to add a sub-part to Chapter 800 entitled ``Credit 
Default Swaps: Part B.'' Chapter 800: Part B provides the meanings of 
capitalized terms that are used but not defined within the proposed 
rules and the location of the meanings of any terms used in the 
proposed rules but not defined within Chapter 800: Part B. In addition, 
CME has included CME Rule 80002.B (Interpretation) which provides for 
the interpretation of certain contractual terms used within the 
proposed rules and CME Rule 80003.B (Notices and Clearing House System 
Failures) which provides for how notices are to be provided by, or to, 
CME and also for the extension of applicable deadlines for the delivery 
of notices if CME, or any of its clearing members, is unable to deliver 
or receive notices due to a failure of the relevant CME internal 
system. CME notes that CME Rule 80002.B and CME Rule 80003.B (each as 
described in the aforementioned sentence) are substantially similar to 
CME Rule 80002 and CME Rule 80003, respectively, that are provided in 
the currently published Chapter 800.
2.2 Chapter 801 (CDS Contracts)
    CME proposes to amend Chapter 801 (CDS Contracts) to include in CME 
Rule 80103.C. (Eligible CDS) an additional provision which describes 
when an iTraxx Contract will be eligible for clearing and other 
conforming, clarification changes and drafting improvements.
2.3 Chapter 804 (CME CDS Risk Committee: Part B)
    CME proposes to add a sub-part to Chapter 804 entitled ``CME CDS 
Risk Committee: Part B'' to apply only in connection with 2003 
Definitions Transactions. Chapter 804: Part B will not contain any 
iTraxx specific provisions, but will be created in anticipation of the 
currently published Chapter 804 being updated to operate in conjunction 
with the 2014 ISDA Definitions. Chapter 804: Part B is substantially 
similar to the currently published Chapter 804 with the exception that 
Chapter 804: Part B grants an additional authority to the CDS RC to 
determine matters of contractual interpretation relevant to market 
standard documentation incorporated into the terms of a CDS Contract. 
In addition, modifications have been made in order to ensure alignment 
of the CDS Product Rules with the current market practices (as proposed 
by ISDA) to clarify the circumstances under which the CDS RC may make 
such determinations to avoid determinations that are inconsistent with 
DC determinations, and other conforming, clarification changes and 
drafting improvements.
2.4 Chapter 805 (CME CDS Physical Settlement: Part B), Chapter 805 (CME 
CDS Physical Settlement: Part C) and CDS Participant Provisions 
Appendix
    CME proposes to add two sub-parts to Chapter 805 entitled ``CME CDS 
Physical Settlement: Part B'' and ``CME CDS Physical Settlement: Part 
C.'' CME notes that it is anticipated that the currently published 
Chapter 805 will be amended and referred to as ``Part A'' as part of 
CME's amendments to its CDS Product Rules to incorporate the 2014 ISDA 
Definitions, but that such amendments will not take into account the 
required iTraxx specific changes that would need to be made to Chapter 
805 in order for CME to clear iTraxx Contracts. Chapter 805: Part B 
will apply only in connection with 2014 Definitions Transactions and 
Chapter 805: Part C will apply only in connection with 2003 Definitions 
Transactions. In general, both Chapter 805: Part B and Chapter 805: 
Part C provide for the physical settlement process that will apply as 
the fallback settlement method with respect to iTraxx Contracts and 
Restructuring European Single Name CDS Contracts in circumstances where 
auction settlement does not apply. The substance of the new provisions 
is based on the fallback physical settlement provisions that apply for 
CDX Contracts, with some additional features addressing the product 
terms particular to iTraxx Contracts and some further clarification and 
detail in light of the increased likelihood of physical settlement 
being applicable to iTraxx Contracts and Restructuring European Single 
Name CDS Contracts. These additional features are described in further 
detail below.
    CME Rules 80502.B.A and 80502.C.A (Matched Pair Notice) provide 
additional detail in relation to the matching process. The additions do 
not substantively alter the CDS Product Rules but rather, seek to 
provide greater clarity with respect to the current matching process 
and how such process will work in respect of iTraxx Contracts.
    CME Rules 80502.B.C and 80502.C.D (Notices) have been updated to 
provide additional detail around the notice procedures in light of the 
more complex notice requirements following a restructuring credit event 
with respect to an iTraxx Component Transaction or a Restructuring 
European Single Name CDS Contract. As a result of the more complex 
notice requirements, CME proposes to insert in CME Rule 80502.B.D and 
80502.C.E (Disputes as to Notices) a more comprehensive dispute process 
in relation to the effective delivery of notices to preserve more 
accurately the economic effect of the delivery of certain notices.
    CME Rule 80503.B and 80503.C (Physical Settlement of Non DVP 
Obligations) provide greater clarity with respect to the timing of the 
delivery of Non DVP Obligations and payment of the related portion of 
the Physical Settlement Amount. In addition, the allocation of any 
expenses incurred in connection with physical settlement is now 
expressly contemplated.
    CME Rule 80507.B and 80507.C (Clearing House Guarantee of Matched 
Pair CDS Contracts) and CME Rule 80508.B and 80508.C (Failure to 
Perform Under Matched Pair CDS Contracts) have been updated to align 
the matching process with the general physical settlement provisions of 
CME as set out in Chapter 7 (Delivery Facilities and Procedures).
    CME also proposes to add an Appendix to Chapter 805 which will be 
split into two sub-parts. Appendix: Part A will apply only in 
connection with 2014 Definitions Transactions and Appendix: Part B will 
apply only in connection with 2003 Definitions Transactions. The 
Appendix primarily sets out provisions dealing with physical settlement 
and the delivery of notices between clearing members and their 
customers. The provisions are intended to facilitate the delivery of 
notices and physical settlement. The Appendix is intended to apply to 
all CDS contracts; however, the provisions are for the convenience of 
the clearing members and their customers and will not bind CME. The 
Appendix includes provisions addressing (i) the timing of the delivery 
of physical notices in a chain of transactions between the clearing 
house, the clearing members and their customers, (ii) when notices, 
requests or instructions between a clearing member and its customer are 
effective, (iii) the delivery of deliverable obligations between a 
clearing member and its customer, (iv) circumstances where a fallback 
to cash settlement will be deemed to apply, (v) buy-in of bonds not 
delivered and the circumstances around the effective delivery of a buy-
in notice, and (vi) alternative procedures relating to loans not 
delivered and the circumstances around the effective delivery of an 
alternative loan buyer notice. The Appendix will only be relevant to 
CME CDS Physical

[[Page 48800]]

Settlement, and not when auction settlement applies and is therefore 
unlikely to be applicable to settlement in most cases.
2.5 Chapter 806 (iTraxx Europe Index Untranched CDS Contracts: Part A) 
and Chapter 806 (iTraxx Europe Index Untranched CDS Contracts: Part B)
    CME proposes to add Chapter 806 which will be split into two sub-
parts entitled ``iTraxx Europe Index Untranched CDS Contracts: Part A'' 
and Chapter 806 ``iTraxx Europe Index Untranched CDS Contracts: Part 
B.'' Chapter 806: Part A will apply only in connection with 2014 
Definitions Transactions and Chapter 806: Part B will apply only in 
connection with 2003 Definitions Transactions.
    CME Rules 80601.A and 80601.B (Scope of Chapter) set forth the 
applicable standard terms relevant for iTraxx Component Transactions 
and where the terms and conditions for Restructuring European Single 
Name CDS Contracts are set out. Further, it is clarified that unless a 
restructuring credit event occurs, no iTraxx Component Transaction will 
be fungible with a European single name CDS contract.
    CME Rules 80602.A and 80602.B (Contract Terms) reflect or 
incorporate the basic contract specifications for iTraxx Contracts and 
Restructuring European Single Name CDS Contracts and are substantially 
similar to under CME Rule 80202 (Contract Terms) for CDX Contracts. 
Similarly CME Rules 80603.A and 80603.B (Contract Modifications) are 
substantially similar to under CME Rule 80203 (Contract Modifications) 
for CDX Contracts, except for conforming changes.
    In addition, CME Rule 80604.A and 80604.B (Restructuring) have been 
added to reflect the fact that restructuring is a credit event for 
iTraxx Contracts and Restructuring European Single Name CDS Contracts, 
that governmental intervention is a credit event for certain 2014 
Definitions Transactions, and that Restructuring European Single Name 
CDS Contracts may be created. In addition, CME has inserted (i) a 
notice delivery procedure to address the delivery of restructuring 
credit event notices and notices to exercise movement options, (ii) a 
process to separate any matched restructuring pairs following an 
announcement that a restructuring credit event did not in fact occur, 
(iii) provisions relating to the identification of the reference 
obligation for a Restructuring European Single Name CDS Contract, (iv) 
a comprehensive dispute process in relation to the effective delivery 
of restructuring credit event notices and notices to exercise movement 
options that are delivered directly (not via DTCC), and (v) a procedure 
for CME to communicate certain information received from DTCC, or from 
its clearing members, as applicable, to the relevant clearing members 
via reports.
3. CDS Risk Model
    CME has submitted to the Commission a proposed rule change to 
enhance its risk model for CDS, File Number SR-CME-2014-28 (the ``CDS 
Risk Model'') for the purposes of enabling CME to offer clearing of 
additional CDS instruments, including iTraxx Contracts, within the CDS 
Risk Model. CDS Risk Model enhancements applicable to clearing iTraxx 
Contracts include, in particular, changes to address self-referencing 
risk and foreign exchange risk. Such filing is currently pending 
regulatory approval by the Commission. CME will not implement the 
proposed rule change in this filing and will not begin to clear iTraxx 
Contracts until it has received receipt of regulatory approval of the 
proposed rule change in File Number SR-CME-2014-28.
4. 2014 ISDA Credit Derivatives Definitions
    CME has submitted to the Commission a proposed rule change to amend 
its CDS Product Rules to incorporate references to the 2014 ISDA 
Definitions, File Number SR-CME-2014-30 (the ``2014 Filing''). 
Implementation of the 2014 iTraxx Chapters is dependent on the approval 
and implementation of the proposed rule change contained in the 2014 
Filing. As a result, the text of the proposed rule change to the 2014 
iTraxx Chapters contained in Exhibit 5 should be read in conjunction 
with the text of the proposed rule change in Exhibit 5 to the 2014 
Filing. CME will not implement the 2014 iTraxx Chapters until it has 
received receipt of regulatory approval of the proposed rule change 
contained in the 2014 Filing.
    CME has identified iTraxx Contracts as products that have become 
increasingly important for market participants to manage risk with 
respect to European corporate and financial entities' credit risk. CME 
believes the proposed changes to its CDS Product Rules are consistent 
with the requirements of the Exchange Act, including Section 17A of the 
Exchange Act.\3\ The proposed changes which will facilitate CME's 
clearance of iTraxx Contracts would expand CME's CDS index product 
offering and would therefore provide investors with an expanded range 
of derivatives products for clearing. CME notes that the facilitation 
of clearance of iTraxx Contracts is of particular importance as the 
CFTC has determined that iTraxx Contracts that are subject to a 5Y or 
10Y tenor are subject to mandatory clearing under Section 2(h) of the 
Commodity Exchange Act (``CEA'').\4\ As such, the proposed changes are 
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.\5\
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    \3\ 15 U.S.C. 78q-1.
    \4\ 7 U.S.C. 2(h).
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the proposed rule change would have any 
impact, or impose any burden, on competition. On the contrary, the 
clearance of iTraxx Contracts will promote competition since some of 
CME's competitors, including ICE Clear Credit LLC, ICE Clear Europe 
Limited and LCH.Clearnet S.A., already offer clearing of iTraxx 
Contracts. CME will therefore be able to provide market participants 
with an expanded choice for clearing iTraxx Contracts.

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

    Written comments relating to the CDS Product Rules have not been 
solicited, or received. CME will notify the Commission of any written 
comments received by CME.

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 such proposed rule change, or

[[Page 48801]]

    (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 Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-CME-2014-31 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC, 20549-1090.

All submissions should refer to File Number SR-CME-2014-31. 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-2014-31 
and should be submitted on or before September 8, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary .
[FR Doc. 2014-19526 Filed 8-15-14; 8:45 am]
BILLING CODE 8011-01-P


