
[Federal Register Volume 79, Number 160 (Tuesday, August 19, 2014)]
[Notices]
[Pages 49132-49136]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19581]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72837; File No. SR-CME-2014-30]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing of Proposed Rule Change Related to 2014 ISDA 
Definitions

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 (i) incorporate references to revised 
Credit Derivatives Definitions, as published by the International Swaps 
and Derivatives Association, Inc. (``ISDA'') on February 21, 2014 (the 
``2014 ISDA Definitions''), which are the successor definitions to the 
2003 Credit Derivatives Definitions published by ISDA and as 
supplemented in 2009 (together, the ``2003 ISDA Definitions'') and (ii) 
provide greater clarity with respect to the operation of certain 
provisions in the CDS Product Rules. CME is submitting the proposed 
amendments to the CDS Product Rules to incorporate references to the 
2014 ISDA Definitions. The effectiveness of the Proposed CME Rules is 
intended to coincide with the date on which the credit derivatives 
market is expected to transition to the 2014 ISDA Definitions, which is 
currently anticipated to be September 22, 2014. As such, the Proposed 
CME

[[Page 49133]]

Rules will become effective on September 22, 2014 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 CME Rules will 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. Purpose
    CME is submitting the proposed amendments to the CDS Product Rules 
to incorporate references to the 2014 ISDA Definitions to be effective 
by the proposed industry implementation date of September 22, 2014. It 
is CME's intention that, following the date on which the 2014 ISDA 
Definitions are implemented, the 2014 ISDA Definitions will apply to 
both (i) open positions cleared by CME (the ``Converting Contracts'') 
and (ii) new CDS contracts cleared by CME, consistent with market 
practice. In furtherance of this, CME proposes to make conforming 
changes throughout the CDS Product Rules to refer to and/or conform to 
the 2014 ISDA Definitions. Additionally, CME proposes to add provisions 
to the CDS Product Rules to provide for the deemed amendment of all 
Converting Contracts on the date on which the 2014 ISDA Definitions are 
implemented.
a. Key 2014 ISDA Definition Changes
    The 2014 ISDA Definitions make changes to a number of the standard 
terms with respect to CDS contracts when compared to the 2003 ISDA 
Definitions. Key changes include the introduction of new provisions 
relating to:
    (i) The settlement of credit events relating to financial and 
sovereign reference entities by delivery of assets other than bonds or 
loans that constitute deliverable obligations,
    (ii) Transactions that would be impacted by a government bail-in of 
certain financial reference entities,
    (iii) Standard reference obligations for certain more frequently 
traded reference entities, and
    (iv) Other technical amendments and improvements.\3\
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    \3\ See ISDA Press Release describing the 2014 Definitions at 
http://www2.isda.org/news/isda-publishes-isda-2014-credit-derivatives-definitions.
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    Of particular note in relation to the CME's proposed changes to the 
CDS Product Rules are the impact of the modifications to the 2014 ISDA 
Definitions relating to (i) the Successor provisions and (ii) the 
inclusion of Asset Package provisions. Notwithstanding the proposed 
changes to the CDS Product Rules relating to Asset Package provisions, 
none of the CDS products that CME currently clears are anticipated to 
be subject to and/or impacted by such changes.
b. Description of Proposed CME Rule Changes
    The proposed changes will primarily provide for the conversion of 
existing contracts which are currently based on the 2003 ISDA 
Definitions into contracts based on the 2014 ISDA Definitions in 
conformance with the anticipated Protocol and allow for new cleared CDS 
products to incorporate the 2014 Definitions.
    CME proposes to amend Chapters 800, 801, 802, 804, and 805 of the 
CDS Product Rules to align them with the 2014 ISDA Definitions. A 
concise description of the changes relating to the 2014 ISDA 
Definitions is set out below. Several provisions are being revised to 
include references to the 2014 ISDA Definitions and the DC Secretary, 
as appropriate. Non-substantive conforming changes and numbering 
changes have been made as well.
1. Chapter 800 (Credit Default Swaps)
    Introductory language has been added to CME Rule 80001 
(Definitions) to consolidate provisions relating to which definitions 
will govern Chapters 800-805. Corresponding deletions have been made to 
CME Rule 80101 (Scope of Chapter) and CME Rule 80501.A (Scope of 
Chapter). Other than the reference to the new 2014 ISDA Definitions, 
the CDS Product Rules are substantively unchanged by this modification.
    CME Rule 80001 (Definitions), has been amended to include new 
definitions for, among other things, ``2003 ISDA Credit Derivatives 
Definitions,'' ``2014 Credit Derivatives Definitions,'' ``2014 
Definitions Transaction,'' ``Asset Package Cash Settlement Amount,'' 
``Asset Package Notice,'' ``CME Successor Resolution Request Date,'' 
``Converting Contract,'' ``Declaration of Successor,'' and 
``Implementation Date'' to conform and adapt the CDS Product Rules to 
the 2014 ISDA Definitions. In addition, the definition of ``DC Rules'' 
and ``Credit Derivatives Definitions'' have been deleted, as they will 
no longer be relevant following the implementation of the 2014 ISDA 
Definitions, and the definition of ``Tax'' has been amended and updated 
in accordance with certain changes to the 2014 ISDA Definitions. The 
definition of ``Contract Elections'' has been revised to correct a typo 
and correctly reference the ``Initial Payment Payer'' and the 
definition of ``Eligible Contract Participant (``ECP'')'' has been 
revised to include a specific reference to the relevant Commodity 
Exchange Act provision referred to therein. Chapter 800 (Credit Default 
Swaps) has also been revised to include certain other clarifying and 
conforming changes related to the incorporation of the 2014 ISDA 
Definitions.
2. Chapter 801 (CDS Contracts)
    A clarifying change has been made to CME Rule 80102 (Eligible 
Contract Participant) to make clear the requirement that a CDS 
Participant be an ECP, pursuant to at least one of the applicable limbs 
of the definition provided in Section 1a(18) of the Commodity Exchange 
Act. In addition, a clarifying change has been made to CME Rule 80103.B 
(Acceptance of CDS by the Clearing House and Creation of CDS Contracts) 
to state that the potential for a separate agreement referred to in the 
second paragraph is subject to applicable law.
    CME Rule 80104 (Clearing Self-Referencing CDS Contracts) has been 
revised to correctly reference the ``North American Single Name CDS 
Contract.''
3. Chapter 802 (CDX Index Untranched CDS Contracts)
    CME Chapter 802 (CDX Index Untranched CDS Contracts) has been 
revised to update the definition of ``CDX Untranched Terms'' to include 
a reference to the new ``2014 Supplement,'' the standard documentation 
for use in documenting standard CDX transactions incorporating the 2014 
ISDA Definitions, anticipated to be published by Markit North America, 
Inc. on or about September 22, 2014 to incorporate the 2014 ISDA 
Definitions. Additionally, provisions have been

[[Page 49134]]

added to CME Rule 80201 (Scope of Chapter) to effect the amendment of 
all Converting Contracts on the date on which the 2014 ISDA Definitions 
are implemented, and authorizing the Clearing House to make such 
additional amendments or modifications to the 2014 Supplement as it 
deems reasonably necessary in order to give effect to the incorporation 
of the 2014 ISDA Credit Derivatives Definitions, as this document has 
yet to be published and may require certain amendments in the clearing 
context. Within CME Rule 80201 (Scope of Chapter), provisions relating 
to CDS Component Transactions have also been updated to clarify the 
already existing position that, notwithstanding that CDX Component 
Transactions will not be fungible with North American Single Name CDS 
Contracts, there may still be margin offsets between them, pursuant to 
the CDS Product Rules.
    CME Rule 80202.F (Credit Event Backstop Date) has been revised to 
update the original amending provision relating to the definition of 
``Credit Event Backstop Date'' in order to conform it to the changes in 
the 2014 ISDA Definitions relating to the definition of ``Credit Event 
Backstop Date.'' Additionally, changes have been made to remove 
provisions relating to Credit Events and/or Credit Event Resolution 
Request Dates occurring prior to June 20, 2009, as these are historic 
provisions within the definition that are no longer relevant.
    CME Rule 80202.I (Declaration of Credit Events) has been revised to 
conform provisions relating to a Declaration of Credit Event to the 
updates in the 2014 ISDA Definitions given that concepts contained in 
CME Rule 80202.I (Declaration of Credit Events) are now captured by the 
newly defined terms of ``Notice Delivery Period'' and ``Post Dismissal 
Additional Period'' in the 2014 ISDA Definitions. Therefore these 
changes are entirely non-substantive.
    CME Rule 80202.J (Event Determination Date) has been revised to 
update the original amending provision relating to the definition of 
``Event Determination Date'' in order to conform it to the changes in 
the 2014 ISDA Definitions relating to the definition of ``Event 
Determination Date.''
    CME Rule 80202.K (Succession Event Backstop Date), CME Rule 80202.L 
(Declaration of Successor) and CME Rule 80202.M (CDX Index Versions) 
have been revised to conform the Successor provisions contained therein 
(including, in particular, the definition of ``Succession Event 
Backstop Date'' and ``Declaration of Succession Event'') to the 2014 
ISDA Definitions as they relate to Successor determinations (as more 
fully described above). ``Succession Event Backstop Date'' has been 
renamed ``Successor Backstop Date'' and ``Declaration of Succession 
Event'' has been renamed ``Declaration of Successor'' in accordance 
with the 2014 ISDA Definitions. Additionally, changes have been made to 
remove provisions relating to Succession Events and/or Succession Event 
Resolution Request Dates occurring prior to June 20, 2009, as these are 
historic provisions within the definition of Succession Event Backstop 
Date that are no longer relevant. Additionally, CME Rule 80202.M (CDX 
Index Versions) has also been updated to make reference to the 
determination of a Substitute Reference Obligation in respect of a Non-
Standard Reference Obligation or publication of a revised SRO List in 
accordance with the 2014 ISDA Definitions.
    A new CME Rule 80202.N (Standard Reference Obligation) has been 
added to conform the CDS Product Rules to the additions made in the 
2014 ISDA Definitions relating to Standard Reference Obligations by 
providing that documentation evidencing any CDX Component Transaction 
which is a Converting Contract will be automatically deemed to be 
amended by insertion of ``Standard Reference Obligation: Applicable'' 
(to the extent that such provision is not already applicable) and 
modifications relating to the introduction of ``Standard Reference 
Obligation'' have also been made to CME Rule 80203.A (Rules). The 
previous CME Rule 80202.N (De Minimis Cash Settlement) has been deleted 
in order to bring the CDS Product Rules in line with current CDS 
documentation and market practices with regard to de minimis cash 
settlement, as provided for in the CDX Untranched Terms.
    A new CME Rule 80202.O (Not Contingent Deliverable Obligation 
Characteristic) has been added to provide that CDX Untranched Terms 
will be amended by deleting the words ``Not Contingent'' to address the 
removal of this concept in the 2014 ISDA Definitions.
    A new CME Rule 80202.P (NOPS Cut-off Date) has been added to modify 
Section 8.10(b) of the 2014 ISDA Credit Derivatives Definitions to add 
a new proviso relating to decisions by the CDS Risk Committee (``CDS 
RC'') to resolve that a Credit Event has occurred with respect to a CDX 
Index Untranched CDS Contract for which there is Publicly Available 
Information. This change is necessary in order to conform the 
application of the 2014 ISDA Definitions with respect to CDS contracts 
cleared by CME with the existence of the CDS RC.
    CME Rule 80203.C (Industry Protocol) has been amended to remove 
outdated references to the March 2009 Protocol and the July 2009 
Protocol.
    CME also proposes various other clarifying and conforming changes 
throughout Chapter 802 (CDX Index Untranched CDS Contracts) related to 
the incorporation of the 2014 ISDA Definitions.\4\
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    \4\ Staff has removed a reference to a proposed rule change in 
the Appendix to Chapter 802. Staff confirmed with CME on August 13, 
2014 that CME does not intend to make that rule change as part of 
this rule filing.
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4. Chapter 804 (CME CDS Risk Committee: Part A)
    Chapter 804 (CME CDS Risk Committee: Part A) has been revised to 
(i) apply only in connection with 2014 Definitions Transactions and 
(ii) update the scope of the chapter generally to conform more 
accurately to the 2014 ISDA Definitions. While CME does not currently 
clear any CDS products to which the 2003 ISDA Definitions will apply 
following the implementation of the 2014 ISDA Definitions, a ``Part A'' 
distinction has been added to Chapter 804 in anticipation of the 
potential need to bifurcate Chapter 804 to allow for separate treatment 
of CDS products that may be cleared by CME in the future and to which 
the 2003 ISDA Definitions will apply.
    CME Rule 80401 (Certain Functions and Authorities of the CDS RC) 
has been revised to update the scope of the definition of ``Issue'' in 
accordance with changes to the 2014 ISDA Definitions by (i) amending 
references and provisions relating to succession events and or 
determinations (as more fully described above), (ii) including 
reference to Non-Standard Reference Obligations and Eligible 
Information, (iii) removing references to Accreted Amount and Accreting 
Obligation, (iv) adding provisions relating to Asset Package Credit 
Events (as more fully described above), and (v) adding provisions 
relating to the determination of Reference Entity mergers with a Seller 
and other matters of contractual determination. In addition, 
modifications have been made in order to ensure alignment of the CDS 
Product Rules with the current market practices (as mandated by ISDA) 
to clarify the circumstances under which the CDS RC may make such 
determinations to avoid determinations that are inconsistent with DC 
determinations.

[[Page 49135]]

    CME Rule 80402.A (Publicly Available Information) has been revised 
to align with the changes to the definition of ``Publicly Available 
Information'' in the 2014 ISDA Definitions.
    Cross references in CME Rule 80404.A.E (Limitation of Liability and 
Waivers) have been updated to reflect changes in section numbering in 
the 2014 ISDA Definitions.
5. Chapter 805 (CME CDS Physical Settlement: Part A)
    Chapter 805 (CME CDS Physical Settlement: Part A) has been revised 
to (i) apply only in connection with 2014 Definitions Transactions and 
(ii) update the scope of the chapter generally to conform more 
accurately to the 2014 ISDA Definitions. Specifically, amendments have 
been made in relation CME Rule 80502.A.C (Notices) and CME Rule 80503.A 
(Physical Settlement of Non DVP Obligations) to include provisions 
relating to Asset Package Delivery (as more fully described above). 
While CME does not currently clear any CDS products to which the 2003 
ISDA Definitions will apply following the implementation of the 2014 
ISDA Definitions, a ``Part A'' distinction has been added to Chapter 
805 in anticipation of the potential need to bifurcate Chapter 805 to 
allow for separate treatment of CDS products that may be cleared by CME 
in the future and to which the 2003 ISDA Definitions will apply.
    CME Rule 80502.A (Matched Pairs) has been updated to provide 
additional detail in relation to the matching process. The additions do 
no substantively alter the CDS Product Rules but rather, seek to 
provide greater clarity with respect to the current matching process.
    Changes have been made to CME Rule 80507.A (Clearing House 
Guarantee of Matched Pair CDS Contracts) and CME Rule 80508.A (Failure 
to Perform Under Matched Pair CDS Contracts) to align the matching 
process with the general physical settlement provisions of CME as set 
out in Chapter 7 (Delivery Facilities and Procedures).
    Additionally, Chapter 805 (CME CDS Physical Settlement: Part A) has 
been revised to include references, where appropriate, to the 2014 ISDA 
Definitions, Asset Package Delivery and the DC Secretary, and 
corresponding changes to provision numbering have been made.
2. Statutory Basis
    CME believes the proposed changes to the CDS Product Rules are 
consistent with the requirements of the Exchange Act, including Section 
17A of the Exchange Act \5\ and the applicable regulations thereunder. 
The proposed changes to the CDS Product Rules 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.\6\
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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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    The 2014 ISDA Definitions are intended to become effective on 
September 22, 2014 as part of an industry-wide comprehensive review of 
the entire ISDA Credit Derivatives Definitions, the first of its kind 
in over a decade. The proposed changes set out in the 2014 ISDA 
Definitions reflect market experience in recent years and are chiefly 
intended to address perceived concerns and/or shortcomings in relation 
to the 2003 ISDA Definitions. As CME plans to accept for clearing, 
contracts referencing the industry standard 2014 ISDA Definitions by 
the time of the planned industry-wide implementation on September 22, 
2014 (and to convert certain existing contracts to the new definitions 
as of that date) the proposed changes to the CDS Product Rules will be 
necessary to achieve the clearing and/or conversion (as applicable) of 
such CDS contracts. CME believes that the proposed changes to the CDS 
Product Rules accurately conform the CDS Product Rules to the 2014 ISDA 
Definitions. As such, the proposed changes to the CDS Product Rules are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, derivatives agreements, contracts, and 
transactions within the meaning of Section 17A(b)(3)(F) of the Act.\7\
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    \7\ Id.
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    Additionally, CME facilitates physical settlement of CDS contracts. 
The proposed amendments to the CDS Product Rules would also facilitate 
the physical settlement process by amending the process to include 
references to the 2014 ISDA Definitions, Asset Package Delivery and the 
DC Secretary. In this regard, the additions do not substantively alter 
the CDS Product Rules but rather, seek to update the process to reflect 
references to the 2014 ISDA Definitions. These proposed amendments are 
designed to permit CME to continue to offer physical delivery and as 
such are designed to promote the prompt and accurate clearance and 
settlement of CDS and 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.\8\
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    \8\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the proposed changes to the CDS Product 
Rules will have any impact, or impose any burden, on competition. CME 
is submitting the proposed amendments to the CDS Product Rules to 
incorporate references to the 2014 ISDA Definitions and are intended to 
apply consistently across all clearing members. CME does not believe 
that any of the proposed changes to the CDS Product Rules would 
significantly affect the ability of clearing members or other market 
participants to continue to clear CDS, or otherwise limit market 
participants' choices for selecting clearing services. For the 
foregoing reasons, the proposed changes to the CDS Product Rules do 
not, in CME's view, impose any unnecessary or inappropriate burden on 
competition.

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
    (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,

[[Page 49136]]

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-2014-30 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-2014-30. 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 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-2014-30 
and should be submitted on or before September 9, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19581 Filed 8-18-14; 8:45 am]
BILLING CODE 8011-01-P


