
[Federal Register Volume 79, Number 173 (Monday, September 8, 2014)]
[Notices]
[Pages 53234-53236]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21251]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72959; File No. SR-CME-2014-28]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
2 Thereto, Related to Enhancements to Its Risk Model for Credit Default 
Swaps

September 2, 2014.
    Pursuant to the 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 2, 2014, Chicago Mercantile 
Exchange Inc. (``CME'') filed with the Securities and Exchange 
Commission (``Commission'') Amendment No. 2 to its previously submitted 
proposed rule change related to proposed enhancements to its risk model 
for broad-based index credit default swap (``CDS'') products.\3\ 
Amendment No. 2 is intended to describe CME's proposed CDS specific 
risk model framework applicable only to broad-based index CDS and also 
provide further description and detail of certain aspects of the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared primarily by CME (the ``CDS Risk Model Filing 
Amendment'').\4\ The Commission is publishing this notice to solicit 
comments on the CDS Risk Model Filing Amendment from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 34-72834 (Aug. 13, 
2014), 79 FR 48805 (Aug. 18, 2014) (SR-CME-2014-28) (hereinafter 
referred to as the ``CDS Risk Model Filing'').
    \4\ On August 18, 2014, CME filed Amendment No. 1 to the 
proposed rule change. CME withdrew Amendment No. 1 on August 29, 
2014.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    On August 8, 2014, CME submitted to the Commission the CDS Risk 
Model Filing pursuant to which CME proposes to enhance its risk model 
for CDS (the ``CDS Risk Model'' and such enhanced model, the ``Proposed 
CDS Risk Model'') to enable CME to offer clearing of additional CDS 
instruments.\5\ The CDS Risk Model Filing is currently pending 
regulatory approval by the Commission. The purpose of the CDS Risk 
Model Filing Amendment is to propose the adoption of a CDS specific 
risk model framework applicable only to broad-based index CDS (the 
``CME CDS Risk Model Framework'') and also provide further description 
and detail of certain aspects of the Proposed CDS Risk Model contained 
within the CDS Risk Model Filing. The CDS Risk Model Filing Amendment 
should be read in conjunction with the CDS Risk Model Filing. All 
capitalized terms not defined herein shall have the meaning given to 
them in the CDS Risk Model Filing.
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    \5\ See supra note 3.
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    The text of the proposed amendment 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 Organizations 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 amendment and 
discussed any comments it received on the proposed amendment. 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
    Pursuant to this CDS Risk Model Filing Amendment, CME proposes to 
adopt a CME CDS Risk Model Framework for broad-based index CDS and also 
intends to provide further description and detail of certain aspects of 
the Proposed CDS Risk Model described in the CDS Risk Model Filing as 
further discussed below. CME also proposes to make changes to the 
Manual of Operations for CME Cleared Credit Default Swaps (the ``CDS 
Manual'') in connection with the proposed CME CDS Risk Model Framework.
1. CME CDS Risk Model Framework
    In connection with the adoption of the Proposed CDS Risk Model, CME 
also proposes to adopt the CME CDS Risk Model Framework. The proposed 
CME CDS Risk Model Framework would apply only to broad-based index CDS 
products cleared by CME and would not apply to security-based swaps. 
CME will file a proposed rule change with the SEC in the future to 
implement any proposed CDS risk model applicable to the clearing of 
security-based swaps. The proposed CME CDS Risk Model Framework 
contains the details of the Proposed CDS Risk Model and existing 
policies relating to governance, back testing and stress testing for 
CDS products.
1.1 Governance
    The proposed CME CDS Risk Model Framework would be governed by the 
CDS Risk Committee, the Stress Testing Committee and senior risk 
management of CME. CDS Risk Committee approval is required for all 
material changes to the CDS Risk Model Framework, CDS stress testing 
framework, and CDS back-testing framework. Any changes to the 
parameters of the CDS Margin Model or CDS stress tests are approved by 
the Stress Testing Committee or a senior member of the Stress Testing 
Committee.
1.2 CDS Risk Model Framework for Cleared CDS
    The proposed CME CDS Risk Model Framework includes CME's proposed 
enhancements to the CDS Risk Model for CDS as set forth in the CDS Risk 
Model Filing. In addition, CME notes that the Post Credit Risk 
Requirement within the Proposed CDS Risk Model is the same as the post-
default charge in the current CDS Risk Model, but also applies to 
additional credit events such

[[Page 53235]]

as restructuring and governmental intervention. CME addresses the risk 
of any CDS position referencing an entity, which has experienced a 
credit event as determined by the CDS contract definitions, through the 
post credit event risk requirement.
1.3 CDS Back-Testing
    The proposed CME CDS Risk Model Framework details CME's existing 
back testing practices for the CDS contracts it clears. CME maintains a 
back-testing methodology for monitoring and testing the adequacy of its 
margin and/or stress requirements for CDS portfolios. CME performs 
back-testing on actual and hypothetical portfolios. CME performs daily 
performance bond coverage back-testing and any breaches are escalated 
to senior risk management. CME also conducts ad-hoc and event driven 
back-testing on an as needed basis. Back-testing results are reviewed 
by the Stress Testing Committee and can result in changes to model 
parameters or data calibration.
1.4 CDS Stress Testing
    The proposed CME CDS Risk Model Framework details CME's existing 
stress testing practices for cleared CDS. CME performs stress testing 
at least daily and on an ad-hoc basis as appropriate. A stressed 
extension of the margin model is used to size the CDS Guaranty Fund and 
CDS Assessments to reflect the necessary financial safeguards under 
extreme but plausible market conditions. As discussed in the CDS Risk 
Model Filing, the stress model addresses self-referencing risk arising 
from contracts that include component transactions for which the 
reference entity is a clearing member or one of its affiliates. CME 
also performs reverse stress testing to identify hypothetical market 
conditions and stress events which might result in depletion of CME's 
funded and/or unfunded financial resources for CDS Clearing. CME 
performs sensitivity analysis on exposures of clearing member 
portfolios to changes in a representative set of material risk model 
parameters. Stress testing results are reviewed by the stress testing 
committee.
    Post implementation of the Proposed CDS Risk Model, CME's financial 
resources for CDS (inclusive of performance bond, CME's corporate 
contribution for CDS, CDS Guaranty Fund and CDS SR Deposits) would 
continue to enable CME to maintain sufficient financial resources to 
withstand a default by the two CDS Clearing Member families to which it 
has the largest exposures in extreme but plausible market conditions as 
required by Rule 17Ad-22(b)(3).\6\
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    \6\ 17 CFR 240.17Ad-22(b)(3).
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2. CDS Manual of Operations
    In connection with the implementation of the proposed CME CDS Risk 
Model Framework, CME is deleting Chapters 7 (CDS Margining) and 10 (CDS 
Guaranty Fund Calculation) in the CDS Manual which relate to outdated 
aspects of the CDS Risk Model.
(2) Statutory Basis
    CME believes the Proposed CDS Risk Model, proposed CME CDS Risk 
Model Framework and the proposed changes to the CDS Manual are 
consistent with the requirements of the Exchange Act, including Section 
17A of the Exchange Act \7\ and the applicable regulations thereunder. 
The Proposed CDS Risk Model, proposed CME CDS Risk Model Framework and 
the proposed changes to the CDS Manual 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.\8\
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    \7\ 15 U.S.C. 78q-1.
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Proposed CDS Risk Model, proposed CME CDS Risk Model Framework 
and the proposed changes to the CDS Manual accomplish these objectives 
because they are intended to more accurately capture different sources 
of risk through a holistic and theoretically coherent scenario-based 
approach that is driven by conservative statistical assumptions, which 
in turn allows CME to appropriately cover the risk of a wide range of 
theoretical and production portfolios under extreme but plausible 
market conditions and in historical back testing, going back to 2008. 
In particular, the Proposed CDS Risk Model, proposed CME CDS Risk Model 
Framework and the proposed changes to the CDS Manual will enhance CME's 
margin methodology by more accurately addressing F/X risk and self-
referencing risk presented by clearing index CDS contracts.
    CME will also promote the efficient use of margin for the 
clearinghouse and its Clearing Members and their customers, by enabling 
CME to provide appropriate portfolio margining treatment between index 
and single-name CDS positions 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.\9\
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    \9\ Id.
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    CME also believes the Proposed CDS Risk Model, proposed CME CDS 
Risk Model Framework and the proposed changes to the CDS Manual are 
consistent with the requirements of 17Ad-22 of the Exchange Act.\10\ In 
particular, in terms of financial resources, CME believes that the 
Proposed CDS Risk Model, proposed CME CDS Risk Model Framework and the 
proposed changes to the CDS Manual will continue to ensure sufficient 
margin to cover its credit exposure to its clearing members, consistent 
with the requirements of Rule 17Ad-22(b)(2) \11\ and Rule 17Ad-
22(d)(14) \12\ and that the CDS Guaranty Fund contributions and 
required margin, both as modified by the proposed rule change, will 
provide sufficient financial resources to withstand a default by the 
two participant families to which it has the largest exposures in 
extreme but plausible market conditions consistent with the 
requirements of Rule 17Ad-22(b)(3).\13\ In addition, CME believes that 
the Proposed CDS Risk Model, proposed CME CDS Risk Model Framework and 
the proposed changes to the CDS Manual are consistent with CME's 
requirement to limit its exposures to potential losses from defaults by 
its participants under normal market conditions pursuant to 17Ad-
22(b)(1).\14\ CME also believes that the Proposed CDS Risk Model, 
proposed CME CDS Risk Model Framework and the proposed changes to the 
CDS Manual will continue to allow for it to take timely action to 
contain losses and liquidity pressures and to continue meeting its 
obligations in the event of clearing member insolvencies or defaults, 
in accordance with Rule 17Ad-22(d)(11).\15\
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    \10\ 17 CFR 240.17Ad-22.
    \11\ 17 CFR 240.17Ad-22(b)(2).
    \12\ 17 CFR 240.17Ad-22(d)(14).
    \13\ 17 CFR 240.17Ad-22(b)(3).
    \14\ 17 CFR 240.17Ad-22(b)(1).
    \15\ 17 CFR 240.17Ad-22(d)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the Proposed CDS Risk Model, proposed CME 
CDS Risk Model Framework and the proposed changes to the CDS Manual 
will have any impact, or impose

[[Page 53236]]

any burden, on competition. The Proposed CDS Risk Model and proposed 
CME CDS Risk Model Framework reflect enhancements to CME's CDS Risk 
Model. CME does not believe that any increase in margin or CDS Guaranty 
Fund contributions, would significantly affect the ability of Clearing 
Members or other market participants to continue to clear CDS, 
consistent with the risk management requirements of CME, or otherwise 
limit market participants' choices for selecting clearing services. For 
the foregoing reasons, the Proposed CDS Risk Model, proposed CME CDS 
Risk Model Framework and the proposed changes to the CDS Manual 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 Risk Model Filing Amendment 
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 notice of the CDS Risk 
Model Filing \16\ 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:
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    \16\ See supra note 3.
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    (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, 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-2014-28 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-2014-28. 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-2014-28 
and should be submitted on or before September 18, 2014.\17\
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    \17\ The Commission believes that a 10-day comment period is 
reasonable, given the nature and content of the amendment. It will 
provide adequate time for comment.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21251 Filed 9-5-14; 8:45 am]
BILLING CODE 8011-01-P


