
[Federal Register Volume 80, Number 1 (Friday, January 2, 2015)]
[Notices]
[Pages 80-83]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30697]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73938; File No. SR-CME-2014-19]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Regarding Certain Contractual Arrangements That Apply to Its Over-the-
Counter Interest Rate Swap Clearing Offering

December 24, 2014.
    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 December 15, 2014, Chicago Mercantile Exchange Inc. (``CME'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III 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) 
\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)(4)(ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CME is proposing to make certain revenue sharing and governance 
changes related to certain contractual arrangements that apply to its 
over-the-counter interest rate swap (``OTC IRS'') clearing offering. 
CME entered into this arrangement (the ``Agreement'') with a group of 
clearing members on June 30, 2012 and the proposed rule change has been 
implemented by CME since June 30, 2012.\5\
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    \5\ Pursuant to a teleconference with CME's counsel on December 
19, 2014, staff in the Division of Trading and Markets has modified 
this sentence to insert references to the Agreement's execution and 
implementation date.
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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 of 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 these statements.

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

    CME is registered as a derivatives clearing organization with the 
Commodity Futures Trading Commission (``CFTC'') and operates a 
substantial business clearing futures and swaps contracts subject to 
the jurisdiction of the CFTC. CME is filing this proposed rule change 
with respect to the Agreement made with various third-party financial 
institutions (dealer founding members, ``DFMs'') relating to its OTC 
IRS clearing business. The Agreement incentivized the DFMs to support 
CME's initial development of its OTC IRS clearing infrastructure and is 
designed to ensure that the DFMs continue their demonstrated commitment 
to CME's ongoing IRS clearing efforts. The existing DFMs were selected 
based on their support in CME's development of its clearing initiative, 
ability to provide liquidity, their client clearing and risk management 
expertise, as well as their willingness to test and generally support 
centralized clearing in IRS Contracts on an on-going basis. CME may 
invite other firms to join the Agreement in the future so long as such 
firms are approved by a majority of the then-existing DFMs.
    In summary, under the Agreement, the DFMs that satisfy their 
obligations under the Agreement will receive a portion of the clearing 
revenues and market data revenues generated in connection with CME's 
clearing of certain specified IRS Contracts, will be subject to a cap 
on the IRS clearing fees payable to CME, and will be entitled to 
participate on CME's IRS advisory group. In addition, CME has agreed to 
minimum IRS clearing member representation on the IRS Risk Committee 
(the ``IRS RC''). These aspects and other relevant background and 
context regarding the Agreement are described in greater detail below.
DFM Obligations Under the Agreement
    Under the Agreement, DFMs are required to (i) maintain an IRS 
clearing membership at CME in good standing, (ii) offer customers the 
ability to clear IRS Contracts at CME on a non-discriminatory basis by 
comparison to the terms offered for clearing of substantially similar 
IRS Contracts through any U.S.-based derivatives clearing organization, 
(iii) provide to

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CME certain pricing curves for daily settlement prices for IRS 
Contracts, and (iv) submit IRS Contracts to CME that generate specified 
minimum annual fees.
Economic Incentives for the DFMs Under the Agreement
    Under the Agreement, DFMs will pay a specified fee for each IRS 
Contract submitted to CME for clearing. In addition, CME and the DFMs 
have agreed to share certain of the adjusted gross revenues associated 
with CME's IRS Contracts clearing activities,\6\ including the sale of 
market data generated by such activities (the ``Revenue Pools''). DFMs 
that qualify during a relevant measurement period will each receive a 
pro-rata share of the Revenue Pools based on volumes of IRS Contracts 
submitted to CME. In addition, the non-customer fees charged to each 
DFM for the clearing of IRS Contracts during a given measurement period 
will not exceed a specified annual cap.\7\
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    \6\ The DFM share of gross revenue is based on the number of 
DFMs and adjusted for applicable discounts, rebates, taxes and 
expenses.
    \7\ During a December 22, 2014 teleconference with CME counsel, 
staff in the Division of Trading and Markets confirmed that CME has 
filed the following fee-related filings relating to the Agreement: 
Securities Exchange Act Release No. 34-66102 (Jan. 5, 2012), 77 FR 
1775 (Jan. 11, 2012) (File No. SR-CME-2011-22); Securities Exchange 
Act Release No. 34-67036 (May 21, 2012), 77 FR 31416 (May 25, 2012) 
(File No. SR-CME-2012-18) and Securities Exchange Act Release No. 
34-71088 (Dec. 17, 2013), 78 FR 77512 (Dec. 23, 2013) (File No. SR-
CME-2013-32).
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    Finally, CME has agreed to offer each DFM the option of electing, 
in lieu of the incentives under the Agreement, any other pricing 
structure for the clearing of IRS Contracts that any other IRS clearing 
member chooses to accept from CME.
Governance Rights
    In addition, CME has agreed with the DFMs that, among other things:
    1. It will exercise its rights under CME's IRS RC charter \8\ so as 
to cause a majority of the IRS RC to be composed such that (i) 
employees or directors of IRS Clearing Members \9\ maintain a majority 
of the IRS RC (the ``IRS Clearing Membership Representatives'') and 
(ii) a majority of the IRS Clearing Membership Representatives be 
selected from those IRS Clearing Members that have the ``n'' largest 
average contributions to the IRS Guaranty Fund, where ``n'' is equal to 
the actual number of IRS Clearing Membership Representatives plus two 
(2); \10\
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    \8\ The Agreement does not amend the charter of the IRS RC.
    \9\ This includes all IRS Clearing Members, not just DFMs.
    \10\ For instance, if the actual number of IRS Clearing 
Membership Representatives is 5, then a majority of the IRS Clearing 
Membership Representatives will be selected from those IRS Clearing 
Members with the 7 largest average contributions to the IRS Guaranty 
Fund.
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    2. each DFM may appoint a representative (a ``DFM Representative'') 
to participate on CME's IRS advisory group; \11\ and
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    \11\ CME's IRS advisory group includes a representative from 
each of the DFMs and a representative from CME. In addition, CME may 
invite up to 2 non-DFM IRS clearing members that are in the top 10 
contributors to the IRS Guaranty Fund and up to 3 non-IRS Clearing 
Members to appoint representatives to the IRS advisory group.
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    3. it will not launch any IRS Product that was not originally 
contemplated by the Agreement in the IRS Guaranty Fund if a majority 
the DFM Representatives object to such launch based on material risk 
management concerns that such DFM Representatives have identified and 
that CME is unable to reasonably mitigate.
    Section17A of the Act does not permit the rules of a clearing 
agency to unfairly discriminate in the admission of participants or 
among participants in the use of the clearing agency.\12\ The rules of 
a clearing agency must also assure its participants are fairly 
represented with respect to the administration of its affairs.\13\ 
Further, the rules of the clearing agency must not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.\14\ Although the terms of the Agreement deliver 
certain rights to a set of participants that are not offered to others, 
CME believes the proposed rules are nevertheless consistent with the 
requirements of the Act for the following reasons.
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 15 U.S.C. 78q-1(b)(3)(C).
    \14\ 15 U.S.C. 78q-1(b)(3)(I).
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    First, the Agreement provides an enumerated group of DFMs, who are 
also IRS Clearing Members at CME, with economic incentives and other 
contractual rights that will not be afforded to other IRS Clearing 
Members who are not DFMs. The rationale for providing this group of 
DFMs with these rights is to incentivize them (i) to provide 
substantial support to CME in its development and structuring of its 
OTC IRS clearing offering and (ii) to serve as the initial set of IRS 
clearing members. These swap market participants invested significant 
time and resources to support CME staff's efforts to design, develop, 
and implement CME's OTC swaps clearing infrastructure and agreed to 
provide clearing member services for OTC IRS on an ongoing basis. 
Providing these rights to these participants does not constitute unfair 
discrimination among participants of CME because of the equity 
ownership-like commitments undertaken by these DFMs during CME's 
initial offering phase. Because the DFMs provided these equity 
ownership-like commitments during CME's initial offering phase, there 
is not unfair discrimination among participants and the Agreement 
should be seen to be consistent with Section 17A(b)(3)(F) of the 
Act.\15\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    With respect to the governance rights provided to the DFMs, CME 
also believes that these should be found to be consistent with the 
requirements of Section 17A of the Act.\16\ CME recognizes that there 
would be reason to be concerned in circumstances where one particular 
member of a self-regulatory organization (``SRO'') was able to acquire 
a controlling influence in the administration of the affairs of the 
SRO. Such circumstances would have the potential to jeopardize an SRO's 
ability to operate impartially, as a single controlling member might be 
tempted to exercise its controlling influence by directing the SRO to 
refrain from diligently surveilling the member's conduct or from 
punishing any conduct that violates the rules of the SRO, Commodity 
Exchange Act or other applicable laws. However, those types of concerns 
are not present with the governance incentives offered to the DFMs in 
the Agreement.
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    \16\ 15 U.S.C. 78q-1.
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    Further, the Agreement provides for significant market participant 
participation in the governance of IRS Products by specifying certain 
membership composition criteria for the IRS RC. These composition 
criteria, in general, provide assurance that the participants with the 
most exposure to CME's IRS clearing initiative will be represented on 
the IRS RC. This granting of a voice to the market participants with 
the greatest risk to the Clearing House for IRS products is inherently 
fair and consistent with Section 17A(b)(3)(C) of the Act.\17\ Further, 
these provisions also ensure that no single participant would be able 
to obtain a concentrated and outsized influence that would implicate 
the concerns outlined above nor is representation on the IRS RC based 
on DFM status.
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    \17\ 15 U.S.C. 78q-1(b)(3)(C).
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    Finally, the proposal will not affect any securities clearing 
operations of CME because CME recently filed a

[[Page 82]]

proposed rule change that clarified that CME has decided not to clear 
security-based swaps, except in a very limited set of 
circumstances.\18\ The rule filing reflecting CME's decision not to 
clear security-based swaps removed any ambiguity concerning CME's 
ability or intent to perform the functions of a clearing agency with 
respect to security-based swaps. Therefore, this proposal will have no 
effect on any securities clearing operations of CME.
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    \18\ See Securities Exchange Act Release No. 34-73615 (Nov. 17, 
2014), 79 FR 69545 (Nov. 21, 2014) (File No. SR-CME-2014-49). The 
only exception is with regards to Restructuring European Single Name 
CDS Contracts created following the occurrence of a Restructuring 
Credit Event in respect of an iTraxx Component Transaction. The 
clearing of Restructuring European Single Name CDS Contracts will be 
a necessary byproduct after such time that CME begins clearing 
iTraxx Europe index CDS.
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    For these reasons, CME submits that the specific economic 
incentives and contractual governance rights granted to the DFMs should 
be found to be reasonable and consistent with the Act. The terms of the 
Agreement do not constitute unfair discrimination in the admission of 
participants or among participants in the use of the clearing agency 
but rather provide reasonable incentives to support the clearing 
offering. The arrangements should be seen as consistent with Section 
17A(b)(3)(F) of the Act,\19\ and should otherwise be seen to be 
consistent with the Act's investor protection and public interest 
mandates. CME submits that the proposed rule change promotes the prompt 
and accurate clearance and settlement of transactions, assures the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, fosters 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions, removes impediments to and 
perfects the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions, and, in general, 
protects investors and the public interest.
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    \19\ 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 will impose any 
burden that is not reasonable, appropriate, or in furtherance of the 
Act. As discussed above, the proposed rules will provide an enumerated 
group of DFM firms, who are also IRS Clearing Members at CME, with 
economic incentives and other contractual rights that will not be 
afforded to other IRS Clearing Members who are not DFMs or do not 
become DFMs. Providing these benefits to one set of firms and not all 
could potentially have an impact on competition. However, CME believes 
any such impacts should not be seen to be unreasonable in light of the 
fact that these benefits were afforded in consideration of the 
substantial support provided to CME in the development and structuring 
of its OTC IRS clearing offering and the firms' agreement to serve as 
the initial set of clearing members.
    Further, the changes are limited to CME's derivatives clearing 
business and, as such, do not affect security-based swap clearing 
activities of CME in any way and therefore would not impose any burden 
on competition that is inappropriate in furtherance of the purposes of 
the Act.

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 become effective upon filing pursuant 
to Section 19(b)(3)(A) \20\ of the Act and Rule 19b-4(f)(4)(ii) \21\ 
thereunder. CME asserts that this proposal constitutes 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 forwards that are not security 
forwards; and (b) does not significantly affect any securities clearing 
operations of CME or any rights or obligations of CME with respect to 
securities clearing or persons using such securities-clearing service, 
which renders the proposed change effective upon filing. CME believes 
that the proposal does not significantly affect any securities clearing 
operations of CME because CME recently filed a rule change that 
clarified that CME has decided not to clear security-based swaps, 
except in a very limited set of circumstances.\22\ The rule filing 
reflecting CME's decision not to clear security-based swaps removed any 
ambiguity concerning CME's ability or intent to perform the functions 
of a clearing agency with respect to security-based swaps. Therefore, 
this proposal will not have an effect on any securities clearing 
operations of CME.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(4)(ii).
    \22\ See supra note 18.
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    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.

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-2014-19 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-2014-19. 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 filings will also be available 
for inspection and copying at the principal office of CME and on CME's 
Web site at

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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-2014-19 
and should be submitted on or before January 23, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-30697 Filed 12-31-14; 8:45 am]
BILLING CODE 8011-01-P


