
[Federal Register Volume 80, Number 1 (Friday, January 2, 2015)]
[Notices]
[Pages 77-80]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30696]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73937; File No. SR-CME-2014-18]


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

December 24, 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 December 15, 2014, Chicago Mercantile Exchange 
Inc. (``CME'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change described in Items I, II and 
III, below, which Items have been primarily prepared by CME. CME filed 
the proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ and Rule 
19b-4(f)(4)(ii) thereunder,\4\ so that the proposal was effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change 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 credit default swap (``OTC CDS'') 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 and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. CME has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.

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

    CME 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 (``DFMs'') relating to its OTC CDS clearing business. The 
Agreement incentivized the DFMs to support CME's initial development of 
its OTC CDS clearing infrastructure and is designed to ensure that the 
DFMs continue their demonstrated commitment to CME's ongoing CDS 
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 CDS Contracts on an on-going basis. CME may invite other 
firms to join the Agreement in the future so long as such firms are 
among the top CDS clearing members by notional amount of CDS Contracts 
submitted to the Clearing House during any six-month period through 
June 2015 or 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 CDS Contracts, will be

[[Page 78]]

subject to a cap on the CDS clearing fees payable to CME, and will be 
entitled to participate in CME's CDS advisory group. In addition, CME 
has agreed to minimum CDS clearing member representation on the CDS 
Risk Committee (the ``CDS 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 a CDS 
clearing membership at CME in good standing, (ii) offer customers the 
ability to clear CDS Contracts at CME on a non-discriminatory basis by 
comparison to the terms offered for clearing of substantially similar 
CDS Contracts through any U.S.-based derivatives clearing organization, 
(iii) provide to CME certain settlement price quotes and transaction 
data relating to CDS Contracts, and (iv) submit CDS Contracts to CME 
that generate specified minimum annual fees.

Economic Incentives for the DFMs Under the Agreement

    Under the Agreement, CME and the DFMs have agreed to share certain 
of the adjusted gross revenues associated with CME's CDS Contracts 
clearing activities,\6\ including the sale of market data generated by 
such activities (the ``Revenue Pools'').
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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.
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    DFMs that qualify during a relevant measurement period, will each 
receive a pro-rata share of the Revenue Pools based on volumes of CDS 
Contracts submitted to CME. In addition, CME has agreed to a fixed cap 
for the non-customer fees charged to each DFM for the clearing of CDS 
Contracts submitted to CME by such DFM and its affiliates during each 
12-month period during the term of the Agreement.\7\
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    \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. 34-65634 (Oct. 26, 2011), 76 FR 
67517 (Nov. 1, 2011) (File No. SR-CME-2011-11); Securities Exchange 
Act Release No. 34-66030 (Dec. 22, 2011), 76 FR 82006 (Dec. 29, 
2011) (File No. SR-CME-2011-18); Securities Exchange Act Release No. 
34-68490 (Dec. 20, 2012), 77 FR 76314 (Dec. 27, 2012) (File No. SR-
CME-2012-46); Securities Exchange Act Release No. 34-71403 (Jan. 27, 
2014), 79 FR 5501 (Jan. 31, 2014) (File No. SR-CME-2014-03) and 
Securities Exchange Act Release No. 34-73752 (Dec. 5, 2014), 79 FR 
73655 (Dec. 11, 2014) (File No. SR-CME-2014-55).
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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 CDS Contracts that any other CDS 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 CDS RC charter \8\ so as 
to cause a majority of the CDS RC to be composed such that (i) 
employees or directors of CDS Clearing Members \9\ maintain a majority 
of the CDS RC (the ``CDS Clearing Membership Representatives'') and 
(ii) a majority of the CDS Clearing Membership Representatives be 
selected from those CDS Clearing Members that have the ``n'' largest 
average contributions to the CDS Guaranty Fund, where ``n'' is equal to 
the actual number of CDS Clearing Membership Representatives plus two 
(2); \10\
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    \8\ The Agreement does not amend the charter of the CDS RC.
    \9\ This includes all CDS Clearing Members, not just DFMs.
    \10\ For instance, if the actual number of CDS Clearing 
Membership Representatives is 5, then a majority of the CDS Clearing 
Membership Representatives will be selected from those CDS Clearing 
Members with the 7 largest average contributions to the CDS Guaranty 
Fund.
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    2. each DFM may appoint a representative (a ``DFM Representative'') 
to participate on CME's CDS advisory group; \11\ and
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    \11\ CME's CDS 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 CDS clearing members that are in the top 10 
contributors to the CDS Guaranty Fund and up to 3 non-CDS Clearing 
Members to appoint representatives to the CDS advisory group.
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    3. it will not launch any CDS Product that was not originally 
contemplated by the Agreement in the CDS Guaranty Fund if (i) 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, (ii) the CDS RC does not approve the 
product launch, (iii) regulatory approval is not obtained, or (iv) 
there are not a sufficient number of CDS Clearing Members that have 
agreed to submit such CDS Product to CME for clearing and to provide 
settlement price information to CME for such CDS Product.
    Section 17A of the Exchange 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 Exchange 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 Exchange 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 CDS Clearing Members at CME, with economic incentives and other 
contractual rights that will not be afforded to other CDS 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 CDS clearing offering and (ii) to serve as the initial set of CDS 
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 CDS 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 
Exchange 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 Exchange 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

[[Page 79]]

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 CDS Products by specifying certain 
membership composition criteria for the CDS RC. These composition 
criteria, in general, provide assurance that the participants with the 
most exposure to CME's CDS clearing initiative will be represented on 
the CDS RC. This granting of a voice to the market participants with 
the greatest risk to the Clearing House for CDS products is inherently 
fair and consistent with Section 17A(b)(3)(C) of the Exchange 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 CDS 
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 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 Exchange 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 CDS Clearing Members at CME, with 
economic incentives and other contractual rights that will not be 
afforded to other CDS 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 CDS 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.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(4)(ii).
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    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 proposed 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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    \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 No. SR-CME-2014-18 on the subject line.

[[Page 80]]

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-2014-18. 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-2014-18 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. 2014-30696 Filed 12-31-14; 8:45 am]
BILLING CODE 8011-01-P


