
[Federal Register Volume 80, Number 78 (Thursday, April 23, 2015)]
[Notices]
[Pages 22754-22756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-09429]



[[Page 22754]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74761; File No. SR-CME-2015-013]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Regarding Liquidity Risk Management

April 17, 2015.
    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 April 17, 2015, Chicago Mercantile Exchange 
Inc. (``CME'' or ``Clearing House'') 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 filing a proposed rule change that is limited to its 
business as a derivatives clearing organization (``DCO''). More 
specifically, the proposed changes would amend current CME Rules in the 
area of liquidity risk management.

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 DCO with the Commodity Futures Trading 
Commission (``CFTC'') and currently offers clearing services for many 
different futures and swaps products. With this filing, CME proposes to 
make rulebook changes that are limited to its business clearing futures 
and swaps under the exclusive jurisdiction of the CFTC. More 
specifically, the proposed rules would enhance CME's existing liquidity 
framework by providing additional liquidity resources and a framework 
for establishment of additional highly reliable prearranged funding 
arrangements.
    On December 2, 2013, the CFTC adopted final regulations to 
establish additional standards for compliance with the DCO core 
principles set forth in the Commodity Exchange Act (``CEA'') for 
systemically important DCOs (``SIDCOs'') and DCOs that elect to opt-in 
to the SIDCO regulatory requirements (``SIDCO Rules''). CFTC Regulation 
39.33(c) established enhanced liquidity standards for SIDCOs. CFTC 
Regulation 39.33(c)(1)(i) requires SIDCOs to maintain eligible 
liquidity resources that, ``at a minimum, will enable it to meet its 
intraday, same-day, and multiday obligations to perform settlements, as 
defined in Sec.  39.14(a)(1), with a high degree of confidence under a 
wide range of stress scenarios that should include, but not be limited 
to, a default by the clearing member creating the largest aggregate 
liquidity obligation for the [SIDCO] . . . in extreme but plausible 
market conditions.'' Regulation 39.33(c)(3) establishes qualifying 
liquidity resources as follows:

(3) Qualifying liquidity resources. (i) Only the following liquidity 
resources are eligible for the purpose of meeting the requirement of 
paragraph (c)(1) of this section: (A) Cash in the currency of the 
requisite obligations, held either at the central bank of issue or 
at a creditworthy commercial bank; (B) Committed lines of credit; 
(C) Committed foreign exchange swaps; (D) Committed repurchase 
agreements; or (E)(1) Highly marketable collateral, including high 
quality, liquid, general obligations of a sovereign nation (2) The 
assets described in paragraph (c)(3)(i)(E)(1) of this section must 
be readily available and convertible into cash pursuant to 
prearranged and highly reliable funding arrangements, even in 
extreme but plausible market conditions.

    Additionally, the CFTC finalized CFTC Regulation 39.35 in the SIDCO 
Rules requiring, among other things, rules to address liquidity 
shortfalls as follows:

(b) Allocation of uncovered liquidity shortfalls. (1) Each 
systemically important derivatives clearing organization and subpart 
C derivatives clearing organization shall establish rules and/or 
procedures that enable it promptly to meet all of its settlement 
obligations, on a same day and, as appropriate, intraday and 
multiday basis, in the context of the occurrence of either or both 
of the following scenarios: (i) An individual or combined default 
involving one or more clearing members' obligations to the 
systemically important derivatives clearing organization or subpart 
C derivatives clearing organization; or (ii) A liquidity shortfall 
exceeding the financial resources of the systemically important 
derivatives clearing organization or subpart C derivatives clearing 
organization. (2) The rules and procedures described in paragraph 
(b)(1) of this section shall: (i) Enable the systemically important 
derivatives clearing organization or subpart C derivatives clearing 
organization promptly to meet its payment obligations in all 
relevant currencies; (ii) Be designed to enable the systemically 
important derivatives clearing organization or subpart C derivatives 
clearing organization to avoid unwinding, revoking, or delaying the 
same-day settlement of payment obligations; and (iii) Address the 
systemically important derivatives clearing organization's or 
subpart C derivatives clearing organization's process to replenish 
any liquidity resources it may employ during a stress event so that 
it can continue to operate in a safe and sound manner.

    CME currently employs a sound risk-management framework for 
comprehensively managing liquidity risk. This framework serves to 
effectively measure, monitor, and manage liquidity risk on an ongoing 
basis. The framework includes assessment and maintenance of sufficient 
liquid resources to effect same-day settlement of payment obligations 
with a high degree of confidence under a wide range of potential stress 
scenarios. The stress scenarios include the default of the clearing 
member and its affiliates that would generate the largest aggregate, 
with consideration of the second largest, and by currency liquidity 
obligation under extreme but plausible market conditions. CME manages 
liquidity risk through utilization of qualifying liquid resources to 
meet the liquidity obligation calculated under the framework. In order 
to augment this framework and comply with CFTC Regulations, CME will 
add certain requirements and/or capabilities that it will employ in its 
administration of its liquidity risk program. This rules-based approach 
to liquidity risk management will also rely on and be augmented by 
CME's collateral policy determinations, with liquidity risk management 
serving

[[Page 22755]]

as a primary consideration in the enumeration of such collateral 
policies.
Rule 822.A.1. Substitution of Cash Guaranty Fund Deposits
    Rule 822.A establishes a liquidity ``waterfall'' where in the event 
CME needs to obtain liquidity for non-cash collateral for same day 
settlement it will first attempt to obtain liquidity for such 
collateral through asset sale, any uncommitted funding arrangements, 
its committed lines of credit and any committed repurchase agreements. 
In the event CME requires further liquidity or such means were 
unsuccessful, CME may then declare a ``Liquidity Event,'' which is a 
newly defined term in the proposed rule change,\5\ and substitute any 
cash deposited by clearing members in satisfaction of their guaranty 
fund requirements up to the amount of U.S. Treasuries deposited by a 
clearing member subject of such Liquidity Event. The amount of U.S. 
Treasuries substituted will be sized using the haircutted market value 
from the prior day's close of business utilizing a recognized third 
party pricing source and CME's then prevailing haircut schedule. Any 
assets so transferred will be applied as guaranty fund deposits of any 
such clearing member whose cash was substituted and will be allocated 
pro rata among any clearing members with cash deposits. To the extent 
requested by the impacted clearing member within 24 hours of 
substitution, CME Clearing will replace the cash for such substituted 
U.S. Treasuries, to the extent still on deposit, within 29 days of the 
date of original substitution. Additionally, to ensure sufficient cash 
exists in a guaranty fund for the above mentioned substitution, CME may 
require any clearing member that is (or has an affiliate that is) a 
broker-dealer that functions in the operation of markets for U.S. 
Treasuries (a ``U.S. Government Securities Broker-Dealer'' \6\) to 
replace its non-cash guaranty fund deposits with cash upon 60 minutes' 
notice. To the extent that a clearing member fails to provide cash 
within 60 minutes or the request occurs after 3 p.m. Central time, CME 
may debit cash from that clearing member's settlement bank account in 
the amount of the clearing member's non-cash guaranty fund assets.
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    \5\ The proposed rules provide for the following new definition: 
``Liquidity Event'' shall mean the Clearing House requires liquidity 
(1) to satisfy obligations of a defaulted or suspended Clearing 
Member, (2) to satisfy obligations associated with the transfer of 
account(s) of a defaulted or suspended Clearing Member or (3) as a 
result of a liquidity constraint or default by a depositary or 
settlement bank.
    \6\ The proposed rules provide for the following new definition: 
``U.S. Government Securities Broker-Dealer'' shall mean a broker-
dealer that functions in the operation of markets for U.S. 
Treasuries. The functions may include, but are not limited to: (1) 
Acting as a channel for the United States Department of the Treasury 
and investors in primary market for U.S. Treasuries (for example, by 
participating in auctions); (2) Acting as providers of liquidity in 
primary and secondary markets for U.S. Treasuries; and (3) Acting as 
providers of asset transformation and market making services in the 
market for U.S. Treasuries.
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Rule 822.A.2. U.S. Treasury Sale To Meet Clearing House Settlement 
Variation Obligations
    Further, pursuant to proposed Rule 822.A.2 in the event a liquidity 
shortfall remains after the substitution provided by Rule 822.A.1, CME 
may satisfy a settlement variation obligation to a clearing member that 
is (or has an affiliate that is) a U.S. Government Securities Broker-
Dealer with a forced sale of U.S. Treasuries using a valuation based on 
the prior day's closing prices with prevailing CME haircuts applied and 
netting the cash proceeds of the sale against the Clearing House's 
settlement variation obligation. The amount of settlement variation 
that can be satisfied in this manner will be subject to a limit equal 
to the receiving clearing member's guaranty fund requirement at such 
time.
Rule 822.B. Transfer or Disbursement of Collateral as Compensation for 
Portfolio Auction, Sale or Transfer With Notice in Advance
    As part of its default management practices, CME will conduct an 
auction, sale or transfer of defaulted member positions and will 
compensate or receive payment from the winner/transferee of such 
positions based on bids received during the terms of the related 
default management action. Traditionally the compensation is 
denominated in cash. CME is proposing Rule 822.B to provide it with the 
option to include as part of the terms of an auction, sale or transfer 
the ability to satisfy any payment owed to a winner of an auction, sale 
or transfer with Federal Reserve discount window eligible securities 
with a market value (determined by the Clearing House as of the prior 
day's close of business utilizing a recognized third party pricing 
source) equal to the amount of such payment obligation. Any such option 
would be included as part of the terms of the auction, sale or transfer 
in advance of bidding so that bidding firms can provide pricing 
information taking the payment in kind possibility into account.
Rule 901.Q. Requirement To Establish Uncommitted Repo
    New Rule 901.Q will require each clearing member that is a U.S. 
Government Securities Broker-Dealer or has a U.S. Government Securities 
Broker-Dealer affiliate to enter into (or arrange for such affiliate to 
enter into) a master repurchase agreement with CME on terms 
substantially similar to those set out by CME. Consistent with CFTC 
Regulation 39.33(c)(3), CME accepts certain highly marketable 
collateral to satisfy performance bond and guaranty fund obligations. 
CME currently utilizes prearranged master repurchase agreements that 
are highly reliable as required by paragraph 39.33(c)(3)(i)(E)(1) of 
the CFTC regulations. In order to ensure a diverse group of repo 
counterparties available to CME in times of market stress, CME is 
requiring that any clearing member that is a U.S. Government Securities 
Broker-Dealer or has a U.S. Government Securities Broker-Dealer 
affiliate to enter into (or arrange for such affiliate to enter into) a 
master repurchase agreement with CME on terms substantially similar to 
those set out by CME.
    The proposed rule change that is described in this filing is 
limited to CME's business as a DCO clearing products under the 
exclusive jurisdiction of the CFTC. CME has not cleared security based 
swaps and does not plan to and therefore the proposed rule change does 
not impact CME's security-based swap clearing business in any way. The 
proposed changes would become effective immediately. CME notes that it 
has also submitted the proposed rule change that is the subject of this 
filing to its primary regulator, the CFTC, in CME Submission 13-565ARR.
    CME believes the proposed rule change is consistent with the 
requirements of the Exchange Act including Section 17A.\7\ The proposed 
rules enhance CME's existing liquidity framework by providing 
additional liquidity resources, a framework for establishment of 
additional highly reliable prearranged funding arrangements and payment 
in kind of Federal Reserve eligible securities in the event the 
liquidity resources are insufficient. These rule changes are therefore 
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

[[Page 22756]]

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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    Furthermore, the proposed changes are limited to CME's futures and 
swaps clearing businesses, which mean they are limited in their effect 
to products that are under the exclusive jurisdiction of the CFTC. As 
such, the proposed changes are limited to CME's activities as a DCO 
clearing futures that are not security futures and swaps that are not 
security-based swaps. CME notes that the policies of the CFTC with 
respect to administering the CEA are comparable to a number of the 
policies underlying the Exchange Act, such as promoting market 
transparency for over-the-counter derivatives markets, promoting the 
prompt and accurate clearance of transactions and protecting investors 
and the public interest.
    Because the proposed changes are limited in their effect to CME's 
futures and swaps clearing businesses, the proposed changes are 
properly classified as effecting 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, 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.

As such, the changes are therefore consistent with the requirements of 
Section 17A of the Exchange Act \9\ and are properly filed under 
Section 19(b)(3)(A) \10\ and Rule 19b-4(f)(4)(ii) \11\ thereunder.
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    \9\ 15 U.S.C. 78q-1.
    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(4)(ii).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the proposed rule change will have any 
impact, or impose any burden, on competition. The proposed rules merely 
enhance CME's existing liquidity framework by providing additional 
liquidity resources and a framework for establishment of additional 
highly reliable prearranged funding arrangements. Further, the changes 
are limited to CME's futures and swaps clearing businesses and, as 
such, do not affect the security-based swap clearing activities of CME 
in any way and therefore do 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) \12\ of the Act and Rule 19b-4(f)(4)(ii) \13\ 
thereunder. 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.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(4)(ii).
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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-2015-013 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-2015-013. 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-2015-013 
and should be submitted on or before May 14, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-09429 Filed 4-22-15; 8:45 am]
 BILLING CODE 8011-01-P


