Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Amend Rules To Facilitate Customer Portfolio Margining of Interest Rate Futures and Interest Rate Swaps, 50730-50733 [2012-20566]

Download as PDF 50730 Federal Register / Vol. 77, No. 163 / Wednesday, August 22, 2012 / Notices 1. The Commission establishes Docket No. MC2012–44 for consideration of the Request of the United States Postal Service to Transfer Outbound SinglePiece First-Class Mail International Packages and Rolls to the Competitive Product List, filed August 10, 2012. 2. Pursuant to 39 U.S.C. 505, the Commission appoints James F. Callow (Public Representative) to represent the interests of the general public in this proceeding. 3. Comments are due by August 24, 2012. 4. Reply comments are due August 31, 2012. 5. The Secretary shall arrange for the publication of this order in the Federal Register. By the Commission. Ruth Ann Abrams, Acting Secretary. [FR Doc. 2012–20623 Filed 8–21–12; 8:45 am] BILLING CODE 7710–FW–P Correction The following language is added to the end of section III above the third line from the bottom of the second column in the document published in the Federal Register of August 10, 2012, in FR Doc. 2012–19579: be submitted on or before August 31, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority (17 CFR 200.30–3(a)(12)). Elizabeth M. Murphy, Secretary. [FR Doc. 2012–20577 Filed 8–21–12; 8:45 am] Solicitation of Comments BILLING CODE 8011–01–P 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 (www.sec.gov/rules/ sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–DTC–2012–03 on the subject line. Paper Comments SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67599A; File No. SR–DTC– 2012–03] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Implement a Change in the Practices of The Depository Trust Company as They Relate to Post-Payable Adjustments; Correction August 16, 2012. Securities And Exchange Commission. ACTION: Notice; correction. AGENCY: The Securities and Exchange Commission published a document in the Federal Register of August 10, 2012, concerning a Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, to Implement a Change in the Practices of The Depository Trust Company as They Relate to Post-payable Adjustments; The request for comment information was inadvertently omitted from the document. mstockstill on DSK4VPTVN1PROD with NOTICES SUMMARY: FOR FURTHER INFORMATION CONTACT: Kenneth Riitho, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549, (202) 551–5592. VerDate Mar<15>2010 16:53 Aug 21, 2012 Jkt 226001 • 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–DTC–2012–03. 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 (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 the filing also will be available for inspection and copying at the principal office of the DTC. 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–DTC–2012–03 and should PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67650; File No. SR–CME– 2012–22] Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Amend Rules To Facilitate Customer Portfolio Margining of Interest Rate Futures and Interest Rate Swaps August 14, 2012. 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 August 7, 2012, the Chicago Mercantile Exchange, Inc. (‘‘CME’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule changes described in Items I and II, below, which Items have been prepared primarily by CME. The Commission is publishing this Notice and Order to solicit comments on the proposed rule changes from interested persons, and to approve the proposed rule changes on an accelerated basis. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change CME proposes to amend rules related to its interest rate swaps (‘‘IRS’’) and interest rate futures clearing offerings by establishing a portfolio margining program for customer portfolios containing IRS and interest rate futures positions. The text of the proposed rule changes is available on the CME’s Web site at https://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 of and basis for the proposed rule changes and discussed 1 15 2 17 E:\FR\FM\22AUN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 22AUN1 Federal Register / Vol. 77, No. 163 / Wednesday, August 22, 2012 / Notices any comments it received on the proposed rule changes. The text of these statements and comments may be examined at the places specified in Item III below. CME has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of these statements.3 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose of the Proposed Rule Change CME is registered as a derivatives clearing organization with the Commodity Futures Trading Commission (‘‘CFTC’’), and currently operates a substantial business clearing both IRS and interest rate futures contracts. The changes that are the subject of this filing are proposed rules that would establish a portfolio margining program for customer portfolios containing cleared IRS and interest rate futures positions. More specifically, the proposed rule amendments consist of revisions to CME Rule 8G831 (Commingling of Eligible Futures and Swaps Positions) and certain corresponding changes to the CME IRS Clearing House Manual of Operations. CME believes the rule changes will benefit customers and the overall derivatives markets by: (1) Enabling customers who clear trades through CME to obtain the benefit of margin offsets between interest rate futures and IRS, thus reducing their trading costs and allowing for more efficient capital usage; (2) improving the efficiency and effectiveness of risk management; and (3) encouraging greater utilization of clearing, thereby facilitating systemic risk reduction. CME notes that it has also submitted the proposed rule changes that are the subject of this filing to its primary regulator, the CFTC, in CME Submission 12–151, and is awaiting the CFTC’s approval for the proposal.4 As described below, CME believes there is good cause for the Commission to grant approval for the proposed rule changes on an accelerated basis by August 31, 2012 to ensure the proposed rule changes can be implemented immediately when CFTC approval is obtained. 3 The Commission has modified the text of the summaries provided by CME. 4 CFTC rules permit self-regulatory organizations like CME voluntarily to request approval of proposed rule changes. See 17 CFR 40.5. VerDate Mar<15>2010 16:53 Aug 21, 2012 Jkt 226001 a. CME’s Proposed Portfolio Margining Program for Eligible Interest Rate Futures Products and IRS; Commingling of Related Positions CME has considerable experience clearing and managing the risks of interest rate futures, and has been clearing IRS since October 2010. CME notes that it previously implemented a portfolio margining program for interest rate futures and IRS products in proprietary or ‘‘house’’ accounts of clearing member firms.5 i. Eligible Products CME’s IRS offering currently includes seven currencies—viz., USD, EUR, GBP, CAD, AUD, JPY, and CHF—each with varying contract attributes. CME identified the following interest rate futures that will initially be eligible for commingling with IRS in CFTC 4d(f) accounts (i.e., customer cleared swaps accounts): Eurodollar Futures and Treasury Futures, including U.S. Treasury Bonds and 2-, 5- and 10-Year Treasury Notes. These particular futures products were identified as eligible for commingling based on their exposure to similar or correlated risk factors as IRS, thus allowing for margin offsets. In accordance with the proposed amendments to Rule 8G831, interest rate futures may be commingled with IRS in 4d(f) accounts only if the futures are risk reducing. ii. Clearing Firm Eligibility To be permitted to commingle interest rate futures and IRS under CME’s program, a clearing firm must be a futures commission merchant (‘‘FCM’’) registered with the CFTC and an IRS clearing member of CME, and it must also be a clearing member of CME, the Chicago Board of Trade (‘‘CBOT’’), or both in order to clear interest rate futures. FCM clearing members must also satisfy minimum regulatory capital requirements under applicable law (including CFTC regulations and CME/ CBOT rules) and must also be in compliance with CME’s operational and risk-management rules and requirements for IRS and CME/CBOT clearing members. iii. Margin Methodology Pursuant to the proposed changes to CME Rule 8G831, interest rate futures residing with IRS in CFTC 4d(f) accounts held at CME will be subject to the margin model developed by CME for IRS. This model is based on an Historical Value at Risk (HVaR) 5 See SR–CME–2012–05, Securities Exchange Act Release No. 34–66641 (Mar. 21, 2012), 77 FR 18288 (Mar. 27, 2012). PO 00000 Frm 00058 Fmt 4703 Sfmt 4703 50731 methodology with Exponentially Weighted Moving Average (EWMA) volatility forecasting. CME’s margin model for IRS covers at least 99 percent of potential losses over any five-day period in a large universe of portfolios, covering 99 percent of market moves. HVaR was selected both for its scalability across multiple currencies and its transparency to market participants: it is a standard, well understood model and is easily replicable. CME has enhanced the multi-currency HVaR model to address risks arising from rate risk and foreign exchange conversion risks. The model is designed to mitigate the rate risks created by additional currencies, correlated yield curves, and differing liquidity profiles. The model also takes into account foreign exchange conversion rates and their implication on collateral liquidation for multicurrency losses. In addition, the HVaR model provides margin offsets for multicurrency portfolios. iv. Default Scenarios CME has considered issues involved with the default of a clearing member and/or the default by one or more of a clearing member’s cleared swaps customers with a commingled account. Because the commingled positions would reside in CFTC 4d(f) accounts, these customer commingled interest rate futures and IRS (and collateral associated therewith) would be part of the customer ‘‘cleared swaps’’ account class under the CFTC’s Part 190 Bankruptcy Rules. This means these positions would be treated in accordance with the CFTC’s Part 22 regulations providing for legal segregation of customer funds with operational commingling, which become effective on November 8, 2012. Any default by an IRS clearing member—including a default involving customer commingled positions—would also be governed by CME’s rules and default management procedures for IRS (including CME Rules 8G802, 8G814, and 8G975). These rules and procedures are based on input from IRS clearing members and market participants, as well as CME’s depth of default management experience from many years as a derivatives clearing house. CME’s default management rules and procedures are reviewed and updated as circumstances warrant. CME Clearing makes these updates in consultation with the CME IRS Risk Committee and the CME IRS Default Management Committee. E:\FR\FM\22AUN1.SGM 22AUN1 50732 Federal Register / Vol. 77, No. 163 / Wednesday, August 22, 2012 / Notices 2. Statutory Basis mstockstill on DSK4VPTVN1PROD with NOTICES CME believes the proposed rule changes are consistent with the requirements of the Act, including Section 17A,6 and the rules and regulations thereunder applicable to CME. CME observes that the proposed rule changes involve improvements and efficiencies that are related to CME’s interest rate futures and swap product offerings for investors. Accordingly, CME believes the proposed rule changes will benefit customers in the following ways: (i) By enabling customers who clear trades through CME to obtain the benefit of margin offsets between interest rate futures and IRS, thus reducing their trading costs and allowing for more efficient capital usage; (ii) by improving the efficiency and effectiveness of risk management; and (iii) by encouraging greater utilization of clearing, thereby facilitating systemic risk reduction. CME contends that the proposed changes are designed to promote the prompt and accurate clearance and settlement of securities transactions and derivatives agreements, contracts and transactions; to assure the safeguarding of securities and funds that are in CME’s custody or control; and, in general, to help to protect investors and the public interest. Furthermore, CME points out that the proposed rule changes are limited to the clearing of futures and swaps, and thus relate solely to CME’s futures and swaps clearing activities pursuant to its registration as a derivatives clearing organization under the Commodity Exchange Act (‘‘CEA’’). CME thus asserts that the proposed rule changes do not significantly affect any of CME’s securities clearing operations or any related rights or obligations of CME or persons using such service. CME notes that the policies of the CEA with respect to clearing are comparable to a number of the policies underlying the 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. B. Self-Regulatory Organization’s Statement on Burden on Competition CME does not believe that the proposed rule changes will have any impact, or impose any burden, on competition. 6 15 U.S.C. 78q–1. VerDate Mar<15>2010 16:53 Aug 21, 2012 Jkt 226001 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 these proposed rule changes. CME has not received any unsolicited written comments from interested parties. III. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule changes are consistent with the Act. Comments may be submitted by any of the following methods: • Electronic comments may be submitted by using the Commission’s Internet comment form (https://www.sec. gov/rules/sro.shtml), or by sending an email to rule-comments@sec.gov. Please include File No. SR–CME–2012–22 on the subject line. • Paper comments should be sent in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–0609. All submissions should refer to File Number SR–CME–2012–22. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule changes that are filed with the Commission, and all written communications relating to the proposed rule changes 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 also will be available for inspection and copying at the principal office of CME. 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–2012–22 and should be submitted on or before September 12, 2012. PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 IV. Commission’s Findings and Order Granting Accelerated Approval of Proposed Rule Change Section 19(b) of the Act 7 directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. The Commission concludes that the proposed rule changes are consistent with the requirements of the Act, in particular with the requirements of Section 17A of the Act,8 and the rules and regulations thereunder applicable to CME. In particular, the Commission concludes that the proposed rule changes are consistent with Section 17A(b)(3)(F) of the Act,9 which requires, among other things, that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of derivative agreements, contracts and transactions. It is the Commission’s view that the proposed rule changes should allow CME to enhance its services in clearing IRS and interest rate futures products, thereby promoting the prompt and accurate clearance and settlement of derivative agreements, contracts and transactions. In its filing, CME requested that the Commission approve these proposed rule changes on an accelerated basis, so they can become effective prior to August 31, 2012. CME has articulated three reasons for granting its request for accelerated approval. One, the products covered by this filing, and CME’s operations as a derivatives clearing organization for such products, are regulated by the CFTC under the CEA. Two, the proposed rule changes affect the IRS swaps and interest rate futures that CME clears, and therefore relate solely to its swaps and futures clearing activities, and do not significantly relate to CME’s functions as a clearing agency for security-based swaps. Three, CME believes the rules will benefit customers and the overall derivatives markets in the following ways: (i) By enabling customers who clear trades through CME to obtain the benefit of margin offsets between interest rate futures and IRS, thus reducing their trading costs and allowing for more efficient capital usage; (ii) by improving the efficiency and effectiveness of risk management; 7 15 U.S.C. 78s(b). U.S.C. 78q–1. In approving these proposed rule changes, the Commission has considered the proposed rule changes’ impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 9 15 U.S.C. 78q–1(b)(3)(F). 8 15 E:\FR\FM\22AUN1.SGM 22AUN1 Federal Register / Vol. 77, No. 163 / Wednesday, August 22, 2012 / Notices and (iii) by encouraging greater utilization of clearing, thereby facilitating systemic risk reduction. CME contends that, as a result, the proposed rule changes will help to protect investors and the public interest. The Commission concludes that there is good cause, pursuant to Section 19(b)(2) of the Act,10 for approving the proposed rule changes prior to the thirtieth day after the date of publication of notice in the Federal Register because: (i) The proposed rule changes do not significantly affect any of CME’s securities clearing operations (whether in existence or contemplated by its rules) or any related rights or obligations of CME or persons using such service; and (ii) the activity relating to CME’s non-security clearing operations for which CME is seeking approval is subject to regulation by another federal regulator. V. Conclusion It is therefore ordered pursuant to Section 19(b)(2) of the Act that the proposed rule change (SR–CME–2012– 22) be, and hereby is, APPROVED on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 Elizabeth M. Murphy, Secretary. [FR Doc. 2012–20566 Filed 8–21–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67664; File No. SR– NYSEMKT–2012–10] Self-Regulatory Organizations; NYSE MKT LLC; Order Approving a Proposed Rule Change Amending the NYSE MKT Price List To Provide for Additional Co-Location Services and Establish Related Fees mstockstill on DSK4VPTVN1PROD with NOTICES August 15, 2012. I. Introduction On June 13, 2012, NYSE MKT LLC (‘‘NYSE MKT’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend the NYSE MKT Price List to provide for additional co-location services and establish related fees. The 10 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 11 17 VerDate Mar<15>2010 16:53 Aug 21, 2012 Jkt 226001 proposed rule change was published for comment in the Federal Register on July 2, 2012.3 The Commission received no comments on the proposal. This order approves the proposed rule change. II. Description of the Proposed Rule Change The Exchange provides co-location services to Users from a data center in Mahwah, New Jersey.4 The Exchange’s co-location services allow Users to rent space in the data center so that they may locate their electronic servers in close physical proximity to the Exchange’s trading and execution system.5 The Exchange proposes to make multiple changes to provide for additional colocation services and establish related fees. Cabinet Cross Connects Currently the Exchange allows Users with more than one cabinet within the data center to purchase one or more fiber cross connects between its cabinets. The Exchange proposes that each User be permitted to purchase cross connects between its own cabinets, as is currently permitted, as well as between its cabinet(s) and the cabinets of separate Users within the data center.6 A cross connect between Users could be requested in order to receive technical support, order routing and/or market data delivery services from another User. In addition, the Exchange proposes to bundle cross connects such that a single sheath can hold either one cross connect or several cross connects in multiples of six (e.g., six, twelve, eighteen or twenty-four cross connects). The Exchange proposes to charge a $500 initial fee for either single or bundled cross connects and a monthly charge contingent upon the number of cross connects established.7 3 See Securities Exchange Act Release No. 67261 (June 26, 2012), 77 FR 39309 (‘‘Notice’’). 4 See Securities Exchange Act Release No. 62961 (September 21, 2010), 75 FR 59299 (September 27, 2010) (SR–NYSEAmex–2010–80). 5 For purposes of its co-location services, the term ‘‘User’’ includes (i) member organizations, as that term is defined in Rule 2(b)—Equities; (ii) Sponsored Participants, as that term is defined in Rule 123B.30(a)(ii)(B)—Equities; and (iii) nonmember organization broker-dealers and vendors that request to receive co-location services directly from the Exchange. 6 The Exchange notes that only the User requesting the cross connect would be charged the related initial and monthly fees; the counterparty User would simply be required to give permission for the cross connection. 7 The Exchange proposes to charge $500 monthly to furnish and install one cross connect between cabinets. For a bundle of six cross connects, the monthly charge would be $1,500; 12 cross connects would be $2,500 per month; 18 cross connects would be $3,200 per month; and 24 cross connects would be $3,900 per month. PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 50733 10 Gb LCN Connections Users are currently able to purchase access to the Exchange’s Liquidity Center Network (‘‘LCN’’), a local area network available in the data center, in either one or ten gigabit (‘‘Gb’’) capacities, for which Users incur an initial and monthly fee per connection. The Exchange proposes that a User that purchases five 10 Gb LCN connections would only be charged the initial fee for a sixth 10 Gb LCN connection and would not be charged the monthly fee that would otherwise be applicable. LCN CSP Connections A User may act as a content service provider (a ‘‘CSP User’’) and deliver services to another User in the data center (a ‘‘Subscribing User’’), such as order routing or market data delivery services. The services can be provided either via direct cross connect between the CSP User and Subscribing Users; or in addition, CSP Users can send data to, and communicate with, all their properly authorized Subscribing Users at once, via a dedicated LCN Connection (an ‘‘LCN CSP’’ connection). The Exchange proposes an initial connection fee for CSP Users establishing a LCN CSP connection as well as a monthly charge depending on whether the connection is a 1 or 10 Gb circuit. The Subscribing User receives the services via its standard LCN connection and is charged an initial and monthly fee that reflects the benefit of receiving services in this manner.8 Cages A User may purchase a cage to house its cabinets within the data center. The Exchange charges fees for cages based on the size of the cage, which corresponds to the number of cabinets housed therein. The Exchange is proposing the following fees for cages: • For 1–14 cabinets, a $5,000 initial charge plus $2,700 monthly charge; • For 15–28 cabinets, a $10,000 initial charge plus $4,100 monthly charge; and • For 29 cabinets or more, a $15,000 initial charge plus $5,500 monthly charge. Change Fee A User may arrange for the Exchange to reconfigure, modify, or otherwise change a co-location service that the Exchange has already established for the User. The Exchange proposes to charge 8 For a CSP User, a 1Gb Circuit for a LCN CSP connection has a $6,000 connection charge plus a $500 monthly fee. A 10Gb Circuit for a LCN CSP connection has a $10,000 initial connection charge plus a $5,000 monthly fee. A CSP Subscriber has an initial charge of $950 plus a $300 monthly fee per LCN CSP. E:\FR\FM\22AUN1.SGM 22AUN1

Agencies

[Federal Register Volume 77, Number 163 (Wednesday, August 22, 2012)]
[Notices]
[Pages 50730-50733]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20566]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67650; File No. SR-CME-2012-22]


Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Amend Rules To Facilitate Customer Portfolio Margining 
of Interest Rate Futures and Interest Rate Swaps

August 14, 2012.
    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 August 7, 2012, the Chicago Mercantile Exchange, Inc. (``CME'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule changes described in Items I and II, below, which Items 
have been prepared primarily by CME. The Commission is publishing this 
Notice and Order to solicit comments on the proposed rule changes from 
interested persons, and to approve the proposed rule changes on an 
accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CME proposes to amend rules related to its interest rate swaps 
(``IRS'') and interest rate futures clearing offerings by establishing 
a portfolio margining program for customer portfolios containing IRS 
and interest rate futures positions. The text of the proposed rule 
changes is available on the CME's Web site at https://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 of and basis for the proposed rule changes and 
discussed

[[Page 50731]]

any comments it received on the proposed rule changes. The text of 
these statements and comments may be examined at the places specified 
in Item III below. CME has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of these statements.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
provided by CME.
---------------------------------------------------------------------------

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

1. Purpose of the Proposed Rule Change
    CME is registered as a derivatives clearing organization with the 
Commodity Futures Trading Commission (``CFTC''), and currently operates 
a substantial business clearing both IRS and interest rate futures 
contracts. The changes that are the subject of this filing are proposed 
rules that would establish a portfolio margining program for customer 
portfolios containing cleared IRS and interest rate futures positions. 
More specifically, the proposed rule amendments consist of revisions to 
CME Rule 8G831 (Commingling of Eligible Futures and Swaps Positions) 
and certain corresponding changes to the CME IRS Clearing House Manual 
of Operations.
    CME believes the rule changes will benefit customers and the 
overall derivatives markets by: (1) Enabling customers who clear trades 
through CME to obtain the benefit of margin offsets between interest 
rate futures and IRS, thus reducing their trading costs and allowing 
for more efficient capital usage; (2) improving the efficiency and 
effectiveness of risk management; and (3) encouraging greater 
utilization of clearing, thereby facilitating systemic risk reduction.
    CME notes that it has also submitted the proposed rule changes that 
are the subject of this filing to its primary regulator, the CFTC, in 
CME Submission 12-151, and is awaiting the CFTC's approval for the 
proposal.\4\ As described below, CME believes there is good cause for 
the Commission to grant approval for the proposed rule changes on an 
accelerated basis by August 31, 2012 to ensure the proposed rule 
changes can be implemented immediately when CFTC approval is obtained.
---------------------------------------------------------------------------

    \4\ CFTC rules permit self-regulatory organizations like CME 
voluntarily to request approval of proposed rule changes. See 17 CFR 
40.5.
---------------------------------------------------------------------------

a. CME's Proposed Portfolio Margining Program for Eligible Interest 
Rate Futures Products and IRS; Commingling of Related Positions
    CME has considerable experience clearing and managing the risks of 
interest rate futures, and has been clearing IRS since October 2010. 
CME notes that it previously implemented a portfolio margining program 
for interest rate futures and IRS products in proprietary or ``house'' 
accounts of clearing member firms.\5\
---------------------------------------------------------------------------

    \5\ See SR-CME-2012-05, Securities Exchange Act Release No. 34-
66641 (Mar. 21, 2012), 77 FR 18288 (Mar. 27, 2012).
---------------------------------------------------------------------------

i. Eligible Products
    CME's IRS offering currently includes seven currencies--viz., USD, 
EUR, GBP, CAD, AUD, JPY, and CHF--each with varying contract 
attributes. CME identified the following interest rate futures that 
will initially be eligible for commingling with IRS in CFTC 4d(f) 
accounts (i.e., customer cleared swaps accounts): Eurodollar Futures 
and Treasury Futures, including U.S. Treasury Bonds and 2-, 5- and 10-
Year Treasury Notes. These particular futures products were identified 
as eligible for commingling based on their exposure to similar or 
correlated risk factors as IRS, thus allowing for margin offsets. In 
accordance with the proposed amendments to Rule 8G831, interest rate 
futures may be commingled with IRS in 4d(f) accounts only if the 
futures are risk reducing.
ii. Clearing Firm Eligibility
    To be permitted to commingle interest rate futures and IRS under 
CME's program, a clearing firm must be a futures commission merchant 
(``FCM'') registered with the CFTC and an IRS clearing member of CME, 
and it must also be a clearing member of CME, the Chicago Board of 
Trade (``CBOT''), or both in order to clear interest rate futures. FCM 
clearing members must also satisfy minimum regulatory capital 
requirements under applicable law (including CFTC regulations and CME/
CBOT rules) and must also be in compliance with CME's operational and 
risk-management rules and requirements for IRS and CME/CBOT clearing 
members.
iii. Margin Methodology
    Pursuant to the proposed changes to CME Rule 8G831, interest rate 
futures residing with IRS in CFTC 4d(f) accounts held at CME will be 
subject to the margin model developed by CME for IRS. This model is 
based on an Historical Value at Risk (HVaR) methodology with 
Exponentially Weighted Moving Average (EWMA) volatility forecasting. 
CME's margin model for IRS covers at least 99 percent of potential 
losses over any five-day period in a large universe of portfolios, 
covering 99 percent of market moves.
    HVaR was selected both for its scalability across multiple 
currencies and its transparency to market participants: it is a 
standard, well understood model and is easily replicable. CME has 
enhanced the multi-currency HVaR model to address risks arising from 
rate risk and foreign exchange conversion risks. The model is designed 
to mitigate the rate risks created by additional currencies, correlated 
yield curves, and differing liquidity profiles. The model also takes 
into account foreign exchange conversion rates and their implication on 
collateral liquidation for multi-currency losses. In addition, the HVaR 
model provides margin offsets for multi-currency portfolios.
iv. Default Scenarios
    CME has considered issues involved with the default of a clearing 
member and/or the default by one or more of a clearing member's cleared 
swaps customers with a commingled account. Because the commingled 
positions would reside in CFTC 4d(f) accounts, these customer 
commingled interest rate futures and IRS (and collateral associated 
therewith) would be part of the customer ``cleared swaps'' account 
class under the CFTC's Part 190 Bankruptcy Rules. This means these 
positions would be treated in accordance with the CFTC's Part 22 
regulations providing for legal segregation of customer funds with 
operational commingling, which become effective on November 8, 2012.
    Any default by an IRS clearing member--including a default 
involving customer commingled positions--would also be governed by 
CME's rules and default management procedures for IRS (including CME 
Rules 8G802, 8G814, and 8G975). These rules and procedures are based on 
input from IRS clearing members and market participants, as well as 
CME's depth of default management experience from many years as a 
derivatives clearing house. CME's default management rules and 
procedures are reviewed and updated as circumstances warrant. CME 
Clearing makes these updates in consultation with the CME IRS Risk 
Committee and the CME IRS Default Management Committee.

[[Page 50732]]

2. Statutory Basis
    CME believes the proposed rule changes are consistent with the 
requirements of the Act, including Section 17A,\6\ and the rules and 
regulations thereunder applicable to CME. CME observes that the 
proposed rule changes involve improvements and efficiencies that are 
related to CME's interest rate futures and swap product offerings for 
investors. Accordingly, CME believes the proposed rule changes will 
benefit customers in the following ways: (i) By enabling customers who 
clear trades through CME to obtain the benefit of margin offsets 
between interest rate futures and IRS, thus reducing their trading 
costs and allowing for more efficient capital usage; (ii) by improving 
the efficiency and effectiveness of risk management; and (iii) by 
encouraging greater utilization of clearing, thereby facilitating 
systemic risk reduction. CME contends that the proposed changes are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and derivatives agreements, contracts and 
transactions; to assure the safeguarding of securities and funds that 
are in CME's custody or control; and, in general, to help to protect 
investors and the public interest.
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    \6\ 15 U.S.C. 78q-1.
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    Furthermore, CME points out that the proposed rule changes are 
limited to the clearing of futures and swaps, and thus relate solely to 
CME's futures and swaps clearing activities pursuant to its 
registration as a derivatives clearing organization under the Commodity 
Exchange Act (``CEA''). CME thus asserts that the proposed rule changes 
do not significantly affect any of CME's securities clearing operations 
or any related rights or obligations of CME or persons using such 
service. CME notes that the policies of the CEA with respect to 
clearing are comparable to a number of the policies underlying the 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the proposed rule changes will have any 
impact, or impose any burden, on competition.

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 these proposed rule changes. CME has not received any 
unsolicited written comments from interested parties.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
changes are consistent with the Act. Comments may be submitted by any 
of the following methods:
     Electronic comments may be submitted by using the 
Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml), or by sending an email to rule-comments@sec.gov. Please 
include File No. SR-CME-2012-22 on the subject line.
     Paper comments should be sent in triplicate to Elizabeth 
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CME-2012-22. To help 
the Commission process and review your comments more efficiently, 
please use only one method of submission. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule changes that 
are filed with the Commission, and all written communications relating 
to the proposed rule changes 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 also will be 
available for inspection and copying at the principal office of CME. 
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-2012-22 and 
should be submitted on or before September 12, 2012.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    Section 19(b) of the Act \7\ directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. The Commission concludes that the proposed rule changes 
are consistent with the requirements of the Act, in particular with the 
requirements of Section 17A of the Act,\8\ and the rules and 
regulations thereunder applicable to CME. In particular, the Commission 
concludes that the proposed rule changes are consistent with Section 
17A(b)(3)(F) of the Act,\9\ which requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of derivative agreements, contracts 
and transactions. It is the Commission's view that the proposed rule 
changes should allow CME to enhance its services in clearing IRS and 
interest rate futures products, thereby promoting the prompt and 
accurate clearance and settlement of derivative agreements, contracts 
and transactions.
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    \7\ 15 U.S.C. 78s(b).
    \8\ 15 U.S.C. 78q-1. In approving these proposed rule changes, 
the Commission has considered the proposed rule changes' impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    In its filing, CME requested that the Commission approve these 
proposed rule changes on an accelerated basis, so they can become 
effective prior to August 31, 2012. CME has articulated three reasons 
for granting its request for accelerated approval. One, the products 
covered by this filing, and CME's operations as a derivatives clearing 
organization for such products, are regulated by the CFTC under the 
CEA. Two, the proposed rule changes affect the IRS swaps and interest 
rate futures that CME clears, and therefore relate solely to its swaps 
and futures clearing activities, and do not significantly relate to 
CME's functions as a clearing agency for security-based swaps. Three, 
CME believes the rules will benefit customers and the overall 
derivatives markets in the following ways: (i) By enabling customers 
who clear trades through CME to obtain the benefit of margin offsets 
between interest rate futures and IRS, thus reducing their trading 
costs and allowing for more efficient capital usage; (ii) by improving 
the efficiency and effectiveness of risk management;

[[Page 50733]]

and (iii) by encouraging greater utilization of clearing, thereby 
facilitating systemic risk reduction. CME contends that, as a result, 
the proposed rule changes will help to protect investors and the public 
interest.
    The Commission concludes that there is good cause, pursuant to 
Section 19(b)(2) of the Act,\10\ for approving the proposed rule 
changes prior to the thirtieth day after the date of publication of 
notice in the Federal Register because: (i) The proposed rule changes 
do not significantly affect any of CME's securities clearing operations 
(whether in existence or contemplated by its rules) or any related 
rights or obligations of CME or persons using such service; and (ii) 
the activity relating to CME's non-security clearing operations for 
which CME is seeking approval is subject to regulation by another 
federal regulator.
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    \10\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-CME-2012-22) be, and hereby is, 
APPROVED on an accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20566 Filed 8-21-12; 8:45 am]
BILLING CODE 8011-01-P
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