Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; Order Approving Proposed Rule Change To Amend Rules in Connection With Status as a “Deemed Registered” Clearing Agency, 75454-75459 [2012-30648]
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75454
Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices
‘‘Proxy’’ features work. For the
Conversion feature, the Reorg Guide
will now state that: ‘‘On Conversions
where the entitlement could be Cash,
proceeds are credited to your account
after the price determination period,’’
and ‘‘DTC will chill Delivery Orders the
evening prior to the redemption date.’’
For the Proxy feature, the Reorg Guide
will now state that: ‘‘DTC also offers
election processing for Consent
Solicitation events via its ATOP
(Automated Tender Offer Program)
service. Under this service, DTC allows
participant instructions on Consent
Solicitation events to be accepted via
ATOP and transmitted electronically to
balloting agents.’’ These changes will
provide a more concise and coherent
description of the procedures.
The proposed rule change is
consistent with the requirements of the
Act, specifically Section 17A(b)(3)(F),6
and the rules and regulations
thereunder, applicable to DTC in that it
promotes efficiencies in the prompt and
accurate clearance and settlement of
securities transactions by enhancing the
utilization of DTC’s existing services.
Moreover, the proposed rule change
reduces the costs, inefficiencies and
risks associated with the processing or
reorganization events by clarifying the
procedures associated with the
Reorganization Service.
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
DTC does not believe that the
proposed rule change will have any
impact, or impose any burden, on
competition.
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(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments relating to the
proposed rule change have not yet been
solicited or received. DTC will notify
the Commission of any written
comments received by DTC.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The forgoing rule change has become
effective pursuant to Section
19(b)(3)(A)(iii) of the Act 7 and Rule
19b–4(f)(4)(i) 8 thereunder because it
effects a change in an existing service of
DTC that does not significantly affect
the safeguarding of securities or funds
in the custody or control of DTC or for
which it is responsible and does not
6 15
U.S.C. 78q–1(b)(3)(F).
U.S.C. 78s(b)(3)(A)(iii).
8 17 CFR 240.19b–4(f)(4)(i).
7 15
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significantly affect the respective rights
or obligations of DTC or persons using
this service. 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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
No. SR–DTC- 2012–09 on the subject
line.
Paper Comments
• Send in triplicate to Elizabeth M.
Murphy, Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC, 20549–1090.
All submissions should refer to File
Number SR–DTC–2012–09. 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 (https://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 DTC and on DTC’s Web site at
https://www.dtcc.com/downloads/legal/
rule_filings/2012/dtc/SR-DTC-201209.pdf.
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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–2012–09 and should
be submitted on or before January 10,
2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–30649 Filed 12–19–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68441; File No. SR–CME–
2012–26]
Self-Regulatory Organizations;
Chicago Mercantile Exchange Inc.;
Order Approving Proposed Rule
Change To Amend Rules in
Connection With Status as a ‘‘Deemed
Registered’’ Clearing Agency
December 14, 2012.
I. Introduction
On October 15, 2012, Chicago
Mercantile Exchange Inc. (‘‘CME’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change (SR–CME–2012–
26) pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
The proposed rule change was
published for comment in the Federal
Register on November 2, 2012.3 The
Commission received no comment
letters regarding the proposal. For the
reasons discussed below, the
Commission is granting approval of the
proposed rule change.
II. Description
A. Background—CME’s Credit Default
Swap Business and ‘‘Deemed
Registered’’ Status
CME began clearing credit default
swaps prior to the passage of the DoddFrank Act.4 These activities were
facilitated by temporary exemptive
relief granted by the Commission to
9 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 68121 (Oct.
29, 2012), 77 FR 66211 (Nov. 2, 2012).
4 The Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat.1376 (2010).
1 15
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CME.5 Upon the passage of the DoddFrank Act, on July 16, 2011, this
temporary relief expired.6 To ensure
that entities that were clearing credit
default swaps prior to the passage of
Dodd-Frank based on exemptions
granted by the Commission could
continue to do so without interruption,
Section 763(b) of the Dodd-Frank Act 7
provided that (i) a depository institution
registered with the Commodities
Futures Trading Commission (‘‘CFTC’’)
that cleared swaps as a multilateral
clearing organization prior to the date of
enactment of the Dodd-Frank Act and
(ii) a derivatives clearing organization
(‘‘DCO’’) registered with the CFTC that
cleared swaps pursuant to an exemption
from registration as a clearing agency
prior to the date of enactment of the
Dodd-Frank Act will be deemed
registered with the Commission as a
clearing agency solely for the purpose of
clearing security-based swaps (‘‘Deemed
Registered Provision’’).8 On July 16,
2011, the Deemed Registered Provision,
along with other general provisions
under Title VII of the Dodd-Frank Act,
became effective,9 thereby requiring
each affected clearing agency, including
CME, to comply with all requirements
of the Act and the rules and regulations
thereunder applicable to clearing
agencies registered with the
Commission under the Act.
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5 See
generally Securities Exchange Act Release
Nos. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19,
2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18,
2009), and 61803 (Mar. 30, 2010), 75 FR 17181
(Apr. 5, 2010) (temporary exemptions in connection
with CDS clearing by Chicago Mercantile Exchange
Inc.). In addition, the Commission issued interim
final temporary rules that provide exemptions
under the Securities Act of 1933 and the Securities
Exchange Act of 1934 for CDS to facilitate the
operation of central counterparties for the CDS
market. See Securities Act Release Nos. 8999 (Jan.
14, 2009), 74 FR 3967 (Jan. 22, 2009) (initial
approval), 9063 (Sep. 14, 2009), 74 FR 47719 (Sep.
17, 2009) (extension until Nov. 30, 2010), and 9158
(Nov. 30, 2010) (extension until Jul. 16, 2011).
6 Securities Exchange Act Release No. 61803
(Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010).
7 The Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat.1376 (2010).
8 See Section 763(b) of the Dodd-Frank Act
(adding new Section 17A(l) to the Exchange Act, 15
U.S.C. 78q–1(1)). Under this Deemed Registered
Provision, CME became a registered clearing agency
solely for the purpose of clearing security-based
swaps.
9 Section 774 of the Dodd-Frank Act states,
‘‘[u]nless otherwise provided, the provisions of this
subtitle shall take effect on the later of 360 days
after the date of the enactment of this subtitle or,
to the extent a provision of this subtitle requires a
rulemaking, not less than 60 days after publication
of the final rule or regulation implementing such
provision of this subtitle.’’
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B. Proposed Changes in Furtherance of
Compliance With the Act
In light of CME’s requirement to
comply with the Act and the rules and
regulations thereunder, CME proposed
rule changes concerning membership
participation standards, administrative
practices, and financial safety, and
provided a description of CME’s
governance arrangements in the context
of the fair representation requirement in
Section 17A(b)(3)(C) of the Act, as they
relate to the CDS portion of CME’s
clearing activities. The proposed
changes are found within Chapter 8H of
the CME Rulebook and are summarized
and discussed in detail below. The text
of the proposed 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.
III. Discussion
A. Statutory Standard
Section 19(b)(2)(C) of the Act 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.10 In
particular, Section 17A(b) of the Act
requires that, among other things, the
rules of a clearing agency:
• Subject to the provisions of Section
17A(b)(4) of the Act,11 provide that any (i)
registered broker or dealer, (ii) other
registered clearing agency, (iii) registered
investment company, (iv) bank, (v) insurance
company, or (vi) other person or class of
persons as the Commission, by rule, may
from time to time designate as appropriate to
the development of a national system for the
prompt and accurate clearance and
settlement of securities transactions may
become a participant in such clearing
agency; 12
• Provide for fair representation of the
clearing agency’s shareholders (or members)
and participants in the selection of its
directors and administration of its affairs; 13
• Are designed to promote the prompt and
accurate clearance and settlement of
securities transactions and, to the extent
applicable, derivative agreements, contracts,
and transactions, to assure the safeguarding
of securities and funds which are in the
custody or control of the clearing agency and
for which it is responsible, to foster
cooperation and coordination with persons
engaged in the clearance and settlement of
securities transactions, to remove
impediments to and perfect the mechanism
of a national system for the prompt and
10 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(4).
12 15 U.S.C. 78q–1(b)(3)(B).
13 15 U.S.C. 78q–1(b)(3)(C).
11 15
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accurate clearance and settlement of
securities transactions, and, in general, to
protect investors and the public interest; and
are not designed to permit unfair
discrimination in the admission of
participants or among participants in the use
of the clearing agency, or to regulate by virtue
of any authority conferred by the Act matters
not related to the purposes of this section or
the administration of the clearing agency; 14
• Provide that (subject to any rule or order
of the Commission pursuant to section 17(d)
or 19(g)(2) of the Act) its participants shall
be appropriately disciplined for violation of
any provision of the rules of the clearing
agency by expulsion, suspension, limitation
of activities, functions, and operations, fine,
censure, or any other fitting sanction; 15 and
• Are in accordance with the provisions of
Section 17A(b)(5) of the Act,16 and, in
general, provide a fair procedure with respect
to the disciplining of participants, the denial
of participation to any persons seeking
participation therein, and the prohibition or
limitation by the clearing agency of any
person with respect to access to services
offered by the clearing agency.17
B. Summary of Proposed Rule Changes
1. Membership Participation Standards
CME Rule 8H04, CDS Clearing
Member Obligations and Qualifications.
CME Rule 8H04 sets forth CDS Clearing
Member obligations and qualifications.
CME has proposed changes to this rule
to provide specifically that CME may
approve an application for CDS Clearing
Membership to permit the clearing of
security-based swaps submitted by any
corporation, partnership, limited
liability company, or any other type of
entity, provided that CME determines
such applicant satisfies applicable
requirements. CME has also proposed to
state in this rule that applicants within
one of the enumerated categories of
participants in Section 17A(b)(3)(B) of
the Act 18 are specifically eligible to
become CDS Clearing Members for the
purpose of clearing security-based
swaps. Further, additional revisions to
CME Rule 8H04 would make clear that
CME may, and in cases in which the
Commission by order directs, shall,
deny an application for CDS Clearing
Membership to any person subject to a
statutory disqualification, as such term
is defined by the Act.
The Commission believes that these
proposed changes to CME Rule 8H04 are
consistent with Sections 17A(b)(3)(B) 19
and 17A(b)(4)(B) 20 of the Act, which
provide that a registered clearing agency
shall provide in its rules that the
14 15
U.S.C. 78q–1(b)(3)(F).
U.S.C. 78q–1(b)(4)(G).
16 15 U.S.C. 78q–1(b)(5).
17 15 U.S.C. 78q–1(b)(4)(H).
18 15 U.S.C. 78q–1(b)(3)(B).
19 15 U.S.C. 78s(b)(2)(B).
20 15 U.S.C. 78s(b)(4).
15 15
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categories of applicants enumerated in
Section 17A(b)(3)(B) of the Act 21 may
become a participant in the registered
clearing agency, subject to meeting the
standards of financial responsibility,
operational capability, experience, and
competence prescribed by the rules of
the clearing agency, among other
things.22 The Commission believes the
proposed changes relating to CME’s
authority and obligation to restrict the
membership and activities of persons
subject to a statutory disqualification are
consistent with Section 17A(b)(4)(A),23
which provides, among other things,
that a registered clearing agency may,
and in cases in which the Commission,
by order, directs as appropriate in the
public interest shall, deny participation
to any person subject to a statutory
disqualification. In addition, the
Commission finds that these proposed
changes are consistent with Section
17A(b)(3)(F) of the Act,24 which
requires, among other things, that a
registered clearing agency’s rules not be
designed to permit unfair
discrimination in the admission of
participants or among participants in
the use of the clearing agency.
2. Administrative Practices
New CME Rule 8H931. CME has
proposed to add new CME Rule 8H931,
which would state that rules that relate
to CME’s activities as a clearing agency
clearing security-based swaps will be
adopted, altered, amended or repealed
in accordance with the applicable
requirements of Section 19(b) of the Act.
Under this rule, CME would promptly
notify all CDS Clearing Members of any
proposal it has made to change, revise,
add or repeal any rule that relates to its
activities as a securities clearing agency.
Such notice would include the text or
a brief description of any such proposed
rule change, along with its purpose and
effect, in accordance with the
requirements of the Act. CDS Clearing
Members would have the opportunity to
submit comments with respect to any
such proposal in accordance with the
applicable Commission rules. The
Commission believes that proposed
CME Rule 8H931 is consistent with
CME’s obligations as a clearing agency
registered under the Act to file its
proposed rule changes pursuant to
21 15
U.S.C. 78s(b)(2)(B).
Commission is not making a determination
whether this proposed rule change or any other
proposed rule change discussed in this Order is
sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
23 15 U.S.C. 78s(b)(4)(A).
24 15 U.S.C. 78s(b)(3)(F).
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22 The
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Section 19(b) of the Act and Rule 19b–
4 thereunder.25
New CME Rule 8H932, Records
Relating to Disciplinary Proceedings
and Security-Based Swaps. Proposed
CME Rule 8H932 would require CME to
maintain records of any disciplinary
proceeding related to the activities of a
CDS Clearing Member involving
security-based swaps in accordance
with the requirements of the Act and
Rule 17a–1 thereunder. The
Commission believes that proposed
CME Rule 8H932 is consistent with
CME’s obligation as a clearing agency
under Section 17(a) 26 and Rule 17a–1
thereunder 27 to maintain records made
or received by it in the course of its
business as such and in the conduct of
its self-regulatory activity.28
New CME Rule 8H933, Notice
Regarding Certain Disciplinary Matters
Related to Security-Based Swaps.
Proposed CME Rule 8H933 would add
language to Chapter 8H that would
require CME to notify the Commission
and any appropriate regulatory agency,
as such term is defined by Section
3(a)(34) of the Act, regarding any final
disciplinary sanction, denial of
participation, prohibition or limitation
with respect to access, and/or summary
suspension taken against a CDS Clearing
Member relating to activities involving
security-based swaps. The Commission
believes that proposed CME Rule 8H933
is consistent with Section 19(d)(1) of the
Act, which requires a self-regulatory
organization that imposes any final
disciplinary sanction on any of its
members or participants, denies
membership or participation to any
applicant, or prohibits or limits any
person in respect to access to services it
offers, promptly to file notice with the
appropriate regulatory agency for the
self-regulatory organization and (if other
than the appropriate regulatory agency
for the self-regulatory organization) the
appropriate regulatory agency for such
member, participant, applicant, or other
person.29 The Commission also believes
that proposed CME Rule 8H933 is
consistent with Section 17A(b)(3)(H) of
the Act,30 which requires that the rules
of a clearing agency provide a fair
25 The Commission is not making a determination
whether this proposed rule change or any other
proposed rule change discussed in this Order is
sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
26 15 U.S.C. 78q(a).
27 17 CFR 240.17a–1.
28 The Commission is not making a determination
whether this proposed rule change or any other
proposed rule change discussed in this Order is
sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
29 15 U.S.C. 78s(d)(1).
30 15 U.S.C. 78q–1(b)(3)(H).
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procedure with respect to the
disciplining of participants, the denial
of participation to any persons seeking
participation therein, and the
prohibition or limitation by the clearing
agency of any person with respect to
access to services offered by the clearing
agency.31
New CME Rule 8H938, Summary
Suspensions Relating to Security-Based
Swap Activities. Under proposed CME
Rule 8H938, CME would only
summarily suspend and close the
accounts of a CDS Clearing Member
engaged in security-based swap clearing
activities that (i) has been and is
expelled or suspended from any selfregulatory organization, (ii) is in default
of any delivery of funds or securities to
the clearing agency, or (iii) is in such
financial operating difficulty that the
clearing agency determines and so
notifies the appropriate regulatory
agency for the member that such
suspension and closing of accounts are
necessary for the protection of the
clearing agency, its members, creditors,
or investors.
The Commission views summary
suspensions, as discussed in Section
17A(b)(5)(C) of the Act,32 as an
exception to the general provisions
Sections 17A(b)(5)(A) 33 and
17A(b)(5)(B) 34 of the Act, which require
a clearing agency to adhere to specific
processes prior to certain disciplinary
actions taking place. The effect of the
exception of Section 17A(b)(5)(C) is to
allow registered clearing agencies to
summarily suspend and close a
participant’s accounts only in the
limited circumstances and in
accordance with the minimum
procedural requirements set forth in
Section 17A(b)(5)(C). Thus, the
Commission believes that proposed
CME Rule 8H938 is consistent with
Section 17A(b)(5)(C) of the Act, as well
as Sections 17A(b)(3)(G) 35 and (H) 36 of
the Act, which require the rules of the
clearing agency provide that its
participants shall be appropriately
disciplined for violations of any
provisions of those rules and to provide
fair procedures for disciplining
participants, denying participation in
the clearing agency to any person, and
prohibiting or limiting access to the
31 The Commission is not making a determination
whether this proposed rule change or any other
proposed rule change discussed in this Order is
sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
32 15 U.S.C. 78q–1(b)(5)(C).
33 15 U.S.C. 78q–1(b)(5)(A).
34 15 U.S.C. 78q–1(b)(5)(B).
35 15 U.S.C. 78q–1(b)(3)(G).
36 15 U.S.C. 78q–1(b)(3)(H).
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clearing agency’s services, among other
things.
3. Financial Safety
Change to CME Rule 8H07, CDS
Financial Safeguards and Guaranty
Fund Deposit, and 8H802.B,
Satisfaction of Clearing House
Obligations. CME has proposed changes
to CME Rule 8H07, governing CDS
financial safeguards and Guaranty Fund
deposit matters, that would require CME
to notify CDS Clearing Members
regarding both the amount of and
reasons for any charges to the CDS
Guaranty Fund (‘‘CDS Guaranty Fund,’’
or ‘‘Guaranty Fund’’) for any reason
other than to satisfy a clearing loss
attributable to a CDS Clearing Member
solely from that Clearing Member’s
Guaranty Fund deposit. CME has
proposed changes to Rule 8H802.B that
would specify that CME would provide
notice to CDS Clearing Members as
required by the Act regarding any
amounts charged to the CDS Guaranty
Fund due to losses incurred. By
providing additional transparency to
CDS Clearing Members regarding the
use of the CDS Guaranty Fund, these
proposed changes facilitate CDS
Clearing Member monitoring of CME’s
financial condition as well as CME’s
accountability with regard to the CDS
Guaranty Fund. The Commission thus
believes that these proposed changes to
CME Rule 8H07 and 8H802.B are
consistent with Section 17A(b)(3)(F) of
the Act,37 which requires that the rules
of a registered clearing agency be
designed, among other things, to assure
the safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.
Further, additional proposed changes
would also clarify that CME would
apply CME Rule 8H07 on a uniform and
non-discriminatory basis when
determining minimum Guaranty Fund
deposits. The Commission finds these
changes to CME Rule 8H07 are
consistent with Section 17A(b)(3)(F) of
the Act, which, among other things,
requires that a clearing agency’s rules
not be designed to permit unfair
discrimination among participants in
the use of the clearing agency.38
New CME Rule 8H820, Performance
Bond for Security-Based Swaps, and
Changes to CME Rule 8H930, CDS
Performance Bond Requirements.
Proposed CME Rule 8H820 would
specify that CDS performance bond
requirements will be as determined by
CME staff from time to time and as set
37 15
38 15
U.S.C. 78s(b)(3)(F).
U.S.C. 78s(b)(3)(F).
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forth in CME Rule 820. Further, the
proposed rule would provide that, with
respect to performance bond
requirements that apply to securitybased swap clearing activities, CME
would be required under new CME Rule
8H20 to determine that each item that
is enumerated as being acceptable
performance bond pursuant to CME
Rule 820 has been determined to assure
the safety and liquidity of the clearing
agency. New language in CME Rule
8H930 also would explain that (i)
acceptable performance bond assets for
security-based swaps and the applicable
haircuts related to such assets will be
set forth on a public Web site and that
CME will have discretion to make
adjustments to asset haircuts at any
time; (ii) any such adjustment to the
applicable asset haircut will be
promptly communicated to CDS
Clearing Members; (iii) any adjustments
to the applicable asset haircut schedule
for security-based swap clearing
activities must be based on an analysis
of appropriate factors including, for
example, historical and implied price
volatilities, market composition, current
and anticipated market conditions, and
other relevant information; and (iv) the
Clearing House will conduct regular
reviews of its then-current haircut
schedules and make any necessary
adjustments. CME also has proposed to
revise CME Rule 8H930 to provide that
CME will apply CME Rule 8H930 on a
uniform and non-discriminatory basis
when determining performance bond
requirements.
By providing additional transparency
concerning CME’s process for
determining CDS performance bond
requirements as described above, the
Commission believes that CME Rule
8H820 and the revisions to CME Rule
8H930 should provide guidance and an
increased level of predictability to
CME’s CDS Clearing Members
concerning performance bond
requirements without compromising
CME’s ability to adjust them as market
conditions warrant. CME Rule 8H975
continues to permit CME to require
additional performance bond to be
deposited to CME and/or to take any
other action necessary to protect the
financial integrity of CME in emergency
situations as defined under CME Rule
8H975. With increased transparency
and predictability concerning
performance bond requirements, CDS
Clearing Members should be better able
to anticipate and manage amounts due
to CME, which may translate into less
risk that CME would not be able to
collect on such requirements and
ultimately, improved financial stability
PO 00000
Frm 00052
Fmt 4703
Sfmt 4703
75457
for CME as well as its CDS Clearing
Members. In addition, the requirement
in CME Rule 820 that each item
enumerated as being acceptable
performance bond has been determined
by CME to assure the safety and
liquidity of the clearing agency should
also provide additional assurance to
Clearing Members that CME performs
the diligence necessary to select
appropriate performance bond assets in
support of the CME’s CDS clearing
activities. Thus, the Commission
believes the addition of CME Rule 820
and the revisions to CME Rule H930
described above to be consistent with
Section 17A(b)(3)(F),39 which requires
that a clearing agency’s rules be
designed, among other things, to assure
the safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible, and to promote the prompt
and accurate clearance and settlement of
securities transactions and, to the extent
applicable, derivative agreements,
contracts, and transactions. The
Commission also believes the changes to
CME Rule 8H930 providing that CME
will determine performance bond
requirements in a uniform and nondiscriminatory manner among members
are consistent with Section 17A(b)(3)(F)
of the Act,40 which, among other things,
requires that a clearing agency’s rules
not be designed to permit unfair
discrimination among participants in
the use of the clearing agency.
New CME Rule 8H934, Reports to CDS
Clearing Members. Proposed CME Rule
8H934 would obligate CME to, as soon
as practicable after the end of each
calendar year, make available financial
statements audited by independent
public accountants to all CDS Clearing
Members engaged in security-based
swap clearing activities. CME would
also be required under this rule to make
available to CDS Clearing Members
clearing security-based swaps a report
by independent public accountants
regarding the system of internal
accounting control of CME Group Inc.
(‘‘CME Group’’), CME’s parent company,
in describing any material weaknesses
discovered and any corrective action
taken or proposed to be taken.
The financial statements would, at a
minimum include: (i) The balance of the
Guaranty Fund, and the breakdown of
the fund balance between the various
forms of contributions to the fund, e.g.,
cash and secured open account
indebtedness; (ii) the types and amounts
of investments made with respect to the
cash balance; (iii) the amounts charged
39 Id.
40 Id.
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75458
Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices
to the Guaranty Fund during the year in
excess of a defaulting CDS Clearing
Member’s Guaranty Fund contribution;
and (iv) any other charges to the fund
during the year not directly related and
chargeable to a specific CDS Clearing
Member’s Guaranty Fund contribution.
CME also would make available to CDS
Clearing Members clearing securitybased swaps a report of CME Group by
independent public accountant
regarding its system of internal
accounting control, describing any
material weaknesses discovered and any
corrective action taken or proposed to
be taken.
CME would also furnish to all CDS
Clearing Members engaged in securitybased swap clearing activities, within 40
days following the close of each fiscal
quarter, unaudited quarterly financial
statements. These unaudited quarterly
financial statements shall at a minimum
consist of: (i) A statement of financial
position as of the end of the most recent
fiscal quarter and as of the end of the
corresponding period of the preceding
fiscal year; (ii) a statement of changes in
financial position for the period
between the end of the last fiscal year
and the end of the most recent fiscal
quarter and for the corresponding
period of the preceding fiscal year; and
(iii) a statement of results of operations,
which may be condensed, for the most
recent fiscal quarter and for the period
between the end of the last fiscal year
and the end of the most recent fiscal
quarter and for the corresponding
periods of the preceding fiscal year.
The Commission believes that CME
Rule 8H934, requiring CME to provide
to all CDS Clearing Members engaged in
security-based swap activities financial
statements of CME and reports regarding
CME Group’s system of internal
accounting control, as described above,
is consistent with Section 17A(b)(3)(F)
of the Act,41 which provides that the
rules of a registered clearing agency
should be designed to promote the
prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions,
to assure the safeguarding of securities
and funds which are in the custody or
control of the clearing agency or for
which it is responsible.
New CME Rule 8H935, Use of Assets.
Proposed CME Rule 8H935 would limit
CME’s ability to invest the cash portion
of the CDS Guaranty Fund and CDS
Clearing Member performance bond
contributions by only allowing
investments in accordance with the
requirements of CFTC Regulation 1.25,
41 Id.
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16:07 Dec 19, 2012
Jkt 229001
including U.S. Government obligations
or such other investments as the rules
of CME may provide which assure
safety and liquidity. CME would also be
required to limit its use of CDS
Guaranty Fund and performance bond
contributions related to security-based
swap activities to the purposes
permitted by the Act under the
proposed rule language. CDS Guaranty
Fund and performance bond
contributions shall not be permitted to
be used to account for clearing agency
losses attributable to day-to-day
operating expenses.
The Commission expects that
proposed CME Rule 8H935 should
provide additional assurance as to the
safety and liquidity of acceptable
performance bond for security-based
swaps positions. Thus, the Commission
believes CME Rule 8H935 is consistent
with Section 17A(b)(3)(F) of the Act,42
which provides that the rules of a
registered clearing agency should be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions and, to the extent
applicable, derivative agreements,
contracts, and transactions, to assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.43
New CME Rule 8H936, Capacity
Reviews. Proposed CME Rule 8H936
would specify that CME would perform
periodic risk assessments of CME’s
operations and its data processing
systems and facilities, and provide
CME’s Board of Directors or its
designee, such as a Board Committee,
with such reports, and supervise the
establishment, maintenance, and
updating of operations and data
processing safeguards while reporting
periodically to the Board or its designee
concerning strengths and weaknesses in
CME’s system of safeguards. In addition,
Rule 8H936 would make clear that CME
is obligated to consider, and advise the
Board of, the impact that new or
expanded service or volume increases
would have on CME’s processing
capacity, both physical, including
personnel, and systemic risk.
The Commission believes that
proposed CME Rule 8H936 is consistent
with Section 17A(b)(3)(F) of the Act,44
which provides that the rules of a
registered clearing agency should be
designed to promote the prompt and
42 Id.
Commission is not making a determination
whether this proposed rule change or any other
proposed rule change discussed in this Order is
sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
44 Id.
Frm 00053
4. Fair Representation Requirement
Commission staff asked CME to
provide an explanation of how CME’s
current governance arrangements
relating to its CDS clearing offering
should be viewed in light of the
requirements of Section 17A(b)(3)(C) of
the Act.45 This provision requires that
the rules of a clearing agency provide
for fair representation of the clearing
agency’s shareholders (or members) and
participants in the selection of its
directors and administration of its
affairs.
CME responded that the Board of
Directors of the CME Group, the parent
company of CME, also serves as the
Board of Directors of CME. CME Group
is a public company whose stock is
listed on the Nasdaq Stock Market
(‘‘Nasdaq’’) and thus is subject to board
composition requirements under
Nasdaq listing standards. In addition,
any member of the public is afforded the
opportunity to purchase shares in CME
Group and influence the selection of
directors and administration of its
affairs on that basis, subject to
applicable law. CME cited Commission
staff guidance in asserting that the
Commission may find fair
representation with respect to clearing
agency participants if such participants
are afforded an opportunity to acquire
voting stock of the clearing agency in
proportion to their use of its facilities.46
In addition, CME noted that it is also
subject to governance and conflict of
interest provisions under the core
principles set out in the CEA for a DCO.
The CFTC reviews CME for compliance
with these principles. For example,
Section 5b(c)(2)(O) of the CEA sets out
governance fitness standards that apply
to DCOs, including transparent
governance arrangements, that are
designed to ensure the consideration of
views of owners and participants.
Further, Section 5b(c)(2)(Q) of the CEA
requires a DCO’s board to include
market participants. CFTC regulations
also require a DCO’s governance
arrangements to be clear and transparent
45 15
43 The
PO 00000
accurate clearance and settlement of
securities transactions and, to the extent
applicable, derivative agreements,
contracts, and transactions, to assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.
Fmt 4703
Sfmt 4703
U.S.C. 78q–1(b)(3)(C).
Regulation of Clearing Agencies, supra
note 10. Rather than prescribing a single method,
Commission staff guidance has stated that the
Commission will evaluate a clearing agency’s
procedures with regard to the fair representation
requirement on a case-by-case basis. Id.
46 See
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tkelley on DSK3SPTVN1PROD with
and ‘‘to support the objectives of
relevant stakeholders.’’ 47
CME also stated that it believes CDS
participants will have a meaningful
input into decisions affecting the
clearing operations for CDS through
participation on the CME CDS Risk
Committee. CME noted that the CDS
Risk Committee was formed under CME
Rule 8H27 to provide guidance and
oversight to CME on matters relating to
CDS products. The CDS Risk
Committee, among other things, is
responsible for reviewing CDS-related
financial safeguards, clearing member
requirements, risk management policies
and practices, and rule changes, among
other things.
CME noted that the Charter of the
CDS Risk Committee sets forth certain
composition requirements that ensure
the perspectives of CDS Clearing
Members are represented. More
specifically, the Charter requires that at
all times the CDS Risk Committee is
populated with up to nine and no fewer
than five individuals who are
representative of CDS Clearing
Members. Because of these composition
requirements of the CDS Risk
Committee, and the scope of its
responsibilities, CME stated that it
believed the Commission could find
that its current governance
arrangements meet the fair
representation requirement of the Act.
Further, CME also noted that the
Charter of the CDS Risk Committee
specifically provides that its Chairman
shall be a member of the CME Board of
Directors. In this capacity, the Chairman
of the CDS Risk Committee serves as a
liaison to the full Board of Directors of
CME. He or she can relay any concerns
addressed by the CDS Risk Committee
to the full CME Board of Directors. CME
noted that the CDS Risk Committee is
required to reassess the adequacy of this
Charter on an annual basis and submit
any recommended changes to the full
CME Board of Directors for approval.
CME believes these features provide a
concrete nexus between the activities of
the CDS Risk Committee and the full
CME Board of Directors and ensure that
there will be a fair representation of
CDS Clearing Members in accordance
with the spirit and letter of the Act.
Based on the representations made by
CME, as described above, the
Commission believes that CME’s
governance structure could
accommodate fair representation of the
clearing agency’s shareholders (or
47 The Commission notes that compliance with
the requirements of other regulatory authorities
does not necessarily substitute for compliance with
the Exchange Act and the rules and regulations
thereunder.
VerDate Mar<15>2010
16:07 Dec 19, 2012
Jkt 229001
members) and participants in the
selection of CME’s directors and
administration of its affairs, consistent
with Section 17A(b)(3)(C) of the Act.48
The Commission intends to monitor
these governance arrangements over
time for consistency with fair
representation requirement, taking into
consideration the interaction between
the CDS Risk Committee, including its
Chairman, with the CME Board of
Directors, any changes to the
composition of the CDS Risk Committee
relative to that of the CME Board of
Directors, the scope and proportion of
CME’s CDS clearing relative to its other
activities, and other facts and
circumstances as appropriate.
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 49 and the rules and regulations
thereunder. It is therefore ordered,
pursuant to Section 19(b)(2) of the
Act,50 that the proposed rule change
(File No. SR–CME–2012–26) be, and
hereby is, approved.51
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.52
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–30648 Filed 12–19–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68442; File No. SR–BATS–
2012–046]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Modify
Exchange Rule 11.23 Relating to
Auctions of Exchange-Listed
Securities
December 14, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
6, 2012, BATS Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BATS’’) filed with the
48 15
U.S.C. 78q–1(b)(3)(C).
U.S.C. 78q–1.
50 15 U.S.C. 78s(b)(2).
51 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
52 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
49 15
PO 00000
Frm 00054
Fmt 4703
Sfmt 4703
75459
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing with the
Commission a proposal to amend Rule
11.23 entitled ‘‘Auctions’’ including to
amend Rule 11.23(a)(6) to incorporate
the Exchange’s clearly erroneous
execution standards into the definition
of Collar Price Range,3 to amend Rule
11.23(a)(22) to provide that any portion
of a market Regular Hours Only 4
(‘‘RHO’’) order will be cancelled
immediately following any auction in
which the order is not fully executed, to
make changes to Rules 11.23(b)(2)(B),
11.23(c)(2)(B), and 11.23(d)(2)(C) to help
to prevent the possibility of erroneous
executions occurring in auctions on the
Exchange, and to make changes to Rule
11.23(d)(2)(A) entitled ‘‘Publication of
BATS Auction Information’’ in order to
both make clear that the rule should
apply to IPO Auctions and to make a
change to the data that will be
disseminated by the Exchange.
The text of the proposed rule change
is available at the Exchange’s Web site
at https://www.batstrading.com, at the
principal office of the Exchange, 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, the
Exchange 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. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
3 As
4 As
E:\FR\FM\20DEN1.SGM
defined in BATS Rule 11.23(a)(6).
defined in BATS Rule 11.23(a)(22).
20DEN1
]]>Agencies
[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75454-75459]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30648]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68441; File No. SR-CME-2012-26]
Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.;
Order Approving Proposed Rule Change To Amend Rules in Connection With
Status as a ``Deemed Registered'' Clearing Agency
December 14, 2012.
I. Introduction
On October 15, 2012, Chicago Mercantile Exchange Inc. (``CME'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change (SR-CME-2012-26) pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on November 2, 2012.\3\ The Commission received no
comment letters regarding the proposal. For the reasons discussed
below, the Commission is granting approval of the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 68121 (Oct. 29, 2012),
77 FR 66211 (Nov. 2, 2012).
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II. Description
A. Background--CME's Credit Default Swap Business and ``Deemed
Registered'' Status
CME began clearing credit default swaps prior to the passage of the
Dodd-Frank Act.\4\ These activities were facilitated by temporary
exemptive relief granted by the Commission to
[[Page 75455]]
CME.\5\ Upon the passage of the Dodd-Frank Act, on July 16, 2011, this
temporary relief expired.\6\ To ensure that entities that were clearing
credit default swaps prior to the passage of Dodd-Frank based on
exemptions granted by the Commission could continue to do so without
interruption, Section 763(b) of the Dodd-Frank Act \7\ provided that
(i) a depository institution registered with the Commodities Futures
Trading Commission (``CFTC'') that cleared swaps as a multilateral
clearing organization prior to the date of enactment of the Dodd-Frank
Act and (ii) a derivatives clearing organization (``DCO'') registered
with the CFTC that cleared swaps pursuant to an exemption from
registration as a clearing agency prior to the date of enactment of the
Dodd-Frank Act will be deemed registered with the Commission as a
clearing agency solely for the purpose of clearing security-based swaps
(``Deemed Registered Provision'').\8\ On July 16, 2011, the Deemed
Registered Provision, along with other general provisions under Title
VII of the Dodd-Frank Act, became effective,\9\ thereby requiring each
affected clearing agency, including CME, to comply with all
requirements of the Act and the rules and regulations thereunder
applicable to clearing agencies registered with the Commission under
the Act.
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\4\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat.1376 (2010).
\5\ See generally Securities Exchange Act Release Nos. 59578
(Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009),
74 FR 67258 (Dec. 18, 2009), and 61803 (Mar. 30, 2010), 75 FR 17181
(Apr. 5, 2010) (temporary exemptions in connection with CDS clearing
by Chicago Mercantile Exchange Inc.). In addition, the Commission
issued interim final temporary rules that provide exemptions under
the Securities Act of 1933 and the Securities Exchange Act of 1934
for CDS to facilitate the operation of central counterparties for
the CDS market. See Securities Act Release Nos. 8999 (Jan. 14,
2009), 74 FR 3967 (Jan. 22, 2009) (initial approval), 9063 (Sep. 14,
2009), 74 FR 47719 (Sep. 17, 2009) (extension until Nov. 30, 2010),
and 9158 (Nov. 30, 2010) (extension until Jul. 16, 2011).
\6\ Securities Exchange Act Release No. 61803 (Mar. 30, 2010),
75 FR 17181 (Apr. 5, 2010).
\7\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat.1376 (2010).
\8\ See Section 763(b) of the Dodd-Frank Act (adding new Section
17A(l) to the Exchange Act, 15 U.S.C. 78q-1(1)). Under this Deemed
Registered Provision, CME became a registered clearing agency solely
for the purpose of clearing security-based swaps.
\9\ Section 774 of the Dodd-Frank Act states, ``[u]nless
otherwise provided, the provisions of this subtitle shall take
effect on the later of 360 days after the date of the enactment of
this subtitle or, to the extent a provision of this subtitle
requires a rulemaking, not less than 60 days after publication of
the final rule or regulation implementing such provision of this
subtitle.''
---------------------------------------------------------------------------
B. Proposed Changes in Furtherance of Compliance With the Act
In light of CME's requirement to comply with the Act and the rules
and regulations thereunder, CME proposed rule changes concerning
membership participation standards, administrative practices, and
financial safety, and provided a description of CME's governance
arrangements in the context of the fair representation requirement in
Section 17A(b)(3)(C) of the Act, as they relate to the CDS portion of
CME's clearing activities. The proposed changes are found within
Chapter 8H of the CME Rulebook and are summarized and discussed in
detail below. The text of the proposed 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.
III. Discussion
A. Statutory Standard
Section 19(b)(2)(C) of the Act 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.\10\ In particular, Section 17A(b) of the Act requires
that, among other things, the rules of a clearing agency:
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(b)(2)(C).
Subject to the provisions of Section 17A(b)(4) of the
Act,\11\ provide that any (i) registered broker or dealer, (ii)
other registered clearing agency, (iii) registered investment
company, (iv) bank, (v) insurance company, or (vi) other person or
class of persons as the Commission, by rule, may from time to time
designate as appropriate to the development of a national system for
the prompt and accurate clearance and settlement of securities
transactions may become a participant in such clearing agency; \12\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78q-1(b)(4).
\12\ 15 U.S.C. 78q-1(b)(3)(B).
---------------------------------------------------------------------------
Provide for fair representation of the clearing
agency's shareholders (or members) and participants in the selection
of its directors and administration of its affairs; \13\
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------
Are designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the
extent applicable, derivative agreements, contracts, and
transactions, to assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency and for
which it is responsible, to foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions, to remove impediments to and perfect the mechanism of
a national system for the prompt and accurate clearance and
settlement of securities transactions, and, in general, to protect
investors and the public interest; and are not designed to permit
unfair discrimination in the admission of participants or among
participants in the use of the clearing agency, or to regulate by
virtue of any authority conferred by the Act matters not related to
the purposes of this section or the administration of the clearing
agency; \14\
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Provide that (subject to any rule or order of the
Commission pursuant to section 17(d) or 19(g)(2) of the Act) its
participants shall be appropriately disciplined for violation of any
provision of the rules of the clearing agency by expulsion,
suspension, limitation of activities, functions, and operations,
fine, censure, or any other fitting sanction; \15\ and
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78q-1(b)(4)(G).
---------------------------------------------------------------------------
Are in accordance with the provisions of Section
17A(b)(5) of the Act,\16\ and, in general, provide a fair procedure
with respect to the disciplining of participants, the denial of
participation to any persons seeking participation therein, and the
prohibition or limitation by the clearing agency of any person with
respect to access to services offered by the clearing agency.\17\
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78q-1(b)(5).
\17\ 15 U.S.C. 78q-1(b)(4)(H).
---------------------------------------------------------------------------
B. Summary of Proposed Rule Changes
1. Membership Participation Standards
CME Rule 8H04, CDS Clearing Member Obligations and Qualifications.
CME Rule 8H04 sets forth CDS Clearing Member obligations and
qualifications. CME has proposed changes to this rule to provide
specifically that CME may approve an application for CDS Clearing
Membership to permit the clearing of security-based swaps submitted by
any corporation, partnership, limited liability company, or any other
type of entity, provided that CME determines such applicant satisfies
applicable requirements. CME has also proposed to state in this rule
that applicants within one of the enumerated categories of participants
in Section 17A(b)(3)(B) of the Act \18\ are specifically eligible to
become CDS Clearing Members for the purpose of clearing security-based
swaps. Further, additional revisions to CME Rule 8H04 would make clear
that CME may, and in cases in which the Commission by order directs,
shall, deny an application for CDS Clearing Membership to any person
subject to a statutory disqualification, as such term is defined by the
Act.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78q-1(b)(3)(B).
---------------------------------------------------------------------------
The Commission believes that these proposed changes to CME Rule
8H04 are consistent with Sections 17A(b)(3)(B) \19\ and 17A(b)(4)(B)
\20\ of the Act, which provide that a registered clearing agency shall
provide in its rules that the
[[Page 75456]]
categories of applicants enumerated in Section 17A(b)(3)(B) of the Act
\21\ may become a participant in the registered clearing agency,
subject to meeting the standards of financial responsibility,
operational capability, experience, and competence prescribed by the
rules of the clearing agency, among other things.\22\ The Commission
believes the proposed changes relating to CME's authority and
obligation to restrict the membership and activities of persons subject
to a statutory disqualification are consistent with Section
17A(b)(4)(A),\23\ which provides, among other things, that a registered
clearing agency may, and in cases in which the Commission, by order,
directs as appropriate in the public interest shall, deny participation
to any person subject to a statutory disqualification. In addition, the
Commission finds that these proposed changes are consistent with
Section 17A(b)(3)(F) of the Act,\24\ which requires, among other
things, that a registered clearing agency's rules not be designed to
permit unfair discrimination in the admission of participants or among
participants in the use of the clearing agency.
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\19\ 15 U.S.C. 78s(b)(2)(B).
\20\ 15 U.S.C. 78s(b)(4).
\21\ 15 U.S.C. 78s(b)(2)(B).
\22\ The Commission is not making a determination whether this
proposed rule change or any other proposed rule change discussed in
this Order is sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
\23\ 15 U.S.C. 78s(b)(4)(A).
\24\ 15 U.S.C. 78s(b)(3)(F).
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2. Administrative Practices
New CME Rule 8H931. CME has proposed to add new CME Rule 8H931,
which would state that rules that relate to CME's activities as a
clearing agency clearing security-based swaps will be adopted, altered,
amended or repealed in accordance with the applicable requirements of
Section 19(b) of the Act. Under this rule, CME would promptly notify
all CDS Clearing Members of any proposal it has made to change, revise,
add or repeal any rule that relates to its activities as a securities
clearing agency. Such notice would include the text or a brief
description of any such proposed rule change, along with its purpose
and effect, in accordance with the requirements of the Act. CDS
Clearing Members would have the opportunity to submit comments with
respect to any such proposal in accordance with the applicable
Commission rules. The Commission believes that proposed CME Rule 8H931
is consistent with CME's obligations as a clearing agency registered
under the Act to file its proposed rule changes pursuant to Section
19(b) of the Act and Rule 19b-4 thereunder.\25\
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\25\ The Commission is not making a determination whether this
proposed rule change or any other proposed rule change discussed in
this Order is sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
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New CME Rule 8H932, Records Relating to Disciplinary Proceedings
and Security-Based Swaps. Proposed CME Rule 8H932 would require CME to
maintain records of any disciplinary proceeding related to the
activities of a CDS Clearing Member involving security-based swaps in
accordance with the requirements of the Act and Rule 17a-1 thereunder.
The Commission believes that proposed CME Rule 8H932 is consistent with
CME's obligation as a clearing agency under Section 17(a) \26\ and Rule
17a-1 thereunder \27\ to maintain records made or received by it in the
course of its business as such and in the conduct of its self-
regulatory activity.\28\
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\26\ 15 U.S.C. 78q(a).
\27\ 17 CFR 240.17a-1.
\28\ The Commission is not making a determination whether this
proposed rule change or any other proposed rule change discussed in
this Order is sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
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New CME Rule 8H933, Notice Regarding Certain Disciplinary Matters
Related to Security-Based Swaps. Proposed CME Rule 8H933 would add
language to Chapter 8H that would require CME to notify the Commission
and any appropriate regulatory agency, as such term is defined by
Section 3(a)(34) of the Act, regarding any final disciplinary sanction,
denial of participation, prohibition or limitation with respect to
access, and/or summary suspension taken against a CDS Clearing Member
relating to activities involving security-based swaps. The Commission
believes that proposed CME Rule 8H933 is consistent with Section
19(d)(1) of the Act, which requires a self-regulatory organization that
imposes any final disciplinary sanction on any of its members or
participants, denies membership or participation to any applicant, or
prohibits or limits any person in respect to access to services it
offers, promptly to file notice with the appropriate regulatory agency
for the self-regulatory organization and (if other than the appropriate
regulatory agency for the self-regulatory organization) the appropriate
regulatory agency for such member, participant, applicant, or other
person.\29\ The Commission also believes that proposed CME Rule 8H933
is consistent with Section 17A(b)(3)(H) of the Act,\30\ which requires
that the rules of a clearing agency provide a fair procedure with
respect to the disciplining of participants, the denial of
participation to any persons seeking participation therein, and the
prohibition or limitation by the clearing agency of any person with
respect to access to services offered by the clearing agency.\31\
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\29\ 15 U.S.C. 78s(d)(1).
\30\ 15 U.S.C. 78q-1(b)(3)(H).
\31\ The Commission is not making a determination whether this
proposed rule change or any other proposed rule change discussed in
this Order is sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
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New CME Rule 8H938, Summary Suspensions Relating to Security-Based
Swap Activities. Under proposed CME Rule 8H938, CME would only
summarily suspend and close the accounts of a CDS Clearing Member
engaged in security-based swap clearing activities that (i) has been
and is expelled or suspended from any self-regulatory organization,
(ii) is in default of any delivery of funds or securities to the
clearing agency, or (iii) is in such financial operating difficulty
that the clearing agency determines and so notifies the appropriate
regulatory agency for the member that such suspension and closing of
accounts are necessary for the protection of the clearing agency, its
members, creditors, or investors.
The Commission views summary suspensions, as discussed in Section
17A(b)(5)(C) of the Act,\32\ as an exception to the general provisions
Sections 17A(b)(5)(A) \33\ and 17A(b)(5)(B) \34\ of the Act, which
require a clearing agency to adhere to specific processes prior to
certain disciplinary actions taking place. The effect of the exception
of Section 17A(b)(5)(C) is to allow registered clearing agencies to
summarily suspend and close a participant's accounts only in the
limited circumstances and in accordance with the minimum procedural
requirements set forth in Section 17A(b)(5)(C). Thus, the Commission
believes that proposed CME Rule 8H938 is consistent with Section
17A(b)(5)(C) of the Act, as well as Sections 17A(b)(3)(G) \35\ and (H)
\36\ of the Act, which require the rules of the clearing agency provide
that its participants shall be appropriately disciplined for violations
of any provisions of those rules and to provide fair procedures for
disciplining participants, denying participation in the clearing agency
to any person, and prohibiting or limiting access to the
[[Page 75457]]
clearing agency's services, among other things.
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\32\ 15 U.S.C. 78q-1(b)(5)(C).
\33\ 15 U.S.C. 78q-1(b)(5)(A).
\34\ 15 U.S.C. 78q-1(b)(5)(B).
\35\ 15 U.S.C. 78q-1(b)(3)(G).
\36\ 15 U.S.C. 78q-1(b)(3)(H).
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3. Financial Safety
Change to CME Rule 8H07, CDS Financial Safeguards and Guaranty Fund
Deposit, and 8H802.B, Satisfaction of Clearing House Obligations. CME
has proposed changes to CME Rule 8H07, governing CDS financial
safeguards and Guaranty Fund deposit matters, that would require CME to
notify CDS Clearing Members regarding both the amount of and reasons
for any charges to the CDS Guaranty Fund (``CDS Guaranty Fund,'' or
``Guaranty Fund'') for any reason other than to satisfy a clearing loss
attributable to a CDS Clearing Member solely from that Clearing
Member's Guaranty Fund deposit. CME has proposed changes to Rule
8H802.B that would specify that CME would provide notice to CDS
Clearing Members as required by the Act regarding any amounts charged
to the CDS Guaranty Fund due to losses incurred. By providing
additional transparency to CDS Clearing Members regarding the use of
the CDS Guaranty Fund, these proposed changes facilitate CDS Clearing
Member monitoring of CME's financial condition as well as CME's
accountability with regard to the CDS Guaranty Fund. The Commission
thus believes that these proposed changes to CME Rule 8H07 and 8H802.B
are consistent with Section 17A(b)(3)(F) of the Act,\37\ which requires
that the rules of a registered clearing agency be designed, among other
things, to assure the safeguarding of securities and funds which are in
the custody or control of the clearing agency or for which it is
responsible.
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\37\ 15 U.S.C. 78s(b)(3)(F).
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Further, additional proposed changes would also clarify that CME
would apply CME Rule 8H07 on a uniform and non-discriminatory basis
when determining minimum Guaranty Fund deposits. The Commission finds
these changes to CME Rule 8H07 are consistent with Section 17A(b)(3)(F)
of the Act, which, among other things, requires that a clearing
agency's rules not be designed to permit unfair discrimination among
participants in the use of the clearing agency.\38\
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\38\ 15 U.S.C. 78s(b)(3)(F).
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New CME Rule 8H820, Performance Bond for Security-Based Swaps, and
Changes to CME Rule 8H930, CDS Performance Bond Requirements. Proposed
CME Rule 8H820 would specify that CDS performance bond requirements
will be as determined by CME staff from time to time and as set forth
in CME Rule 820. Further, the proposed rule would provide that, with
respect to performance bond requirements that apply to security-based
swap clearing activities, CME would be required under new CME Rule 8H20
to determine that each item that is enumerated as being acceptable
performance bond pursuant to CME Rule 820 has been determined to assure
the safety and liquidity of the clearing agency. New language in CME
Rule 8H930 also would explain that (i) acceptable performance bond
assets for security-based swaps and the applicable haircuts related to
such assets will be set forth on a public Web site and that CME will
have discretion to make adjustments to asset haircuts at any time; (ii)
any such adjustment to the applicable asset haircut will be promptly
communicated to CDS Clearing Members; (iii) any adjustments to the
applicable asset haircut schedule for security-based swap clearing
activities must be based on an analysis of appropriate factors
including, for example, historical and implied price volatilities,
market composition, current and anticipated market conditions, and
other relevant information; and (iv) the Clearing House will conduct
regular reviews of its then-current haircut schedules and make any
necessary adjustments. CME also has proposed to revise CME Rule 8H930
to provide that CME will apply CME Rule 8H930 on a uniform and non-
discriminatory basis when determining performance bond requirements.
By providing additional transparency concerning CME's process for
determining CDS performance bond requirements as described above, the
Commission believes that CME Rule 8H820 and the revisions to CME Rule
8H930 should provide guidance and an increased level of predictability
to CME's CDS Clearing Members concerning performance bond requirements
without compromising CME's ability to adjust them as market conditions
warrant. CME Rule 8H975 continues to permit CME to require additional
performance bond to be deposited to CME and/or to take any other action
necessary to protect the financial integrity of CME in emergency
situations as defined under CME Rule 8H975. With increased transparency
and predictability concerning performance bond requirements, CDS
Clearing Members should be better able to anticipate and manage amounts
due to CME, which may translate into less risk that CME would not be
able to collect on such requirements and ultimately, improved financial
stability for CME as well as its CDS Clearing Members. In addition, the
requirement in CME Rule 820 that each item enumerated as being
acceptable performance bond has been determined by CME to assure the
safety and liquidity of the clearing agency should also provide
additional assurance to Clearing Members that CME performs the
diligence necessary to select appropriate performance bond assets in
support of the CME's CDS clearing activities. Thus, the Commission
believes the addition of CME Rule 820 and the revisions to CME Rule
H930 described above to be consistent with Section 17A(b)(3)(F),\39\
which requires that a clearing agency's rules be designed, among other
things, to assure the safeguarding of securities and funds which are in
the custody or control of the clearing agency or for which it is
responsible, and to promote the prompt and accurate clearance and
settlement of securities transactions and, to the extent applicable,
derivative agreements, contracts, and transactions. The Commission also
believes the changes to CME Rule 8H930 providing that CME will
determine performance bond requirements in a uniform and non-
discriminatory manner among members are consistent with Section
17A(b)(3)(F) of the Act,\40\ which, among other things, requires that a
clearing agency's rules not be designed to permit unfair discrimination
among participants in the use of the clearing agency.
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\39\ Id.
\40\ Id.
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New CME Rule 8H934, Reports to CDS Clearing Members. Proposed CME
Rule 8H934 would obligate CME to, as soon as practicable after the end
of each calendar year, make available financial statements audited by
independent public accountants to all CDS Clearing Members engaged in
security-based swap clearing activities. CME would also be required
under this rule to make available to CDS Clearing Members clearing
security-based swaps a report by independent public accountants
regarding the system of internal accounting control of CME Group Inc.
(``CME Group''), CME's parent company, in describing any material
weaknesses discovered and any corrective action taken or proposed to be
taken.
The financial statements would, at a minimum include: (i) The
balance of the Guaranty Fund, and the breakdown of the fund balance
between the various forms of contributions to the fund, e.g., cash and
secured open account indebtedness; (ii) the types and amounts of
investments made with respect to the cash balance; (iii) the amounts
charged
[[Page 75458]]
to the Guaranty Fund during the year in excess of a defaulting CDS
Clearing Member's Guaranty Fund contribution; and (iv) any other
charges to the fund during the year not directly related and chargeable
to a specific CDS Clearing Member's Guaranty Fund contribution. CME
also would make available to CDS Clearing Members clearing security-
based swaps a report of CME Group by independent public accountant
regarding its system of internal accounting control, describing any
material weaknesses discovered and any corrective action taken or
proposed to be taken.
CME would also furnish to all CDS Clearing Members engaged in
security-based swap clearing activities, within 40 days following the
close of each fiscal quarter, unaudited quarterly financial statements.
These unaudited quarterly financial statements shall at a minimum
consist of: (i) A statement of financial position as of the end of the
most recent fiscal quarter and as of the end of the corresponding
period of the preceding fiscal year; (ii) a statement of changes in
financial position for the period between the end of the last fiscal
year and the end of the most recent fiscal quarter and for the
corresponding period of the preceding fiscal year; and (iii) a
statement of results of operations, which may be condensed, for the
most recent fiscal quarter and for the period between the end of the
last fiscal year and the end of the most recent fiscal quarter and for
the corresponding periods of the preceding fiscal year.
The Commission believes that CME Rule 8H934, requiring CME to
provide to all CDS Clearing Members engaged in security-based swap
activities financial statements of CME and reports regarding CME
Group's system of internal accounting control, as described above, is
consistent with Section 17A(b)(3)(F) of the Act,\41\ which provides
that the rules of a registered clearing agency should be designed to
promote the prompt and accurate clearance and settlement of securities
transactions and, to the extent applicable, derivative agreements,
contracts, and transactions, to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible.
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\41\ Id.
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New CME Rule 8H935, Use of Assets. Proposed CME Rule 8H935 would
limit CME's ability to invest the cash portion of the CDS Guaranty Fund
and CDS Clearing Member performance bond contributions by only allowing
investments in accordance with the requirements of CFTC Regulation
1.25, including U.S. Government obligations or such other investments
as the rules of CME may provide which assure safety and liquidity. CME
would also be required to limit its use of CDS Guaranty Fund and
performance bond contributions related to security-based swap
activities to the purposes permitted by the Act under the proposed rule
language. CDS Guaranty Fund and performance bond contributions shall
not be permitted to be used to account for clearing agency losses
attributable to day-to-day operating expenses.
The Commission expects that proposed CME Rule 8H935 should provide
additional assurance as to the safety and liquidity of acceptable
performance bond for security-based swaps positions. Thus, the
Commission believes CME Rule 8H935 is consistent with Section
17A(b)(3)(F) of the Act,\42\ which provides that the rules of a
registered clearing agency should be designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions, to assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible.\43\
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\42\ Id.
\43\ The Commission is not making a determination whether this
proposed rule change or any other proposed rule change discussed in
this Order is sufficient for full compliance with the statute, rule,
or regulation with which they are consistent.
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New CME Rule 8H936, Capacity Reviews. Proposed CME Rule 8H936 would
specify that CME would perform periodic risk assessments of CME's
operations and its data processing systems and facilities, and provide
CME's Board of Directors or its designee, such as a Board Committee,
with such reports, and supervise the establishment, maintenance, and
updating of operations and data processing safeguards while reporting
periodically to the Board or its designee concerning strengths and
weaknesses in CME's system of safeguards. In addition, Rule 8H936 would
make clear that CME is obligated to consider, and advise the Board of,
the impact that new or expanded service or volume increases would have
on CME's processing capacity, both physical, including personnel, and
systemic risk.
The Commission believes that proposed CME Rule 8H936 is consistent
with Section 17A(b)(3)(F) of the Act,\44\ which provides that the rules
of a registered clearing agency should be designed to promote the
prompt and accurate clearance and settlement of securities transactions
and, to the extent applicable, derivative agreements, contracts, and
transactions, to assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible.
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\44\ Id.
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4. Fair Representation Requirement
Commission staff asked CME to provide an explanation of how CME's
current governance arrangements relating to its CDS clearing offering
should be viewed in light of the requirements of Section 17A(b)(3)(C)
of the Act.\45\ This provision requires that the rules of a clearing
agency provide for fair representation of the clearing agency's
shareholders (or members) and participants in the selection of its
directors and administration of its affairs.
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\45\ 15 U.S.C. 78q-1(b)(3)(C).
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CME responded that the Board of Directors of the CME Group, the
parent company of CME, also serves as the Board of Directors of CME.
CME Group is a public company whose stock is listed on the Nasdaq Stock
Market (``Nasdaq'') and thus is subject to board composition
requirements under Nasdaq listing standards. In addition, any member of
the public is afforded the opportunity to purchase shares in CME Group
and influence the selection of directors and administration of its
affairs on that basis, subject to applicable law. CME cited Commission
staff guidance in asserting that the Commission may find fair
representation with respect to clearing agency participants if such
participants are afforded an opportunity to acquire voting stock of the
clearing agency in proportion to their use of its facilities.\46\
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\46\ See Regulation of Clearing Agencies, supra note 10. Rather
than prescribing a single method, Commission staff guidance has
stated that the Commission will evaluate a clearing agency's
procedures with regard to the fair representation requirement on a
case-by-case basis. Id.
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In addition, CME noted that it is also subject to governance and
conflict of interest provisions under the core principles set out in
the CEA for a DCO. The CFTC reviews CME for compliance with these
principles. For example, Section 5b(c)(2)(O) of the CEA sets out
governance fitness standards that apply to DCOs, including transparent
governance arrangements, that are designed to ensure the consideration
of views of owners and participants. Further, Section 5b(c)(2)(Q) of
the CEA requires a DCO's board to include market participants. CFTC
regulations also require a DCO's governance arrangements to be clear
and transparent
[[Page 75459]]
and ``to support the objectives of relevant stakeholders.'' \47\
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\47\ The Commission notes that compliance with the requirements
of other regulatory authorities does not necessarily substitute for
compliance with the Exchange Act and the rules and regulations
thereunder.
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CME also stated that it believes CDS participants will have a
meaningful input into decisions affecting the clearing operations for
CDS through participation on the CME CDS Risk Committee. CME noted that
the CDS Risk Committee was formed under CME Rule 8H27 to provide
guidance and oversight to CME on matters relating to CDS products. The
CDS Risk Committee, among other things, is responsible for reviewing
CDS-related financial safeguards, clearing member requirements, risk
management policies and practices, and rule changes, among other
things.
CME noted that the Charter of the CDS Risk Committee sets forth
certain composition requirements that ensure the perspectives of CDS
Clearing Members are represented. More specifically, the Charter
requires that at all times the CDS Risk Committee is populated with up
to nine and no fewer than five individuals who are representative of
CDS Clearing Members. Because of these composition requirements of the
CDS Risk Committee, and the scope of its responsibilities, CME stated
that it believed the Commission could find that its current governance
arrangements meet the fair representation requirement of the Act.
Further, CME also noted that the Charter of the CDS Risk Committee
specifically provides that its Chairman shall be a member of the CME
Board of Directors. In this capacity, the Chairman of the CDS Risk
Committee serves as a liaison to the full Board of Directors of CME. He
or she can relay any concerns addressed by the CDS Risk Committee to
the full CME Board of Directors. CME noted that the CDS Risk Committee
is required to reassess the adequacy of this Charter on an annual basis
and submit any recommended changes to the full CME Board of Directors
for approval. CME believes these features provide a concrete nexus
between the activities of the CDS Risk Committee and the full CME Board
of Directors and ensure that there will be a fair representation of CDS
Clearing Members in accordance with the spirit and letter of the Act.
Based on the representations made by CME, as described above, the
Commission believes that CME's governance structure could accommodate
fair representation of the clearing agency's shareholders (or members)
and participants in the selection of CME's directors and administration
of its affairs, consistent with Section 17A(b)(3)(C) of the Act.\48\
The Commission intends to monitor these governance arrangements over
time for consistency with fair representation requirement, taking into
consideration the interaction between the CDS Risk Committee, including
its Chairman, with the CME Board of Directors, any changes to the
composition of the CDS Risk Committee relative to that of the CME Board
of Directors, the scope and proportion of CME's CDS clearing relative
to its other activities, and other facts and circumstances as
appropriate.
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\48\ 15 U.S.C. 78q-1(b)(3)(C).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \49\ and the
rules and regulations thereunder. It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,\50\ that the proposed rule change (File
No. SR-CME-2012-26) be, and hereby is, approved.\51\
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\49\ 15 U.S.C. 78q-1.
\50\ 15 U.S.C. 78s(b)(2).
\51\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\52\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30648 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P
