[Federal Register Volume 80, Number 24 (Thursday, February 5, 2015)]
[Notices]
[Pages 6555-6558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02251]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74179; File No. SR-CME-2015-002]


Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to Enhancements to Its Risk Model for Credit Default Swaps

January 30, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on January 21, 2015, Chicago Mercantile Exchange 
Inc. (``CME'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change described in Items I, II and 
III below, which Items have been prepared primarily by CME. CME filed 
the proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ and Rule 
19b-4(f)(4)(ii) \4\ thereunder, so that the proposal was effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit

[[Page 6556]]

comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CME is proposing to add a new CDS Guaranty Fund charge to CDS 
Clearing Members that clear CDS Products that reference themselves or 
their affiliates and delete the current threshold-based approach. 
Specifically, CME proposes to add a new risk component to its CDS 
Stress Test Methodology to capture self-referencing risk arising from 
contracts that include component transactions for which the reference 
entity is a clearing member or one of its affiliates. In addition, CME 
proposes to add a new stress exposure calculation to size the self-
referencing risk.

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

    In its filing with the Commission, CME included statements 
concerning the purpose and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. CME has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.

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

1. Purpose
    CME is proposing to add a new CDS Guaranty Fund charge to CDS 
Clearing Members that clear CDS Products that reference themselves or 
their affiliates and delete the current threshold-based approach. 
Specifically, CME proposes to add a new risk component to its CDS 
Stress Test Methodology to capture self-referencing risk arising from 
contracts that include component transactions for which the reference 
entity is a Clearing Member or one of its affiliates. In addition, CME 
proposes to add a new stress exposure calculation to size the 
anticipated maximum self-referencing risk.
    Although CME does not permit a CDS Clearing Member or a customer to 
enter into or maintain a single-name CDS position referencing the 
clearing member or an affiliate, a self-referencing CDS position may 
arise where the CDS Clearing Member or its affiliate is the Reference 
Entity in respect of a component transaction within the index 
referenced in a CDS position. For example, such a situation may arise 
in the context of index CDS contracts which reference CDS Clearing 
Members or their affiliates. In such cases, the CDS Clearing Member (a 
``CDS SR Clearing Member''), either through its own account or that of 
a customer, has exposure to a CDS Product that references itself or its 
affiliate (each, an ``SR Transaction''). CME proposes to address this 
potential exposure to self-referencing risk by allocating an additional 
``jump-to-default'' (``JTD'') risk for each CDS SR Clearing Member 
under its Stress Test Methodology. CME considers a CDS Clearing Member 
default to be an extreme tail risk event which is subject to the CDS 
financial safeguards, including mutualization across all other CDS 
Clearing Members via the CDS Guaranty Fund.
    Currently, CDS SR Clearing Members that clear self-referencing 
indices for themselves or their customers are required to collateralize 
the self-referencing exposure in an amount specified in the CME Rules. 
CME is now proposing to adopt a risk-based approach without reference 
to any preset threshold to capture this self-referencing risk. The 
additional risk associated with CDS SR Clearing Members will be added 
to the stress scenarios used to size the CDS Guaranty Fund and CME will 
require each CDS SR Clearing Member to make an additional CDS Guaranty 
Fund Deposit to address this risk (such additional deposit, the ``CDS 
SR Deposit''). The aggregate amount of CDS SR Deposits will be sized to 
cover the net self-referencing exposure of the two CDS SR Clearing 
Members whose combined default would create the largest possible loss 
to CME in extreme but plausible market conditions \5\ using the stress 
testing methodology and will be allocated proportionately to each CDS 
SR Clearing Member. The required CDS SR Deposit will be allocated to 
each CDS SR Clearing Member in proportion to each such CDS SR Clearing 
Member's net self-referencing exposure.\6\
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    \5\ For purposes of determining the largest potential residual 
losses, the self-referencing exposure of a CDS SR Clearing Member 
will be aggregated with that of any affiliated CDS SR Clearing 
Member.
    \6\ CME received a notice of non-objection to the proposed rule 
change contained herein from the Commodity Futures Trading 
Commission (``CFTC''). See Letter from Phyllis Dietz, Acting 
Director, CFTC, to Jason Silverstein, Executive Director and 
Associate General Counsel, CME (December 22, 2014). The CFTC imposed 
conditions in the notice of non-objection. In accordance with the 
CFTC conditions, CME will monitor the self-referencing risk brought 
by CDS SR Clearing Members on a daily basis. In the event the self-
referencing potential residual loss of three or more CDS SR Clearing 
Members exceeds the equivalent of 50 million Euros each, CME will 
require additional initial margin from each such CDS SR Clearing 
Member to cover the incremental portion of the self-referencing risk 
it brings above 50 million Euros.
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    A new CME Rule 8H06 (CDS SR Deposit) has been added to reflect 
accurately these proposed changes to the CDS Guaranty Fund in the CME 
Rules, and CME Rule 8H802.B (Satisfaction of Clearing House 
Obligations) has been amended to reflect the introduction of the CDS SR 
Deposit. In addition, provisions in CME Rule 80104.A (Clearing Through 
Clearing Member's House (or Proprietary) Account) and CME Rule 80104.B 
(Clearing Through Clearing Members Customer Account) that relate to the 
requirement by clearing members that clear self-referencing indices for 
themselves or their customers to collateralize the self-referencing 
exposure in an amount specified in the CME Rules have been deleted.
2. Statutory Basis
    CME believes the proposed rule change is consistent with the 
requirements of the Exchange Act, including Section 17A of the Exchange 
Act \7\ and the applicable regulations thereunder. The proposed rule 
change is designed to promote the prompt and accurate clearance and 
settlement of securities transactions and, to the extent applicable, 
derivatives agreements, contracts, and transactions, to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, and, in 
general, to protect investors and the public interest consistent with 
Section 17A(b)(3)(F) of the Exchange Act.\8\
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    \7\ 15 U.S.C. 78q-1.
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed rule change accomplishes these objectives because it 
is intended to capture more accurately the risk associated with CDS 
Clearing Members that clear CDS Products that references themselves or 
their affiliates. A CDS Clearing Member default may result in contagion 
among financial institutions, widening spreads and exposing portfolios 
consisting of index CDS that reference financial entities to potential 
wrong-way risk. For example, the default of a CDS Clearing Member based 
in the United States, which is not referenced in an index referencing 
European names, could lead to overall widening of the credit spreads 
among financial institutions worldwide, leading to widening of spreads 
in non-US indices. This may lead to variations in correlations between 
such non-US indices and other North American

[[Page 6557]]

indices, potentially adversely impacting certain portfolios which are 
sensitive to such correlations. This increase in potential exposure 
caused by contagion is addressed in the Proposed CDS Risk Model and 
Stress Test Methodology via incorporation of stressed correlation 
scenarios.
    CME will also promote the efficient use of margin for the 
clearinghouse and its Clearing Members and their customers, by enabling 
CME to provide appropriate portfolio margining treatment between index 
and single-name CDS positions and as such contribute to the 
safeguarding of securities and funds in CME's custody or control or for 
which CME is responsible and the protection of investors.\9\
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    \9\ Id.
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    CME also believes the proposed rule change is consistent with the 
requirements of Rule 17Ad-22 of the Exchange Act.\10\ In particular, in 
terms of financial resources, CME believes that the proposed rule 
change will continue to ensure sufficient margin to cover its credit 
exposure to its clearing members, consistent with the requirements of 
Rule 17Ad-22(b)(2) \11\ and Rule 17Ad-22(d)(14),\12\ and that the CDS 
Guaranty Fund contributions and required margin will provide sufficient 
financial resources to withstand a default by the two participant 
families to which it has the largest exposures in extreme but plausible 
market conditions consistent with the requirements of Rule 17Ad-
22(b)(3).\13\ CME is adding a CDS Guaranty Fund deposit using this 
approach to address self-referencing risk, which has historically not 
been a material risk in relation to the CDS products cleared by CME to 
date. In anticipation of clearing additional products, CME proposes to 
replace the existing threshold-based margin requirement with a risk-
based additional CDS Guaranty Fund charge. In addition, CME believes 
that the proposed rule change is consistent with CME's requirement to 
limit its exposures to potential losses from defaults by its 
participants under normal market conditions pursuant to 17Ad-
22(b)(1).\14\ CME also believes that the proposed rule change will 
continue to allow for it to take timely action to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of clearing member insolvencies or defaults, in accordance with 
Rule 17Ad-22(d)(11).\15\
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    \10\ 17 CFR 240.17Ad-22.
    \11\ 17 CFR 240.17Ad-22(b)(2).
    \12\ 17 CFR 240.17Ad-22(d)(14).
    \13\ 17 CFR 240.17Ad-22(b)(3).
    \14\ 17 CFR 240.17Ad-22(b)(1).
    \15\ 17 CFR 240.17Ad-22(d)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the proposed rule change will have any 
impact, or impose any burden, on competition. The proposed rule change 
reflects enhancements to CME's CDS Risk Model. Consequently, CME does 
not believe that the proposed rule change would significantly affect 
the ability of Clearing Members or other market participants to 
continue to clear CDS, consistent with the risk management requirements 
of CME, or otherwise limit market participants' choices for selecting 
clearing services. For the foregoing reasons, the Proposed CDS Risk 
Model does not, in CME's view, impose any unnecessary or inappropriate 
burden on competition.

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 CDS Risk Model have not 
been solicited or received. CME will notify the Commission of any 
written comments received by CME.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A) \16\ of the Act and Rule 19b-4(f)(4)(ii) \17\ 
thereunder.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(4)(ii).
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    CME asserts that this proposal constitutes a change in an existing 
service of CME that (a) primarily affects the clearing operations of 
CME with respect to products that are not securities, including futures 
that are not security futures, and swaps that are not security-based 
swaps or mixed swaps, and forwards that are not security forwards; and 
(b) does not significantly affect any securities clearing operations of 
CME or any rights or obligations of CME with respect to securities 
clearing or persons using such securities-clearing service, which 
renders the proposed change effective upon filing. CME believes that 
the proposal does not significantly affect any securities clearing 
operations of CME because CME recently filed a proposed rule change 
that clarified that CME has decided not to clear security-based swaps, 
except in a very limited set of circumstances.\18\ The rule filing 
reflecting CME's decision not to clear security-based swaps removed any 
ambiguity concerning CME's ability or intent to perform the functions 
of a clearing agency with respect to security-based swaps. Therefore, 
this proposal will not have an effect on any securities clearing 
operations of CME.
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    \18\ See Securities Exchange Act Release No. 34-73615 (Nov. 17, 
2014), 79 FR 69545 (Nov. 21, 2014) (SR-CME-2014-49). The only 
exception is with regards to Restructuring European Single Name CDS 
Contracts created following the occurrence of a Restructuring Credit 
Event in respect of an iTraxx Component Transaction. The clearing of 
Restructuring European Single Name CDS Contracts will be a necessary 
byproduct after such time that CME begins clearing iTraxx Europe 
index CDS.
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    At any time within 60 days of the filing of the proposed 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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#542621383179373b3939313a2027142731377a333b22"><span class="__cf_email__" data-cfemail="c5b7b0a9a0e8a6aaa8a8a0abb1b685b6a0a6eba2aab3">[email protected]</span></a>. Please include 
File No. SR-CME-2015-002 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CME-2015-002. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the

[[Page 6558]]

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 or 10:00 a.m. and 3:00 p.m. Copies of 
such filing also will be available for inspection and copying at the 
principal office of CME and on CME's Web site at http://www.cmegroup.com/market-regulation/rule-filings.html.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.
    All submissions should refer to File Number SR-CME-2015-002 and 
should be submitted on or before February 26, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-02251 Filed 2-4-15; 8:45 am]
BILLING CODE 8011-01-P


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