Document ID: SEC-2012-1884-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Comply With CFTC Part 22 Regulations
Posted Date: 2012-11-16T05:00Z

[Federal Register Volume 77, Number 222 (Friday, November 16, 2012)]
[Notices]
[Pages 68869-68871]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27873]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68207; File No. SR-CME-2012-43]

Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Comply With CFTC Part 22 Regulations

November 9, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 31, 2012, Chicago Mercantile Exchange Inc. (``CME'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change described in Items I and II below, which Items 
have been prepared primarily by CME. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons and to approve the proposed rule change on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CME proposes to amend certain of its rules to comply with the 
Commodity Futures Trading Commission's Part 22 Regulations. The text of 
the proposed rule change is available at the CME's Web site at http://www.cmegroup.com, at the principal office of CME, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, CME included statements 
concerning the purpose of, and basis for, the proposed rule 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 III below. CME has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by CME.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    CME is registered as a derivatives clearing organization (``DCO'') 
with the Commodity Futures Trading Commission (``CFTC'') and operates a 
substantial business clearing futures and swaps contracts subject to 
the jurisdiction of the CFTC. CME proposes to make changes to CME Rules 
802 and 901; CME Rules 8G04, 8G802, 8H04 and 8H802 to comply with the 
CFTC's Part 22 Regulations. The compliance date for these Regulations 
is November 14, 2012.\4\ CME will also make corresponding changes to 
CME's Clearing House Manuals of Operation for Interest Rate Swaps and 
CME's Clearing House Manuals of Operation for Credit Default Swaps to 
account for the proposed rule changes.
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    \4\ The original compliance date for CFTC's Part 22 Regulations 
was November 8, 2012. Subsequent to CME filing the proposed rule 
change with the Commission, due to the effects of Hurricane Sandy, 
the CFTC issued a no-action letter applicable for the period from 
November 8, 2012, to November 13, 2012, which in effect delayed the 
compliance date for the provisions of CFTC's Part 22 rules relevant 
to this proposed rule change to November 14, 2012. See Commodity 
Futures Trading Commission Letter No. 12-30, Staff No-Action Relief, 
Temporary Delay of Compliance Date for Part 22 Rules Due to Effects 
of Hurricane Sandy (October 31, 2012) (http://cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-30.pdf).
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    The proposed rule changes are intended, among other things, to 
implement CFTC requirements regarding the protection of cleared swaps 
customer contracts and collateral which became effective on April 9, 
2012. DCOs like CME are required to comply with these requirements by 
November 14, 2012, as set forth in Part 22 of the CFTC Regulations.\5\ 
The CFTC Part 22 Regulations implement the new CFTC customer protection 
model for cleared swaps customers--the legal segregation with 
operational commingling model (``LSOC Model'' or ``Complete Legal 
Segregation Model'').
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    \5\ See supra note 4.
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    The proposed rule changes also set forth new requirements for post-
default cleared swaps customer account processing. Under the proposed 
process, upon the default of a clearing member, CME would cease netting 
of settlement variation within the operationally commingled account and 
calculate obligations to CME separately for each customer. As further 
set forth in the rule, each cleared swaps customer would then be 
required to pay directly to CME any obligations to CME associated with 
its cleared swaps positions. Where appropriate, similar rules have been 
adopted in the related sections of the default rules of each of CME's 
three financial safeguard packages: base products, interest rate swaps 
(``IRS'') and credit default swaps (``CDS'').
    The proposed changes to CME Rules 802 and 901 can be summarized as 
follows:
     Rule 802.A harmonizes the definition of a clearing member 
default with those in Rules 8G802.A and 8H802.A.
     Rule 802.B clarifies the approach the Clearing House may 
take in liquidating any open contracts of a defaulted clearing member, 
including book entry that offsets open commodity contracts on the books 
of the defaulting clearing member; liquidation in the open market; and/
or one or more private auctions amongst qualified market participants 
invited by the Clearing House to submit confidential bids.
     Rule 802.G sets forth new requirements for post-default 
cleared swaps customer account processing, with the Clearing House 
treating positions and collateral of a defaulting clearing member's 
cleared swaps customers in accordance with Part 22 of the Commission's 
regulations. The rule also requires the Clearing House to cease netting 
of settlement variation in the cleared swaps customer account class 
upon a clearing member default and discusses the processes that the 
Clearing House would use to manage such customer accounts.
     New Rule 901.P provides that each Clearing Member would be 
required to use systems and appropriate procedures to accurately track 
and provide to the Clearing House the positions and collateral of each 
of its cleared swaps customers.
    The proposed changes to CME Rules 8G802 and 8G04 can be summarized 
as follows:
     Rule 8G802.A clarifies the rights of CME for the use of an 
IRS Clearing Member's and its customer's collateral in the event of a 
default of an IRS Clearing Member in conformity with the Part 22 
regulations. Rule 8G802.A.1(i) would also harmonize the definition of a 
clearing member default with rules 802.A and 8H802.A.
     Rule 8G802.B sets forth amended procedures for 
establishing a close out

[[Page 68870]]

value for IRS contracts to be consistent with Part 22. Section B.3 of 
the rule would provide for revised netting and offset provisions for 
the final settlement cycle upon an IRS Termination Event.
     Rule 8G802.G is amended to remove the customer 
mutualization within the customer account class for IRS to conform to 
the Part 22 Regulations.
     Rule 8G802.I sets forth the new requirements for cleared 
swaps customer account processing with CME after the default of an IRS 
Clearing Member treating positions and collateral of a defaulting 
clearing member's cleared swaps customers in accordance with Part 22 of 
the Commission's regulations. The rule also requires CME to cease 
netting of settlement variation in the cleared swaps customer account 
class upon an IRS Clearing Member default and establishes processes for 
CME to use to manage such customer accounts.
     New Rule 8G04.5 provides that each IRS Clearing Member 
would be required to use systems and appropriate procedures to 
accurately track and provide to CME the IRS positions and collateral of 
each of its cleared swaps customers.
     The IRS Manual is also being revised to make conforming 
changes related to the Part 22 regulations.
    The proposed changes to CME Rules 8H802 and 8H04.12 can be 
summarized as follows:
     Rule 8H802.A clarifies the rights of CME for the use of a 
CDS Clearing Member's and its customer's collateral in the event of a 
default of a CDS Clearing Member in conformity with the Part 22 
Regulations.
     Rule 8H802.B sets forth amended procedures for 
establishing a close out value for CDS contracts to be consistent with 
Part 22. Section B.3 of the rule would provide for revised netting and 
offset provisions for the final settlement cycle upon a CDS Termination 
Event.
     Rule 8H802.G is amended to remove the customer 
mutualization of the customer account class for CDS to conform to the 
Part 22 regulations.
     Rule 8H802.I sets forth the new requirements for cleared 
swaps customer account processing with CME after the default of a CDS 
Clearing Member treating positions and collateral of a defaulting 
clearing member's cleared swaps customers in accordance with Part 22 of 
the Commission's regulations. The rule also requires CME to cease 
netting of settlement variation in the cleared swaps customer account 
class upon the default of a CDS Clearing Member and establishes 
processes for CME to use to manage such customer accounts.
     New Rule 8H04.12 provides that each CDS Clearing Member 
would be required to use systems and appropriate procedures to 
accurately track and provide to CME the CDS positions and collateral of 
each of its cleared swaps customers.
     The CDS Manual is also being revised to make conforming 
changes related to the Part 22 Regulations.
    CME proposes to make these rule changes effective on November 14, 
2012. CME also made a filing, CME Submission 12-347, with its primary 
regulator, the CFTC, with respect to the proposed rule changes.
    CME believes the proposed changes are consistent with the 
requirements of the Exchange Act including Section 17A. The rule 
changes are being proposed to comply directly with the CFTC's Part 22 
Regulations, which are designed to protect investors, or in CME's view, 
are critical in facilitating CME's compliance with Part 22 (e.g., the 
new provisions for post-default cleared swaps customer account 
processing that require the Clearing House to cease netting of 
settlement variation in the cleared swaps customer account class and 
require each cleared swaps customer to pay directly to CME any 
obligations to CME associated with its cleared swaps positions).\6\ As 
such, the proposed changes are designed to promote the prompt and 
accurate clearance and settlement of securities transactions and 
derivatives agreements, contracts and transactions, to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency and, in general, help to protect 
investors and the public interest. CME, a derivatives clearing 
organization registered with the CFTC, further notes that it is 
required to implement the proposed changes to comply with applicable 
CFTC regulations. CME notes that the policies of the Commodity Exchange 
Act (``CEA'') with respect to clearing are comparable to a number of 
the policies underlying the Exchange Act, such as promoting market 
transparency for derivatives markets, promoting the prompt and accurate 
clearance of transactions and protecting investors and the public 
interest.
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    \6\ Telephone conversation among Tim Elliot, Executive Director 
and Associate General Counsel, CME; Jason Silverstein, Executive 
Director and Associate General Counsel, CME; Gena Lai, Senior 
Special Counsel, SEC; Justin Byrne, Attorney-Advisor, SEC; November 
9, 2012.
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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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    CME has not solicited, and does not intend to solicit, comments 
regarding this proposed rule change. CME has not received any 
unsolicited written comments from interested parties.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CME-2012-43 on the subject line.

Paper Comments

     Send paper comments 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-CME-2012-43. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for

[[Page 68871]]

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-2012-43 
and should be submitted on or before December 7, 2012.

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

    Section 19(b) of the Act \7\ directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. The Commission finds that the proposed rule change is 
consistent with the requirements of the Act, in particular the 
requirements of Section 17A of the Act, and the rules and regulations 
thereunder applicable to CME.\8\ Specifically, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act, which requires, among other things, that the rules of a 
registered clearing agency be designed 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 protect investors 
and the public interest.\9\
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    \7\ 15 U.S.C. 78s(b).
    \8\ 15 U.S.C. 78q-1. In approving this proposed rule change, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    In its filing, CME requested that the Commission approve this 
proposed rule change on an accelerated basis for good cause shown. CME 
cites as the reason for this request that the proposed changes are 
necessary to facilitate CME's compliance with new CFTC regulations that 
become effective on November 14, 2012.
    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\10\ for approving the proposed rule change prior to the 30th 
day after the date of publication of notice in the Federal Register 
because, as a registered derivatives clearing organization, CME must 
amend certain of its rules to comply with the CFTC's Part 22 
Regulations that will become effective on November 14, 2012.
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    \10\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-CME-2012-43) be, and hereby is, 
approved on an accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27873 Filed 11-15-12; 8:45 am]
BILLING CODE 8011-01-P