[Federal Register Volume 77, Number 21 (Wednesday, February 1, 2012)]
[Notices]
[Pages 5070-5072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-2133]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66250; File No. SR-CME-2012-01]
Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.;
Notice of Filing of Proposed Rule Change To Amend Rules Relating to
Credit Default Swap Guaranty Fund
January 26, 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 January 23, 2012, 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. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of Terms of Substance of
the Proposed Rule Change
The text of the proposed rule change is below. Italicized text
indicates additions; bracketed text indicates deletions.
* * * * *
CHICAGO MERCANTILE EXCHANGE INC. RULEBOOK
Rule 100--Rule 8H06--No Change.
* * * * *
Rule 8H07. CDS FINANCIAL SAFEGUARDS AND GUARANTY FUND DEPOSIT
Rule 8H07.1(i)--No Change.
Rule 8H07.1(ii). (ii) Each CDS Clearing Member's required
contribution to the CDS Guaranty Fund shall be the greater of: (a) such
CDS Clearing Member's proportionate share of the largest two losses
described in 8H07.1(i)(a) above, each CDS Clearing Member's
proportionate share being based on the 90-day trailing average of its
[aggregate performance requirements] potential residual loss (``PRL'')
and the 90-day trailing average gross notional open interest
outstanding at the Clearing House (or, in either case, such other
shorter time interval determined by the CDS Risk Committee); and (b)
$50,000,000.
* * * * *
Rule 8H07.2--End--No Change.
* * * * *
[[Page 5071]]
CME CDS MANUAL OF OPERATIONS
CHAPTERS 1--9--No Change.
CHAPTER 10--CDS GUARANTY FUND CALCULATION
Separate CDS Guaranty Fund
CME Clearing shall establish an additional CDS Guaranty Fund as
described in Rule 8H07.
Guaranty Fund Calculation
Each CDS Clearing Member's Guaranty Fund contribution to the
Financial Safeguards Package will be equal to the greater of:
(1) 50MM; and
(2) An amount using stress test methodology equal to such Clearing
Member's proportionate share of the overall CDS Guaranty Fund based on
a 90 day trailing average of such Clearing Member's [performance bond]
PRL performance bond requirement (95% weight) and its average CDS gross
notional open interest at the CME (5% weight), as further set forth in
Rule 8H07.
Once the overall financial safeguards pool size has been determined
using the stress testing described below, the guaranty fund calculation
is calculated as per the example below:
------------------------------------------------------------------------
Determine overall financial safeguards
pool size based on net debtor stress Time Period X
testing results
------------------------------------------------------------------------
Aggregate
1st Largest Net Debtor stress test.... $500,000,000
2nd Largest Net Debtor stress test.... $400,000,000
Required Guaranty Fund Size (Sum of 2 $900,000,000
Largest Net Debtor stress tests).....
............................
Hypothetical CDS Clearing Member's
Guaranty Fund Contribution
[performance bond] PRL Component--95%
weight...............................
Total average aggregate CDS $10,000,000,000
[performance bond] PRL over trailing
90 days at CME.......................
Clearing member XYZ's average 90-day[, $800,000,000
performance bond requirement] PRL....
Clearing member XYZ's % of aggregate.. 8%
Clearing member XYZ's calculated $72,000,000
contribution to the CDS guaranty fund
($900M Target x 8%)..................
Clearing member XYZ's weighted (95%) $68,400,000
[performance bond] PRL contribution
to the CDS guaranty fund.............
Open Interest (Gross Notional) Component--
5% weight
Total average aggregate CDS gross $100,000,000,000
notional over trailing 90 days at CME
Clearing member XYZ's average 90-day 7,000,000,000
CDS gross notional...................
Clearing member XYZ's open interest % 7%
of aggregate.........................
Clearing member XYZ's open interest $63,000,000
component of the CDS guaranty fund
($900M Target x 7%)..................
Clearing member XYZ's weighted (5%) $3,150,000
open interest component of the CDS
guaranty fund........................
Clearing member XYZ's [performance $68,400,000
bond] PRL component of the CDS
guaranty fund........................
Clearing member XYZ's gross notional $3,150,000
component of the CDS guaranty fund...
Total clearing member XYZ's $71,550,000
calculated guaranty fund
contribution.....................
------------------------------------------------------------------------
* * * * *
II. Self-Regulatory Organization's Statement of 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 Purpose of, and
Statutory Basis for, the Proposed Rule Change
CME offers clearing services for certain credit default swap index
products. Current CME Rule 8H07 provides that each CDS Clearing
Member's allocation to the CDS Guaranty Fund will be the greater of (i)
$50,000,000 and (ii) its proportionate share of the 90-day trailing
average of its aggregate performance bond requirements and average
gross notional open interest outstanding at the Clearing House. The
rule change that is the subject of this filing would replace the
``aggregate performance bond requirement'' standard with a new standard
that CME believes better allocates tail risk. CME is also proposing to
make conforming changes to its CDS Manual of Operations.
CME believes the current ``aggregate performance bond requirement''
standard set forth in Rule 8H07 is designed to provide for margin
requirements that adequately cover day-to-day P/L moves, however, CME
believes changes could be made to provide for a more accurate
allocation of potential tail risk. Therefore, in order to more
accurately align the allocation of the CDS Guaranty Fund to each CDS
Clearing Member, consistent with the CDS Guaranty Fund's purpose of
covering tail risk events, CME proposes certain rule changes so that
the allocation will be made on the basis of each CDS Clearing Member's
potential residual loss (``PRL''). PRL is a stress test of the tail
risk CDS Clearing Member portfolios bring to the market.
CME notes that it will also submit the proposed rule changes that
are the subject of this filing to its primary regulator, the Commodity
Futures Trading Commission (``CFTC''). The text of the CME proposed
rule amendments is noted in Section I above, with additions italicized
and deletions in brackets.
CME believes the proposed rule changes are consistent with the
requirements of the Exchange Act including Section 17A of the Exchange
Act. Currently, the only swaps CME clears are CFTC-regulated swaps and
therefore the proposed rule changes will only directly affect CME's
swaps clearing activities pursuant to its registration as a derivatives
clearing organization under the Commodity Exchange Act (``CEA'').\3\
CME notes that the policies of the CEA with respect to clearing are
comparable to a number of the policies underlying the Exchange Act,
such as promoting market transparency for over-the-counter derivatives
markets, promoting the prompt and accurate clearance of transactions
and protecting investors and the public interest. CME believes the
proposed rule changes accomplish these objectives by more accurately
aligning the allocation of its CDS Guaranty Fund to each CDS Clearing
Member.
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\3\ The staff notes that the PRL allocation will apply to any
security-based swaps CME may clear in the future.
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[[Page 5072]]
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. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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 may be submitted by using the
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an email to [email protected]. Please include
File No. SR-CME-2012-01 on the subject line.
Paper comments should be sent in triplicate to Elizabeth
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CME-2012-01. 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
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of CME. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.
All submissions should refer to File Number SR-CME-2012-01 and
should be submitted on or before February 22, 2012.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2133 Filed 1-31-12; 8:45 am]
BILLING CODE 8011-01-P