[Federal Register Volume 77, Number 30 (Tuesday, February 14, 2012)]
[Notices]
[Pages 8318-8321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3329]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66354; File No. SR-CME-2012-03]
Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change to Amend Certain Aspects of the Performance Bond Regime
Applicable to Cleared Only OTC FX Swaps
February 8, 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 30, 2012, the 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 and Order 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 Terms of Substance of
the Proposed Rule Change
CME proposes to make certain changes that are related to its
current cleared-only OTC foreign currency (``FX'') product offering.
The proposed rule changes \3\ would add Price Alignment Interest
(``PAI'') functionality to current ``cash mark-to-market'' performance
bond regime that applies to CME's cleared-only OTC FX offering.
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\3\ The text of the proposed changes does not appear in CME's
rulebook but is available on CME's Web site at http://www.cmegroup.com/rulebook/files/s_6105_otc_fx_pai_cash_mk_to_mkt_ser_020112_revised.pdf.
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A description of the revised performance bond regime with the
addition of PAI is included below:
* * * * *
CME Forwards With Cash Mark-To-Market
In accordance with customer demand CME has begun clearing
privately-negotiated transactions in forwards with cash mark-to-market.
Until October 18, 2011, all forwards cleared by CME had a
collateralized mark-to-market. Each day, for each open forward trade,
mark-to-market is calculated, from original trade price to the current
end-of-day settlement price. These amounts are netted together and
``collateralized''. In other words, if a negative number (a loss), they
increase the initial margin (performance bond) requirement, thereby
increasing the amount of collateral that must be posted to meet that
margin requirement. If a positive number (a gain), they decrease the
initial margin requirement.
With cash mark-to-market implemented on October 18, 2011, the mark-
to-market value for the previous clearing business date is subtracted
from the mark-to-market amount for the current clearing date. These
amounts are netted down and become part of the total banked cash flow
for the currency in which they are denominated. It is a very simple
change for this cash mark-to-market as opposed to collateralized mark-
to-market.
There is an additional feature for FX forwards, and in particular
for non-deliverable forwards (NDF's)--forwards where one currency of
the pair is not bankable. We call this a forward where the cash mark-
to-market is flipped, or inverted.
Take for example a forward on the exchange rate between the US
Dollar (USD) and the Chilean Peso (CLP). The quantity is specified in
USD, and the price is quoted as a specified amount of CLP per one USD.
Normally, the mark-to-market amount would be denominated in CLP, also
referred to as the contra currency. But with the flipped mark-to-
market, the amount is converted to USD by dividing by today's end-of-
day settlement price for the contract.
Calculating Mark-to-Market and Change in Mark-to-Market
In the normal case, the mark-to-market amount for a forward is
calculated as:
Subtract the original trade price from the end-of-day
settlement price.
Express the trade quantity as a positive number for a buy
or a negative number for a sell.
Take the product of the price difference, the trade
quantity, the contract value factor, and the discount factor.
Round normally to the normal precision of the currency in
which the mark-to-market amount is denominated. (the contra currency
for an FX forward)
In other words:
(S - T) * Q * CVF * DF
Where:
S is the end-of-day settlement price
T is the original trade price
Q is the trade quantity
CVF is the contract value factor
DF is the discount factor
In the inverse case, the mark-to-market amount is calculated in the
exact same way, except that it includes a division by the daily
settlement price:
Subtract the original trade price from the end-of-day
settlement price.
Express the trade quantity as a positive number for a buy
or a negative number for a sell.
Take the product of the price difference, the trade
quantity, the contract value factor, and the discount factor.
Divide this result by the end-of-day settlement price.
Round normally to the normal precision of the currency in
which the mark-to-market amount is denominated. (the primary currency
for an FX forward)
In other words:
[(S - T) * Q * CVF * DF]/S
In either case, the settlement variation amount to be banked is
calculated by subtracting the mark-to-market amount for the previous
clearing business date from the amount for the current business date.
Cash-Settled and Physically-Delivered Forwards
At maturity, forwards with cash mark-to-market can be either cash-
settled or physically-delivered, exactly as for forwards with
collateralized mark-to-market.
For a cash-settled forward, at contract maturity (end-of-day on the
``clearing settlement date''):
The mark-to-market amount is set to zero.
We then calculate the settlement variation amount to be
banked exactly as on any other day--by subtracting the previous day's
value for mark-to-market from the current day's (zero) value.
The mark-to-market amount is then calculated one final
time--from original
[[Page 8319]]
trade price to the final settlement price and banked as part of the
final settlement of the contract.
The initial margin requirement is also set to zero,
exactly as for any other cash-settled forward or future.
The next morning the cash moves at the bank, and any
collateral deposited to meet the initial margin requirement may be
withdrawn.
For a physically-delivered forward, at contract maturity (end-of-
day on the clearing settlement date):
The mark-to-market amount is set to zero.
We then calculate the settlement variation amount to be
banked exactly as on any other day--by subtracting the previous day's
value for mark-to-market from the current day's (zero) value.
The invoice amount, calculated at original trade price, is
included in the total amount to be banked.
On the value date for physical delivery, the position is
removed. This causes the initial margin requirement to be set to zero,
and any collateral deposited to meet it may be withdrawn.
PAI is now a second additional feature for FX forwards and it
applies to both (1) non-deliverable forwards (NDF's)--cash-settlement
forwards where one currency of the pair is not bankable and (2) cash-
settlement WM/Reuters OTC FX forwards.
CME Clearing is introducing PAI to ensure settlement variation
amounts for cleared OTC FX forwards are treated consistently with those
of CME's cleared interest-rate swaps and credit-default swaps. PAI is
consistent and appropriate for all of these cleared products with daily
mark-to-market amounts settled in cash.
If the forward has positive net present value, the position holder
pays price alignment interest, and conversely if the forward has
negative net present value, the position holder receives price
alignment interest. The amount is calculated on the net realized cash
flow, from the banking business day on which that amount was realized,
to the next banking business day, and is annualized on an actual/360
day basis.
Data Formats
Exactly as before, a forward is denoted with a product type code of
FWD, and the settlement method is denoted as either CASH (for cash-
settled) or DELIV (for physically-delivered).
There are now three possible values for the ``valuation method''
for forwards:
The existing value FWD will continue to mean that mark-to-
market amounts are collateralized.
A new value FWDB (``forward banked'') means a forward with
cash mark-to-market.
A second new value FWDBI (``forward banked inverse'') will
be used for FX forwards with cash mark-to-market where the value is
flipped from the contra currency to the primary currency.
Exactly as before, the FinalSettlCcy attribute denotes the currency
in which the mark-to-market amount is denominated, and the Ccy
attribute on Amt elements also specifies the currency.
Exactly as before, the FMTM amount type will denote mark-to-market.
For forwards with cash mark-to-market, a new IMTM amount type--
``incremental mark-to-market''--denotes the change in mark-to-market
from the previous clearing business date--in other words, the
settlement variation amount.
Exactly as before, the DLV amount type represents either the final
mark-to-market amount to be banked (for cash settled contracts) or the
invoice amount (for physically-delivered contracts.)
To simplify bookkeeping system processing, a new BANK amount
element represents the total cash to be banked, and a new COLAT amount
element represents the total amount to be collateralized. (For forwards
with cash mark-to-market, the COLAT element will always have a value of
zero.)
Margining in SPAN
There are no changes to how performance bond (initial margin)
requirements are calculated in SPAN for portfolios including forwards
with cash mark-to-market. Simply divide the true notional position by
the equivalent position factor for the product, round the result up
(away from zero) to the nearest integer, and feed the resulting
``marginable positions'' to SPAN, exactly as before.
Production Ready
Forwards with cash mark-to-market and the PAI enhancement are now
available in CME's ``Production'' environment. For more information
please contact CME Clearing at 312-207-2525.
* * * * *
The text of the proposed changes is also 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 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 III 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 currently offers clearing for certain OTC FX cleared-only
products. In a previous filing, CME adopted a ``cash mark-to-market''
performance bond regime for its cleared-only OTC FX products. These
changes were applicable to all then currently listed and future product
rollouts (which now include 12 cleared, cash-settlement OTC FX non-
deliverable forwards (``NDFs'') and 26 cleared, cash-settlement CME WM/
Reuters OTC Spot, Forward and Swaps).\4\ With this filing, CME proposes
to enhance this current ``cash mark-to-market'' performance bond regime
by adding PAI functionality, which will bring CME's centrally cleared
OTC FX products in line with typical bilaterally held OTC FX
transactions.
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\4\ See Securities Exchange Act Release No. 34-65636 (October
26, 2011), 76 FR 67514 (November 1, 2011) [SR-CME-2011-14].
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CME uses its SPAN system to establish performance bond or
``margin'' requirements for CME's OTC FX cleared-only products. Initial
performance bond requirements are established at levels that are
consistent with observed levels of volatility in the particular
currency pairing and generally aligned with initial margin levels
applied to current CME FX futures and option contracts, where
applicable. Variation margins may be satisfied with the posting of
appropriate amounts of collateral, where CME collects and pays in cash
between the counterparties each day. CME accepts as collateral cash or
any other instruments currently designated as approved collateral for
posting for performance bonds. In order to calculate variation
requirements, settlement prices are established for each contract and
for each delivery date referencing data collected from a variety of
market sources. None of these risk components of the clearing system
would be changed with the proposed implementation of
[[Page 8320]]
PAI to the ``cash mark-to-market'' performance bond regime.
The addition of PAI, which is appropriate for cleared-only
derivatives products with daily mark-to-market amounts settled in cash
like OTC FX, would simply enhance the current performance bond
administration operational procedures. Under PAI, if the contract has
positive net present value, the position holder pays price alignment
interest and, conversely, if the contract has negative net present
value, the position holder receives price alignment interest. The
amount is calculated on the net realized cash flow, from the banking
business day on which that amount was realized, to the next business
day, and is annualized on an actual/360 basis. Therefore, when market
participants are required to post a cash mark-to-market amount for a
cleared OTC FX forward position, that market participant will be
reimbursed the interest equivalent on those newly posted funds.
Similarly, those market participants receiving the cash mark-to-market
amount for a cleared OTC FX forward position are charged the interest
equivalent on those newly credited funds to their account. This PAI
performance bond mechanism adjustment makes the CME cleared OTC FX
market more aligned with the underlying OTC FX forward market.
Pursuant to Commodity Futures Trading Commission (``CFTC'')
regulations, the changes in the applicable performance bond regime have
been interpreted by CME as being subject to CFTC Regulation 40.6(d),
requiring a self certification filing to the CFTC, although no change
to text of the CME rulebook is required. As such, the changes that are
the subject of this filing and that are necessary to add the PAI
functionality to CME's ``cash mark to market'' performance bond regime
are changes to CME operational procedures only. CME notes that it has
already certified the proposed changes that are the subject of this
filing to its primary regulator, the CFTC. The text of the proposed
changes is noted above.
CME believes the proposed changes are consistent with the
requirements of the Exchange Act including Section 17A of the Exchange
Act because they involve clearing of swaps and thus relate solely to
the CME's swaps clearing activities pursuant to its registration as a
derivatives clearing organization under the Commodity Exchange Act
(``CEA'') and do not significantly affect any securities clearing
operations of the clearing agency or any related rights or obligations
of the clearing agency or persons using such service. CME further 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. The proposed rule changes accomplish
those objectives by offering investors clearing for a range of FX OTC
swap products.
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 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-2012-03 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-2012-03. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 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-2012-03 and should be
submitted on or before March 6, 2012.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
In its filing, CME requested that the Commission approve this
request on an accelerated basis, for good cause shown. CME has
articulated three reasons for granting this request on an accelerated
basis. One, the products covered by this filing, and CME's operations
as a derivatives clearing organization for such products, are regulated
by the CFTC under the CEA. Two, the proposed rule changes relate solely
to FX swap products and therefore relate solely to its swaps clearing
activities and do not significantly relate to CME's functions as a
clearing agency for security-based swaps. Three, not approving this
request on an accelerated basis will have a significant impact on the
swap clearing business of CME as a designated clearing organization.
Section 19(b) of the Act \5\ 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 changes is
consistent with the requirements of the Act, in particular the
requirements of Section 17A of the Act,\6\ and the rules and
regulations thereunder applicable to CME. 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 clearing agency be designed to promote the prompt and
accurate clearance and
[[Page 8321]]
settlement of derivative agreements, contracts, and transactions
because it should allow CME to enhance its services in clearing foreign
currency contracts, thereby promoting the prompt and accurate clearance
and settlement of derivative agreements, contracts, and
transactions.\7\
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\5\ 15 U.S.C. 78s(b).
\6\ 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).
\7\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission finds good cause for accelerating approval because:
(i) The proposed rule change does not significantly affect any
securities clearing operations of the clearing agency (whether in
existence or contemplated by its rules) or any related rights or
obligations of the clearing agency or persons using such service; (ii)
CME has indicated that not providing accelerated approval would have a
significant impact on the foreign currency contracts clearing business
of CME as a designated clearing organization; and (iii) the activity
relating to the non-security clearing operations of the clearing agency
for which the clearing agency is seeking approval is subject to
regulation by another regulator.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-CME-2012-03) is approved on an
accelerated basis.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3329 Filed 2-13-12; 8:45 am]
BILLING CODE 8011-01-P