[Federal Register Volume 77, Number 250 (Monday, December 31, 2012)]
[Notices]
[Pages 77160-77162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-31241]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68529; File No. SR-CME-2012-34]
Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.;
Notice of Filing of Proposed Rule Change Related to the Liquidity
Factor of CME's CDS Margin Methodology
December 21, 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 December 10, 2012, Chicago Mercantile Exchange Inc. (``CME'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CME proposes to make an adjustment to one particular component of
its current CDS margin model. The text of the proposed rule change is
below. Italicized text indicates additions; bracketed text indicates
deletions.
* * * * *
CME CDS Liquidity Margin Factor Calculation Methodology
The Liquidity Factor will be calculated as the sum of two
components:
(1) A concentration charge for market exposure as a function of
absolute Spread DV01 (a portfolio sensitivity to 1% par spread shock);
and
(2) A concentration charge for portfolio basis exposure as a
function of Residual Spread DV01 (which is the difference between the
Gross Spread DV01 and the Net Spread DV01 of the portfolio).
CME will also establish a floor component to the Liquidity Factor
using the current Gross Notional Function with the following
modifications: (1) the concentration scalar will be removed; and (2)
the maximum DST would be replaced by series-tenor specific DST values
based on the series and tenor of the relevant HY and IG positions, as
applicable.
* * * * *
The text of the proposed change is also available at 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 IV below. CME has prepared summaries, set forth in sections A, B,
[[Page 77161]]
and C below, of the most significant aspects of such statements.\3\
---------------------------------------------------------------------------
\3\ The Commission has modified the text of the summaries
prepared by CME.
---------------------------------------------------------------------------
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
CME's currently approved credit default swap margin methodology
utilizes a ``multi-factor'' portfolio model to determine margin
requirements for credit default swap (``CDS'') instruments. The model
incorporates risk-based factors that are designed to represent the
different risks inherent to CDS products. The factors are aggregated to
determine the total amount of margin required to protect a portfolio
against exposures resulting from daily changes in CDS spreads. For both
total and minimum margin calculations, CME evaluates each CDS contract
held within a portfolio. These positions are distinguished by the
single name of the underlying entity, the CDS tenor, the notional
amount of the position, and the fixed spread or coupon rate. For
consistency, margins for CDS indices in a portfolio are handled based
on the required margin for each of the underlying components of the
index.
CME proposes to make an adjustment to one particular component of
its current CDS margin model, the liquidity risk factor. This CDS
margin model component is designed to capture the risk that
concentrated positions may be difficult or costly to unwind following
the default of a CDS clearing member.
The Liquidity Risk Factor in CME's Current CDS Margin Model
The current liquidity/concentration factor (``Liquidity Factor'')
of CME's margin methodology for a portfolio of CDS indices is the
product of (1) the gross notional amount for each family (i.e., CDX IG
or CDX HY) of CDS positions in a portfolio (2) the current bid/ask of
the 5 year tenor of the ``on the run'' (OTR) contract (3) the Duration/
Series/Tenor (``DST'') factor and (4) a concentration factor based upon
the gross notional for each of the CDX IG and CDX HY contracts (``Gross
Notional Function''). The associated margin for a CDS portfolio
attributed to the Liquidity Factor is the sum of the Liquidity Factor
calculations for each family of CDS positions in the portfolio.
The calculation of the Liquidity Factor is based on the premise
that the 5-year OTR index is the most liquid CDS index product. As
such, the methodology is designed to evaluate the liquidity exposure of
each position in a CDS portfolio relative to the 5-year OTR index.
For each index family (i.e., CDX IG and CDX HY), a DST matrix is
calculated based on the historical bid-ask averages of each cleared
position relative to the OTR 5-year historical bid-ask averages. Then,
the maximum DST values are used as the DST factors. Such maximum DST
factors are then applied to the product of 5-year OTR bid-ask spread
(adjusted for duration for CDX IG only) and the Gross Notional of all
positions within each index family. The resulting products are further
scaled by concentration factors in order to account for oversized (as
measured by Gross Notional) portfolios. The concentration factors are
based on exponential functions of the Gross Notional of each index
family in a given portfolio.
Proposed Changes to the Liquidity Risk Factor
As liquidation costs are dependent on the risk in a portfolio, CME
is proposing to use an index portfolio's market risk rather than its
gross notional as the basis for determining the margins associated with
the Liquidity Factor. The proposed changes would calculate the
Liquidity Factor as the sum of two components:
(1) A concentration charge for market exposure as a function of
absolute Spread DV01 (a portfolio sensitivity to 1% par spread shock);
and
(2) A concentration charge for portfolio basis exposure as a
function of Residual Spread DV01 (which is the difference between the
Gross Spread DV01 and the Net Spread DV01 of the portfolio).
CME expects that these proposed changes would not generally impact
smaller portfolios whose liquidation costs are driven by the market
bid/ask spread rather than by the cost of hedging, and are therefore
adequately captured by the existing Liquidity Factor methodology. To
account for the risks associated with such smaller portfolios, CME also
proposes to establish a floor component to the Liquidity Factor using
the current Gross Notional Function described above with the following
modifications: (1) the concentration scalar would be removed as
concentration risk would already be accounted for by the concentration
charge component outlined above; and (2) the maximum DST would be
replaced by series-tenor specific DST values based on the series and
tenor of the relevant HY and IG positions, as applicable. CME expects
that large (by notional amount) portfolios will be impacted by the
proposed changes more than smaller portfolios.
The proposed liquidity risk factor model adjustments do not require
any changes to rule text in the CME rulebook and do not necessitate any
changes to CME's CDS Manual of Operations. The change will be announced
to CDS market participants in an advisory notice that will be issued
prior to implementation.
CME believes the proposed rule changes are consistent with the
requirements of the Exchange Act including Section 17A of the Exchange
Act.\4\ The enhancements to CME's current CDS margin methodology will
facilitate the prompt and accurate settlement of security-based swaps
and contribute to the safeguarding of securities and funds associated
with security-based swap transactions. CME believes the proposed rule
changes accomplish those objectives because the changes are designed to
incorporate how the liquidity risk factor is affected by not only
portfolio concentration based on gross notional, but also the
composition of the portfolio based on an underlying strategy. CME
believes the proposed rule changes would also better align CME's margin
methodology with the liquidity profile of the actual instruments in the
portfolio.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
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 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.
[[Page 77162]]
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 (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CME-2012-34 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-2012-34. 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 and on CME's
Web site at http://www.cmegroup.com/market-regulation/files/SEC_19B-4_12-34.pdf.
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-2012-34
and should be submitted on or before January 22, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\5\
---------------------------------------------------------------------------
\5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary .
[FR Doc. 2012-31241 Filed 12-28-12; 8:45 am]
BILLING CODE 8011-01-P