[Federal Register Volume 79, Number 120 (Monday, June 23, 2014)]
[Notices]
[Pages 35607-35609]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14539]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72413; File No. SR-CME-2014-22]
Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Physical Delivery of CLS-Eligible Foreign Currencies
June 17, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on June 9, 2014, 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. 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 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 filing the proposed rule change that is limited to its
business as a derivatives clearing organization. More specifically, the
proposed rule change would make amendments to its current procedures
for facilitating physical delivery of CLS-eligible foreign currencies.
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.
[[Page 35608]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
CME is registered as a DCO with the Commodity Futures Trading
Commission (``CFTC'') and offers clearing services for many different
futures and swaps products. The proposed rule change that is the
subject of this filing is limited to CME's business as a DCO offering
clearing services for CFTC-regulated products. More specifically, the
change is limited to the delivery processing timelines for CME FX
futures paired delivery contracts. As discussed below, the proposed
change, which would facilitate continued physical delivery of CLS-
eligible foreign currencies, would not materially affect the nature or
level of risks presented to CME and its clearing members.
The operation and purpose of the proposed change is as follows.
Currently, CME facilitates physical deliveries for CLS eligible
currencies through a CME account at CLS Settlement Member banks for the
purpose of efficiently matching CLS instructions. To facilitate this
arrangement, CME has an agreement as a 3rd party customer with a CLS
settlement member bank, henceforth termed as CLS agent bank. CME
maintains accounts with two CLS agent banks for operational redundancy.
The CLS agent bank plays an operational role in the CLS process. CME
clearing members use their own CLS settlement banks or affiliates to
physically settle currency deliveries within CLS.
Currently, in a failure of physical settlement, CME would
administer the failure under current CME Rule 702. CME would be under
no obligation to secure the failed currency; it may, however,
facilitate the purchase of the currency for impacted clearing firm due
to the fact that the currency of the impacted firm would be in the
account of the CME at the CLS agent bank. Under CME rules, CME will
remove any failed transactions from the CLS settlement process and
resolve the failed physical settlements as set out under current CME
Rule 743.B.
CME's CLS agent banks have expressed an intention to discontinue
providing such services to central counterparties, such as CME, beyond
September 2014. To maintain the orderly functioning of the CME FX
Futures market and to avoid disruption to CME clearing members and
market participants, it is required for CME to migrate away from the
current operational mechanism described above to the ``paired
delivery'' model for the September 2014 FX delivery cycle for CLS
eligible currencies. Given the long history of operating under the
current operational mechanism, it is important to provide the clearing
members with an orderly migration path with an initial pilot physical
delivery for the CAD/USD contract in the June 2014 delivery cycle.
As a result, CME is amending the process for physical delivery of
CLS-eligible foreign currencies to a paired delivery process, which is
similar to that currently used for CME's physically settled products in
the Treasury complex. The operation of the paired delivery process is
as follows. The process is an assignment-based process where clearing
members with open long and short positions at the termination of
trading on expiration of the contract will be matched against one
another in order to facilitate the delivery. The assignment algorithm
first matches delivery positions within a clearing firm. The algorithm
then matches remaining positions across clearing firms. The algorithm
for matching across clearing firms is designed to reduce the
concentration of physical settlement. The migration to the Paired
Delivery model does not impact or change the Clearing Member's ability
to use their existing CLS access arrangements. The paired delivery
process simplifies the physical delivery process and provides more
transparency and certainty in the event of a failure in physical
settlement. The physical settlement transactions continue to receive
the same level of guarantee as defined under CME Rule 702.
Aside from the change described above, nothing will otherwise
change from an operational or risk perspective. Consequently, the
proposed change does not materially affect the nature or level of risks
presented to CME and its clearing members.
After implementation of the proposed change, CME teams would
continue to monitor clearing members going through delivery to assess
their ability to perform for their house and client accounts; this is
comparable to the process currently used for Treasury deliveries.
Moreover, for FX futures, clearing members would be able to continue to
use their existing CLS arrangements for currency deliveries. This is
comparable to the current CME Treasury delivery process; in that
process, clearing members are able to utilize their own banking
relationships provided the relationship meets the standards outlined in
applicable CME rules. Clearing members can also continue to use the
offset benefit they currently get with the spot FX physical settlements
through CLS. As noted above, the physical settlement transactions
continue to receive the same level of guarantee as defined under CME
Rule 702.
The removal of the CLS agent banks from the delivery process would
not result in the reduction of liquidity from the delivery process.
Under the agreements, CME's CLS agent banks are under no contractual
obligation to provide services to secure the alternate currency.
To facilitate an orderly transition to the new process, CME will
move FX futures currency pairings on a staggered basis to the new
paired delivery process beginning with the CAD/USD contract for the
June 2014 FX delivery cycle. Additional currencies will be moved to the
new process for the September 2014 and December 2014 FX delivery
cycles.
The change described in this filing is limited to CME's business as
a DCO clearing products under the exclusive jurisdiction of the CFTC
and does not materially impact CME's security-based swap or futures
clearing business in any way. The change will become effective
immediately but will be operationalized beginning June 18, 2014 and on
a staggered basis over the next few currency delivery cycles. CME notes
that it has also certified the proposed rule change that is the subject
of this filing to its primary regulator, the CFTC, in a separate
filing, CME Submission No. 14-165.
CME believes the proposed rule change is consistent with the
requirements of the Exchange Act including Section 17A of the Exchange
Act.\5\ Currently, CME facilitates physical deliveries for CLS-eligible
currencies through a CME account at third party banks that are members
of CLS for the purpose of efficiently matching CLS instructions for all
CLS-eligible currencies. These banks have expressed an intention to
discontinue providing such services to central counterparties, such as
CME, beyond September 2014. The amendments would facilitate physical
delivery of CLS-eligible foreign currencies by amending the process for
physical delivery of CLS-eligible foreign currencies to an assignment
based paired delivery process where clearing members with open long and
short positions at the end of trading on last trade date will be
matched against one another in order to facilitate a delivery. These
proposed amendments are designed to continue the ability to offer
physical delivery of CLS-eligible foreign currencies and as such are
designed to promote the prompt and accurate
[[Page 35609]]
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.\6\
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\5\ 15 U.S.C. 78q-1.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
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Furthermore, the proposed change is limited in its effect to
products offered under CME's authority to act as a DCO. The products
that are the subject of this filing are under the exclusive
jurisdiction of the CFTC. As such, the proposed CME change is limited
to CME's activities as a DCO clearing futures that are not security
futures and swaps that are not security-based swaps and forwards that
are not security forwards; CME notes that the policies of the CFTC with
respect to administering the Commodity Exchange Act 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.
Because the proposed change is limited in its effect to products
offered under CME's authority to act as a DCO, the proposed change is
properly classified as effecting 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, 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.
As such, the change is therefore consistent with the requirements of
Section 17A of the Exchange Act \7\ and is properly filed under Section
19(b)(3)(A) \8\ and Rule 19b-4(f)(4)(ii) \9\ thereunder.
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\7\ 15 U.S.C. 78q-1.
\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 17 CFR 240.19b-4(f)(4)(ii).
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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. Currently, CME
facilitates physical deliveries for CLS-eligible currencies through a
CME account at third party banks that are members of CLS for the
purpose of efficiently matching CLS instructions for all CLS-eligible
currencies. These banks have expressed an intention to discontinue
providing such services to central counterparties, such as CME, beyond
September 2014. The amendments would facilitate physical delivery of
CLS-eligible foreign currencies by amending the process for physical
delivery of CLS-eligible foreign currencies to an assignment based
paired delivery process where clearing members with open long and short
positions at the end of trading on last trade date will be matched
against one another in order to facilitate a delivery. These proposed
amendments are designed to continue the ability to offer physical
delivery of CLS-eligible foreign currencies and should not be seen to
impact 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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) \10\ of the Act and Rule 19b-4(f)(4)(ii) \11\ thereunder.
At any time within 60 days of the filing of the proposed rule 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.
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(4)(ii).
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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 No. SR-CME-2014-22 on the subject line.
Paper Comments
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-2014-22. 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/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-2014-22 and
should be submitted on or before July 14, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14539 Filed 6-20-14; 8:45 am]
BILLING CODE 8011-01-P