[Federal Register Volume 79, Number 191 (Thursday, October 2, 2014)]
[Notices]
[Pages 59544-59547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-23447]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73232; File No. SR-CME-2014-30]
Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1,
Related to 2014 ISDA Definitions
September 26, 2014.
I. Introduction
On August 11, 2014, Chicago Mercantile Exchange Inc. (``CME'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-CME-2014-30 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on August 19, 2014.\3\ The Commission did not
receive comments on the proposed rule change. On September 22, 2014,
CME filed Amendment No. 1 to the proposed rule change.\4\ The
Commission is publishing this notice to solicit comments on Amendment
No. 1 from interested persons and is approving the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-72837 (Aug. 13,
2014), 79 FR 49132 (Aug. 19, 2014) (SR-CME-2014-30) (hereinafter
referred to as the ``Initial Rule Filing'').
\4\ CME filed Amendment No. 1 to the proposed rule change to (i)
reflect the exclusion of certain entities referenced in CDX indices
from the 2014 ISDA Credit Derivatives Definitions Protocol and (ii)
reflect the recent change of the implementation date of the 2014
ISDA Credit Derivatives Definitions Protocol from September 22,
2014, to October 6, 2014, as discussed in more detail below.
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II. Description of the Proposed Rule Change
A. Description of the Initial Rule Filing
CME proposes to revise its clearing rules (the ``CDS Product
Rules'') to (i) incorporate references to revised Credit Derivatives
Definitions, as published by the International Swaps and Derivatives
Association, Inc. (``ISDA'') on February 21, 2014 (the ``2014 ISDA
Definitions''), which are the successor definitions to the 2003 Credit
Derivatives Definitions published by ISDA and as supplemented in 2009
(the ``2003 ISDA Definitions''), and (ii) provide greater clarity with
respect to the operation of certain provisions in the CDS Product
Rules. CME's implementation of the proposed rule change is intended to
coincide with the date on which the credit derivatives market is
expected to transition to the 2014 ISDA Definitions (the ``2014 ISDA
Definitions Implementation Date'').\5\ As such, CME states that the
proposed rule change would become effective on September 22, 2014, or
on such later date that CME otherwise determines. CME further states
that, to the extent that the credit derivatives market does not
transition to the 2014 ISDA Definitions, the proposed rule change will
not become effective.
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\5\ At the time of the Initial Rule Filing, CME anticipated that
this transition date would be September 22, 2014. In response to
subsequent changes in the planned industry-wide implementation date,
CME amended its proposal and now plans to accept for clearing
contracts referencing the 2014 ISDA Definitions by the time of the
updated industry-wide implementation date of October 6, 2014, and to
convert certain existing contracts to the 2014 ISDA Definitions as
of October 6, 2014. See supra note 4 and the discussion of Amendment
No. 1 below.
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CME states that the 2014 ISDA Definitions make changes to a number
of the standard terms with respect to CDS contracts when compared to
the 2003 ISDA Definitions. According to CME, key changes include the
introduction of new provisions relating to: (i) The settlement of
credit events relating to financial and sovereign reference entities by
delivery of assets other than bonds or loans that constitute
deliverable obligations, (ii) transactions that would be impacted by a
government bail-in of certain financial reference entities, (iii)
standard reference obligations for certain more frequently traded
reference entities, and (iv) other technical amendments and
improvements. CME states that the impact of the modifications to the
2014 ISDA Definitions relating to (i) the Successor provisions and (ii)
the inclusion of Asset Package provisions are of particular note in
relation to CME's proposed changes to the CDS Product Rules. CME
further states that notwithstanding the proposed changes to the CDS
Product Rules relating to Asset Package provisions, none of the CDS
products that CME currently clears are anticipated to be subject to
and/or impacted by such changes.
CME proposes to revise Chapters 800, 801, 802, 804, and 805 of the
CDS Product Rules to align them with the 2014 ISDA Definitions.\6\ The
proposed changes would primarily provide for the conversion of existing
contracts which are currently based on the 2003 ISDA Definitions into
contracts based on the 2014 ISDA Definitions in conformance with the
anticipated 2014 ISDA Credit Derivatives Definitions Protocol (as
amended and/or supplemented from time to time) (the ``2014 Protocol'')
and allow for new cleared CDS products to incorporate the 2014 ISDA
Definitions. Under CME's proposal, following the 2014 ISDA Definitions
Implementation Date, the 2014 ISDA Definitions will apply to both (i)
open positions cleared by CME (the ``Converting Contracts'') and (ii)
new CDS contracts cleared by CME, consistent with market practice. In
furtherance of this, CME proposes to make conforming changes throughout
the CDS Product Rules to refer to and/or conform to the 2014 ISDA
Definitions. Additionally, CME proposes to add provisions to the CDS
[[Page 59545]]
Product Rules to provide for the deemed amendment of all Converting
Contracts on the 2014 ISDA Definitions Implementation Date. CME also
proposes to make a number of non-substantive conforming and numbering
changes as part of the proposed rule change.
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\6\ A more detailed description of the proposed changes to the
CDS Product Rules is set forth in the notice of the Initial Rule
Filing. See supra note 3.
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B. Description of Amendment No. 1
On September 22, 2014, CME filed Amendment No. 1 to the proposed
rule change to (i) reflect the exclusion of certain entities referenced
in CDX indices \7\ from the 2014 Protocol, which will be used by the
market to update certain existing bilateral CDS Contracts to the 2014
ISDA Definitions, and (ii) to reflect the recent amendment of the
implementation date of the 2014 Protocol from September 22, 2014, to
October 6, 2014. CME states that the proposed amendments would avoid a
mismatch between open positions in CDS Contracts cleared by CME, which
would otherwise be updated to the 2014 ISDA Definitions under the
proposed rule change described in the Initial Rule Filing, and the
bilateral CDS market, which ultimately decided not to update certain
CDS on certain reference entities to be based on the 2014 ISDA
Definitions, and will also amend the proposed rule change to the CDS
Product Rules described in the Initial Rule Filing to be in line with
recent market developments.
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\7\ Currently, CME offers clearing of (i) the Markit CDX North
American Investment Grade Index Series 8 and forward and (ii) the
Markit CDX North American High Yield Index Series 13 and forward
(collectively, the ``CDX Contracts'').
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As described above, CME's Initial Rule Filing proposes to update
its CDS Product Rules to provide for the conversion of all open
positions in CDS contracts cleared by CME into contracts based on the
2014 ISDA Definitions (i.e., Converting Contracts). CME states that, at
the time of the Initial Rule Filing, there was an understanding in the
CDS market that all CDX Component Transactions (as defined in the CDS
Product Rules) would be Converting Contracts and, based on this
understanding, the proposed rule change in the Initial Rule Filing did
not contemplate that certain CDX Component Transactions may continue to
reference the 2003 ISDA Definitions post the 2014 ISDA Definitions
Implementation Date.
CME states that, subsequent to its submission of the Initial Rule
Filing, the market revised the list of reference entities that will be
excluded from the 2014 Protocol (the ``Excluded Reference Entity
List'') and which will continue to reference the 2003 ISDA Definitions
post the 2014 ISDA Definitions Implementation Date, inter alios, by
adding to the Excluded Reference Entity List certain entities
referenced in CDX Contracts which CME clears and therefore, it will be
necessary for the CDS Product Rules to provide for CDX Component
Transactions to which the 2003 ISDA Definitions may continue to apply.
CME states that, accordingly, certain CDX Contracts which CME clears
will, following the 2014 ISDA Definitions Implementation Date, be
bifurcated such that certain CDX Component Transactions will continue
to reference the 2003 ISDA Definitions (such transactions, ``2003
Definitions Transactions''), and certain other CDX Component
Transactions will reference the 2014 ISDA Definitions (such
transactions ``2014 Definitions Transactions''). As a result of this
bifurcation, CME proposes to split Chapters 800, 802, 804 and 805 of
its current CDS Product Rules into separate sub-parts to provide for
CDX Component Transactions depending on whether such transactions are
2014 Definitions Transactions or 2003 Definitions Transactions.
In Amendment No. 1, CME proposes to amend the Initial Rule Filing
to add to its CDS Product Rules the following sub-parts to provide for
CDX Component Transactions that are 2003 Definitions Transactions:
Chapters 800: Part: C, 802: Part B, 804: Part C and 805: Part D. CME
notes that the labeling of such sub-parts takes into account that other
sub-parts to the above-mentioned chapters are concurrently being
proposed to the Commission pursuant to CME's proposal to amend its
clearing rules to enable it to clear iTraxx contracts.\8\ CME also
proposes to amend certain definitions in Chapter 800 (Credit Default
Swaps: Part A) which were proposed in the Initial Rule Filing to align
its implementation of the 2014 ISDA Definitions with the recently
adopted approach in the bilateral CDS market. A concise description of
the amendments is set out below.
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\8\ See Securities Exchange Act Release No. 34-72833 (Aug. 13,
2014), 79 FR 48797 (Aug. 18, 2014) (SR-CME-2014-31).
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1. Chapter 800 (Credit Default Swaps: Part A)
CME proposes to make conforming changes to the definitions of
``Asset Package Notice'' and ``2014 Definitions Transaction'' in
Chapter 800 (Credit Default Swaps: Part A), which were proposed in the
Initial Rule Filing, to align these definitions with bifurcations
proposed to the Commission pursuant to CME's proposal to amend its
clearing rules to enable it to clear iTraxx contracts.\9\ In addition,
CME also proposes to amend the definitions of ``Implementation Date''
and ``Converting Contract'' in Chapter 800 (Credit Default Swaps: Part
A) in light of recent market developments to provide for the amendment
of all Converting Contracts on the date on which certain existing
contracts are converted to the 2014 ISDA Definitions in accordance with
the 2014 Protocol.
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\9\ Id.
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2. Chapter 800 (Credit Default Swaps: Part C)
CME proposes to add a sub-part to Chapter 800 entitled ``Credit
Default Swaps: Part C.'' Chapter 800: Part C provides the meanings of
capitalized terms that are used but not defined within the proposed
rules and the location of the meanings of any terms used in the
proposed rules but not defined within Chapter 800: Part C. In addition,
CME proposes to include CME Rule 80002.C (Interpretation), which
provides for the interpretation of certain contractual terms used
within the proposed rules, and CME Rule 80003.C (Notices and Clearing
House System Failures), which provides for how notices are to be
provided by, or to, CME and also for the extension of applicable
deadlines for the delivery of notices if CME, or any of its clearing
members, is unable to deliver or receive notices due to a failure of
the relevant CME internal system. CME notes that proposed CME Rule
80002.C and CME Rule 80003.C are substantially similar to CME Rule
80001 and CME Rule 80002, respectively,\10\ that are provided in the
currently published Chapter 800 of the CDS Product Rules.
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\10\ Pursuant to a teleconference with representatives of CME on
September 23, 2014, staff in the Division of Trading and Markets has
corrected incorrect cross-references to currently published CME
Rules 80002 and 80003 contained in CME's filing.
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3. Chapter 802 (CDX Index Untranched CDS Contracts: Part B)
CME proposes to add a sub-part to Chapter 802 entitled ``CDX Index
Untranched CDS Contracts: Part B.'' CME represents that Chapter 802:
Part B is substantially the same as the currently published Chapter
802, with the exception that certain clarifications have been added to
make it clear that Chapter 802 has been bifurcated and that Chapter
802: Part B will only apply to 2003 Definitions Transactions. In
addition, changes would be made to remove provisions relating to
Succession Events and/or Succession Event Resolution Request Dates
[[Page 59546]]
occurring prior to June 20, 2009, as these are historic provisions
within the definition of Succession Event Backstop Date that are no
longer relevant, and the Appendix to Chapter 802 has been updated to
delete expired CDX Contracts.\11\
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\11\ Pursuant to a teleconference with representatives of CME on
September 23, 2014, staff in the Division of Trading and Markets
confirmed that CME is not proposing to add new CDX Contracts to the
Appendix to Chapter 802 as incorrectly stated in CME's filing.
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4. Chapter 804 (CME CDS Risk Committee: Part C)
CME proposes to add a sub-part to Chapter 804 entitled ``CME CDS
Risk Committee: Part C'' to apply only in connection with 2003
Definitions Transactions. CME notes that Chapter 804: Part C is
substantially similar to the currently published Chapter 804 with the
exception that Chapter 804: Part C grants an additional authority to
the CDS RC to determine matters of contractual interpretation relevant
to market standard documentation incorporated into the terms of a CDS
Contract. In addition, CME proposes modifications to the existing CDS
Product Rules in order to ensure alignment of the CDS Product Rules
with the current market practices (as proposed by ISDA) to clarify the
circumstances under which the CDS RC may make such determinations to
avoid determinations that are inconsistent with DC determinations, and
other conforming, clarification changes and drafting improvements.
5. Chapter 805 (CME CDS Physical Settlement: Part D)
CME proposes to add a sub-part to Chapter 805 entitled ``CME CDS
Physical Settlement: Part D.'' Chapter 805: Part D provides for the
physical settlement process that will apply as the fallback settlement
method with respect to 2003 Definitions Transactions in circumstances
where auction settlement does not apply. CME represents that the
substance of the new provisions is based on the currently published
Chapter 805 of the CDS Product Rules, with some additional features as
described in further detail below.
CME Rule 80502.D.A (Matched Pair Notice) would provide additional
detail in relation to the matching process. CME states that the
additions do not substantively alter the CDS Product Rules, but rather,
seek to provide greater clarity with respect to the current matching
process and how such process will work in respect of CDS Contracts.
CME Rule 80507.D (Clearing House Guarantee of Matched Pair CDS
Contracts) and CME Rule 80508.D (Failure to Perform Under Matched Pair
CDS Contracts) would be updated to align the matching process with the
general physical settlement provisions of CME as set out in Chapter 7
(Delivery Facilities and Procedures).
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \12\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if the
Commission finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such self-regulatory organization. Section 17A(b)(3)(F)
of the Act \13\ requires, among other things, that the rules of a
clearing agency are designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative 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.
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\12\ 15 U.S.C. 78s(b)(2)(C).
\13\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 17A of the Act \14\ and the
rules thereunder applicable to CME. CME plans to accept for clearing
contracts referencing the industry standard 2014 ISDA Definitions by
the time of the planned industry-wide implementation on October 6,
2014, and to convert certain existing contracts to the new definitions
as of that date. The proposed rule change, which is principally
designed to incorporate and implement the 2014 ISDA Definitions, would
permit the clearing of both new and existing contracts referencing the
new definitions. Additionally, the proposed rule change, as modified by
Amendment No. 1, will allow CME to continue to offer clearing of
certain CDX Component Transactions that may continue to reference the
2003 ISDA Definitions post the implementation date of the 2014 ISDA
Definitions. The Commission therefore believes that the proposed rule
change is reasonably designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions,
consistent with Section 17A(b)(3)(F) of the Act.\15\
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\14\ 15 U.S.C. 78q-1.
\15\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Accelerated Approval of Proposed Rule Change as Modified by
Amendment No. 1
As discussed above, CME submitted Amendment No. 1 to the proposed
rule change to (i) reflect the exclusion of certain entities referenced
in CDX indices from the 2014 Protocol, which will be used by the market
to update certain existing bilateral CDS Contracts to the 2014 ISDA
Definitions, and (ii) to reflect the recent change of the
implementation date of the 2014 Protocol from September 22, 2014 to
October 6, 2014. The Commission believes that the modification by
Amendment No. 1 to the proposed rule change as described in the Initial
Rule Filing \16\ is consistent with the industry protocol, which has
been widely accepted by participants in the CDS market, and will (i)
permit CME to continue to offer clearing of certain CDX Component
Transactions that may continue to reference the 2003 ISDA Definitions
post the implementation date of the 2014 ISDA Definitions and (ii)
address the necessary change in the timing of the clearing of
transactions incorporating the 2014 ISDA Definitions in light of the
change in the implementation timing of the industry-wide ISDA protocol,
thereby facilitating the trading and clearing of CDS throughout the
entire credit derivatives market. Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)(C)(iii) of the Act,\17\ to
approve the proposed rule change, as modified by Amendment No. 1, prior
to the thirtieth day after the date of publication of notice of
Amendment No. 1 in the Federal Register.
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\16\ The Initial Rule Filing was published in the Federal
Register on August 19, 2014, for 21-day comment and the comment
period ended on September 9, 2014. The Commission did not receive
comments on the Initial Rule Filing.
\17\ 15 U.S.C. 78s(b)(2)(C)(iii).
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V. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether Amendment No. 1
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
[[Page 59547]]
Send an email to [email protected]. Please include
File Number SR-CME-2014-30 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-2014-30. 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 the 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-2014-30
and should be submitted on or before October 23, 2014.
VI. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \18\ and the
rules and regulations thereunder.
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\18\ 15 U.S.C. 78q-1.
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IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (File No. SR-CME-2014-30), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.\20\
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\19\ 15 U.S.C. 78s(b)(2).
\20\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23447 Filed 10-1-14; 8:45 am]
BILLING CODE 8011-01-P