[Federal Register Volume 80, Number 1 (Friday, January 2, 2015)]
[Notices]
[Pages 80-83]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-30697]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73938; File No. SR-CME-2014-19]
Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Regarding Certain Contractual Arrangements That Apply to Its Over-the-
Counter Interest Rate Swap Clearing Offering
December 24, 2014.
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 15, 2014, 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. 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 proposing to make certain revenue sharing and governance
changes related to certain contractual arrangements that apply to its
over-the-counter interest rate swap (``OTC IRS'') clearing offering.
CME entered into this arrangement (the ``Agreement'') with a group of
clearing members on June 30, 2012 and the proposed rule change has been
implemented by CME since June 30, 2012.\5\
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\5\ Pursuant to a teleconference with CME's counsel on December
19, 2014, staff in the Division of Trading and Markets has modified
this sentence to insert references to the Agreement's execution and
implementation date.
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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,
and C below, of the most significant aspects of these statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
CME is registered as a derivatives clearing organization with the
Commodity Futures Trading Commission (``CFTC'') and operates a
substantial business clearing futures and swaps contracts subject to
the jurisdiction of the CFTC. CME is filing this proposed rule change
with respect to the Agreement made with various third-party financial
institutions (dealer founding members, ``DFMs'') relating to its OTC
IRS clearing business. The Agreement incentivized the DFMs to support
CME's initial development of its OTC IRS clearing infrastructure and is
designed to ensure that the DFMs continue their demonstrated commitment
to CME's ongoing IRS clearing efforts. The existing DFMs were selected
based on their support in CME's development of its clearing initiative,
ability to provide liquidity, their client clearing and risk management
expertise, as well as their willingness to test and generally support
centralized clearing in IRS Contracts on an on-going basis. CME may
invite other firms to join the Agreement in the future so long as such
firms are approved by a majority of the then-existing DFMs.
In summary, under the Agreement, the DFMs that satisfy their
obligations under the Agreement will receive a portion of the clearing
revenues and market data revenues generated in connection with CME's
clearing of certain specified IRS Contracts, will be subject to a cap
on the IRS clearing fees payable to CME, and will be entitled to
participate on CME's IRS advisory group. In addition, CME has agreed to
minimum IRS clearing member representation on the IRS Risk Committee
(the ``IRS RC''). These aspects and other relevant background and
context regarding the Agreement are described in greater detail below.
DFM Obligations Under the Agreement
Under the Agreement, DFMs are required to (i) maintain an IRS
clearing membership at CME in good standing, (ii) offer customers the
ability to clear IRS Contracts at CME on a non-discriminatory basis by
comparison to the terms offered for clearing of substantially similar
IRS Contracts through any U.S.-based derivatives clearing organization,
(iii) provide to
[[Page 81]]
CME certain pricing curves for daily settlement prices for IRS
Contracts, and (iv) submit IRS Contracts to CME that generate specified
minimum annual fees.
Economic Incentives for the DFMs Under the Agreement
Under the Agreement, DFMs will pay a specified fee for each IRS
Contract submitted to CME for clearing. In addition, CME and the DFMs
have agreed to share certain of the adjusted gross revenues associated
with CME's IRS Contracts clearing activities,\6\ including the sale of
market data generated by such activities (the ``Revenue Pools''). DFMs
that qualify during a relevant measurement period will each receive a
pro-rata share of the Revenue Pools based on volumes of IRS Contracts
submitted to CME. In addition, the non-customer fees charged to each
DFM for the clearing of IRS Contracts during a given measurement period
will not exceed a specified annual cap.\7\
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\6\ The DFM share of gross revenue is based on the number of
DFMs and adjusted for applicable discounts, rebates, taxes and
expenses.
\7\ During a December 22, 2014 teleconference with CME counsel,
staff in the Division of Trading and Markets confirmed that CME has
filed the following fee-related filings relating to the Agreement:
Securities Exchange Act Release No. 34-66102 (Jan. 5, 2012), 77 FR
1775 (Jan. 11, 2012) (File No. SR-CME-2011-22); Securities Exchange
Act Release No. 34-67036 (May 21, 2012), 77 FR 31416 (May 25, 2012)
(File No. SR-CME-2012-18) and Securities Exchange Act Release No.
34-71088 (Dec. 17, 2013), 78 FR 77512 (Dec. 23, 2013) (File No. SR-
CME-2013-32).
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Finally, CME has agreed to offer each DFM the option of electing,
in lieu of the incentives under the Agreement, any other pricing
structure for the clearing of IRS Contracts that any other IRS clearing
member chooses to accept from CME.
Governance Rights
In addition, CME has agreed with the DFMs that, among other things:
1. It will exercise its rights under CME's IRS RC charter \8\ so as
to cause a majority of the IRS RC to be composed such that (i)
employees or directors of IRS Clearing Members \9\ maintain a majority
of the IRS RC (the ``IRS Clearing Membership Representatives'') and
(ii) a majority of the IRS Clearing Membership Representatives be
selected from those IRS Clearing Members that have the ``n'' largest
average contributions to the IRS Guaranty Fund, where ``n'' is equal to
the actual number of IRS Clearing Membership Representatives plus two
(2); \10\
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\8\ The Agreement does not amend the charter of the IRS RC.
\9\ This includes all IRS Clearing Members, not just DFMs.
\10\ For instance, if the actual number of IRS Clearing
Membership Representatives is 5, then a majority of the IRS Clearing
Membership Representatives will be selected from those IRS Clearing
Members with the 7 largest average contributions to the IRS Guaranty
Fund.
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2. each DFM may appoint a representative (a ``DFM Representative'')
to participate on CME's IRS advisory group; \11\ and
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\11\ CME's IRS advisory group includes a representative from
each of the DFMs and a representative from CME. In addition, CME may
invite up to 2 non-DFM IRS clearing members that are in the top 10
contributors to the IRS Guaranty Fund and up to 3 non-IRS Clearing
Members to appoint representatives to the IRS advisory group.
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3. it will not launch any IRS Product that was not originally
contemplated by the Agreement in the IRS Guaranty Fund if a majority
the DFM Representatives object to such launch based on material risk
management concerns that such DFM Representatives have identified and
that CME is unable to reasonably mitigate.
Section17A of the Act does not permit the rules of a clearing
agency to unfairly discriminate in the admission of participants or
among participants in the use of the clearing agency.\12\ The rules of
a clearing agency must also assure its participants are fairly
represented with respect to the administration of its affairs.\13\
Further, the rules of the clearing agency must not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.\14\ Although the terms of the Agreement deliver
certain rights to a set of participants that are not offered to others,
CME believes the proposed rules are nevertheless consistent with the
requirements of the Act for the following reasons.
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
\13\ 15 U.S.C. 78q-1(b)(3)(C).
\14\ 15 U.S.C. 78q-1(b)(3)(I).
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First, the Agreement provides an enumerated group of DFMs, who are
also IRS Clearing Members at CME, with economic incentives and other
contractual rights that will not be afforded to other IRS Clearing
Members who are not DFMs. The rationale for providing this group of
DFMs with these rights is to incentivize them (i) to provide
substantial support to CME in its development and structuring of its
OTC IRS clearing offering and (ii) to serve as the initial set of IRS
clearing members. These swap market participants invested significant
time and resources to support CME staff's efforts to design, develop,
and implement CME's OTC swaps clearing infrastructure and agreed to
provide clearing member services for OTC IRS on an ongoing basis.
Providing these rights to these participants does not constitute unfair
discrimination among participants of CME because of the equity
ownership-like commitments undertaken by these DFMs during CME's
initial offering phase. Because the DFMs provided these equity
ownership-like commitments during CME's initial offering phase, there
is not unfair discrimination among participants and the Agreement
should be seen to be consistent with Section 17A(b)(3)(F) of the
Act.\15\
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
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With respect to the governance rights provided to the DFMs, CME
also believes that these should be found to be consistent with the
requirements of Section 17A of the Act.\16\ CME recognizes that there
would be reason to be concerned in circumstances where one particular
member of a self-regulatory organization (``SRO'') was able to acquire
a controlling influence in the administration of the affairs of the
SRO. Such circumstances would have the potential to jeopardize an SRO's
ability to operate impartially, as a single controlling member might be
tempted to exercise its controlling influence by directing the SRO to
refrain from diligently surveilling the member's conduct or from
punishing any conduct that violates the rules of the SRO, Commodity
Exchange Act or other applicable laws. However, those types of concerns
are not present with the governance incentives offered to the DFMs in
the Agreement.
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\16\ 15 U.S.C. 78q-1.
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Further, the Agreement provides for significant market participant
participation in the governance of IRS Products by specifying certain
membership composition criteria for the IRS RC. These composition
criteria, in general, provide assurance that the participants with the
most exposure to CME's IRS clearing initiative will be represented on
the IRS RC. This granting of a voice to the market participants with
the greatest risk to the Clearing House for IRS products is inherently
fair and consistent with Section 17A(b)(3)(C) of the Act.\17\ Further,
these provisions also ensure that no single participant would be able
to obtain a concentrated and outsized influence that would implicate
the concerns outlined above nor is representation on the IRS RC based
on DFM status.
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\17\ 15 U.S.C. 78q-1(b)(3)(C).
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Finally, the proposal will not affect any securities clearing
operations of CME because CME recently filed a
[[Page 82]]
proposed rule change that clarified that CME has decided not to clear
security-based swaps, except in a very limited set of
circumstances.\18\ The rule filing reflecting CME's decision not to
clear security-based swaps removed any ambiguity concerning CME's
ability or intent to perform the functions of a clearing agency with
respect to security-based swaps. Therefore, this proposal will have no
effect on any securities clearing operations of CME.
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\18\ See Securities Exchange Act Release No. 34-73615 (Nov. 17,
2014), 79 FR 69545 (Nov. 21, 2014) (File No. SR-CME-2014-49). The
only exception is with regards to Restructuring European Single Name
CDS Contracts created following the occurrence of a Restructuring
Credit Event in respect of an iTraxx Component Transaction. The
clearing of Restructuring European Single Name CDS Contracts will be
a necessary byproduct after such time that CME begins clearing
iTraxx Europe index CDS.
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For these reasons, CME submits that the specific economic
incentives and contractual governance rights granted to the DFMs should
be found to be reasonable and consistent with the Act. The terms of the
Agreement do not constitute unfair discrimination in the admission of
participants or among participants in the use of the clearing agency
but rather provide reasonable incentives to support the clearing
offering. The arrangements should be seen as consistent with Section
17A(b)(3)(F) of the Act,\19\ and should otherwise be seen to be
consistent with the Act's investor protection and public interest
mandates. CME submits that the proposed rule change promotes the prompt
and accurate clearance and settlement of transactions, assures the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible, fosters
cooperation and coordination with persons engaged in the clearance and
settlement of securities transactions, removes impediments to and
perfects the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions, and, in general,
protects investors and the public interest.
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\19\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CME does not believe that the proposed rule change will impose any
burden that is not reasonable, appropriate, or in furtherance of the
Act. As discussed above, the proposed rules will provide an enumerated
group of DFM firms, who are also IRS Clearing Members at CME, with
economic incentives and other contractual rights that will not be
afforded to other IRS Clearing Members who are not DFMs or do not
become DFMs. Providing these benefits to one set of firms and not all
could potentially have an impact on competition. However, CME believes
any such impacts should not be seen to be unreasonable in light of the
fact that these benefits were afforded in consideration of the
substantial support provided to CME in the development and structuring
of its OTC IRS clearing offering and the firms' agreement to serve as
the initial set of clearing members.
Further, the changes are limited to CME's derivatives clearing
business and, as such, do not affect security-based swap clearing
activities of CME in any way and therefore would not impose any burden
on competition that is inappropriate in furtherance of the purposes of
the Act.
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 upon filing pursuant
to Section 19(b)(3)(A) \20\ of the Act and Rule 19b-4(f)(4)(ii) \21\
thereunder. CME asserts that this proposal constitutes 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, and 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,
which renders the proposed change effective upon filing. CME believes
that the proposal does not significantly affect any securities clearing
operations of CME because CME recently filed a rule change that
clarified that CME has decided not to clear security-based swaps,
except in a very limited set of circumstances.\22\ The rule filing
reflecting CME's decision not to clear security-based swaps removed any
ambiguity concerning CME's ability or intent to perform the functions
of a clearing agency with respect to security-based swaps. Therefore,
this proposal will not have an effect on any securities clearing
operations of CME.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(4)(ii).
\22\ See supra note 18.
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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.
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-2014-19 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-2014-19. 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 filings will also be available
for inspection and copying at the principal office of CME and on CME's
Web site at
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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-2014-19
and should be submitted on or before January 23, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-30697 Filed 12-31-14; 8:45 am]
BILLING CODE 8011-01-P