[Federal Register Volume 80, Number 24 (Thursday, February 5, 2015)]
[Notices]
[Pages 6555-6558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02251]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74179; File No. SR-CME-2015-002]
Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Related to Enhancements to Its Risk Model for Credit Default Swaps
January 30, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on January 21, 2015, Chicago Mercantile Exchange
Inc. (``CME'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change 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
[[Page 6556]]
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 add a new CDS Guaranty Fund charge to CDS
Clearing Members that clear CDS Products that reference themselves or
their affiliates and delete the current threshold-based approach.
Specifically, CME proposes to add a new risk component to its CDS
Stress Test Methodology to capture self-referencing risk arising from
contracts that include component transactions for which the reference
entity is a clearing member or one of its affiliates. In addition, CME
proposes to add a new stress exposure calculation to size the self-
referencing risk.
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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
CME is proposing to add a new CDS Guaranty Fund charge to CDS
Clearing Members that clear CDS Products that reference themselves or
their affiliates and delete the current threshold-based approach.
Specifically, CME proposes to add a new risk component to its CDS
Stress Test Methodology to capture self-referencing risk arising from
contracts that include component transactions for which the reference
entity is a Clearing Member or one of its affiliates. In addition, CME
proposes to add a new stress exposure calculation to size the
anticipated maximum self-referencing risk.
Although CME does not permit a CDS Clearing Member or a customer to
enter into or maintain a single-name CDS position referencing the
clearing member or an affiliate, a self-referencing CDS position may
arise where the CDS Clearing Member or its affiliate is the Reference
Entity in respect of a component transaction within the index
referenced in a CDS position. For example, such a situation may arise
in the context of index CDS contracts which reference CDS Clearing
Members or their affiliates. In such cases, the CDS Clearing Member (a
``CDS SR Clearing Member''), either through its own account or that of
a customer, has exposure to a CDS Product that references itself or its
affiliate (each, an ``SR Transaction''). CME proposes to address this
potential exposure to self-referencing risk by allocating an additional
``jump-to-default'' (``JTD'') risk for each CDS SR Clearing Member
under its Stress Test Methodology. CME considers a CDS Clearing Member
default to be an extreme tail risk event which is subject to the CDS
financial safeguards, including mutualization across all other CDS
Clearing Members via the CDS Guaranty Fund.
Currently, CDS SR Clearing Members that clear self-referencing
indices for themselves or their customers are required to collateralize
the self-referencing exposure in an amount specified in the CME Rules.
CME is now proposing to adopt a risk-based approach without reference
to any preset threshold to capture this self-referencing risk. The
additional risk associated with CDS SR Clearing Members will be added
to the stress scenarios used to size the CDS Guaranty Fund and CME will
require each CDS SR Clearing Member to make an additional CDS Guaranty
Fund Deposit to address this risk (such additional deposit, the ``CDS
SR Deposit''). The aggregate amount of CDS SR Deposits will be sized to
cover the net self-referencing exposure of the two CDS SR Clearing
Members whose combined default would create the largest possible loss
to CME in extreme but plausible market conditions \5\ using the stress
testing methodology and will be allocated proportionately to each CDS
SR Clearing Member. The required CDS SR Deposit will be allocated to
each CDS SR Clearing Member in proportion to each such CDS SR Clearing
Member's net self-referencing exposure.\6\
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\5\ For purposes of determining the largest potential residual
losses, the self-referencing exposure of a CDS SR Clearing Member
will be aggregated with that of any affiliated CDS SR Clearing
Member.
\6\ CME received a notice of non-objection to the proposed rule
change contained herein from the Commodity Futures Trading
Commission (``CFTC''). See Letter from Phyllis Dietz, Acting
Director, CFTC, to Jason Silverstein, Executive Director and
Associate General Counsel, CME (December 22, 2014). The CFTC imposed
conditions in the notice of non-objection. In accordance with the
CFTC conditions, CME will monitor the self-referencing risk brought
by CDS SR Clearing Members on a daily basis. In the event the self-
referencing potential residual loss of three or more CDS SR Clearing
Members exceeds the equivalent of 50 million Euros each, CME will
require additional initial margin from each such CDS SR Clearing
Member to cover the incremental portion of the self-referencing risk
it brings above 50 million Euros.
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A new CME Rule 8H06 (CDS SR Deposit) has been added to reflect
accurately these proposed changes to the CDS Guaranty Fund in the CME
Rules, and CME Rule 8H802.B (Satisfaction of Clearing House
Obligations) has been amended to reflect the introduction of the CDS SR
Deposit. In addition, provisions in CME Rule 80104.A (Clearing Through
Clearing Member's House (or Proprietary) Account) and CME Rule 80104.B
(Clearing Through Clearing Members Customer Account) that relate to the
requirement by clearing members that clear self-referencing indices for
themselves or their customers to collateralize the self-referencing
exposure in an amount specified in the CME Rules have been deleted.
2. Statutory Basis
CME believes the proposed rule change is consistent with the
requirements of the Exchange Act, including Section 17A of the Exchange
Act \7\ and the applicable regulations thereunder. The proposed rule
change is designed to promote the prompt and accurate 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.\8\
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\7\ 15 U.S.C. 78q-1.
\8\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change accomplishes these objectives because it
is intended to capture more accurately the risk associated with CDS
Clearing Members that clear CDS Products that references themselves or
their affiliates. A CDS Clearing Member default may result in contagion
among financial institutions, widening spreads and exposing portfolios
consisting of index CDS that reference financial entities to potential
wrong-way risk. For example, the default of a CDS Clearing Member based
in the United States, which is not referenced in an index referencing
European names, could lead to overall widening of the credit spreads
among financial institutions worldwide, leading to widening of spreads
in non-US indices. This may lead to variations in correlations between
such non-US indices and other North American
[[Page 6557]]
indices, potentially adversely impacting certain portfolios which are
sensitive to such correlations. This increase in potential exposure
caused by contagion is addressed in the Proposed CDS Risk Model and
Stress Test Methodology via incorporation of stressed correlation
scenarios.
CME will also promote the efficient use of margin for the
clearinghouse and its Clearing Members and their customers, by enabling
CME to provide appropriate portfolio margining treatment between index
and single-name CDS positions and as such contribute to the
safeguarding of securities and funds in CME's custody or control or for
which CME is responsible and the protection of investors.\9\
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\9\ Id.
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CME also believes the proposed rule change is consistent with the
requirements of Rule 17Ad-22 of the Exchange Act.\10\ In particular, in
terms of financial resources, CME believes that the proposed rule
change will continue to ensure sufficient margin to cover its credit
exposure to its clearing members, consistent with the requirements of
Rule 17Ad-22(b)(2) \11\ and Rule 17Ad-22(d)(14),\12\ and that the CDS
Guaranty Fund contributions and required margin will provide sufficient
financial resources to withstand a default by the two participant
families to which it has the largest exposures in extreme but plausible
market conditions consistent with the requirements of Rule 17Ad-
22(b)(3).\13\ CME is adding a CDS Guaranty Fund deposit using this
approach to address self-referencing risk, which has historically not
been a material risk in relation to the CDS products cleared by CME to
date. In anticipation of clearing additional products, CME proposes to
replace the existing threshold-based margin requirement with a risk-
based additional CDS Guaranty Fund charge. In addition, CME believes
that the proposed rule change is consistent with CME's requirement to
limit its exposures to potential losses from defaults by its
participants under normal market conditions pursuant to 17Ad-
22(b)(1).\14\ CME also believes that the proposed rule change will
continue to allow for it to take timely action to contain losses and
liquidity pressures and to continue meeting its obligations in the
event of clearing member insolvencies or defaults, in accordance with
Rule 17Ad-22(d)(11).\15\
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\10\ 17 CFR 240.17Ad-22.
\11\ 17 CFR 240.17Ad-22(b)(2).
\12\ 17 CFR 240.17Ad-22(d)(14).
\13\ 17 CFR 240.17Ad-22(b)(3).
\14\ 17 CFR 240.17Ad-22(b)(1).
\15\ 17 CFR 240.17Ad-22(d)(11).
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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. The proposed rule change
reflects enhancements to CME's CDS Risk Model. Consequently, CME does
not believe that the proposed rule change would significantly affect
the ability of Clearing Members or other market participants to
continue to clear CDS, consistent with the risk management requirements
of CME, or otherwise limit market participants' choices for selecting
clearing services. For the foregoing reasons, the Proposed CDS Risk
Model does not, in CME's view, impose any unnecessary or inappropriate
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments relating to the Proposed CDS Risk Model have not
been solicited or received. CME will notify the Commission of any
written comments received by CME.
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) \16\ of the Act and Rule 19b-4(f)(4)(ii) \17\
thereunder.
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\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 17 CFR 240.19b-4(f)(4)(ii).
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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 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 not have an 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) (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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At any time within 60 days of the filing of the proposed 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 No. SR-CME-2015-002 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-2015-002. 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
[[Page 6558]]
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 or 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-2015-002 and
should be submitted on or before February 26, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-02251 Filed 2-4-15; 8:45 am]
BILLING CODE 8011-01-P