Daily Rules, Proposed Rules, and Notices of the Federal Government
CME proposes to amend rules related to its interest rate swaps ("IRS") and interest rate futures clearing offerings by establishing a portfolio margining program for customer portfolios containing IRS and interest rate futures positions. The text of the proposed rule changes is available on the CME's Web site at
In its filing with the Commission, CME included statements concerning the purpose of and basis for the proposed rule changes and discussed
CME is registered as a derivatives clearing organization with the Commodity Futures Trading Commission ("CFTC"), and currently operates a substantial business clearing both IRS and interest rate futures contracts. The changes that are the subject of this filing are proposed rules that would establish a portfolio margining program for customer portfolios containing cleared IRS and interest rate futures positions. More specifically, the proposed rule amendments consist of revisions to CME Rule 8G831 (Commingling of Eligible Futures and Swaps Positions) and certain corresponding changes to the CME IRS Clearing House Manual of Operations.
CME believes the rule changes will benefit customers and the overall derivatives markets by: (1) Enabling customers who clear trades through CME to obtain the benefit of margin offsets between interest rate futures and IRS, thus reducing their trading costs and allowing for more efficient capital usage; (2) improving the efficiency and effectiveness of risk management; and (3) encouraging greater utilization of clearing, thereby facilitating systemic risk reduction.
CME notes that it has also submitted the proposed rule changes that are the subject of this filing to its primary regulator, the CFTC, in CME Submission 12-151, and is awaiting the CFTC's approval for the proposal.
CME has considerable experience clearing and managing the risks of interest rate futures, and has been clearing IRS since October 2010. CME notes that it previously implemented a portfolio margining program for interest rate futures and IRS products in proprietary or "house" accounts of clearing member firms.
CME's IRS offering currently includes seven currencies--viz., USD, EUR, GBP, CAD, AUD, JPY, and CHF--each with varying contract attributes. CME identified the following interest rate futures that will initially be eligible for commingling with IRS in CFTC 4d(f) accounts (
To be permitted to commingle interest rate futures and IRS under CME's program, a clearing firm must be a futures commission merchant ("FCM") registered with the CFTC and an IRS clearing member of CME, and it must also be a clearing member of CME, the Chicago Board of Trade ("CBOT"), or both in order to clear interest rate futures. FCM clearing members must also satisfy minimum regulatory capital requirements under applicable law (including CFTC regulations and CME/CBOT rules) and must also be in compliance with CME's operational and risk-management rules and requirements for IRS and CME/CBOT clearing members.
Pursuant to the proposed changes to CME Rule 8G831, interest rate futures residing with IRS in CFTC 4d(f) accounts held at CME will be subject to the margin model developed by CME for IRS. This model is based on an Historical Value at Risk (HVaR) methodology with Exponentially Weighted Moving Average (EWMA) volatility forecasting. CME's margin model for IRS covers at least 99 percent of potential losses over any five-day period in a large universe of portfolios, covering 99 percent of market moves.
HVaR was selected both for its scalability across multiple currencies and its transparency to market participants: it is a standard, well understood model and is easily replicable. CME has enhanced the multi-currency HVaR model to address risks arising from rate risk and foreign exchange conversion risks. The model is designed to mitigate the rate risks created by additional currencies, correlated yield curves, and differing liquidity profiles. The model also takes into account foreign exchange conversion rates and their implication on collateral liquidation for multi-currency losses. In addition, the HVaR model provides margin offsets for multi-currency portfolios.
CME has considered issues involved with the default of a clearing member and/or the default by one or more of a clearing member's cleared swaps customers with a commingled account. Because the commingled positions would reside in CFTC 4d(f) accounts, these customer commingled interest rate futures and IRS (and collateral associated therewith) would be part of the customer "cleared swaps" account class under the CFTC's Part 190 Bankruptcy Rules. This means these positions would be treated in accordance with the CFTC's Part 22 regulations providing for legal segregation of customer funds with operational commingling, which become effective on November 8, 2012.
Any default by an IRS clearing member--including a default involving customer commingled positions--would also be governed by CME's rules and default management procedures for IRS (including CME Rules 8G802, 8G814, and 8G975). These rules and procedures are based on input from IRS clearing members and market participants, as well as CME's depth of default management experience from many years as a derivatives clearing house. CME's default management rules and procedures are reviewed and updated as circumstances warrant. CME Clearing makes these updates in consultation with the CME IRS Risk Committee and the CME IRS Default Management Committee.
CME believes the proposed rule changes are consistent with the requirements of the Act, including Section 17A,
Furthermore, CME points out that the proposed rule changes are limited to the clearing of futures and swaps, and thus relate solely to CME's futures and swaps clearing activities pursuant to its registration as a derivatives clearing organization under the Commodity Exchange Act ("CEA"). CME thus asserts that the proposed rule changes do not significantly affect any of CME's securities clearing operations or any related rights or obligations of CME or persons using such service. CME notes that the policies of the CEA with respect to clearing are comparable to a number of the policies underlying the 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.
CME does not believe that the proposed rule changes will have any impact, or impose any burden, on competition.
CME has not solicited, and does not intend to solicit, comments regarding these proposed rule changes. CME has not received any unsolicited written comments from interested parties.
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule changes are consistent with the Act. Comments may be submitted by any of the following methods:
* Electronic comments may be submitted by using the Commission's Internet comment form (
* Paper comments should be sent in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-0609.
All submissions should refer to File Number SR-CME-2012-22. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's Internet Web site (
All submissions should refer to File Number SR-CME-2012-22 and should be submitted on or before September 12, 2012.
Section 19(b) of the Act
In its filing, CME requested that the Commission approve these proposed rule changes on an accelerated basis, so they can become effective prior to August 31, 2012. CME has articulated three reasons for granting its request for accelerated approval. One, the products covered by this filing, and CME's operations as a derivatives clearing organization for such products, are regulated by the CFTC under the CEA. Two, the proposed rule changes affect the IRS swaps and interest rate futures that CME clears, and therefore relate solely to its swaps and futures clearing activities, and do not significantly relate to CME's functions as a clearing agency for security-based swaps. Three, CME believes the rules will benefit customers and the overall derivatives markets in the following ways: (i) By enabling customers who clear trades through CME to obtain the benefit of margin offsets between interest rate futures and IRS, thus reducing their trading costs and allowing for more efficient capital usage; (ii) by improving the efficiency and effectiveness of risk management;
The Commission concludes that there is good cause, pursuant to Section 19(b)(2) of the Act,