Daily Rules, Proposed Rules, and Notices of the Federal Government
CME is proposing to amend certain rules in connection with its status as a "deemed registered" clearing agency for purposes of clearing security-based swap products. The proposed changes are designed to comply with certain requirements in the Act. The text of the proposed 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 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.
CME began clearing credit default swaps prior to the passage of the Dodd-Frank Act. These activities were facilitated by temporary exemptive relief granted by the Commission to CME. This temporary exemptive relief expired on July 16, 2011. At that time, certain provisions in the Dodd-Frank Act became effective that were intended to ensure that derivatives clearing organizations such as CME that were clearing credit default swaps prior to the passage of Dodd-Frank based on exemptions granted by the Commission could continue to do so without interruption. These provisions provided that CME became "deemed registered" as a clearing agency solely for the limited purpose of clearing security-based swaps. Commission staff has interpreted this Dodd-Frank "deemed registered" provision to mean that CME Inc., the legal entity that houses all of CME's futures and swap businesses, is generally subject to all of the requirements of the Act that apply to clearing agencies, including the obligation to submit rule filings of CME Inc. under SEC Rule 19b-4.
To-date, CME has not offered any products for clearing that fall under the Commission's jurisdiction since the passage of the Dodd-Frank Act.
Commission staff has reviewed CME's rulebook and requested that CME make certain changes in accordance with existing Commission interpretive guidance.
The financial statements would, at a minimum include: (i) The balance of the clearing fund and the breakdown of the fund balance between the various forms of contributions to the fund, e.g., cash and secured open account indebtedness; (ii) the types and amounts of investments made with respect to the cash balance; (iii) the amounts charged to the clearing fund during the year in excess of a defaulting clearing member's Guaranty Fund contribution; and (iv) any other charges to the fund during the year not directly related and chargeable to a specific clearing member's Guaranty Fund contribution. CME also would make available to CDS Clearing Members clearing security-based swaps a report of CME Group Inc. by independent public accountant regarding its system of internal accounting control, describing any material weaknesses discovered and any corrective action taken or proposed to be taken.
CME would also furnish to all CDS Clearing Members engaged in security-based swap clearing activities, within 40 days following the close of each fiscal quarter, unaudited quarterly financial statements. These unaudited quarterly financial statements shall at a minimum consist of: (i) A statement of financial position as of the end of the most recent fiscal quarter and as of the end of the corresponding period of the preceding fiscal year; (ii) a statement of changes in financial position for the period between the end of the last fiscal year and the end of the most recent fiscal quarter and for the corresponding period of the preceding fiscal year; and (iii) a statement of results of operations, which may be condensed, for the most recent fiscal quarter and for the period between the end of the last fiscal year and the end of the most recent fiscal quarter and for the corresponding periods of the preceding fiscal year.
Commission staff has asked CME to provide an explanation of how CME's current governance arrangements relating to its CDS clearing offering should be viewed in light of the requirements of Section 17A(b)(3)(C) of the Act. This provision requires that the rules of a clearing agency assure a "fair representation" of its participants in the selection of its directors and administration of its affairs.
As an initial matter, CME notes that the Board of Directors of the CME Group Inc., the parent of CME, also serves as the Board of the CME. CME Group is a public company whose stock is listed on
CME is also subject to governance and conflict of interest provisions under the core principles set out in the Commodity Exchange Act ("CEA") for a derivatives clearing organization ("DCO"). The CFTC reviews CME for compliance with these principles. For example, Section 5b(c)(2)(O) of the CEA sets out governance fitness standards that apply to DCOs, including transparent governance arrangements, that are designed to ensure the consideration of views of owners and participants. Further, Section 5b(c)(2)(Q) of the CEA requires a DCO's board to include market participants. CFTC regulations also require a DCO's governance arrangements to be clear and transparent and "to support the objectives of relevant stakeholders".
CME also believes it is relevant that CDS participants will have a meaningful input into decisions affecting the clearing operations for CDS through participation on the CME CDS Risk Committee. Under CME Rule 8H27, the CDS Risk Committee was formed to provide guidance and oversight to CME Clearing on matters relating to CDS Products. The CDS Risk Committee, among other things, is responsible for reviewing CDS financial safeguards, and CDS clearing member requirements, risk management policies and practices, review of CDS rule changes, etc.
The Charter of the CDS Risk Committee sets forth certain composition requirements that ensure the perspectives of CDS Clearing Members are represented. More specifically, the Charter requires that at all times the CDS Risk Committee is populated with up to nine and no fewer than five individuals who are representative of CDS Clearing Members. Because of these composition requirements of the CDS Risk Committee, and the scope of its responsibilities, CME believes the Commission could find that its current governance arrangements meet the requirements of the Act.
Further, CME also notes that the Charter of the CDS Risk Committee specifically provides that its Chairman shall be a member of the CME Inc. Board of Directors. In this capacity, the Chairman of the CDS Risk Committee serves as a liason to the full board of directors of CME. He or she can relay any concerns addressed by the CDS Risk Committee to the full CME Board. CME notes that the CDS Risk Committee is required to reassess the adequacy of this Charter on an annual basis and submit any recommended changes to the full CME Board for approval. CME believes these features provide a concrete nexus between the activities of the CDS Risk Committee and the full CME Board and ensure that there will be a "fair representation" of CDS Clearing Members in accordance with the spirit and letter of the Act.
The CME believes the proposed rule changes are consistent with the requirements of the Act, including Section 17A of the Act. The changes are specifically designed to meet Section 17A requirements as interpreted by Commission staff for clearing agencies.
CME does not believe that the proposed rule change will have any impact, or impose any burden, on competition.
CME has presented these proposed changes to the representatives of its CDS Risk Committee. CME has not otherwise solicited, and does not intend to solicit, comments regarding this proposed rule change. CME has not received any unsolicited written comments from interested parties.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove the proposed rule change or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
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:
* Use the Commission's Internet comment form (
* Send an email to
Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
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-2012-26 and should be submitted on or before November 23, 2012.