[Federal Register Volume 79, Number 236 (Tuesday, December 9, 2014)]
[Notices]
[Pages 73122-73124]
[FR Doc No: 2014-28770]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73729; File No. SR-CME-2014-13]

Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to the Application of Excess Defaulting Clearing Member Assets
in Crossover Default Scenarios and the Harmonization of Defaulted Base
Clearing Member Collateral Definitions

December 3, 2014.
    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 November 26, 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 240.19b4(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 filing proposed rules changes that are limited to its
business as a derivatives clearing organization. More specifically, the
proposed rule changes would make amendments to CME Rules relating to
the application of excess defaulting clearing member assets in
crossover default scenarios and the harmonization of Defaulted Base
Clearing Member Collateral definitions.

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

    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 proposing new rules to specify the
allocation of excess collateral of a defaulted clearing member to
losses relating to products in other financial safeguards at CME pro
rata based on the remaining loss in each of such product classes.
Additionally, CME is proposing to amend CME Rule 802.A to harmonize the
member collateral definition across the default rules. CME notes that
it has also made a corresponding filing with the CFTC, in Submission
No. 14-097R, regarding the proposed changes.
    The proposed changes to CME Rules 802.D, 8G802.D and 8H802.D would
specify the allocation of excess collateral of a defaulted clearing
member for a particular financial safeguard package to losses relating
to product classes subject to other financial safeguards at CME. CME
employs three financial safeguard packages (i.e. waterfalls) for each
of the following product classes: interest rate swap products
(``IRS''); credit default swap products (``CDS''); and Base products
(which are all products other than IRS and CDS). The default rules for
each respective waterfall contain the ability, once the loss of the
clearing member for that waterfall is entirely satisfied, to use excess
house assets of the clearing member towards satisfying uncovered losses
of such clearing member for products in other waterfalls. For example,
if a member was clearing IRS and Base products and excess Base
collateral remained after completely satisfying all losses for Base
Products, the rules provide that such excess may be used towards any
uncovered losses of that clearing member for IRS products.
    CME rules are currently silent on the allocation mechanism of such
excess funds to unresolved losses in other product classes where losses
remain in both of the other product classes. The proposed new CME Rules
802.D.1, 8G802.D.1, and 8H802.D.1 would specify that any such excess is
allocated to the other safeguard packages pro rata based on the
remaining loss in each of such product classes.
    Additionally, CME is proposing to amend CME Rule 802.A.2 to
harmonize

the clearing member house collateral definition across the default
rules.
    CME believes the proposed rule changes are consistent with the
requirements of the Exchange Act including Section 17A.\5\ The proposed
changes for the allocation of excess funds comport with CFTC Regulation
39.16(c)(2)(iv) by adding clarifying language to specify the sequence
in which excess house funds of the defaulting clearing member for a
product class will be used to satisfy uncovered losses for other
product classes. In addition, changes are proposed that would harmonize
the defaulted clearing member definition and clarify the defaulted
member's assets held by the clearing house that may be used to satisfy
losses due to the clearing member's default. Because these changes
clarify CME's existing default rules and procedures, they 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 CME or for which it is responsible,
and, in general, to protect investors and the public interest in a way
that is consistent with Section 17A(b)(3)(F) of the Exchange Act.\6\
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    \5\ 15 U.S.C. 78q-1.
    \6\ 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 have any
impact, or impose any burden, on competition. The proposed changes
simply specify the allocation of excess collateral of a defaulted
clearing member to losses relating to products in other financial
safeguards at CME pro rata based on the remaining loss in each of such
product classes and, additionally, harmonize the member collateral
definition across the default rules.

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

    CME Inc. has filed the proposed rule change pursuant to Section
19(b)(3)(A) \7\ of the Act and paragraph (f)(4)(ii) of Rule 19b-4 \8\
thereunder.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 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. \9\ 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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    \9\ 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 Securities Exchange Act of 1934.
If the Commission takes such action, the Commission shall institute
proceedings under Section 19(b)(2)(B) \10\ of the Act to determine
whether the proposed rule change should be approved or disapproved.
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    \10\ 15 U.S.C. 78s(b)(2)(B).
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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_ADDRESS>Please include
File No. SR-CME-2014-13 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-2014-13. 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, 100F 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 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-2014-13 and
should be submitted on or before December 30, 2014.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28770 Filed 12-8-14; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register: November 12, 2009 (Volume 74, Number 217)]
[Notices]
[Page 58332-58334]
[DOCID:fr12no09-114]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60957; File No. SR-CBOE-2009-070]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change Relating to
Preferred Market Makers

November 6, 2009.

I. Introduction

    On September 28, 2009, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposal to amend CBOE Rule 8.13, ``Preferred Market-
Maker Program'' to establish a participation entitlement for complex
orders designated to Preferred Market Makers and to clarify the
operation of the Hybrid System with respect to the existing Preferred
Market Maker participation entitlement for individual options orders.
The proposed rule change was published for comment in the Federal
Register on October 7, 2009.\3\ The Commission received no comments
regarding the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60746 (September 30,
2009), 74 FR 51626 (``Notice'').
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II. Description of the Proposal

    The CBOE proposes to amend CBOE Rule 8.13 to: (1) Establish a
participation entitlement for complex orders entered into the Complex
Order Book (``COB'') or the complex order RFQ auction (``COA'') that
are designated to a Preferred Market Maker; and (2) clarify the
operation of the Hybrid System with respect to the Preferred Market
Maker participation entitlement for individual options orders.

A. Participation Entitlement for Complex Orders

    Under the proposal, any Designated Primary Market Maker, Lead
Market Maker, or Market Maker with an appointment/allocation in the
relevant options class may be designated as a Preferred Market Maker
for complex orders.\4\ A Preferred Market Maker must comply with the
quoting obligations applicable to its Market Maker type under CBOE's
rules and must provide continuous electronic quotes (as defined in CBOE
Rule 1.1(ccc)) in at least 90% of the series of each class for which it
receives Preferred Market Maker orders.\5\ In addition, to receive a
participation entitlement for orders entered into the COB, the
Preferred Market Maker must be quoting at the best net priced bid/offer
when the order is received.\6\ For orders in a COA, the Preferred
Market Maker must: (1) At the beginning of the auction, be quoting at
either (A) the best bid/offer on the CBOE in at least one of the
component series of the complex order, or (B) the best net priced bid/
offer for the complex order; and (2) be quoting at the best net priced
bid/offer at the conclusion of the auction.\7\
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    \4\ See CBOE Rule 8.13, Interpretation and Policy .01(a).
    \5\ See CBOE Rule 8.13, Interpretation and Policy .01(c).
    \6\ See CBOE Rule 8.13, Interpretation and Policy .01(a)(ii).
    \7\ See CBOE Rule 8.13, Interpretation and Policy .01(a)(iii).
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    CBOE prohibits an order flow provider from notifying a Preferred
Market Maker of its intention to submit a preferenced complex order so
that the Preferred Market Maker could change its quotation to match the
national best bid or offer (``NBBO'') immediately prior to the
submission of the preferenced order.\8\ CBOE states that CBOE Rule
4.18, ``Prevention of the Misuse of Material, Nonpublic Information,''
prohibits this misuse of material non-public information.\9\ CBOE
represents that it will conduct surveillance for, and enforce against,
such violations.\10\
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    \8\ See Notice, supra note 3, at note 3.
    \9\ Id.
    \10\ Id.
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    The participation entitlement for a complex order is based on the
contracts remaining after equivalent net priced orders and quotes on
the EBook and equivalent net priced public customer complex orders
resting in the COB that have priority over Preferred Market Makers have
been filled.\11\ After these orders have been filled, the participation
entitlement for a Preferred Market Maker that satisfies the
requirements in CBOE Rule 8.13, Interpretation and Policy .01 is: (1)
40% when there are two or more Market Makers also quoting at the best
net priced bid/offer execution price; and (2) 50% when there is one
other Market Maker quoting at the best net priced bid/offer execution
price.\12\ The participation entitlement percentages for complex orders
are the same as the

participation entitlement percentages for individual options orders
currently provided under CBOE Rule 8.13(c). If a Preferred Market Maker
receives a participation entitlement for a complex order in the COB or
a COA, no other participation entitlement provided in the CBOE's rules
for complex orders will apply to the complex order.\13\
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    \11\ See CBOE Rule 8.13, Interpretation and Policy .01(b)(ii).
    \12\ See CBOE Rule 8.13, Interpretation and Policy .01(b).
    \13\ See CBOE Rule 8.13, Interpretation and Policy .01(b)(iii).
However, if a complex order executes, in part, against a Preferred
Market Maker's interest in the COB or the COA and, in part, against
the Preferred Market Maker's interest in the individual series legs
in the EBook, a Preferred Market Maker entitlement may apply on both
the individual series legs and on the COB or COA execution. See
Notice, supra note 3, at note 5.
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B. Clarification of the Participation Entitlement for Individual Orders

    CBOE is amending CBOE Rule 8.13(b) to more clearly reflect the
operation of the Hybrid System with respect to Preferred Market Makers.
Specifically, CBOE is revising CBOE Rule 8.13(b) to indicate that the
Hybrid System is programmed so that the recipient of a Preferred Market
Maker order will receive a participation entitlement if: (1) The
Preferred Market Maker has an appointment/allocation in the relevant
options class; and (2) the Preferred Market Maker is quoting at the
CBOE's best bid or offer. CBOE is adding paragraph (d) to CBOE Rule
8.13, which will incorporate the quoting obligations applicable to
Preferred Market Makers that are currently set forth in CBOE Rule
8.13(b)(iii), including the requirement that a Preferred Market Maker
provide continuous electronic quotes, as defined in CBOE Rule 1.1(ccc),
in at least 90% of the series of each class for which it receives
Preferred Market Maker orders. CBOE notes that this quoting obligation,
like other Market Maker quoting obligations, is subject to CBOE market
performance, surveillance, and disciplinary programs to assess and
enforce compliance.

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\14\ In
particular, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\15\ which requires, in part, that the rules
of a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest. The proposal
establishes a Preferred Market Maker participation entitlement for
complex orders submitted to the COB and the COA. Under the proposal,
the Preferred Market Maker participation entitlement percentages for
complex orders are the same as the Preferred Market Maker participation
entitlement percentages provided currently in CBOE Rule 8.13(c) for
individual options orders.\16\ Because the proposal does not provide a
participation entitlement for complex orders that is greater than the
currently acceptable participation entitlement threshold for individual
options orders, the Commission does not believe that the proposal will
negatively impact quote competition for complex orders on CBOE. Under
the proposal, the remaining portion of each complex order will still be
allocated based on the competitive bidding of market participants.
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    \14\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ The Commission also has approved similar participation
entitlement percentages for individual options orders on other
options exchanges. See, e.g., Securities Exchange Act Release Nos.
56269 (August 15, 2007), 72 FR 47086 (August 22, 2007) (File No. SR-
Amex-2007-75) (order approving an American Stock Exchange directed
order program that provides a 40% participation entitlement on
directed orders) (``Amex Order''); 51759 (May 27, 2005), 70 FR 32860
(June 6, 2005) (File No. SR-Phlx-2004-91) (order approving a
directed order program on the Philadelphia Stock Exchange that
allows the directed order recipient to receive a 40% participation
entitlement on designated orders) (``Phlx Order''); and 51818 (June
10, 2005), 70 FR 35146 (June 16, 2005) (File No. ISE-2005-18) (order
approving a preferencing program on the International Securities
Exchange that allows a preferenced market maker to receive a 40%
participation entitlement on designated orders).
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    A Preferred Market Maker must satisfy certain requirements to be
eligible for a participation entitlement in complex orders.
Specifically, a Preferred Market Maker must comply with the quoting
obligations applicable to its Market Maker type under the CBOE's rules
and must provide continuous electronic quotes (as defined in CBOE Rule
1.1(ccc)) in at least 90% of the series for each class for which it
receives Preferred Market Maker orders.\17\ In addition, to receive a
participation entitlement for orders entered into the COB, the
Preferred Market Maker must be quoting at the best net priced bid/offer
when the order is received.\18\ For orders in a COA, the Preferred
Market Maker must: (1) At the beginning of the auction, be quoting at
either (A) the best bid/offer on the CBOE in at least one of the
component series of the complex order, or (B) the best net priced bid/
offer for the complex order; and (2) be quoting at the best net priced
bid/offer at the conclusion of the auction.\19\ These quoting
requirements are analogous to the current requirement in CBOE Rule
8.13(b)(ii) that a Preferred Market Maker be quoting at the CBOE's best
bid/offer to be eligible for a participation entitlement for an
individual options order.
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    \17\ See CBOE Rule 8.13, Interpretation and Policy .01(c). This
quoting obligation also applies currently to the Preferred Market
Maker participation entitlement for individual options orders.
    \18\ See CBOE Rule 8.13, Interpretation and Policy .01(a)(ii).
    \19\ See CBOE Rule 8.13, Interpretation and Policy .01(a)(iii).
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    The Commission believes that it is critical that, to be eligible
for a participation entitlement for a complex order, a Preferred Market
Maker may not step up and match the CBOE's best bid/offer after it
receives an order, but must be publicly quoting at the CBOE's best net
priced bid/offer when the order is received (for orders in the COB),
or, for orders in a COA, quoting at either the CBOE's best/bid offer
for a least one component of a complex order or at the CBOE's best net
priced bid/offer for the complex order at the start of the auction.\20\
As noted above, CBOE states that it would be a misuse of material non-
public information in violation of CBOE Rule 4.18 for an order flow
provider to notify a Preferred Market Maker of its intention to submit
a preferenced complex order immediately prior to sending the order to
allow the Preferred Market Maker to modify its quotation.\21\ CBOE
represents that it will conduct surveillance for, and enforce against,
such violations of its rules.\22\
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    \20\ A Preferred Market Maker will not be allocated a total
quantity greater than the quantity it is quoting at the best net
priced bid/offer execution price. See CBOE Rule 8.13, Interpretation
and Policy .01(b)(i).
    \21\ See notes 8 and 9, supra, and accompanying text.
    \22\ See note 10, supra, and accompanying text.
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    The Commission emphasizes that approval of this proposal does not
affect a broker-dealer's duty of best execution. The Commission has
discussed the duty of best execution in previous orders approving
proposals to implement participation entitlements,\23\ and hereby
incorporates those discussions by reference into this order.
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    \23\ See, e.g., Amex Order and Phlx Order, supra note 16; and
Securities Exchange Act Release No. 51779 (June 2, 2005), 70 FR
33564 (June 8, 2005) (File No. SR-CBOE-2004-71) (order approving a
modification of the participation entitlement for Preferred
Designated Primary Market Makers).
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    Finally, the Commission finds that the changes to CBOE Rule 8.13(b)
are

consistent with the Act because they clarify the operation of the
Hybrid System with respect to Preferred Market Maker participation
entitlements.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (File No. SR-CBOE-2009-070) is
approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27258 Filed 11-10-09; 8:45 am]

BILLING CODE 8011-01-P