Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding…

Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding Collateral Acceptance Practices for Products in the Base Guaranty Fund

June 26, 2014.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Exchange Act" or "Act"), /1/ and Rule 19b-4 thereunder, /2/ notice is hereby given that on June 23, 2014, Chicago Mercantile Exchange Inc. ("CME") filed with the Securities and Exchange Commission ("Commission") the proposed rule change described in Items I and II 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.

FOOTNOTE 1 15 U.S.C. 78s(b)(1). END FOOTNOTE

FOOTNOTE 2 17 CFR 240.19b-4. END FOOTNOTE

FOOTNOTE 3 15 U.S.C. 78s(b)(3)(A). END FOOTNOTE

FOOTNOTE 4 17 CFR 240.19b-4(f)(4)(ii). END FOOTNOTE

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

CME is proposing to announce via advisory notice a certain change to its collateral acceptance practices. More specifically, CME is proposing to issue an advisory to clearing member firms announcing a change to the acceptable collateral types for base guaranty fund products. The text of the proposed rule change is below. Italicized text indicates additions; bracketed text indicates deletions.

CME Group Advisory Notice #14-194

TO: Clearing Member Firms

FROM: CME Clearing

SUBJECT: Exchange Traded Fund (ETF) and Stock Programs

CME Clearing is expanding its existing collateral program to include additional Exchange Traded Funds (ETFs) that may be used as performance bond collateral for Base Guaranty Fund products effective June 23rd, 2014. Currently, CME Clearing accepts a select number of ETFs through its Stock Program. The existing haircut of 30% will be applied to ETFs. Please see CME's Financial and Collateral Management page for the updated acceptance criteria for ETFs and stocks. On the 5th business day of every month, a new list of acceptable ETFs and stocks will be posted to CME's Financial and Collateral Management page.

Both ETFs and stocks are part of category 3 assets. Therefore, ETFs and stocks in combination with other category 3 assets will be capped at the lesser of 40% of core requirement per currency or $5 billion per clearing member firm. Please see the list of category 3 assets below. ETFs and stocks combined are capped at $1 billion per clearing member firm.

In accordance with CME Rule 930.C, a clearing member cannot accept an accountholder security that has been "issued, sponsored or otherwise guaranteed by the accountholder." In addition, any ETF that is sponsored by the clearing member or its parent or affiliate company may not be pledged for the clearing member's house performance bond requirement. For any questions related to the ETF and Stock Programs, please contact the Risk Management department at 312-648-3888 or the Financial Management group at 312-207-2594.

Category 3 Assets

. IEF 2 (Money Market Funds)

. IEF 4 (Corporate Bonds)

. Gold

. ETFs and Stocks

. Foreign Sovereign Debt

The list of proposed ETFs that may be used as performance bond collateral for Base Guaranty Fund products effective June 23rd, 2014 is as follows:

TICKER NAME

SPY US SPDR S&P 500 ETF TRUST

IWM US ISHARES RUSSELL 2000 ETF

QQQ US POWERSHARES QQQ TRUST SERIES

XLU US UTILITIES SELECT SECTOR SPDR

IYR US ISHARES US REAL ESTATE ETF

XLI US INDUSTRIAL SELECT SECT SPDR

XLE US ENERGY SELECT SECTOR SPDR

XLV US HEALTH CARE SELECT SECTOR

XLK US TECHNOLOGY SELECT SECT SPDR

XLP US CONSUMER STAPLES SPDR

XLY US CONSUMER DISCRETIONARY SELT

DIA US SPDR DJIA TRUST

XLB US MATERIALS SELECT SECTOR SPDR

XOP US SPDR S&P OIL & GAS EXP & PR

IVV US ISHARES CORE S&P 500 ETF

VNQ US VANGUARD REIT ETF

VTI US VANGUARD US TOTAL STOCK MKT

IBB US ISHARES NASDAQ BIOTECHNOLOGY

LQD US ISHARES IBOXX INVESTMENT GRA

BND US VANGUARD TOTAL BOND MARKET

AGG US ISHARES CORE U.S. AGGREGATE

VOO US VANGUARD S&P 500 ETF

REM US ISHARES MORTGAGE REAL ESTATE

BSV US VANGUARD SHORT-TERM BOND ETF

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 to make a certain change to its collateral acceptance practices through the issuance of an advisory notice to its clearing members. More specifically, CME is expanding its existing collateral program to include additional Exchange Traded Funds ("ETFs") that may be used as performance bond collateral for CME's Base Guaranty Fund products. The proposed change would not impact CME's collateral acceptance practices relating to products in its CDS Guaranty Fund. CME also notes that although the proposed change would expand the eligible performance bond collateral for products in the Base Guaranty Fund, the proposed change would have no impact on the level of margin collected but rather would simply impact the makeup of the collateral used by a clearing member to meet its margin requirements.

Currently, CME accepts a select number of ETFs as collateral in connection with the products associated with certain non-CDS guaranty funds. ETFs accepted by CME as collateral are chosen through historical analysis of the ETF market and stock market. ETFs accepted as collateral conform to CME's credit risk criteria and are monitored by CME daily for price changes and are subject to periodic eligibility review. The existing haircut of 30% for currently accepted ETFs would be applied to the newly-added ETFs under the proposed change. Both ETFs and stocks are part of CME's "Category 3" assets. Therefore, ETFs and stocks in combination with other category 3 assets would be capped at the lesser of 40% of core requirement per currency or $5 billion per clearing member firm. ETFs and stocks combined are capped at $1 billion per clearing member firm. An updated table showing CME Base Guaranty Fund performance bond limits is included below. GOES

.... Updated Performance Bond Acceptable Collateral Categories and Limits

Category 1.............. Category 2 *............ Category 3 **

.... Category 2 & 3 Capped at..$7bn Per Firm

Cash:

U.S. Treasuries..........U.S. Government Agencies IEF2 + (Money Market

........................ Strips.................. Mutual Funds)

IEF5 (Interest Bearing.. TIPS (capped at..$1bn....Gold (capped at..$500mm

Cash) Letters of Credit..per firm)................per firm)

*

*Capped at 40% of core.. Select MBS.............. ETFs and Stocks (capped

requirement per currency * Capped at 40% of core..at..$1bn per firm)

requirement per firm.... requirement per currency IEF4 (corporate bonds)

........................ requirement per firm.... Foreign Sovereign Debt

..................................................(capped at..$1bn per

..................................................firm)

..................................................** Capped at 40% of core

..................................................requirement per currency

..................................................requirement per firm or

.................................................. $5 billion per firm,

..................................................the lesser of the two

..................................................+ Not included in the

..................................................40% requirement

The advisory also clarifies that, in accordance with CME Rule 930.C, a CME clearing member cannot accept an accountholder security that has been "issued, sponsored or otherwise guaranteed by the accountholder." In addition, the advisory would clarify that any ETF that is sponsored by the clearing member or its parent or affiliate company may not be pledged for the clearing member's house performance bond requirement.

The proposed change in this filing is limited to products associated with CME's Base Guaranty Fund and therefore does not impact products associated with CME's CDS guaranty fund. CME accepts a narrower range of collateral for CDS clearing and does not currently accept letters of credit, stocks or corporate bonds as acceptable collateral for CDS; the proposed rule change in this filing would not impact these current practices. The proposed rule change would become effective immediately.

--This is a summary of a Federal Register article originally published on the page number listed below--

Citation: "79 FR 37784"

Document Number: "Release No. 34-72478; File No. SR-CME-2014-25"

Federal Register Page Number: "37784"

"Notices"