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«Chapter 8-G Interest Rate Derivative Clearing 8G01. SCOPE OF CHAPTER This chapter sets forth the rules governing clearing and settlement of all IRS ...»

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Chapter 8-G

Interest Rate Derivative Clearing

8G01. SCOPE OF CHAPTER

This chapter sets forth the rules governing clearing and settlement of all IRS Products. In the event

there is a conflict between a rule in this Chapter 8G and another rule in the Rulebooks, the Rule in

this Chapter 8G shall supersede the conflicting rule with respect to IRS Contracts. Rules 8F02,

8F05, 8F06, 8F07, 8F14, 8F25, 802, 813, 816, 913, 930 and 975 shall not apply to IRS Contracts,

except for Rule 818 which shall supersede the rules in this chapter 8G. Chapter 6 shall be modified for IRS Contracts as set forth below. The Clearing House shall adopt, establish, publish and amend from time to time a Clearing House Manual of Operations for CME Cleared Interest Rate Swaps (the "IRS Manual"). The IRS Manual shall contain, among other things, information and directions for preparing trade data, completing prescribed memoranda and meeting other Clearing House requirements for IRS Products. The IRS Manual and amendments thereto shall constitute part of the Rules. With respect to IRS Products, in the event of any conflict between the IRS Manual and the Clearing House Manual of Operations, the IRS Manual will govern.

8G02. DEFINITIONS

AFFILIATE

With respect to an IRS Clearing Member, any person or entity is an Affiliate of such IRS Clearing Member if such person or entity directly or indirectly, through one or more intermediaries, controls, owns, is controlled by or is under common control with such IRS Clearing Member.

IRS ADVISORY COMMITTEE

The IRS Advisory Committee shall be a committee having the powers set forth in Rule 8G26.

IRS DEFAULT MANAGEMENT COMMITTEE

The Default Management Committee shall be a committee having the powers set forth in Rule 8G25.

IRS RISK COMMITTEE

The IRS Risk Committee shall be a committee having the powers set forth in Rule 8G27.

8G03. [RESERVED]

8G04. IRS CLEARING MEMBER OBLIGATIONS AND QUALIFICATIONS

IRS Clearing Members shall be subject to the requirements for IRS Clearing Members set forth in Chapter 8G and Rule 8F04, all CME Rules applicable to IRS Products, the Clearing House Manual and the IRS Manual unless an exemption has been granted by the Clearing House Risk Committee or the IRS Risk Committee, as applicable. In addition, IRS Clearing Members are subject to all CME, CBOT and NYMEX Rules, as applicable, when clearing products traded on, or subject to the rules of, CME, CBOT or NYMEX. IRS Clearing Members must execute all agreements and documents required by the Clearing House.

An IRS Clearing Member must satisfy the requirements set forth below:

1. An IRS Clearing Member must be in compliance with all applicable regulatory capital requirements and it must maintain minimum capital (as defined in CFTC Regulation 39.12(a) (2)) of $50 million. For an IRS Clearing Member that is a bank, “capital” shall mean Tier 1 Capital (as defined in accordance with regulation applicable to the relevant bank and acceptable to the Clearing House or, in the absence of any such regulation, as defined by the Basel Committee on Banking Supervision of the Bank for International Settlements).

2. The capital requirement with respect to the participation of an IRS Clearing Member in the Clearing House shall be scalable to the risks posed by such IRS Clearing Member. Accordingly, an IRS Clearing Member must maintain capital (as defined in 8G04.1 above) at least equal to 20% of the aggregate performance bond requirement for its proprietary and customer IRS Contracts.

3. An IRS Clearing Member and any applicant for IRS clearing membership shall be engaged in or demonstrate immediate capacity to engage in the conduct of the business of a IRS Clearing Member and to perform all other obligations of a IRS Clearing Member as described or referenced in these Rules or in the IRS Manual; provided that, in the event that a IRS Clearing Member does not have the capabilities to perform such responsibilities or obligations, such IRS Clearing Member

–  –  –

© Copyright Chicago Mercantile Exchange, Inc. All rights reserved. Page 3 of 19 Fund required by an individual IRS Clearing Members pursuant to Rule 8G07.3.

8G08-13. [RESERVED] 8G14. MITIGATION OF IRS LOSS In the event of a default by an IRS Clearing Member, all IRS Clearing Members shall work cooperatively with their customers, other IRS Clearing Members and the Clearing House to administer the mitigation of any losses that may occur as a result of such default and shall ensure that resources required to be provided by IRS Clearing Members to the IRS Default Management Committee are promptly made available.

In the event of a default by an IRS Clearing Member, the Clearing House shall work cooperatively with the IRS Risk Committee to convene the IRS Default Management Committee to manage the process of the liquidation and risk mitigation of such defaulted IRS Clearing Member’s IRS Contracts. IRS Clearing Members shall work cooperatively with the Clearing House¸ the IRS Risk Committee and the IRS Default Management Committee to (i) mitigate any losses that may occur as a result of a default, (ii) liquidate the defaulted IRS Clearing Member’s IRS Contracts, (iii) bid in an auction of the defaulted IRS Clearing Member’s IRS Contracts and (iv) take any other action reasonably requested by the IRS Risk Committee.





8G15-16. [RESERVED] 8G17. IRS CLEARING SERVICE ACCESS CME shall provide open access to its IRS Contract clearing services for any execution venue or trade processing or confirmation service that desires to facilitate the submission of IRS Product transactions to the Clearing House for clearing, subject to the Clearing House’s normal operational requirements applied to all such third-party services, including the requirement, in this instance, that an IRS Clearing Member guaranty all transactions in IRS Products that are submitted to the Clearing House for clearing.

8G18. IRS SWAPTIONS MEMBERSHIP 8G18.A. IRS Swaptions Eligibility

1. An IRS Clearing Member interested in clearing IRS Swaptions must demonstrate to CME Clearing it has the ability, commitment and expertise to risk manage IRS Swaptions and has the operational capability to clear IRS Swaptions.

2. IRS Clearing Members interested in clearing IRS Swaptions are required to respond to a questionnaire and are subject to CME Clearing diligence for assessment that such IRS Clearing Member has sufficient internal market risk, credit risk and operational risk processes and management frameworks to clear IRS Swaptions, including the ability to properly measure, monitor and limit risks associated with clearing IRS Swaptions.

3. Each IRS Swaptions Clearing Member shall submit to ongoing diligence reviews by CME Clearing.

4. Each IRS Swaptions Clearing Member shall nominate IRS Swaptions trader(s) to the IRS Default Management Committee.

5. “ IRS Swaptio ns Clearing Mem ber” m eans an IRS Clearing M em ber that has been approved by the Clearing House as eligible to clear IRS Swaptions.

8G18.B. IRS Swaptions Information Submissions

1. Each IRS Swaptions Clearing Member shall submit the IRS Swaptions Information Submission File on each Business Day at the time specified by the Clearing House for each IRS Swaptions currency it is eligible to clear. The information submitted by an IRS Swaptions Clearing Member in the IRS Swaptions Information Submission File shall be consistent with the information used by the IRS Swaptions Clearing Member for its internal valuation of IRS Swaptions.

“IRS Swaptions Information Submission File” means the file containing the requested market data, internal price levels and such other information as specified by the Clearing House for each moneyness/expiry/tenor combination.

2. “Failed IRS Swaptions Submission” means a failure to submit (i) all or a portion of an IRS Swaptions Information Submission File at or prior to the time designated by the Clearing House or (ii) the IRS Swaptions Information Submission File in the proper format.

–  –  –

Penalties shall be assessed monthly and payable with the IRS Guaranty Fund payment cycle.

In addition, the IRS Swaptions Clearing Member may be referred to the IRS Risk Committee for further discipline. Penalties from Failed IRS Swaptions Submissions shall become part of the IRS Priority of Payments as additional CME IRS Contribution to the IRS Priority of Payments pursuant to CME Rule 8G802 and shall be applied to IRS Losses on a pro rata basis with other CME IRS Contribution.

8G18.C. Withdrawal from IRS Swaptions Clearing Membership An IRS Swaptions Clearing Member that intends to no longer be eligible to clear IRS Swaptions shall provide written notice of such intent to the Clearing House. The IRS Swaptions Clearing Member’s withdrawal shall be effective on the earlier of (i) the date Clearing House Staff approves such withdrawal and (ii) the 10th Business Day following the date of the clearing cycle in which the withdrawing IRS Swaptions Clearing Member liquidates or transfers to an appropriate IRS Swaptions Clearing Member all of its open customer and house positions in IRS Swaptions (such earlier date, the “IRS Swaptions Withdrawal Date”). Promptly following the IRS Swaptions Withdrawal Date, the Clearing House shall post a notice of the IRS Swaptions Clearing Member’s withdrawal from its eligibility to clear IRS Swaptions.

An IRS Swaptions Clearing Member withdrawing with an IRS Swaptions Withdrawal Date that is not during an IRS Cooling Off Period will not be responsible for the requirements of an IRS Swaptions Clearing Member following the IRS Swaptions Withdrawal Date. An IRS Swaptions Clearing Member withdrawing with an IRS Swaptions Withdrawal Date during an IRS Cooling Off Period shall remain liable for all requirements of IRS Swaptions Clearing Members until the end of the IRS Cooling Off Period in which it withdraws from eligibility to clear IRS Swaptions.

An IRS Swaptions Clearing Member may withdraw from eligibility to clear IRS Swaptions without withdrawing as an IRS Clearing Member.

8G19-24. [RESERVED]

8G25. IRS DEFAULT MANAGEMENT COMMITTEE

In the event of a potential or actual default with respect to IRS Contracts, an IRS Default Management Committee shall be convened which shall be comprised of the President of the Clearing House, the President of Global Operations, Technology & Risk, the Chairman of the IRS Risk Committee and representatives of such IRS Clearing Members as may be appointed by the © Copyright Chicago Mercantile Exchange, Inc. All rights reserved. Page 5 of 19 Board. The purpose of this committee shall be to advise the Clearing House with respect to issues arising from the potential or actual default of an IRS Clearing Member and to manage the process of the liquidation and/or transfer of such IRS Clearing Member’s portfolio of IRS Contracts. Such advice may include advice on hedging the risk associated with a defaulted IRS Clearing Member’s portfolio, structuring the defaulted IRS Clearing Member’s portfolio for liquidation or transfer, and administration of the default auction process.

8G26. [RESERVED] 8G27. IRS RISK COMMITTEE There shall be an IRS Risk Committee which shall serve to provide guidance to the Clearing House on general matters relating to IRS Products including risk management policies and practices. In addition to the responsibilities set forth in these Rules, the IRS Risk Committee shall have the composition, responsibilities and other characteristics as set forth in its Charter.

The IRS Risk Committee may conduct investigations, issue charges and consider offers of settlement with respect to violations of these Rules as relate to IRS Clearing on its own initiative or by referral from Clearing House staff.

If the IRS Risk Committee determines that a IRS Clearing Member fails to meet the requirements for being a IRS Clearing Member or is in a financial or operational condition which jeopardizes or

may jeopardize the integrity of the Clearing House, the IRS Risk Committee may, by majority vote:

1. Order the IRS Clearing Member or its customers to deposit such additional performance bond with the Clearing House as deemed appropriate to protect the integrity of open contracts;

2. Prescribe such additional capital or other financial requirements as it deems appropriate;

3. Impose position limits on IRS Clearing Members based on their regulatory capital and such other criteria as it deems appropriate;

4. Suspend a IRS Clearing Member, subject to approval of any two of the following individuals: the Chief Executive Officer, the President, the President of the Clearing House, the Chairman of the Board, the Chairman of the IRS Risk Committee or the President of Global Operations, Technology & Risk;

5. Order the IRS Clearing Member to cease and desist from the conduct found to be contrary to the best interests of the Clearing House; and/or

6. Order the liquidation or transfer of all or a portion of the open positions of the IRS Clearing Member; provided that all costs associated with any such liquidation and/or transfer shall solely be obligations of the IRS Clearing Member.

No person shall serve on the IRS Risk Committee unless he has agreed in writing that he will not publish, divulge, or make known in any manner, any facts or information regarding the business of any person or entity or any other information which may come to his attention in his official capacity as a member of the IRS Risk Committee, except when reporting to the Board or to a committee concerned with such information or to the Legal Department, financial & Regulatory Surveillance Department or Market Regulation Department, when requested by the CFTC or other governmental agency or self regulatory organization or when compelled in any judicial or administrative proceeding.

All information and documents provided to the IRS Risk Committee and all deliberations and documents related thereto shall be treated as non-public and confidential and, subject to the provisions in the previous paragraph, shall not be disclosed, except as necessary to further a Clearing House investigation or as required by law.



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