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«CHAPTER 8-H Credit Default Swaps Clearing 8H01. SCOPE OF CHAPTER This chapter sets forth the rules governing clearing and settlement of all CDS ...»

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CHAPTER 8-H

Credit Default Swaps Clearing

8H01. SCOPE OF CHAPTER

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

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

Chapter 8H shall supersede the conflicting Rule with respect to CDS Contracts, except for Rule 818

which shall supersede the rules in this chapter 8H. Rules 8F01-8F25 and 802, 804, 808, 813, 816, 824,

912, 913, 930 and 975 shall not apply to CDS Contracts. Chapter 6 shall be modified for CDS 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 Credit Default Swaps (the "CDS Manual"). The CDS Manual shall contain, among other things, information and directions for preparing trade data, completing prescribed memoranda and meeting other Clearing House requirements for CDS Products. The CDS Manual and amendments thereto shall constitute part of the Rules. In the event of conflict between the Rules applicable to CDS Products or CDS Clearing Members acting in their capacity as such and the CDS Manual, such Rules will govern. The Clearing House will not clear Security-Based Swaps, except for Restructuring European Single Name CDS Contracts created following the occurrence of a Restructuring Credit Event in respect of an iTraxx Component Transaction.

8H02. DEFINITIONS

AFFILIATE

With respect to a CDS Clearing Member, any person or entity is an Affiliate of such CDS Clearing Member if such person or entity directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such CDS Clearing Member. For this purpose, “control” of any entity or person means ownership of a majority of the voting power of the entity or person.

BUSINESS DAY

For purposes of this Chapter 8-H, any day on which commercial banks in New York City are open during regularly scheduled hours.

CDS CLEARING MEMBER

A CDS Clearing Member is an entity that has been approved by the Clearing House to clear CDS Products. A CDS Clearing Member that is not also a CME, CBOT, NYMEX or COMEX Clearing Member may not clear CME, CBOT, NYMEX or COMEX transactions, as applicable, other than CDS Products.

CDS DEFAULT MANAGEMENT COMMITTEE

The CDS Default Management Committee shall be a committee having the powers set forth in Rule 8H26.

CDS RISK COMMITTEE

The CDS Risk Committee shall be a committee having the powers set forth in Rule 8H27.

8H03. CLASSIFICATION OF CDS POSITIONS

CDS Contracts submitted for clearing by a CDS Clearing Member for its proprietary account shall be assigned to and held in a proprietary account of such CDS Clearing Member. All collateral deposited as performance bond to support positions in the proprietary account of a CDS Clearing Member, all variation margin payments received in respect of positions in such account, any membership-equivalent deposit referenced in Rule 8H04.5, all CDS Guaranty Funds deposited with the Clearing House by such CDS Clearing Member, and any CDS Assessments deposited with the Clearing House by such CDS Clearing Member, including advanced assessments pursuant to Rule 8H802.C, is the property of the CDS Clearing Member and shall be subject to the Clearing House’s lien and security rights as described in Rule 8H08.

CDS Contracts submitted for clearing for the account of a CDS Clearing Member’s Cleared OTC Derivatives Customers shall be assigned and held in a Cleared OTC Derivatives Sequestered Account of such CDS Clearing Member. All CDS Clearing Members must comply with the requirements set forth in CME Rule 971 for such Cleared OTC Derivatives Sequestered Accounts.

© Copyright Chicago Mercantile Exchange, Inc. All rights reserved. Page 1 of 22 Notwithstanding the foregoing, if the CFTC issues an order permitting CDS Clearing Members to commingle customer funds used to margin particular CDS Contracts that are cleared by CME with other funds held in CEA Section 4d(a)(2) customer segregated accounts, such positions may be held in the customer segregated accounts of a CDS Clearing Member and, if so held, all collateral deposited as performance bond to support such positions and all variation margin payments made from such accounts shall be commingled with similar property of regulated customers. All CDS Clearing Members must comply with the requirements set forth in CME Rule 971 for such customer segregated accounts.

8H04. CDS CLEARING MEMBER OBLIGATIONS AND QUALIFICATIONS

CDS Clearing Members shall be subject to the requirements for CDS Clearing Members set forth in Chapter 8H, all CME Rules applicable to CDS Products, the Clearing House Manual and the CDS Manual unless an exemption has been granted by the CDS Risk Committee. In addition, CDS 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. CDS Clearing Members must execute all agreements and documents required by the Clearing House.





A CDS Clearing Member must satisfy the requirements set forth below:

1. A CDS Clearing Member must be registered with its primary regulator and, if relevant under the laws of the jurisdiction of its organization, or incorporation, in “good standing” under each regulatory regime to which it is subject at the time it applies for CDS clearing membership and it must maintain its good standing status, if applicable, while it is a CDS Clearing Member. A CDS Clearing Member and, if applicable, its parent guarantor must be subject to a legal and insolvency regime acceptable to the Clearing House.

2. A CDS 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 a CDS 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).

3. The capital requirement with respect to the participation of a CDS Clearing Member in the Clearing House shall be scalable to the risks posed by such CDS Clearing Member. Accordingly, a CDS Clearing Member must maintain capital (as defined in 8H04.2 above) at least equal to 20% of the aggregate performance bond requirement for its proprietary and customer CDS Contracts.

4. A CDS Clearing Member and any applicant for CDS clearing membership shall be engaged in or demonstrate immediate capacity to engage in the conduct of the business of a CDS Clearing Member and to perform all other obligations of a CDS Clearing Member as described or referenced in these Rules or in the CDS Manual; provided that, in the event that a CDS Clearing Member does not have the capabilities to perform such responsibilities or obligations, such CDS Clearing Member may contract with a third party (including an Affiliate) to fulfill certain operational or risk requirements; provided that all agreements relating to such service shall be subject to the prior review and approval by the Clearing House staff and the CDS Risk Committee. The Clearing House may impose limitations on CDS Clearing Member utilization of service providers, including limitations on the number of CDS Clearing Members to which a service provider may provide services.

5. [Reserved]

6. A CDS Clearing Member must comply with the requirements set forth in Rule 970, provided that, if the CDS Clearing Member is regulated by a regulatory authority other than the CFTC, then it shall submit to the Clearing House annual audited financial statements as well as all unaudited financial statements provided to its primary regulator within five days after such statements are provided to its regulator as well as reports of a type and frequency determined by the Clearing House and CDS Risk Committee in order to monitor compliance with the capital requirements described in Rule 8H04.2. All financial statements and other reports shall be in the English language.

7. The books and records of a CDS Clearing Member regarding CDS Products cleared by the Clearing House shall be made promptly available for inspection upon request by the Clearing House and such books and records shall be subject to reasonable standards of confidentiality.

8. Each CDS Clearing Member, regardless of whether it is a Futures Commission Merchant, shall keep the types of information and records that are described in Section 4g of the Commodity Exchange Act and CFTC regulations thereunder including, but not limited to, Regulation 1.35, with respect to all CDS Products submitted for clearing.

9. Each CDS Clearing Member shall nominate at least two officers or employees to be members to the © Copyright Chicago Mercantile Exchange, Inc. All rights reserved. Page 2 of 22 CDS Default Management Committee. Upon Clearing House request, each CDS Clearing Member shall submit nominations for an Independent Member of the CDS Risk Committee.

10. Each CDS Clearing Member must demonstrate, at all times, either directly or through a approved service provider in accordance with Rule 8H04.4, the operational capabilities and infrastructure necessary to facilitate physical settlement of CDS Products cleared by such CDS Clearing Member.

11. Each CDS Clearing Member shall use systems and appropriate procedures to track accurately, and to provide to the Clearing House accurately, the CDS positions and collateral of each of its cleared swaps customers.

12. The Clearing House may, and in cases in which the Securities and Exchange Commission by order directs, shall, deny CDS Clearing Membership to any person subject to a statutory disqualification, as such term is defined in the Securities Exchange Act of 1934.

8H05. SUBSTITUTION AND TIMEFRAME OF ACCEPTANCE FOR CLEARING

If a CDS Product or a portfolio of CDS Products (i) is submitted by CDS Clearing Members who are not suspended or in default, (ii) was executed and submitted in accordance with the rules governing such CDS Product and (iii) does not exceed the credit limits established by the Clearing House for the CDS Clearing Member submitting such CDS Product or portfolio of CDS Products, then each original transaction is extinguished, the Clearing House shall substitute itself as the counterparty to each party of each original transaction and there shall be two equal and offsetting contracts for each original transaction as follows: one between the original buyer and the Clearing House, as seller and one between the original seller and the Clearing House, as buyer.

An existing CDS Product or portfolio of CDS Products (i.e., a backloaded trade) submitted to the Clearing House for clearing, shall be guaranteed by the Clearing House at the time payment of initial settlement of mark to market, performance bond and any other applicable initial OTC cash flows for such IRS Product or portfolio of IRS Products, in accordance with the procedures set forth in Rule 814, is confirmed by the appropriate settlement bank for both CDS Clearing Members. The Clearing House shall substitute itself as the counterparty to each party to the original transaction at the time of guarantee.

With regard to a CDS Product submitted for clearing that is executed on or subject to the rules of a designated contract market or a swap execution facility, the Clearing House shall accept or reject such OTC Derivative for clearing in accordance with the time frames required under CFTC Regulation 39.12(b)(7)(B)(ii). Except with respect to a backloaded trade, a CDS Product submitted for clearing that is not executed on or subject to the rules of a designated contract market or a swap execution facility, or that is executed noncompetitively on or subject to the rules of a designated contract market or a swap execution facility, shall be accepted or rejected for clearing in accordance with the time frames required under CFTC Regulation 39.12(b)(7)(B)(iii).The CDS Clearing Member shall be deemed the principal to the CDS Contract when cleared by such CDS Clearing Member for its own account and shall be deemed a guarantor and agent of the CDS Contract when cleared by such CDS Clearing Member for the account of an affiliate or customer of such CDS Clearing Member.

8H06. CDS SR DEPOSIT A. The Clearing House shall require an additional CDS Guaranty Fund Deposit from CDS SR Clearing Members to address potential risks of CDS SR Clearing Members clearing contracts where it or its affiliate is a Reference Entity (the “CDS SR Deposit”).

The aggregate amount of CDS SR Deposits will be calculated by the Clearing House using stress test methodology, calculated on a net exposure basis within each of the proprietary account and the customer account, equal to the largest theoretical aggregate losses caused by the default of any two CDS SR Clearing Members produced by such stress test or such other methodology, also on such a net exposure basis, determined by the CDS Risk Committee (such amount, the “CDS SR Aggregate Amount”).

“CDS SR Clearing Member” means a CDS Clearing Member that is clearing index CDS Contracts that contain Reference Entities that reference the CDS Clearing Member or one of its affiliates.

Each CDS SR Clearing Member’s required CDS SR Deposit shall be such CDS SR Clearing B.

Member's proportionate share of the largest two losses described in 8H06.A above at the end of the prior calendar month.

Following any recalculation of the CDS SR Aggregate Amount, the Clearing House shall, within one Business Day, provide a report to each CDS Clearing Member showing the detail of its required CDS SR Deposit and the amount of any required additional or any excess CDS SR Deposit. A

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