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Self-Regulatory Organizations; Chicago Mercantile Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change to Amend Certain Aspects of the Performance Bond Regime Applicable to Cleared Only OTC FX Swaps
Feb 14, 2012 (SECURITIES AND EXCHANGE COMMISSION RELEASE/ContentWorks via COMTEX) --
February 8, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"), /1/ and Rule 19b-4 thereunder, /2/ notice is hereby given that on January 30, 2012, the 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. The Commission is publishing this Notice and Order to solicit comments on the proposed rule change from interested persons and to approve the proposed rule change on an accelerated basis.
FOOTNOTE 1 15 U.S.C. 78s(b)(1). END FOOTNOTE
FOOTNOTE 2 17 CFR 240.19b-4. END FOOTNOTE
I. Self-Regulatory Organization's Statement of Terms of Substance of the Proposed Rule Change
CME proposes to make certain changes that are related to its current cleared-only OTC foreign currency ("FX") product offering. The proposed rule changes /3/ would add Price Alignment Interest ("PAI") functionality to current "cash mark-to-market" performance bond regime that applies to CME's cleared-only OTC FX offering.
FOOTNOTE 3 The text of the proposed changes does not appear in CME's rulebook but is available on CME's Web site at http://www.cmegroup.com/rulebook/files/s_6105_otc_fx_pai_cash_mk_to_mkt_ser_020112_revised.pdf. END FOOTNOTE
A description of the revised performance bond regime with the addition of PAI is included below:
* * * * *
CME Forwards With Cash Mark-To-Market
In accordance with customer demand CME has begun clearing privately-negotiated transactions in forwards with cash mark-to-market.
Until October 18, 2011, all forwards cleared by CME had a collateralized mark-to-market. Each day, for each open forward trade, mark-to-market is calculated, from original trade price to the current end-of-day settlement price. These amounts are netted together and "collateralized". In other words, if a negative number (a loss), they increase the initial margin (performance bond) requirement, thereby increasing the amount of collateral that must be posted to meet that margin requirement. If a positive number (a gain), they decrease the initial margin requirement.
With cash mark-to-market implemented on October 18, 2011, the mark-to-market value for the previous clearing business date is subtracted from the mark-to-market amount for the current clearing date. These amounts are netted down and become part of the total banked cash flow for the currency in which they are denominated. It is a very simple change for this cash mark-to-market as opposed to collateralized mark-to-market.
There is an additional feature for FX forwards, and in particular for non-deliverable forwards (NDF's)--forwards where one currency of the pair is not bankable. We call this a forward where the cash mark-to-market is flipped, or inverted.
Take for example a forward on the exchange rate between the US Dollar (USD) and the Chilean Peso (CLP). The quantity is specified in USD, and the price is quoted as a specified amount of CLP per one USD. Normally, the mark-to-market amount would be denominated in CLP, also referred to as the contra currency. But with the flipped mark-to-market, the amount is converted to USD by dividing by today's end-of-day settlement price for the contract.
Calculating Mark-to-Market and Change in Mark-to-Market
In the normal case, the mark-to-market amount for a forward is calculated as:
* Subtract the original trade price from the end-of-day settlement price.
* Express the trade quantity as a positive number for a buy or a negative number for a sell.
* Take the product of the price difference, the trade quantity, the contract value factor, and the discount factor.
* Round normally to the normal precision of the currency in which the mark-to-market amount is denominated. (the contra currency for an FX forward)
In other words:
(S - T) * Q * CVF * DF
Where:
S is the end-of-day settlement price
T is the original trade price
Q is the trade quantity
CVF is the contract value factor
DF is the discount factor
In the inverse case, the mark-to-market amount is calculated in the exact same way, except that it includes a division by the daily settlement price:
* Subtract the original trade price from the end-of-day settlement price.
* Express the trade quantity as a positive number for a buy or a negative number for a sell.
* Take the product of the price difference, the trade quantity, the contract value factor, and the discount factor.
* Divide this result by the end-of-day settlement price.
* Round normally to the normal precision of the currency in which the mark-to-market amount is denominated. (the primary currency for an FX forward)
In other words:
[(S - T) * Q * CVF * DF]/S
In either case, the settlement variation amount to be banked is calculated by subtracting the mark-to-market amount for the previous clearing business date from the amount for the current business date.
Cash-Settled and Physically-Delivered Forwards
At maturity, forwards with cash mark-to-market can be either cash-settled or physically-delivered, exactly as for forwards with collateralized mark-to-market.
For a cash-settled forward, at contract maturity (end-of-day on the "clearing settlement date"):
* The mark-to-market amount is set to zero.
* We then calculate the settlement variation amount to be banked exactly as on any other day--by subtracting the previous day's value for mark-to-market from the current day's (zero) value.
* The mark-to-market amount is then calculated one final time--from original trade price to the final settlement price and banked as part of the final settlement of the contract.
* The initial margin requirement is also set to zero, exactly as for any other cash-settled forward or future.
* The next morning the cash moves at the bank, and any collateral deposited to meet the initial margin requirement may be withdrawn.
For a physically-delivered forward, at contract maturity (end-of-day on the clearing settlement date):
* The mark-to-market amount is set to zero.
* We then calculate the settlement variation amount to be banked exactly as on any other day--by subtracting the previous day's value for mark-to-market from the current day's (zero) value.
* The invoice amount, calculated at original trade price, is included in the total amount to be banked.
* On the value date for physical delivery, the position is removed. This causes the initial margin requirement to be set to zero, and any collateral deposited to meet it may be withdrawn.
PAI is now a second additional feature for FX forwards and it applies to both (1) non-deliverable forwards (NDF's)--cash-settlement forwards where one currency of the pair is not bankable and (2) cash-settlement WM/Reuters OTC FX forwards.
CME Clearing is introducing PAI to ensure settlement variation amounts for cleared OTC FX forwards are treated consistently with those of CME's cleared interest-rate swaps and credit-default swaps. PAI is consistent and appropriate for all of these cleared products with daily mark-to-market amounts settled in cash.
If the forward has positive net present value, the position holder pays price alignment interest, and conversely if the forward has negative net present value, the position holder receives price alignment interest. The amount is calculated on the net realized cash flow, from the banking business day on which that amount was realized, to the next banking business day, and is annualized on an actual/360 day basis.
Data Formats
Exactly as before, a forward is denoted with a product type code of FWD, and the settlement method is denoted as either CASH (for cash-settled) or DELIV (for physically-delivered).
There are now three possible values for the "valuation method" for forwards:
* The existing value FWD will continue to mean that mark-to-market amounts are collateralized.
* A new value FWDB ("forward banked") means a forward with cash mark-to-market.
* A second new value FWDBI ("forward banked inverse") will be used for FX forwards with cash mark-to-market where the value is flipped from the contra currency to the primary currency.
Exactly as before, the FinalSettlCcy attribute denotes the currency in which the mark-to-market amount is denominated, and the Ccy attribute on Amt elements also specifies the currency.
Exactly as before, the FMTM amount type will denote mark-to-market. For forwards with cash mark-to-market, a new IMTM amount type--"incremental mark-to-market"--denotes the change in mark-to-market from the previous clearing business date--in other words, the settlement variation amount.
Exactly as before, the DLV amount type represents either the final mark-to-market amount to be banked (for cash settled contracts) or the invoice amount (for physically-delivered contracts.)
--This is a summary of a Federal Register article originally published on the page number listed below--
Citation: "77 FR 8318"
Document Number: "Release No. 34-66354; File No. SR-CME-2012-03"
Federal Register Page Number: "8318"
"Notices"
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