Notice2026-17666
Self-Regulatory Organizations; CME Securities Clearing Inc.; Notice of Filing of Proposed Rule Change To Adopt Standards for Establishing Cross-Margin Arrangements and Adopt a Cross-Margin Arrangement With Chicago Mercantile Exchange Inc.
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 31, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 167 (Monday, August 31, 2026)</title>
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[Federal Register Volume 91, Number 167 (Monday, August 31, 2026)]
[Notices]
[Pages 55940-55951]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-17666]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-106193; File No. SR-CMESC-2026-007]
Self-Regulatory Organizations; CME Securities Clearing Inc.;
Notice of Filing of Proposed Rule Change To Adopt Standards for
Establishing Cross-Margin Arrangements and Adopt a Cross-Margin
Arrangement With Chicago Mercantile Exchange Inc.
August 26, 2026.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 18, 2026, CME Securities Clearing Inc. (``CMESC'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change described in Items I, II, and III below, which
Items have been substantially prepared by CMESC. CMESC filed the
proposed rule change pursuant to Section 19(b)(2) of the Act.\3\ 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)(2).
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I. CMESC's Statement of the Terms and Substance of the Proposed Rule
Change
The proposed rule change of CME Securities Clearing Inc.
(``CMESC'') consists of three parts: (i) proposed modifications to the
CMESC Rulebook (the ``Rules'') \4\ relating to cross-margining
arrangements; (ii) modifications to certain CMESC clearing risk
management policies to cover cross-margining; and (iii) proposed
agreements to establish an initial cross-margining arrangement in
accordance with and subject to the Rules and clearing risk management
policies.
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\4\ Capitalized terms used herein and not otherwise defined
herein have the meanings assigned to such terms in the Rules, as
applicable, available at <a href="https://www.cmegroup.com/rulebook/CMESC/CMESC%20Rulebook.pdf">https://www.cmegroup.com/rulebook/CMESC/CMESC%20Rulebook.pdf</a>.
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The proposed modifications to the Rules set forth a framework under
which CMESC may establish a cross-margining arrangement with a clearing
organization registered with the Commodity Futures Trading Commission
(``CFTC'') under the Commodity Exchange Act (``CEA'') as a derivatives
clearing organization (``DCO''). They include new Rule 514 (Cross-
Margining) and new defined terms in Rule 101 (Definitions), along with
related revisions proposed to (i) the definitions in Rule 101 for
``Independent User Account'' and ``Member Account;'' (ii) Rules 405
(Default Management Process) and 1507 (Default Management); (iii) Rule
406 (Use and Application of Guaranty Fund, Margin and Other Financial
Resources); (iv) Rule 412 (Corporation Authority with Respect to Users
of a Defaulting Member); (v) Rule 502 (Form and Value of Initial
Margin; Collateral Value Reports); (vi) Rule 506 (Outstanding Exposure
Settlement); (vii) Rule 508 (Daily Margin Report); (viii) Rule 509
(Settlement Cycles; Additional Margin); (ix) renumber current Rule 514
(Using the Corporation's Systems) as Rule 515; (x) Rule 602 (Submission
of Transaction Data); (xi) Rule 709 (Release of Clearing Data); and
(xii) Rule 902 (Ceasing to Act for Member or User Based on Other
Grounds).
The clearing risk management policies that CMESC proposes to revise
include the (i) CMESC Risk
[[Page 55941]]
Management Framework; (ii) CMESC Credit Policy; (iii) CMESC Credit Risk
Management Assessment Methodology; (iv) CMESC Liquidity Risk Management
Policy; (v) CMESC Stress Testing & Guaranty Fund Sizing Policy; (vi)
proposed CMESC Margin Policy (the ``Proposed Margin Policy''); \5\
(vii) CMESC Backtesting Policy; and (viii) CMESC Model Risk Management
Policy (collectively, the ``Policies'').
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\5\ CMESC filed a proposed rule change with the SEC to adopt the
CMESC Margin Policy on July 22, 2026. See Exchange Act Release No.
106037 (Aug. 5, 2026), 91 FR 51191 (Aug. 7, 2026) (SR-CMESC-2026-
005).
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The proposed agreements include a cross-margining agreement to be
executed by and between CMESC and its affiliate Chicago Mercantile
Exchange Inc. (``CME'') to establish a cross-margining arrangement and
as appendices thereto the forms of the agreement a participant in the
cross-margining arrangement must sign. Under the cross-margining
arrangement reflected in these agreements, a Member or Independent User
may cross-margin its Eligible Securities Transactions cleared at CMESC
with positions in interest rate futures cleared at CME by the Member or
Independent User as a clearing member of CME or by an affiliate of the
Member or Independent User that is a clearing member of CME. As a
related agreement, CMESC and CME will enter into the service level
agreement.
II. CMESC's Statement of the Purpose of, and Statutory Basis for the
Proposed Rule Change
In its filing with the Commission, CMESC included statements
concerning the purpose of 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. CMESC has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. CMESC's Statement of the Purpose of, and Statutory Basis for the
Proposed Rule Change
1. Purpose
Background
CMESC became registered as a clearing agency under the Securities
Exchange Act of 1934, as amended (``Act''), and rules and regulations
of the Securities and Exchange Commission (``Commission'' or ``SEC'')
thereunder, on December 1, 2025, to provide central counterparty
services as a covered clearing agency for transactions in or involving
U.S. Treasury securities.\6\ CMESC is seeking to enhance its Clearing
Services prior to commencing operations as a covered clearing agency by
adopting a framework for establishing cross-margining arrangements and
implementing an initial proprietary cross-margining arrangement
(described further below).
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\6\ Release No. 34-104281 (Dec. 1, 2025), 90 FR 55926 (Dec. 4,
2025), available at <a href="https://www.federalregister.gov/documents/2025/12/04/2025-21908/cme-securities-clearing-inc-order-granting-an-application-for-registration-as-a-clearing-agency">https://www.federalregister.gov/documents/2025/12/04/2025-21908/cme-securities-clearing-inc-order-granting-an-application-for-registration-as-a-clearing-agency</a>.
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In this regard, CMESC is proposing modifications to its Rules to
set forth terms under which CMESC may establish one or more cross-
margining arrangements with clearing organizations registered with the
CFTC under the CEA as DCOs and to govern a Member's or User's
participation in a cross-margining arrangement, along with related
amendments to the Policies. The proposed changes will enable CMESC to
offer market participants the benefit of cross-margining positions in
Eligible Securities Transactions cleared by CMESC and related
derivatives transactions cleared by a participating DCO.
CMESC is also proposing to enter into a cross-margining agreement
(``Cross-Margining Agreement'') and related service level agreement
(``Service Level Agreement'') with CME, an affiliate and registered
DCO, to establish a cross-margining arrangement (the ``Proposed
Proprietary X-M Arrangement'') as permitted under and subject to the
Rules and Policies, as amended pursuant to this proposed rule change.
The Proposed Proprietary X-M Arrangement will be available to an
eligible Member or Independent User with respect to its Eligible
Securities Transactions cleared at CMESC and eligible positions in
interest rate futures cleared at CME by the Member or Independent User,
if it is a clearing member of CME or its affiliate that is a clearing
member of CME, in its account at CME for clearing proprietary
positions. The Proposed Proprietary X-M Arrangement will benefit
participating Members and Independent Users and, as applicable, their
affiliates, by holistically reflecting the risk exposure of their
portfolios of interest rate futures and Eligible Securities
Transactions that are subject to cross-margining and in turn, provide
them with capital efficiencies. This will encourage their greater
utilization of CMESC's Clearing Services for their Eligible Securities
Transactions, thereby facilitating the reduction of systemic risk to
the benefit of the overall financial markets, in turn supporting the
resiliency and robustness of the markets for U.S. Treasury securities.
The proposed changes to the Rules and Polices and the terms of the
agreements governing the Proposed Proprietary X-M Arrangement with CME
are described in the following sections.
Description of the Proposed Rule Change
1. Proposed Changes to CMESC Rules
CMESC is proposing to adopt new Rule 514 (Cross-Margining) and new
definitions in Rule 101 for terms used in proposed Rule 514 to set out
the primary substantive terms under which CMESC may establish and offer
cross-margining arrangements and Participants may utilize such
arrangements, along with related changes to existing Rules, and to
renumber existing Rule 514 as Rule 515. By design, the proposed changes
cover cross-margining arrangements that CMESC may establish with CFTC-
registered DCOs to provide cross-margining of Eligible Securities
Transactions cleared by CMESC subject to the Act's regulatory framework
and SEC oversight with derivatives cleared by DCOs subject to the CEA
regulatory framework and CFTC oversight. The proposed changes will
permit CMESC to establish cross-margining arrangements for eligible
cross-margining participants with respect to their cleared
transactions. The proposed changes are also drafted in a manner to
facilitate future modifications to the Rules that would permit CMESC to
establish and offer customer level cross-margining arrangements with
DCOs.\7\
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\7\ CMESC understands that any change to the proposed Rules,
Policies or agreements provided pursuant to this proposed rule
change, such as to facilitate an expansion to customer-level cross-
margining may be subject to regulatory filings and approvals with
both the Commission and the CFTC.
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a. Definitions
CMESC is proposing new defined terms to aid in delineating the
scope of cross-margining arrangements it may establish, as described
above. In this respect, CMESC is proposing to add the following defined
terms to Rule 101:
<bullet> ``Cross-Margining Agreement,'' defined to cover an
agreement between CMESC and a Cross-Margining Clearing Organization,
and ``Cross-Margining Clearing Organization,'' defined to cover a CFTC-
registered DCO.
<bullet> ``Proprietary X-M Account,'' defined to cover a Member
Account or Independent User Account designated by CMESC within its
books and records
[[Page 55942]]
as a cross-margining account in connection with the Member's or User's
participation in a Proprietary X-M Arrangement, and ``X-M Account,''
defined to cover more generally any Account designated by CMESC as a
cross-margining account within its books and records for a Participant
participating in an X-M Arrangement.
<bullet> ``Proprietary X-M Arrangement,'' defined to cover cross-
margining arrangements with a Cross-Margining Clearing Organization to
cover proprietary cleared activity of participants, which at CMESC
would be limited to Members and Independent Users, and ``X-M
Arrangement,'' defined more generally to cover any cross-margining
arrangement established pursuant to proposed Rule 514.
<bullet> ``X-M Affiliated Clearing Member,'' defined to cover an
affiliate of a Member or Independent User with which the Member or
Independent User cross-margins eligible positions at CMESC and a Cross-
Margining Clearing Organization; ``X-M Joint Clearing Member,'' defined
to cover a Member or Independent User that is a clearing member of the
Cross-Margining Clearing Organization for the X-M Arrangement in which
it participates; and ``X-M Participant'' to refer generally to a Member
or Independent User that participates in an X-M Arrangement either
pursuant to its affiliation with an X-M Affiliated Clearing Member or
as a Joint Clearing Member.
CMESC is also proposing to modify the definitions of ``Independent
User Account'' and ``Member Account'' in Rule 101 to clarify that an
Independent User Account or Member Account includes any such Account
that is established as a Proprietary X-M Account.
b. New Rule 514
Proposed Rule 514 sets out the parameters for CMESC to establish an
X-M Arrangement with a DCO, as a Cross-Margining Clearing Organization,
pursuant to a Cross-Margining Agreement. As provided in proposed Rule
514(a), CMESC may establish one or more X-M Arrangements with the
approval of the Board.
Proposed Rule 514(b) permits CMESC to establish a Propriety X-M
Arrangement with a Cross-Margining Clearing Organization in which a
Member or Independent User may participate, either as a Joint Clearing
Member or with an X-M Affiliated Clearing Member. Participants in a
Proprietary X-M Arrangement must sign an appropriate agreement (or
agreements) with CMESC and the Cross-Margining Clearing Organization,
under which they grant a first priority lien on and security interest
in their cross-margined positions and related margin and proceeds
thereof jointly to CMESC and the Cross-Margining Clearing Organization.
In addition, an Independent User may participate in a Proprietary X-M
Arrangement only with the consent of its authorizing Member.
Proposed Rule 514 also includes the following:
<bullet> Rule 514(c), which is marked ``RESERVED'' and is a
placeholder where CMESC could add details as part of any futures
amendments to the Rules to cover customer-level X-M Arrangements.
<bullet> Rule 514(d), which provides that the terms of the
applicable Cross-Margining Agreement for an established X-M Arrangement
will govern margining of X-M Accounts at CMESC and the related paired
accounts carried by the Cross-Margining Clearing Organization,
including the forms and amount of margin.
<bullet> Rule 514(e), which provides that cross-margined positions
and related margin or other assets will be treated in accordance with
the applicable Cross-Margining Agreement, the Rules, and the rules of
the Cross-Margining Clearing Organization, and that in the event of any
inconsistency between the agreement and the Rules, the provisions of
the Cross-Margining Agreement will govern.
<bullet> Rule 514(f), which sets out that an X-M Participant may be
suspended from an the X-M Arrangement if it or its X-M Affiliated
Clearing Member, as applicable, is in default in payment of any
obligation under an X-M Arrangement and sets out CMESC's right to
liquidate the positions in the X-M Account, convert associated non-cash
margin to cash, and use the proceeds thereof, in accordance with the
terms of the applicable Cross-Margining Agreement. Proposed Rule 514(f)
also provides that CMESC may liquidate the Proprietary X-M Account of
an X-M Participant at the request of the Cross-Margining Clearing
Organization, regardless of whether CMESC suspends, or is otherwise
expressly permitted under the Rules to suspend, such X-M Participant.
c. Related Changes to Existing Rules
CMESC is also proposing related changes to the Rules, which are
primarily clarifying or conforming in nature, as follows:
<bullet> Rule 405 (Default Management Process) and Rule 1507
(Default Management): Adding text to paragraph (a) in each Rule to
provide that, in addition to managing a Member Default or User Default
in accordance with the Rules, CMESC as applicable will act in
accordance with the Cross-Margining Agreement for an X-M Arrangement in
which the Defaulting Member or Defaulting User participates.
<bullet> Rule 406 (Use and Application of Guaranty Fund, Margin and
Other Financial Resources). In paragraphs (a) (Member Default) and (b)
(User Default), adding text confirming that if a Member or an
Independent User is in Default and participated in an X-M Arrangement,
the margin or other assets of the Member or Independent User, along
with margin or other assets of its X-M Affiliated Clearing Member, as
applicable, and the proceeds thereof, are assets available to CMESC as
and to the extent provided in the governing Cross-Margining Agreement.
The proposed changes to Rule 406(a) also confirm that CMESC will have a
claim against a Defaulting Member for any loss or liability to CMESC
arising from the Default to the extent the amount thereof exceeds the
value of the Member's or, as applicable its X-M Affiliated Clearing
Member's, assets available to CMESC.
<bullet> Rule 412 (Corporation Authority With Respect to Users of a
Defaulting Member). Adding text to the Rule to provide that in the
event of a Member Default, before CMESC may transfer a Proprietary X-M
Account of an Independent User that was authorized by the Defaulting
Member, the receiving Member has consented to the Independent User's
continued participation in the X-M Arrangement.
<bullet> Rule 502 (Form and Value of Initial Margin; Collateral
Value Reports). Consistent with proposed Rule 514(d), (i) adding a
sentence to paragraph (a) of the Rule providing that margin
requirements for X-M Accounts will be determined in accordance with the
applicable Cross-Margining Agreement, and (ii) adding a clarifying
statement in paragraph (b) of the Rule that, as applicable, the Cross-
Margining Agreement will specify details with respect to the deposit of
margin. In addition, CMESC is correcting a typographical error in
paragraph (a), replacing ``the'' with ``The''.
<bullet> Rule 506 (Outstanding Exposure Settlement). Adding
statements to the Rule to provide that for positions subject to cross-
margining, Outstanding Exposure Settlement will be determined as
provided in the applicable Cross-Margining Agreement and that a Cross-
Margining Clearing Organization may have the authority to auto-debit
the participating Member's or Independent User's relevant Bank
account(s). Also adding a sentence to clarify that CMESC
[[Page 55943]]
is not required to pay any increase in the market value of a
Proprietary X-M Account if, as applicable, the Member or Independent
User for such X-M Account or its X-M Affiliated Clearing Member fails
to pay outstanding exposure to the Cross-Margining Clearing
Organization for the same settlement cycle.
<bullet> Rule 508 (Daily Margin Report). Adding text to paragraph
(a) of the Rule to confirm that the items listed that are covered in a
Daily Margin Report will, as applicable, be provided separately for X-M
Accounts.
<bullet> Rule 509 (Settlement Cycles; Additional Margin). Adding
text to paragraph (b) of the Rule to confirm that CMESC's authority to
require a Member or User to post additional margin applies to margin
that may be required for an X-M Account.
<bullet> Rule 514 (Using the Corporation's System). Renumbering as
Rule 515.
<bullet> Rule 602 (Submission of Transaction Data). Adding text to
paragraph (c) of the Rule to set out that no Member or User may provide
any false or inaccurate transaction data in connection with
transactions submitted to a Cross-Margining Clearing Organization for
any account participating in an X-M Arrangement at such Cross-Margining
Clearing Organization.
<bullet> Rule 709 (Release of Clearing Data). Adding text to
paragraph (c) of the Rule to confirm that CMESC may release Clearing
Data to a Cross-Margining Clearing Organization in connection with an
X-M Arrangement.
<bullet> Rule 902 (Ceasing to Act for Member or User Based on Other
Grounds). Consistent with proposed Rule 514(f), expanding the list of
``for cause'' events in paragraph (a) of the Rule in respect of which
CMESC may deem a Member or User to be in Default and to cease to act
for the Member or User to include the circumstance when a Cross-
Margining Clearing Organization suspends the Member or User or its X-M
Affiliated Member from participating in the X-M Arrangement or such
person is otherwise deemed to be in default of its obligations to the
Cross-Margining Clearing Organization.
2. Proposed Changes to Policies
CMESC is proposing revisions related to cross-margining to its
Policies.
CMESC Risk Management Framework. CMESC proposes adding Section 9.3
(CME Inc. Cross-Margining) to the CMESC Risk Management Framework to
cover cross-margining arrangements between CMESC and CME. The proposed
text reflects both the expectations of CMESC for establishing a
Proprietary X-M Arrangement and the benefits and terms of the Proposed
Proprietary X-M Arrangement between CMESC and CME, described in
additional detail in the following section. Updated Section 9.3 the
CMESC Risk Management Framework describes certain aspects of the cross-
margining arrangement with CME, including its single collateral account
model, each Clearing Organization's interest in collateral and the
process for cash settlements under the arrangement. Section 9.3 further
addresses CMESC's monitoring of exposures that arise under the cross-
margining arrangement and notes that margin offsets for applicable
products comply with CMESC's risk management standards and are set to
meet a 99% coverage standard on an ex post basis within the defined
margin period of risk. CMESC also proposes adding a clarification to
Section 12.1 (Backtesting) to cross-reference that, under the separate
CMESC Backtesting Policy, CMESC will conduct regular backtesting with
respect to the cross-margining arrangement with CME.
CMESC Credit Policy. CMESC proposes revisions to Section 4.1.2
(Counterparty Review Requirements by Counterparty Type) and Section 7.3
(Monthly Monitoring) of the CMESC Credit Policy to provide that (i) a
central clearing counterparty for cross-margining (referred to in this
Policy and the CMESC Credit Risk Management Assessment Methodology as a
``CCP'') is a counterparty relationship for CMESC; (ii) CMESC will rate
such a counterparty under the CMESC Credit Risk Management Assessment
Methodology, as described below, and review relevant financial
information and other information obtained from ongoing interactions
with such CCP, and (iii) the Risk Management team (as defined in the
CMESC Risk Management Framework) will review information it receives
from the CCP on Participants participating in a cross-margining
arrangement and escalate any identified concerns to the CMESC Credit &
Liquidity Committee (i.e., internal governance committee).
CMESC Credit Risk Management Assessment Methodology. CMESC proposes
to amend the CMESC Credit Risk Management Assessment Methodology, which
sets out CMESC's internal credit rating methodology, to confirm that
CMESC will rate a CCP for which it has established a cross-margining
arrangement under this methodology. CMESC maintains scorecards used to
rate different types of counterparties based on business profile. As
such, CMESC proposes to amend Section 4.2 (Counterparty
Classifications) and add new Section 6.6 (Central Counterparty) and its
subsection to establish a scorecard for conducting a credit rating
assessment of a CCP. The subsections of Section 6.6 describe the (i)
qualitive considerations in the CCP scorecard, including relating to
the categories of operating environment, business profile, financial
profile, management and governance, and risk management and (ii) the
weights applied to each of these categories within the CCP scorecard.
CMESC also proposes to add Section 14.6 (Central Counterparty
Scorecard) and its subsection, which establish a functional
representation of the CCP scorecard (e.g., potentially ratings of a CCP
relative to each aforementioned categories).
CMESC Liquidity Risk Management Policy. CMESC proposes clarifying
in Section 5.5.2 (Stress Potential Payment Obligations) of this Policy
that CMESC's liquidity stress testing to determine a Participant's
stress potential payment obligations \8\ (``SPPO'') will take account
of a Participant's positions in a cross-margining arrangement with
CMESC, covering in full the final cash settlement obligations for
positions in Eligible Securities Transactions in the Participant's
cross-margining portfolio. CMESC is also proposing to set out in a new
Section 7.4.4 (CME Inc. Cross-Margining Program) that the collateral
that will be accepted under the cross-margining arrangement with CME
consists of U.S. Dollar cash and U.S. Treasury securities, and that the
collateral is subject to the more conservative collateral limits and
collateral haircuts independently established by CMESC and CME. It also
states that CME will manage the collateral, with the exception that
CMESC will manage the collateral for Repo Transactions that are Clear
to Hold Transactions.
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\8\ Under the CMESC Liquidity Risk Management Policy, the stress
potential payment obligation is the hypothetical liquidity need
CMESC may incur if a Participant defaults.
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CMESC Stress Testing & Guaranty Fund Sizing Policy.\9\ CMESC
proposes adding new Section 4.1.1 (CME Inc. Cross-Margining
Arrangement) to this Policy. The new section provides that CMESC is
expanding its historical and hypothetical scenarios within its stress
testing methodology to capture the risks relevant for cross-margined
portfolios. More specifically, CMESC is proposing
[[Page 55944]]
to set out that historical scenarios will include (i) shocks to risk
factor curves that are designed to ensure that relative price
dislocations between the underlying spot curve and the futures
settlement price are captured and (ii) event-driven scenarios that are
designed to capture historical events characterized by large spread
movements. CMESC also proposes to incorporate hypothetical scenarios
that are designed to capture a breakdown in historical spread
relationships. CMESC also proposes renumbering current Section 4.1.1 as
Section 4.1.2. CMESC proposes clarifying in Section 5 (Financial
Resource Sizing) that the stress shortfall calculations used to size
the Guaranty Fund includes positions cleared by CMESC and CME relating
to the cross-margining arrangement.
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\9\ CMESC filed a proposed rule change with the SEC to amend the
CMESC Stress Testing & Guaranty Fund Sizing Policy on August 6,
2026. See File No. SR-CMESC-2026-006. The proposed changes described
here do not amend any revisions pending in that filing.
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Proposed CMESC Margin Policy. CMESC has submitted the Proposed
Margin Policy to the Commission under a separate rule change proposal,
which is pending as of the date of this filing.\10\ CMESC is here
proposing to add new Section 7 (CME Inc. Cross-Margining Arrangement)
to the Proposed Margin Policy. Consistent with proposed Rule 514 and
the proposed Cross-Margining Agreement with CME, this new section
provides that CMESC will compute the single margin requirement for a
cross-margining portfolio using the SPAN 2 framework described in the
Proposed Margin Policy, based on the combined risk presented by the
eligible positions in U.S. Treasury securities (including Repo
Transactions) cleared by CMESC and interest rate futures cleared by
CME, along with standalone margin requirements for the positions
cleared, respectively, by CMESC and CME.
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\10\ See Exchange Act Release No. 106037 (Aug. 5, 2026), 91 FR
51191 (Aug. 7, 2026) (SR-CMESC-2026-005).
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CMESC also proposes adding to Section 1 (Purpose and Statement of
Policy) of the Proposed Margin Policy that the SPAN 2 framework
captures the risk profile of interest rate futures. In addition, CMESC
proposes changes to Section 5 (CMESC SPAN 2 Framework), specifically,
to (i) Section 5.1 (Market Risk Component) to provide that interest
rate risk covers, as applicable, the risk of changes in the market
value of futures contracts eligible for cross-margining and to describe
the manner in which CMESC accounts for the interest rate risk
corresponding to interest rate futures; (ii) Section 5.1.2 (SVaR
Component) to provide that the set of risk factors CMESC considers in
evaluating stress periods exhibiting extreme returns includes
combinations of spread risk factors; (iii) Section 5.1.3 (Valuation
Uncertainty Margin) to clarify that the valuation uncertainty margin is
relevant for U.S. Treasury futures, in addition to U.S. Treasury
securities; and (iv) Section 5.2 (Liquidity & Concentration Risk
Component) to provide that the calculation of the liquidity and
concentration risk component will account for risks separately for each
tenor bucket of interest rate futures and U.S. Treasury securities and
will also account for any spread risk.
CMESC Backtesting Policy. CMESC is proposing changes to Sections
4.4 and 4.5 of the CMESC Backtesting Policy to provide that CMESC will
perform, respectively, daily backtesting of portfolios within the
cross-margining arrangement with CME and monthly backtesting for
positions within that cross-margining arrangement.
CMESC Model Risk Management Policy. CMESC is proposing changes to
Appendix I (Model Inventory) of the CMESC Model Risk Management Policy
to update the model inventory to provide that credit stress testing
includes stress testing of the cross-margining arrangement with CME and
that the SPAN 2 framework includes margining for the cross-margining
arrangement with CME.
3. Proposed Agreements To Establish a Proprietary X-M Arrangement
Between CMESC and CME
CMESC is seeking to establish the Proposed Proprietary X-M
Arrangement with its affiliate CME, which is registered as a DCO under
the CEA, in accordance with and subject to the Rules and clearing risk
management policies including the Policies, as the Rules and Policies
would be modified as described in the prior sections. Thus, CMESC is
proposing to enter into the specific Cross-Margining Agreement and
related Service Level Agreement with CME.\11\ The proposed Cross-
Margining Agreement contains as appendices the forms of agreement that
a person would sign to participate in the Proprietary X-M Arrangement
(each a ``Clearing Member Cross-Margining Agreement''), which are
described further below.
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\11\ The Cross-Margining Agreement and the related Service Level
Agreement are part of this proposed rule change. This section uses
certain defined terms in the proposed Cross-Margining Agreement,
which are similar to the defined terms that CMESC proposes adding to
Rule 101 described above.
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a. Cross-Margining Agreement and Participant Cross-Margining Agreements
The core elements of the proposed Cross-Margining Agreement in
conjunction with the Clearing Member Cross-Margining Agreements and
Service Level Agreement can be summarized as follows: (i) eligible
participation and positions, (ii) margin calculation, (iii) eligible
margin and custodian level accounts, (iv) collection and exchange of
funds, and (v) default management and loss sharing. These core elements
are described further below.
i. Eligible Participation and Positions
Consistent with proposed CMESC Rule 514, under the proposed Cross-
Margining Agreement, persons that may participate in the Proprietary X-
M Arrangement include: (i) a person that is a Member or an Independent
User of CMESC and a ``Clearing Member'' \12\ of CME (a ``Joint Clearing
Member'' under the proposed agreement), and (ii) affiliated pairs
consisting of one person that is a Member or an Independent User of
CMESC and an affiliate of such person that is a ``Clearing Member'' of
CME (``Affiliated Clearing Members'' under the proposed agreement).
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\12\ The proposed Cross-Margining Agreement uses the defined
term ``Clearing Member'' generally to refer to a person that is a
Member or Independent User of CMESC and a person that is a clearing
member of CME as defined in the rules of CME, referred to in the
proposed agreement as the ``CME Rules''.
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Consistent with proposed Rule 514(b), under the proposed Cross-
Margining Agreement, eligible cross-margining participants are required
to enter into the appropriate ``Clearing Member Participation
Agreement.'' The form attached to the proposed Cross-Margining
Agreement as Appendix A-1 is used by a Joint Clearing Member and the
form attached as Appendix A-2 is used by Affiliated Clearing Members.
Under the Clearing Member Cross-Margining Agreements, the Joint
Clearing Member or each Affiliated Clearing Member agrees to, among
other things, be bound by applicable CMESC Rules and CME Rules and
provisions of the Cross-Margining Agreement, as any of the foregoing
may be in effect from time to time. Consistent with proposed CMESC Rule
514(b), if an Independent User elects to participate in a Proprietary
X-M Arrangement, its authorizing Member must consent to the Independent
User's participation; this requirement is set forth in the proposed
Cross-Margining Agreement and is reflected in the consenting Member's
signature block in each form of Clearing Member Cross-Margining
Agreement.
A Joint Clearing Member or a pair of Affiliated Clearing Members
may participate in the Proposed X-M Arrangement only if both CMESC and
CME (referred to generally in the
[[Page 55945]]
proposed agreement as ``Clearing Organizations'') have determined that
the Joint Clearing Member or each Affiliated Clearing Member, as
applicable, is eligible to participate (such eligible participants are
``X-M Participants'' under the proposed agreement). X-M Participants
must meet the ongoing participation requirements of CMESC and CME, as
applicable, including applicable financial resource and operational
requirements. Such requirements are risk-based and publicly disclosed
in the CMESC Rules and CME Rules.
Subject to acceptance by both Clearing Organizations of an X-M
Participant's Clearing Member Cross-Margining Agreement in the
appropriate form, CMESC and CME would each establish a ``Proprietary X-
M Account'' as defined in the proposed Cross-Margining Agreement \13\
on its books and records to carry the Eligible Positions (defined
below) that it clears for the relevant X-M Participant. These accounts
together comprise a ``Pair of Proprietary X-M Accounts'' under the
proposed Cross-Margining Agreement. An X-M Participant may elect to
have cleared positions in CMESC Eligible Products and CME Eligible
Products carried in the relevant Pair of Proprietary X-M Accounts and
treated as a combined account for margining purposes. The proposed
Cross-Margining Agreement uses the term ``CMESC Eligible Products'' and
``CME Eligible Products'' to refer to the products cleared,
respectively, by CMESC and by CME that are eligible for cross-margining
and refers to such products collectively as the ``Eligible Products''
and to cleared positions in Eligible Products as ``Eligible
Positions.''
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\13\ This use of the term in the proposed agreement is
consistent with the definition of ``Proprietary X-M Account''
described above that CMESC proposes adding to Rule 101.
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Positions of X-M Participants in Eligible Products may be carried
in Pairs of Proprietary X-M Accounts to be cross-margined provided that
(i) the positions cleared by CMESC are for the Member or Independent
User's own account and (ii) the positions cleared by CME are for the
Clearing Member's own account or for a person whose account with the
Clearing Member is a ``proprietary account'' as defined under CFTC
Regulation 1.3, which would include positions cleared for the Member or
Independent User.\14\
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\14\ 17 CFR 1.3 (``Proprietary account. This term means a
commodity futures, commodity option, or swap trading account carried
on the books and records of an individual, a partnership,
corporation or other type of association: . . . (2) Of which ten
percent or more is owned by one of the following persons, or an
aggregate of ten percent or more of which is owned by more than one
of the following persons: . . . (vii) A business affiliate that
directly or indirectly controls such individual, partnership,
corporation or association; or (viii) A business affiliate that,
directly or indirectly is controlled by or is under common control
with, such individual, partnership, corporation or association . . .
.'').
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Under the proposed Cross-Margining Agreement, products eligible for
cross-margining are those products mutually agreed upon by CMESC and
CME as CMESC Eligible Products and as CME Eligible Products. Any
amendments to the list of Eligible Products must also be mutually
agreed to by CMESC and CME.\15\ The initial list of: (i) CMESC Eligible
Products is set forth in Exhibit B to the proposed Cross-Margining
Agreement and covers positions in Cash Treasury Transactions and Repo
Transactions (as those terms are defined in the CMESC Rules) in or
involving U.S. Treasury bills, notes and bonds cleared by CMESC and
(ii) CME Eligible Products is set forth in Exhibit A to the proposed
Cross-Margining Agreement and includes interest rate futures cleared by
CME and listed on either CME or its affiliate The Board of Trade of the
City of Chicago, Inc. for trading.
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\15\ CMESC understands that any change to the proposed Rules,
Policies or agreements pursuant to the proposed rule change, such as
to expand the list of eligible products may be subject to regulatory
filings and approvals with both the Commission and the CFTC.
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ii. Margin Calculation
Under the proposed Cross-Margining Agreement, an X-M Participant's
Eligible Positions cleared at CMESC or CME, respectively, are recorded
by CMESC or CME within its internal account records in a Proprietary X-
M Account and thus, are identified separately from the rest of the X-M
Participant's proprietary positions cleared at CMESC or CME. At CMESC,
a Member's Proprietary X-M Account will be a Member Account and an
Independent User's Proprietary X-M Account will be an Independent User
Account, under the proposed amendments to those terms in CMESC Rule
101.
CMESC will calculate a single margin requirement for Eligible
Positions--related to both CMESC and CME cleared Eligible Products--
held in the Pair of X-M Accounts (``Margin Requirement'' under the
proposed agreement) for a Joint Clearing Member or a pair of Affiliated
Clearing Members using its approved margin methodology, which is
currently CMESC's proprietary SPAN 2 framework risk-based margin
methodology.\16\ The SPAN 2 framework is a risk-based margin
methodology that is designed to achieve margin coverage of 99% on an
ex-post basis over a margin period of risk of at least two business
days. Margin offsets under the SPAN 2 framework will also be inherently
limited to positions in products that are significantly and reliably
correlated, a requirement of CMESC and CME for all Eligible Products.
Notwithstanding that the SPAN 2 framework will be used to determine the
Margin Requirements, CMESC and CME each have the independent authority
at any time to require additional margin from an X-M Participant,
consistent with their respective rules.
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\16\ The proposed amendments to CMESC Rule 502 and proposed
CMESC Rule 514 establish that Margin Requirements will be determined
in accordance with the relevant cross-margining agreement for a
cross-margining arrangement.
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iii. Eligible Margin and Custodian Level Accounts
Under the proposed Cross-Margining Agreement, CMESC and CME must
mutually agree upon the collateral eligible for satisfying Margin
Requirements (``Eligible Margin'' under the agreement).\17\ Eligible
Margin must be determined to have minimal credit, market, and liquidity
risks. Consistent with the proposed amendments to the CMESC Liquidity
Risk Management Policy, CMESC and CME intend to accept U.S. Dollar cash
and U.S. Treasury securities as Eligible Margin.\18\ When collateral
haircuts or collateral limits differ between CMESC and CME, the more
conservative of the haircuts and/or limits apply.
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\17\ Proposed amendments to CMESC Rule 502 and proposed new
CMESC Rule 514 establish that forms of Eligible Margin will be
determined in accordance with the relevant Cross-Margining
Agreement.
\18\ This is also consistent with CME's proposed amendments to
its clearing risk management policies.
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Under the proposed Cross-Margining Agreement, CMESC and CME will
establish joint custody accounts for holding cash and non-cash
collateral at one or more banks (referred to in the proposed agreement
as ``X-M Clearing Banks'') that will be used exclusively to hold
Eligible Margin posted by X-M Participants (referred to in the proposed
agreement as ``Posted Margin''). Consistent with proposed CMESC Rule
514(b), CMESC and CME will each hold a joint security interest in the
Posted Margin, which the X-M Participants will grant under the Clearing
Member Cross-Margining Agreements they sign. CMESC and CME will jointly
agree upon the X-M Clearing Banks that will be used for holding the
Posted Margin. Any X-M Clearing Bank used to hold Posted Margin will be
subject to
[[Page 55946]]
CMESC's ongoing monitoring and reviews (e.g., internal credit rating
methodology).
Consistent with the CMESC Liquidity Risk Management Policy, CME
will be responsible for managing such margin collateral, as the
collateral agent, provided, however that for Eligible Positions in
CMESC Eligible Products that are Repo Transactions that are Clear to
Hold Transactions, CMESC will be responsible for managing the associate
margin collateral via the Securities Settlement Bank as noted above.
Also as provided in the proposed Cross-Margining Agreement, U.S. Dollar
cash posted by X-M Participants is subject to investment limitations
consistent with the more restrictive of the investment policies of
CMESC and CME.
Each Joint Clearing Member and each pair of Affiliated Clearing
Members must establish a ``Proprietary Bank Account'' (as defined in
the proposed Cross-Margining Agreement) at an X-M Clearing Bank for
purposes of daily money settlement in respect of its Pair of
Proprietary X-M Accounts and other purposes under the proposed Cross-
Margining Agreement.
iv. Collection and Exchange of Funds
CMESC and CME will conduct regular clearing cycles twice each
business day--once at intraday and once at end-of-day--where Eligible
Margin will be collected and outstanding exposure will be settled. With
respect to outstanding exposure, the proposed Cross-Margining Agreement
uses the term ``Outstanding Exposure Settlement'' as defined in the
CMESC Rules as it relates to CMESC Eligible Products and the term
``Outstanding Exposure'' as defined in the CME Rules as it relates to
CME Eligible Products. Pursuant to existing CMESC Rule 506(b), payments
in satisfaction of Outstanding Exposure Settlement will be final,
irrevocable and unconditional no later than when the correct bank
account at the relevant settlement bank is debited or credited with the
payment.\19\ CMESC and CME will jointly agree upon the X-M Clearing
Bank(s) that will be used to conduct settlements of outstanding
exposure.
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\19\ Payments for Outstanding Exposure on Eligible Positions in
CME Eligible Products will likewise be final, irrevocable and
unconditional no later than when debited or credited by the relevant
bank under CME Rule 814.
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The clearing cycle timelines are documented in the relevant CMESC
Rules and CME Rules and/or the proposed Service Level Agreement.\20\
For each clearing cycle, (i) CMESC will calculate the Margin
Requirement for each X-M Participant and provide it to CME; (ii) CMESC
and CME will each independently calculate whether an X-M Participant
has a net pay or net collect for outstanding exposure relative to its
respective Proprietary X-M Account \21\ and CMESC will provide its
calculation to CME; and (iii) CME will determine whether a Joint
Clearing Member or pair of X-M Participants that are Affiliated
Clearing Members has a net pay or net collect on an aggregated basis
across CMESC and CME.
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\20\ Under the proposed Cross-Margining Agreement, in the event
of an operational issue arises which prevents a clearing cycle from
being conducted in accordance with the SLA, CMESC and CME would
coordinate closely to address the issue and complete the clearing
cycle.
\21\ For Eligible Positions in CMESC Eligible Products that are
Repo Transactions that are Clear to Hold Transactions, the
Securities Settlement Bank holding the securities delivered on the
start leg will calculate the Outstanding Exposure Settlement amount
owed or owing, which CMESC will use in its calculation. Outstanding
Exposure Settlement amounts for positions in Clear to Hold
Transactions will flow through the Securities Settlement Bank (i.e.,
separate from the other X-M Clearing Bank accounts established under
the cross-margining arrangement).
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Subject to CMESC and CME both approving the amounts calculated to
debit and/or credit each Joint Clearing Member or pair of Affiliated
Clearing Members for the clearing cycle as correct,\22\ CME, or CMESC
in CME's absence, will debit the relevant Proprietary Bank Account of
the Joint Clearing Member or pair of Affiliated Clearing Members that
has an obligation to post additional funds in satisfaction of the
Margin Requirement (i.e., margin call) and debit or credit the relevant
Proprietary Bank Account of the Joint Clearing Member or pair of
Affiliated Clearing Members for its aggregated net pay or net collect,
respectively, across CMESC and CME. For ``members'' more generally \23\
of a given Clearing Organization to be credited for their collects, the
joint bank account of CMESC and CME for the Proprietary X-M Arrangement
will be credited with the surplus funds that were collected by the
Clearing Organization that had net pays of outstanding exposure (i.e.,
funds due to the Clearing Organization) that were in excess of net
collects, which will in turn be used to cover the funds that the other
Clearing Organization is due to pay for outstanding exposure. Margin
calls must be met in U.S Dollar cash. X-M Participants may subsequently
replace the U.S. Dollar cash posted in satisfaction of a margin call
with other collateral types eligible to meet Margin Requirements (e.g.,
U.S. Treasury securities). Net pays will be met in U.S. Dollar cash by
X-M Participants with net collects paid in U.S. Dollar cash to X-M
Participants.
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\22\ Under the proposed Cross-Margining Agreement, there are
defined and limited circumstances in which CME or CMESC may withhold
its approval of the amounts calculated to debit and/or credit each
X-M Participant for at clearing cycle are correct (e.g., calculated
amount is incorrect).
\23\ Under the proposed Cross-Margining Agreement, the term
``member'' in this context means any Participant of CMESC and any
clearing member of CME as defined in the CME Rules.
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v. Default Management and Loss Sharing
Consistent with proposed CMESC Rule 514(f), the proposed Cross-
Margining Agreement provides that either CMESC or CME may suspend an X-
M Participant whose positions it carries in a Proprietary X-M Account
for purposes of the Proprietary X-M Arrangement and will notify the
other. If CME or CMESC suspends an X-M Participant that is part of a
pair of Affiliated Clearing Members, both X-M Participants in the pair
are treated as suspended for purposes of the Cross-Margining Agreement
and CMESC and CME would coordinate in managing the suspension--also,
referred to as a ``default'' in this filing--of the X-M Participant or
pair of X-M Participants. The description below of how an X-M
Participant's default would be managed covers a Joint Clearing Member
and its Pair of Proprietary X-M Accounts, but the approach would
equally apply to a pair of X-M Participants that are Affiliated
Clearing Members and their Pair of Proprietary X-M Accounts.
To manage the default, as provided in the proposed Cross-Margining
Agreement, CMESC and CME will first attempt to jointly liquidate,
transfer, or close-out the Eligible Positions in the associated Pair of
Proprietary X-M Accounts and will establish a joint liquidation plan.
Any losses or gains arising from joint liquidation would be subject to
pro rata loss sharing by CMESC and CME, as described below. The
proposed Cross-Margining Agreement provides that a joint liquidation
may be undertaken using a third-party liquidation agent and/or
liquidation auction conducted by CMESC and CME. A joint liquidation or
close-out is expected to be optimal for both CMESC and CME by enabling
the Clearing Organizations to recognize reduced risk by offsetting risk
reducing positions together. Where CMESC and CME manage a default
jointly, the collection and exchange of U.S. Dollar cash for
outstanding exposure would occur consistent with daily settlement
practices, using the Posted Margin held for the suspended X-M
Participant and any other available collateral of the X-M Participant
under the X-M
[[Page 55947]]
Agreement (collectively, ``Liquidation Funds'' under the proposed
agreement). Importantly, as provided in the proposed Cross-Margining
Agreement, from the time an X-M Participant defaults until the time
such default is resolved, a Clearing Organization that receives
payments of outstanding exposure with respect to the Eligible Positions
it clears for the suspended X-M Participant (i.e., net collect) would
be obligated to pay some or all of such amount to the other Clearing
Organization to the extent such other Clearing Organization is owed
payments for outstanding exposure from the suspended X-M Participant
with respect to the Eligible Positions it clears (i.e., net pay).
If either Clearing Organization determines that jointly liquidating
or closing-out the relevant Eligible Positions of the suspended X-M
Participant is not feasible, advisable or legally permissible, each
Clearing Organization will separately liquidate and/or close-out the
Eligible Positions it clears. While outstanding exposure will be
calculated independently by each Clearing Organization where CMESC and
CME manage a default separately, if the suspended X-M Participant's
proprietary positions results in a net pay (e.g., positions are subject
to losses) to non-suspended members (as the term is used above) in
aggregate at one Clearing Organization and a net collect (e.g.,
positions are subject to gains) from non-suspended members in aggregate
at the other Clearing Organization, the Clearing Organization with the
net collect will provide the funds it receives to the other Clearing
Organization, up to an amount that is equal to the lesser of the net
collect or net pay. Where CME and CMESC manage the default of an X-M
Participant separately, the Clearing Organizations will determine their
pro rata share of the Liquidation Funds held for the suspended X-M
Participant, based on each Clearing Organization's share of the Margin
Requirement for the Eligible Positions it clears as of the time jointly
agreed upon by the Clearing Organizations (e.g., time of suspension).
More specifically, each Clearing Organization's pro rata share of the
Margin Requirement will be determined based on the ratio of (i) the
standalone margin required for Eligible Positions within the
Proprietary X-M Account at each Clearing Organization, calculated using
the SPAN 2 framework to (ii) the sum of the standalone margin required
for the Eligible Positions within the Pair of Proprietary X-M Accounts
at both Clearing Organizations, calculated using the SPAN 2 framework.
The Cross-Margining Agreement provides for post-default loss
sharing. After a default is resolved, whether the Clearing
Organizations engage in a joint liquidation and close-out or pursue
separate liquidations and close-outs, losses will be shared pro rata
based on each Clearing Organization's share of the Margin Requirement
for its respective Eligible Positions (i.e., the ratio of (i) the
standalone margin required for Eligible Positions within the
Proprietary X-M Account at each Clearing Organization, calculated using
the CMESC SPAN 2 framework to (ii) the sum of the standalone margin
required for the Eligible Positions within the Pair of Proprietary X-M
Accounts at both Clearing Organizations, calculated using the SPAN 2
framework).
In a joint liquidation and close-out of a suspended X-M
Participant, the Clearing Organizations would determine their
respective pro rata shares of the remaining Liquidation Funds held for
the suspended X-M Participant and whether the sum of their individual
losses in managing the default (e.g., default management costs) result
in net gains or net losses relative to their share of the Liquidation
Funds. The Clearing Organizations would then determine the payment to
be made by one to the other so that any combined net gain or net loss
is borne pro rata by each based on such Clearing Organization's share
of the Margin Requirement for its respective Eligible Positions.
If the Clearing Organizations instead proceed to separately
liquidate and/or close-out the Eligible Positions they respectively
clear, then the gains or losses associated with managing the X-M
Participant's default would be calculated by each Clearing Organization
independently and shared on a ``better off/worse off'' basis.
Specifically, if one Clearing Organization has a net loss (e.g., its
default management costs are greater than its share of the Liquidation
Funds) (i.e., the ``worse off party'') and the other Clearing
Organization has a net gain (e.g., its default management costs are
less than its share of the Liquidation Funds) (the ``better off
party''), then the better off party must make a payment to the worse
off party which is equal to the lesser of: (i) the absolute value of
worse-off party's loss in excess of its pro rata share of the
Liquidation Funds; or (ii) the better-off party's net gain, up to the
amount of its pro rata share of the remaining Liquidation Funds. If
both CMESC and CME have a net gain (e.g., their respective default
management costs are less than their share of the Liquidation Funds) or
if both CMESC and CME have a net loss (e.g., their respective default
management costs are more than their share of the Liquidation Funds),
neither Clearing Organization is obligated to pay the other. Regardless
of whether the default is managed jointly or separately, any losses in
excess of the Liquidation Funds held for the suspended X-M Participant,
subject to any pro rata allocation, will be borne by each Clearing
Organization's own financial safeguards waterfalls and each Clearing
Organization, pursuant to its respective rules, would take commercially
reasonable steps to recover any losses, including any payments made
between Clearing Organizations under the loss sharing arrangements.
Under the proposed Cross-Margining Agreement, CMESC will be
responsible for conducting credit stress testing for each Pair of X-M
Proprietary Accounts and determining each Clearing Organization's pro
rata share of the credit stress testing's outputs (e.g., stress
shortfall \24\) based on each Clearing Organization's share of the
Margin Requirement for its respective Eligible Positions. CMESC will in
turn provide these outputs to CME for its use in its own stress testing
practices. Under the proposed revisions to the CMESC Stress Testing &
Guaranty Fund Policy, CMESC's stress testing methodology will use
historical and hypothetical scenarios to capture the risk posed by a
portfolio of cleared cross-margined products under extreme but
plausible market conditions and such scenarios will be expanded to
consider the risks of portfolios containing securities and futures
(e.g., spread risk factors). Therefore, CMESC's credit stress testing
for sizing and monitoring of the sufficiency of the CMESC Guaranty Fund
will account for an X-M Participant's credit exposures (i.e., stress
shortfall) arising from each Pair of X-M Proprietary Accounts, on a pro
rata basis, in extreme but plausible market conditions. The credit
exposures assumed to be borne by CMESC from a given X-M Participant
under its credit stress testing will be based on the pro rata loss
sharing that would be applied in managing the actual default or
suspension of an X-M Participant or pair of X-M Participants. CMESC's
consideration of potential loss sharing under the proposed Cross-
Margining Agreement in its credit stress testing is designed to ensure
that the CMESC Guaranty Fund is sufficient to cover the default of the
two Member Families
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with the largest aggregate credit exposures in extreme but plausible
market conditions, including where such Members are X-M Participants.
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\24\ As described in the CMESC Stress Testing & Guaranty Fund
Sizing Policy, the stress shortfall is the stress loss less margin.
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Similarly, under the proposed Cross-Margining Agreement, CMESC will
be responsible for conducting liquidity stress testing for each Pair of
X-M Proprietary Accounts and determining each Clearing Organization's
pro rata share of the liquidity stress testing's outputs (e.g., SPPO)
based on each Clearing Organization's share of the Margin Requirement
for its respective Eligible Positions. CMESC will in turn provide these
outputs to CME for its use in its own stress testing practices. As
documented in the CMESC Stress Testing & Guaranty Fund Policy, the
stress scenarios used for credit stress testing and liquidity stress
testing are identical. Therefore, CMESC's liquidity stress testing for
monitoring the sufficiency of CMESC's qualifying liquidity resources
will account for the liquidity obligations (i.e., SPPO) arising from
each Pair of X-M Proprietary Accounts, on a pro rata basis, in extreme
but plausible market conditions. The liquidity obligations assumed to
be borne by CMESC from a given X-M Participant under its liquidity
stress testing will be based on the pro rata allocation that would be
applied in managing the actual default or suspension of an X-M
Participant or pair of X-M Participants. Liquidity obligations would be
subject to a pro rata allocation between CMESC and CME based on each
Clearing Organization's share of the Margin Requirement for its
respective Eligible Positions, calculated in the same manner as for the
loss sharing arrangements described above. However, given that CME is
not responsible for the trade settlement of transactions pertaining to
U.S. Treasury securities, liquidity obligations arising from the trade
settlement of Eligible Positions in CMESC Eligible Products will be
borne solely by CMESC, which will also be captured in CMESC's liquidity
stress testing. CMESC's consideration of the allocation of liquidity
obligations in liquidity stress testing is designed to ensure that
CMESC's qualifying liquidity resources are sufficient to cover the
default by the Participant Family creating the largest aggregate
liquidity obligation to CMESC in extreme but plausible market
conditions, including where such Participant is an X-M Participant.
vi. Other Aspects of the Proposed Cross-Margining Agreement
The proposed Cross-Margining Agreement also contains provisions
typical for an arms-length arrangement covering: (i) confidentiality
obligations of CMESC and CME for information shared in connection with
the proposed Cross-Margining Agreement, (ii) indemnification
requirements between CMESC and CME, (iii) limitations of liability
between CMESC and CME, (iv) representations and warranties, and (v)
terms and timelines for the termination of the proposed Cross-Margining
Agreement.
b. Service Level Agreement
The Service Level Agreement supplements the proposed Cross-
Margining Agreement by documenting the operational processes
underpinning the day-to-day operations of the cross-margining
arrangement between CMESC and CME. Specifically, the Service Level
Agreement establishes the form and manner in which position, margin,
and outstanding exposure (e.g., settlement variation) information will
be communicated between CMESC and CME. Among other terms, the Service
Level Agreement provides for the frequent and timely exchange of risk
information, including on an intraday basis, which will help ensure
that Margin Requirements are based on then-current information. The
Service Level Agreement also provides that CMESC and CME will meet on
at least a monthly basis to share with each other information regarding
risk management matters and membership and operational matters that are
relevant to services performed under the Cross-Margining Agreement and
will conduct a joint default management drill on a Pair of X-M Accounts
at least annually. Also, the Service Level Agreement provides that
CMESC and CME will share with each other any information necessary for
risk management and regulatory purposes, in accordance with the terms
thereunder.
2. Statutory Basis
For the reasons set forth below, CMESC believes the proposed rule
change is consistent with Section 17A of the Act,\25\ and Commission
rules thereunder that are applicable to CMESC.
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\25\ 15 U.S.C. 78q-1.
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Section 17A(b)(3)(F) of the Act \26\ requires, in part, that the
rules of a clearing agency be designed to remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions. The proposed rule
change establishes a framework under which CMESC may enter into one or
more cross-margining arrangements with DCOs registered under the CEA,
including the Proposed Proprietary X-M Arrangement with CME. This
framework will enable CMESC to adopt a cross-margining arrangement with
CME, whereby the Margin Requirements for a participant's cross-margined
positions will holistically account for the risks of the relevant
cleared portfolios across CMESC and CME, recognizing the risk reducing
nature of the positions cleared by each Clearing Organization. The
resulting capital efficiencies would provide incentives for market
participants to engage in central clearing to manage their risks. In
turn, these incentives to submit transactions for clearance and
settlement would promote the diversity and scope of market participants
able to benefit from multilateral netting and centralized risk
management services at CMESC and CME. CMESC expects these benefits will
encourage greater utilization of CMESC's Clearing Services for Eligible
Securities Transactions, thereby facilitating the reduction of systemic
risk for the benefit of the overall financial markets, which will in
turn support the resiliency and robustness of the markets for U.S.
Treasury securities. Thus, the proposed rule change would serve to
promote prompt and accurate clearance and settlement of securities
transactions and CMESC, accordingly, believes that the proposed rule
change will remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions.
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\26\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act also requires, in part, that the
rules of a clearing agency be designed to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\27\ CMESC believes that
the proposed rule change is designed to assure the safeguarding of
securities and funds which are in its custody or control for which it
is responsible. The details of the Proposed Proprietary X-M Arrangement
reflected in the proposed Cross-Margining Agreement and Clearing Member
Participation Agreements, as supplemented by the CMESC Rules and
clearing risk management policies including the Policies and the
proposed changes to the Rules and Policies and by the Service Level
Agreement, are carefully designed to assure that the entire portfolio
of positions in a Pair of Proprietary X-M Accounts of a Joint Clearing
Member or Pair of Affiliated
[[Page 55949]]
Clearing Members, along with all associated Posted Margin and the
proceeds of the foregoing, are available to CMESC and CME to satisfy
such X-M Participants obligations arising from such accounts. As
explained above, CMESC and CME will jointly hold a first priority lien
on and security interest in such property, granted to them by the X-M
Participants under the Clearing Member Cross-Margining Agreements they
must sign. Moreover, CMESC and CME will jointly hold cash and non-cash
collateral in accounts they establish at X-M Clearing Banks that will
be used exclusively to hold Posted Margin and the X-Clearing Banks will
be subject to CMESC's ongoing monitoring and reviews under its
Policies. These features also enhance CMESC's ability to safeguard the
funds and securities in its control or for which it is responsible. For
the foregoing reasons, the proposed rule change is also consistent with
Rule 17ad-22(e)(16) under the Act,\28\ which is comparable to Section
17A(b)(3)(F) in that the rule requires a covered clearing agency to
have reasonably designed policies and procedures to safeguard its
participants' assets.
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\27\ See id.
\28\ 17 CFR 240.17ad-22(e)(16).
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Rule 17ad-22(e)(1) under the Act \29\ requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to provide for a well-founded,
clear, transparent and enforceable legal basis for its activities in
all relevant jurisdictions. The proposed changes to the Rules establish
a clear and transparent framework pursuant to which CMESC may enter
into a legally binding agreement with a Cross-Margining Clearing
Organization to adopt an X-M Arrangement and prescribe the agreements
that persons must sign to participate in such an arrangement. The
proposed Cross-Margining Agreement and the forms of Clearing Member
Participation Agreement that X-M Participants must sign, in conjunction
with applicable CMESC Rules and CME Rules, will establish an
enforceable legal basis for CMESC and CME to implement the Proposed
Proprietary X-M Arrangement.
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\29\ 17 CFR 240.17ad-22(e)(1).
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Rule 17ad-22(e)(4)(i) under the Act \30\ requires a covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes by
maintaining sufficient financial resources to cover its credit exposure
to each participant fully with a high degree of confidence. Consistent
with these standards, for the Proposed Proprietary X-M Arrangement,
CMESC will monitor its credit exposure to X-M Participants in
accordance with the CMESCE Credit Policy and CMESC Credit Risk
Management Assessment Methodology. Furthermore, pursuant to the
proposed Cross-Margining Agreement, CMESC will conduct credit stress
testing for each Pair of Proprietary X-M Accounts, consistent with the
CMESC Stress Testing & Guaranty Fund Sizing Policy including the
proposed amendments thereto. Moreover, as explained above, as provided
in the proposed Cross-Margining Agreement and further detailed in the
proposed amendments to the Proposed Margin Policy, CMESC will utilize
the SPAN 2 framework, taking into account the risk of interest rate
futures, to determine Margin Requirements, consistent with its
obligation to maintain sufficient financial resources under Rule 17ad-
22(e)(4)(i).
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\30\ 17 CFR 240.17ad-22(e)(4)(i).
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Rule 17ad-22(e)(5) under the Act \31\ requires, in part, a covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to limit the assets it
accepts as collateral to those with low credit, liquidity, and market
risks, and to set and enforce appropriately conservative haircuts and
concentration limits if it collateral to manage its or its
participants' credit exposure. Consistent with this rule, CMESC and CME
must jointly agree on the forms of Eligible Margin, as they determine
have minimal credit, market, and liquidity risks, and when collateral
haircuts or collateral limits differ between CMESC and CME, as
determined independently by them, the more conservative of the haircuts
and/or limits apply.
---------------------------------------------------------------------------
\31\ 17 CFR 240.17ad-22(e)(5).
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Rule 17ad-22(e)(6) under the Act \32\ requires a covered clearing
agency that provides central counterparty services to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to cover its credit exposure to its participants by
establishing a risk-based margin system. Among other minimum
requirements, under Rule 17ad-22(e)(6)(i),\33\ the risk-based margin
system must consider, and produce margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market. CMESC believes that the proposed rule change is consistent
with this standard in that it establishes a framework under which CMESC
may enter into one or more cross-margining arrangements with DCOs
registered under the CEA, including the Proposed Proprietary X-M
Arrangement, where the Margin Requirements for a cross-margining
participants' positions will capture the risks of their cross-margined
portfolios. Moreover, for the Proposed Proprietary X-M Arrangement, as
provided in the proposed Cross-Margining Agreement, and as further
detailed in the proposed amendments to the Proposed Margin Policy,
CMESC will utilize the SPAN 2 framework to determine Margin
Requirements for cross-margined positions in the Proposed Proprietary
X-M Arrangement, consistent with this standard under Rule 17ad-
22(e)(6). The use of the SPAN 2 framework, taking into account the
amendments to the Proposed Margin Policy described above, in the
Proposed Proprietary X-M Arrangement is also consistent with the
standard under Rule 17ad-22(e)(6)(iii) \34\ applicable to a covered
clearing agency to calculate margin sufficient to cover the clearing
agency's potential exposure to participants in the interval between the
last margin collection and the close out of positions following a
participant default and the standard under Rule 17ad-22(e)(6)(v) \35\
to measure credit exposure that accounts for relevant product risk
factors and the portfolio effect across products, as well as the
standard in SEC Rule 17Ad-22(b)(2) to use risk-based models and
parameters to set margin requirements.\36\ Consistent with Rule 17ad-
22(e)(6)(ii),\37\ under the Proposed Proprietary X-M Arrangement, CMESC
and CME will conduct clearing cycles twice each business day, where
payments for margin and outstanding exposure will occur.
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\32\ 17 CFR 240.17ad-22(e)(6).
\33\ 17 CFR 240.17ad-22(e)(6)(i).
\34\ 17 CFR 240.17ad-22(e)(6)(iii).
\35\ 17 CFR 240.17ad-22(e)(6)(v).
\36\ 17 CFR 240.17ad-22(b)(2).
\37\ 17 CFR 240.17ad-22(e)(6)(ii).
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Rule 17ad-22(e)(7) under the Act \38\ generally requires a covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to effectively manage
liquidity risk and maintain sufficient liquid resources. Specifically,
Rule 17ad-22(e)(7)(vi) contemplates the determination and testing of
resource sufficiency for the purposes of meeting minimum liquidity
resource requirements.\39\ Under the proposed Cross-Margining Agreement
[[Page 55950]]
and proposed revisions to the CMESC Liquidity Risk Management Policy,
CMESC will account for X-M Participants' liquidity obligations, on a
pro rata basis, arising from the cross-margining arrangement in its
liquidity stress testing that is used to measure the sufficiency of
CMESC's qualifying liquid resources in covering the default by the
Participant creating the largest aggregate liquidity obligation to
CMESC in extreme but plausible market conditions. The proposed
amendments to the CMESC Liquidity Risk Management Policy also provide
that within CMESC's liquidity stress testing the final cash settlement
obligations for positions in Eligible Securities Transactions in the
Participant's cross-margining portfolio will be borne by CMESC. CMESC
believes these features, along with the overall details of the Proposed
Proprietary X-M Arrangement, assure that the Proposed Proprietary X-M
Arrangement will appropriately account for the impact of proprietary
cross-margining on CMESC's liquidity risk management to ensure that
CMESC will meet the requirements of Rule 17ad-22(e)(7). Therefore, the
proposed rule change is consistent with the standards of Rule 17ad-
22(e)(7).
---------------------------------------------------------------------------
\38\ 17 CFR 240.17ad-22(e)(7).
\39\ 17 CFR 240.17ad-22(e)(7)(vi).
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Rule 17ad-22(e)(13) under the Act \40\ requires, in part, a covered
clearing agency's policies and procedures to be reasonably designed to
ensure that the clearing agency has the authority and operational
capacity to take timely action to contain losses and liquidity demands
and continue to meet its obligations to in the event of a participant's
default. The proposed Cross-Margining Agreement is consistent with this
standard in that it establishes the manner in which the default of an
X-M Participant will be managed, with a framework that prioritizes a
joint liquidation approach. Any such joint liquidation would be
conducted pursuant to default management provisions reflected in the
proposed Cross-Margining Agreement, and the CMESC Rules and CME Rules.
As provided in the proposed Service Level Agreement, CMESC and CME will
also conduct a joint default management drill on a Pair of X-M Accounts
at least annually.
---------------------------------------------------------------------------
\40\ 17 CFR 240.17ad-22(e)(13).
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Rule 17ad-22(e)(16) under the Act \41\ requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to safeguard participants' assets by
investing such assets in instruments with minimal credit, market and
liquidity risks. Consistent with CMESC's obligations under this SEC
rule, Eligible Margin under the Proposed Proprietary X-M Arrangement
will be invested in accordance with the more conservative investment
policy of CMESC or CME, which is intended to ensure the safeguarding of
X-M Participants' assets by limiting investments of such assets to
either CMESC's standards or a more conservative standard where
applicable.
---------------------------------------------------------------------------
\41\ 17 CFR 240.17ad-22(e)(16).
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Rule 17ad-22(e)(18)(i) under the Act \42\ requires, in part, that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to establish
objective, risk based, publicly disclosed criteria for participation.
The proposed rule change is consistent with this requirement in that
participation in the Proposed Proprietary X-M Arrangement is open to
any Member or Independent User that meets the eligibility requirements
and CMESC's ongoing requirements to be a Member or Independent User.
The requirements to be a Member or Independent User are risk based and
such requirements and the requirements to participate in the Proposed
Proprietary X-M Arrangement as an X-M Participant are publicly
disclosed. Rule 17ad-22(e)(18)(iv)(C) under the Act \43\ requires,
among other things, that a covered clearing agency that provides
central counterparty services for transactions in U.S. Treasury
securities should ensure it has appropriate means to facilitate access
to clearance and settlement services of all eligible secondary market
transactions in U.S. Treasury securities. As explained above, the
Proposed Proprietary X-M Arrangement component of the proposed rule
change will encourage and facilitate access to clearance and settlement
services of eligible secondary market transactions in U.S. Treasury
securities, consistent with this standard.
---------------------------------------------------------------------------
\42\ 17 CFR 240.17ad-22(e)(18)(i).
\43\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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Rule 17ad-22(e)(20) under the Act \44\ requires a covered clearing
agency to, in part, establish, implement, maintain, and enforce written
policies and procedures reasonably designed to identify, monitor and
manage risks related to a link with another financial market utility.
Consistent with this standard, CMESC is proposing revisions to the
Policies pursuant to which it will appropriately monitor and manage
risks related to the Proposed Proprietary X-M Arrangement with CME.
Among other revisions to the Policies, CMESC is proposing revisions to
the CMESC Risk Management Framework to bring the cross-margining
arrangement with CME within CMESC's overall risk management framework.
CMESC is also proposing revisions to the CMESC Credit Policy and CMESC
Credit Risk Management Assessment Methodology to confirm that CMESC
will rate CME (as a CCP counterparty under these Policies) using
qualitative considerations and associated weightings as set out in a
CCP scorecard. Moreover, CMESC will implement the Proposed Proprietary
X-M Agreement with CME pursuant to binding agreements--the proposed
Cross-Margining Agreement and Service Level Agreement--that contain
detailed terms addressing eligible participation and positions, margin
calculation, eligible margin and custodian level accounts, collection
and exchange of funds and default management and loss sharing, as
discussed above in detail. These contractual terms enable CMESC to
appropriately monitor and manage risks related to the Proposed
Proprietary X-M Arrangement, consistent with its obligations under Rule
17ad-22(e)(20).
---------------------------------------------------------------------------
\44\ 17 CFR 240.17ad-22(e)(20).
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Rule 17ad-22(e)(23)(ii) under the Act \45\ requires a covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide sufficient
information to enable participants to identify and evaluate, among
other things, the risks they incur by participating in the covered
clearing agency. The proposed rule change includes revisions to CMESC
Rules to establish the framework for CMESC to adopt cross-margining
arrangements with DCOs, along with changes to the Rules clarifying the
obligations of a Participant that may participate in a cross-margining
arrangement that CMESC establishes. Moreover, the proposed Cross-
Margining Agreement and Clearing Member Cross-Margining Agreements will
be publicly available, like the Rules, and contain detailed terms
describing how an X-M Participant's positions are treated and margined
under the Proposed Proprietary X-M Program, including in the event of
the X-M Participant's suspension. Thus, CMESC will provide market
participants with the information to enable them to evaluate the risks
and costs of participating in the Proposed Proprietary X-M Arrangement
in accordance with Rule 17ad-22(e)(23)(ii).
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\45\ 17 CFR 240.17ad-22(e)(23)(ii).
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[[Page 55951]]
B. CMESC's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \46\ requires that the rules of a
clearing agency not impose any burden on competition that are not
necessary or appropriate in furtherance of the purposes of the Act.
CMESC believes that the proposed rule change would not impose a burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act. CMESC believes the proposed rule change may
enhance competition by establishing a framework under which CMESC may
offer market participants the benefit of cross-margining positions in
Eligible Securities Transactions cleared by CMESC and related
derivatives transactions cleared by a participating DCO and further by
enabling CMESC to offer the Proposed Proprietary X-M Arrangement with
CME to Members and Independent Users.
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\46\ 15 U.S.C. 78q-1(b)(3)(I).
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C. CMESC's Statement on Comments on the Proposed Rule Change Received
From Members, Participants, or Others
CMESC currently does not have any Members or Users and has not
received nor solicited any written comments from others related to this
proposal. CMESC has not received any unsolicited written comments from
any interested parties. If any written comments are received, they will
be publicly filed as an Exhibit 2 to this filing, as required by Form
19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
<a href="/cdn-cgi/l/email-protection#26525447424f48414748424b47544d4352556655434508414950"><span class="__cf_email__" data-cfemail="6f1b1d0e0b0601080e010b020e1d040a1b1c2f1c0a0c41080019">[email protected]</span></a> or 202-551-5777. CMESC reserves the right to
not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4e3c3b222b632d2123232b203a3d0e3d2b2d60292138"><span class="__cf_email__" data-cfemail="d5a7a0b9b0f8b6bab8b8b0bba1a695a6b0b6fbb2baa3">[email protected]</span></a>. Please include
file number SR-CMESC-2026-007 on the subject line.
Paper Comments
<bullet> 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-CMESC-2026-007. 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 website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the filing also will be available for inspection
and copying at the principal office of CMESC and on CMESC's website
(<a href="https://www.cmegroup.com/market-regulation/rule-filings.html">https://www.cmegroup.com/market-regulation/rule-filings.html</a>). Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to File Number SR-CMESC-2026-007 and should be
submitted on or before September 21, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-17666 Filed 8-28-26; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 31, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.