Self-Regulatory Organizations; CME Securities Clearing Inc.; Notice of Filing of Proposed Rule Change To Support Members' Risk Management of and Enhance Their Ability To Authorize Persons as Users

[Federal Register Volume 91, Number 109 (Monday, June 8, 2026)]

[Notices]

[Pages 34666-34675]

From the Federal Register Online via the Government Publishing Office [ www.gpo.gov ]

[FR Doc No: 2026-11381]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-105605; File No. SR-CMESC-2026-004]

Self-Regulatory Organizations; CME Securities Clearing Inc.;

Notice of Filing of Proposed Rule Change To Support Members' Risk

Management of and Enhance Their Ability To Authorize Persons as Users

June 3, 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 May 21, 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 primarily 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'') is in an Exhibit 5 and consists of modifications to the

CMESC Rulebook (the ``Rules'') \4\ to (i) support Members' risk

management of and enhance their ability to authorize persons as Users,

by providing Members the means to enforce contractual termination

rights against their authorized Users under their contractual

arrangements with their authorized Users; (ii) create legal structures

to provide security entitlement to an authorizing Member in each

Supported User Account

[[Page 34667]]

associated with such Member's authorization and to grant secondary

security interests in and liens against Independent User funds held by

CMESC while affirming CMESC's first priority and unencumbered lien and

security interest in such User funds; and (iii) strengthen and clarify

Members' ability to participate in the close-out (liquidation) of

positions of Users they authorize in the event of the User's Default.

The proposed rule change includes proposed new Rule 316 (Member

Exercise of Contractual Rights Against an Authorized User) and new Rule

317 (Member Second Priority Lien Against Independent User Margin) and

modifications to Rule 101 (Definitions), Rule 405 (Default Management

Process), Rule 513 (Margin Deposited for Supported Users Using the Repo

or Cash Treasury Clearing Services), Rule 602 (Submission of

Transaction Data), and Rule 1507 (Default Management). Each

modification is described in more detail below. These modifications

will support Members' risk management of their authorized Users and are

designed to support Members' ability and capacity to authorize Users.

This, in turn, will support CMESC's efforts to attract and to on-board

Members and Users prior to CMESC's launch of its Clearing Services and

on an ongoing basis thereafter by enhancing the attractiveness of

CMESC's Clearing Services offering for prospective Members, thereby

promoting the prompt and accurate clearance and settlement of

transactions in or involving U.S. Treasury securities. The proposed

revisions to the CMESC Rules are in an Exhibit 5.

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\4\ Capitalized terms used herein and not defined have the

meanings assigned to such terms in the Rules, as applicable,

available at https://www.cmegroup.com/rulebook/CMESC/CMESC%20Rulebook.pdf .

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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

2. Purpose

Background

On December 1, 2025, the Securities and Exchange Commission

(``Commission'' or ``SEC'') issued an order approving CMESC's Form CA-1

(``Application'') for registration as a clearing agency to provide

central counterparty services for transactions involving U.S. Treasury

securities, finding the Application satisfies the requirements of the

Securities Exchange Act of 1934, as amended (``Act'') and rules and

regulations thereunder.\5\ Based on engagement with market participants

and trade associations during the Commission's review of the

Application, CMESC has identified enhancements to its Rules designed to

enhance Members' risk management flexibility and mitigate potential

constraints on their ability to authorize Users due to potential

capital constraints. More specifically, the proposed rule change is

designed to further support prompt close-out of a User's positions,

whether the User is subject to a termination event under binding

contractual terms between it and its authorizing Member or the User is

in Default to CMESC under the Rules.

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\5\ Release No. 34-104281 (Dec. 1, 2025), 90 FR 55926 (Dec. 4,

2025), available at https://www.federalregister.gov/documents/2025/12/04/2025-21908/cme-securities-clearing-inc-order-granting-an-application-for-registration-as-a-clearing-agency .

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1. Member Risk Management Considerations

As provided in the Rules, a person may become a Participant to

utilize CMESC's Clearing Services as a Member or a User.\6\ Members may

clear proprietary Eligible Securities Transactions through CMESC \7\

and may authorize Users to clear their own proprietary Eligible

Securities Transactions through CMESC.\8\ A person may become a User

only with the authorization of a Member but is contractually bound to

settle its Eligible Securities Transactions directly with CMESC.\9\

Users may participate in CMESC's Clearing Services as Independent Users

or Supported Users.\10\ An Independent User is obligated to post margin

and make Outstanding Exposure Settlement payments to CMESC for its

Independent User Account.\11\ In contrast, for a Supported User, the

Member authorizing the Supported User is obligated to post margin and

make Outstanding Exposure Settlement payments to CMESC for the

Supported User Account associated with the Member's authorization.\12\

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\6\ See e.g., Rule 301.

\7\ Id.

\8\ See e.g., 302(a) and 305(c).

\9\ See e.g., Rules 305(d) and 1504(b).

\10\ See e.g., Rule 301(b).

\11\ See e.g., Rules 501 (margin) and 506 (Outstanding Exposure

Settlement).

\12\ See e.g., Rules 501 and 513 (margin) and 506 (Outstanding

Exposure Settlement).

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A Member has certain obligations under the Rules with respect to

persons admitted as Users pursuant to the Member's authorization. An

authorizing Member must establish, maintain, and enforce User Due

Diligence Policies and Procedures that demonstrate the Member's ability

to, among other things, determine the risk profile of each User it

authorizes and monitor the risks associated with clearing Eligible

Securities Transactions by its authorized Users through CMESC.\13\ In

the event of a User Default, if any losses remain after CMESC applies

the margin posted to the Account of the Defaulting User associated with

the Member's authorization as well as certain other assets available to

CMESC as provided in the Rules,\14\ the authorizing Member will be

required to provide funds to discharge such remaining losses pursuant

to Rule 406(b)(iii) (User Default). If the Member fails to do so, CMESC

may declare the Member in Default pursuant to Rule 406(b)(iii) and then

apply the resources in the financial resources waterfall as provided

for and in the priority specified in Rule 406(a) (Member Default),

including such Defaulting Member's contribution to the Guaranty Fund.

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\13\ See Rule 306(c)(iii).

\14\ When the Defaulting User is an Independent User, CMESC may

also apply any other assets of the Independent User held by, pledged

to, or otherwise available to the Corporation on behalf of that

Independent User. See Rule 406(b)(ii)(A). When the Defaulting User

is a Supported User, CMESC may also apply any collateral in excess

of the margin requirement posted to it for the Supported User of the

authorizing Member that such Member has not designated to CMESC as

Funded Supported User Margin for any other Supported User Account or

Supported User Margin for any other Supported User Account. See Rule

406(b)(ii)(B).

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A Member must enter into an Authorization Agreement with each User

it authorizes pursuant to which the Member agrees to authorize the

User, as provided in Rule 305(c) (Member Authorization Agreement

Between a Member and Authorized User). The Authorization Agreement is a

commercial matter between the Member and authorized User, though its

terms must be consistent with the Member's and User's respective rights

and obligations to CMESC and to one another under the Rules. As

provided in Rule 306(d) (Notice of Termination of User Authorization),

a Member or User must provide CMESC with ten Business Days' advance

notice of its termination of the Authorization Agreement for any

reason, subject to CMESC's discretion to provide a shorter notification

period. CMESC understands that Members want the certainty that its

authorization of a given User will terminate immediately

[[Page 34668]]

upon notification to CMESC in certain circumstances, in order to

further support such Members' ability to manage risk arising from its

authorized Users' cleared activity.

2. Bank Regulatory Capital Considerations for Certain Members

CMESC understands that for a bank or firm affiliated with a bank

that becomes a Member, it is beneficial for the Member to have explicit

means to enforce any contractual rights it may have under its

agreement(s) governing its relationship with an authorized User to

terminate all the authorized User's Eligible Securities Transactions

cleared through CMESC in the User Account associated with the Member's

authorization, so that such agreement(s) may be treated as qualified

master netting agreements \15\ under bank regulatory capital

requirements.\16\ CMESC further understands there may be regulatory

capital benefits for a Member that is a bank or bank affiliate if such

Member has a security interest, secondary to CMESC's, in the margin or

other funds posted to the Account of an authorized User and to have

assurance that in the event of an authorized User Default, the

Defaulting User's open positions at CMESC will be closed out (i.e.,

liquidated or terminated) promptly.

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\15\ See 12 CFR 50.3 (definition of ``qualifying master netting

agreement'').

\16\ Pursuant to the relevant capital rules, we understand that

a banking organization is only permitted to recognize the effects of

financial collateral or offsetting transactions for capital purposes

if the banking organization satisfies certain requirements,

including that the banking organization must have the right to

terminate the transaction and set off or apply collateral ``promptly

upon an event of default'' under the bilateral agreement between the

banking organization and its client. We further understand from

comment letters submitted on CMESC's application for registration as

a clearing agency that if a covered Member is unable to meet these

requirements, it must hold capital without regard to such collateral

or offsetting transactions, i.e., against its ``gross exposure'' to

the customer and further, that the significant costs associated with

gross exposure capital calculations could make the costs of offering

clearing services to clients prohibitively expensive for relevant

Members. See e.g. letter from Allison Lurton, General Counsel and

Chief Legal Officer, FIA, dated Mar. 10, 2025, on SEC Notice of

Filing of an Application for Registration as a Clearing Agency Under

Section 17A of the Securities Exchange Act of 1934 [Release No. 34-

102200 (Jan. 15, 2025), 90 FR 7713 (Jan. 22, 2025); File No. 600-

44].

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Thus, CMESC is filing the proposed rule change to address each of

these considerations for prospective Members. Specifically, the

proposed modifications will enhance Members' abilities to enforce

contractual termination rights and contractual liens against a User's

margin or other funds held by CMESC (subordinate to CMESC's rights

thereto) that Members may have under their contractual arrangements

with their authorized Users, provided that neither the authorizing

Member nor its User is in Default to CMESC. The proposed rule change

will also further strengthen and clarify a Member's ability to

participate in the liquidation of an authorized User's positions in the

event of the User's Default.

The proposed changes are described in detail as follows.

Description of the Proposed Rule Change

1. Proposed Changes Relating to a Member's Contractual Termination

Rights Outside an Authorized User's Default to CMESC

CMESC proposes two changes to its Rules to further facilitate a

Member's enforcement of its contractual termination rights in relation

to a User it authorizes. First, CMESC proposes adopting new Rule 316

(Member Exercise of Contractual Rights Against an Authorized User),

which sets out a process whereby a Member may, pursuant to a request to

CMESC and subject to certain conditions, immediately assume an

authorized User's positions pursuant to the Member's contractual

termination rights, provided that neither the User nor the Member is in

Default to CMESC. Second, CMESC proposes changes to Rule 602

(Submission of Transaction Data) to recognize explicitly that a Member

may submit transactions for an authorized User's Account if the User

has given the Member the authority to do so, provided again that

neither the User nor the Member is in Default. The proposed changes to

Rule 602 will cover trade submission by a Member both as a routine

matter and as a potential means for a Member to exercise contractual

termination rights in relation to an authorized User by submitting

liquidating transactions for the authorized User's Account.

As noted, proposed Rule 316 sets out the process and conditions for

a Member to assume an authorized User's positions pursuant to

contractual termination rights as between the Member and the User.

Proposed Rule 316(a) applies to the circumstance when a User is in

default to its authorizing Member, or is otherwise subject to a

termination event, under one or more binding agreements between the

Member and User and neither party is in Default (as that term is

defined in the Rules). Proposed Rule 316(a) introduces the term

``Contractual Terms'' to refer to such binding agreement(s) and the

terms ``Affected Member'' and ``Affected User'' to refer to the Member

and to the User, respectively, when this circumstance arises. It also

introduces the term ``Affected User Account'' for purposes of proposed

Rule 316 and defines the term separately in relation to an Affected

User that is a Supported User and an Affected User that is an

Independent User. When the Affected User is a Supported User, the

Affected User Account is the Account that CMESC maintains in the name

of the Affected Member for the exclusive benefit of the Affected

Supported User. For an Independent User as the Affected User, the term

covers the Independent User's Account associated with the Affected

Member's authorization of the User.

Proposed Rule 316(b) sets out that an Affected Member may submit a

written request to CMESC, in such form as CMESC may prescribe, to

promptly transfer all the positions in Eligible Securities Transactions

in the Affected User Account to the Account of the Affected Member. The

Member's request may also request the transfer of initial margin or

other funds in the Affected User Account to the Account of the Affected

Member. CMESC will promptly effect the requested transfer, provided the

conditions set out in other paragraphs of Rule 316 are met. Proposed

Rule 316(b) explicitly sets out that each Eligible Securities

Transaction that is transferred is novated to the Affected Member, such

that the transaction is terminated in the Affected User's Account and

an equivalent position is established as a cleared position booked to

the Account of the Affected Member, with the Affected Member

substituted as CMESC's counterparty to the Eligible Securities

Transaction.

Proposed Rule 316(c) sets out the condition that transfers pursuant

to the proposed Rule will only occur if the Affected User is not in

Default to CMESC at the time of the request or at the time the

transfers are to be effected. If a User is subject to a Default to

CMESC under the Rules, CMESC's default management rules will govern

and, as acknowledged in this part of the proposed Rule, the authorizing

Member(s) will have the opportunity to close-out the Defaulting User's

positions as permitted under and in accordance with the proposed

changes to Rule 405(c) and Rule 1507(b), as explained below.

Proposed Rule 316(d) sets forth certain conditions that apply when

an Affected Member submits a written request to transfer the Affected

User's positions pursuant to the Rule. A Member's request to transfer

an Affected User's positions pursuant to proposed

[[Page 34669]]

Rule 316 is deemed by CMESC to constitute an election of the Member to

terminate its Authorization Agreement with the User with immediate

effectiveness, and thus, the Member is ceasing to authorize the

Affected User. Proposed Rule 316(d) also eliminates the need for the

Member to separately submit advance notice of termination of the

Authorization Agreement pursuant to Rule 311(d) (Notice of Termination

of User Authorization).

The predicate for proposed Rule 316 is that the Member requesting

the transfer of the Affected User's positions has the contractual right

to do so under the Contractual Terms. CMESC is not a party to the

Contractual Terms, and the negotiation of such terms is a commercial

matter between the Member and its authorized User. Accordingly, Rule

316(d) sets out that when an Affected Member submits a written request

to CMESC to effect a transfer pursuant to this Rule, the Affected

Member is deemed to represent, warrant and covenant to CMESC that the

Affected User is in default to the Affected Member, or subject to a

termination event, under the Contractual Terms, and that it has the

authority under the Contractual Terms to request CMESC to take such

action. The Affected Member also is deemed to represent to CMESC that

the Affected Member has reasonably determined that it will be able to

meet its initial margin and other obligations on all positions in its

Member Account following completion of the transfer of positions to

such Account covered by the request, and that its exercise of its

rights under the Contractual Terms and Rule 316 is consistent with, and

does not and will not cause the Affected Member to be in violation of,

its obligations to the Affected User under applicable law.

It is important that CMESC be protected in the event a dispute

arises between an Affected Member and Affected User when CMESC acts

upon the Affected Member's request given that CMESC is adopting Rule

316 to facilitate a Member's rights under Contractual Terms between the

Affected Member and Affected User to which CMESC is not a party.

Indeed, the Contractual Terms may well govern aspects of the

relationship between a Member and a User beyond the Member's

authorization of the User or even extend to relationships with or among

their respective affiliates. Thus, proposed Rule 316(e) sets out that

CMESC has no liability to the Affected Member or the Affected User for

any loss or costs that they may incur in connection with the transfer

of any positions from the Affected User Account to the Account of the

Affected Member pursuant to the proposed Rule. Proposed Rule 316(e)

also provides that the Affected Member will indemnify CMESC and its

affiliates and their respective officers, employees and agents against

any and all losses, liabilities, damages, claims, costs or expenses

they may suffer or incur arising out of or in connection with any

dispute between the Affected Member and Affected User regarding any

action taken or not taken pursuant to proposed Rule 316.

As noted, as an alternative to the transfer of all the positions in

Eligible Securities Transactions in the Affected User Account, CMESC

also proposes changes to Rule 602 to facilitate a Member's ability to

liquidate an authorized User's transactions pursuant to its contractual

termination rights by submitting liquidating transactions for the

authorized User's Account associated with the Member's authorization.

Specifically, CMESC is proposing to add a new sentence to existing Rule

602 to provide that transaction data may be submitted by a Member for

the Account of a User that it authorizes, provided that the User is not

in Default. CMESC believes it is beneficial to clarify explicitly in

Rule 602 that a Member may submit transaction data for the Account of a

User that it authorizes only when the User is not in Default. This is

consistent with proposed Rule 316(c), which provides that CMESC will

not effect any transfer of positions in the Affected User's Account to

the Affected Member's Account if the Affected User is subject to a

Default under the Rules. CMESC believes that if an authorized User is

in Default, no transaction data should be submitted to the Defaulting

User's Account and the Rules regarding default management, e.g., Rule

405(c) and 1507(b), should apply to facilitate the prompt close-out

(e.g., liquidation) of the Defaulting User Positions, as described

below.

In addition, a Member could submit transactions on behalf of an

authorized User either as a routine matter or in connection with

contractual termination rights pursuant to the proposed changes to Rule

602. To assure the Member has the authority to submit transactions for

the User's Account, proposed changes to Rule 602 set out that, when the

Member submits transaction data for an authorized User, the Member is

deemed to represent that it has the authority to do so. As the Member's

authority to submit transactions for a User it authorizes is a matter

between the Member and authorized User, the proposed changes to Rule

602 further provide that the Member indemnifies CMESC and its

affiliates and their respective officers, employees and agents against

any and all losses, liabilities, damages, claims, costs or expenses

they may suffer or incur arising out of or in connection with any

dispute between the Member and User regarding such action taken by the

Member.

2. Proposed Changes Relating to a Member's Subordinate Security

Interest in User Collateral

This section describes CMESC's proposed modifications to its Rules

with respect to a Member's rights to margin or other funds posted to

the User Account of a User it has authorized. The purpose of the

proposed changes is to establish explicit structures whereby the

authorizing Member will have a claim to the return of any excess margin

of the User associated with the Member's authorization that remain

following CMESC's default management process for a Defaulting User or

following the termination of a Member's authorization of a User and

satisfaction of the User's obligations to CMESC. The legal approach

differs for a Supported User and an Independent User, each of which is

discussed below.

First, CMESC is proposing modifications to Rule 513, which governs

the treatment of margin deposited with CMESC for Supported User

Accounts, to add new paragraph (c) to provide explicitly that CMESC

will maintain a Supported User Account as a ``securities account''

under Article 8 of the New York Uniform Commercial Code (proposed Rule

513(c) uses the defined term ``NY UCC'') and that CMESC is the

securities intermediary in relation to the Member that establishes the

Supported User Account in its name for the benefit of the Supported

User of the Member.

As explained above, the authorizing Member for a Supported User is

responsible for posting initial margin (and Outstanding Exposure

Settlement) for the Account of the Supported User. Thus, as set out in

existing Rule 513, CMESC will establish within its books and records a

Supported User Account for each Supported User of the authorizing

Member, in the name of the Member for the benefit of the Supported

User.\17\ Under existing Rule 504

[[Page 34670]]

(Corporation Lien), each Member and each User grants to CMESC to secure

its obligations to CMESC a first priority and unencumbered security

interest and lien against any property, cash, securities, or collateral

deposited with, held by, pledged to, or otherwise available to, CMESC

by such Member or User, and thus, CMESC has a first priority and

unencumbered security interest in and lien against the initial margin

and other funds deposited in the Supported User Account. By providing

that CMESC will maintain a Supported User Account as a ``securities

account'' under Article 8 of the NY UCC and that CMESC is the

securities intermediary in relation to the Member that establishes the

Supported User Account for the benefit of the Supported User, the

Member will be the entitlement holder for the Supported User Account

and be entitled to the return of any excess margin or other funds

remaining following CMESC's default management process and termination

of the Member's authorization of the Supported User and satisfaction of

CMESC's first priority claim.

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\17\ See Rule 513(b)(i). If the authorizing Member is a broker-

dealer, CMESC will also maintain a master grouping of the Supported

User Accounts designated as a ``Special Account for the Exclusive

Benefit of the Supported Users as Customers of [name of broker-

dealer Member].'' See Rule 513(b)(iv).

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Proposed Rule 513(c) also clarifies that all margin, whether in the

form of cash or Qualified Margin Securities, or other funds credited to

the Supported User Account for the benefit of a Supported User of the

Member are treated as ``financial assets'' within the meaning of

Article 8 of the NY UCC, that New York is the ``securities

intermediary's jurisdiction'' for purposes of the NY UCC, and that New

York law will govern all issues specified in Article 2(1) of the Hague

Securities Convention (which if not overridden means the Hague

Securities Convention would determine the law applicable to such

issues).\18\ As a related change, CMESC is proposing to add a

definition to Rule 101 of the term ``NY UCC,'' which is used in

proposed new paragraph (c) of Rule 513. As defined, the term means

``the Uniform Commercial Code enacted by the State of New York as in

effect from time to time.''

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\18\ Article 2(1) of the Hague Securities Convention states:

This Convention determines the law applicable to the following

issues in respect of securities held with an intermediary--(a) the

legal nature and effects against the intermediary and third parties

of the rights resulting from a credit of securities to a securities

account; (b) the legal nature and effects against the intermediary

and third parties of a disposition of securities held with an

intermediary; (c) the requirements, if any, for perfection of a

disposition of securities held with an intermediary; (d) whether a

person's interest in securities held with an intermediary

extinguishes or has priority over another person's interest; (e) the

duties, if any, of an intermediary to a person other than the

account holder who asserts in competition with the account holder or

another person an interest in securities held with that

intermediary; (f) the requirements, if any, for the realisation of

an interest in securities held with an intermediary; (g) whether a

disposition of securities held with an intermediary extends to

entitlements to dividends, income, or other distributions, or to

redemption, sale or other proceeds.

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A different approach is taken with respect to Independent Users, as

they will establish Accounts in their own name with CMESC and are

responsible for posting initial margin (and Outstanding Exposure

Settlement) directly to CMESC. Thus, CMESC is proposing new Rule 317

under which CMESC will recognize and accommodate the grant of a second

priority security interest to a Member by an authorized Independent

User in initial margin or other funds credited to the User's

Independent User Account.

Under proposed Rule 317, a Member and an Independent User

authorized by the Member may enter into an Authorization Agreement or

other appropriate related agreement (such as a control agreement) that

contains a provision whereby the authorized Independent User grants the

Member a second priority security interest and lien against any initial

margin or other funds credited to the relevant Independent User

Account. For purposes of proposed Rule 317, such credited initial

margin or other funds are referred to as the ``Independent User

Funds.'' As provided in proposed Rule 317(a), the agreement under which

the security interest is granted must contain certain minimum terms

described below to assure that the agreement does not contain terms

that conflict with CMESC's first priority security interest in and lien

against such funds or CMESC's application of such funds in connection

with the management of any Default of the Independent User.

First, in order for CMESC to recognize the Member's second priority

security interest in the Independent User Funds, the agreement between

the Member and authorized Independent User must contain the Member's

acknowledgment of CMESC's first priority and unencumbered security

interest in and lien against property, cash, securities, or collateral

deposited with, held by, pledged to, or otherwise available to CMESC to

secure the Independent User's obligations to CMESC created under Rule

504 (Corporation Lien). This acknowledgement reinforces CMESC's

priority claim to Independent User Funds ahead of the authorizing

Member under the Rules and is intended to avoid competing claims to

Independent User Funds between CMESC and the authorizing Member.

Second, consistent with the Member's required acknowledgment of

CMESC's first priority and unencumbered security interest and lien

described above and again in the context of CMESC recognizing a

Member's second priority security interest, the agreement between the

Member and authorized Independent User must provide that the Member

will ``exercise control over the Independent User Funds only following

(A) the occurrence of a User Default of the Independent User and

subject to the condition that the Member will refrain from taking any

action that could interfere with the Corporation's management of such

User Default (it being understood that the Member's election to

participate in the management of the User Default pursuant to and in

accordance with Rule 405(c) and Rule 1507(b) does not constitute

interference) or (B) following the effective date of termination of the

Authorization Agreement between the Member and the Independent User and

satisfaction of all obligations owing to the Corporation relating to

the Independent User's Account associated with the Member's

authorization of the Independent User and subject to the condition that

the Independent User is not in Default.'' (As explained in the

following section, CMESC is proposing revisions to Rules 405(c) and

1507(b).) These are important contractual terms that reinforce CMESC's

priority claim to apply Independent User Funds under the Rules and are

intended to avoid competing claims to Independent User Funds between

CMESC and the authorizing Member.

Third, the agreement must provide that ``the Member will assert its

security interest and lien only over those Independent User Funds that

may remain following, as applicable, (A) completion of the

Corporation's management of the Independent User's User Default or (B)

closing of the Independent User's Account associated with the Member's

authorization of the Independent User and satisfaction of all

obligations related thereto, and (C) the Corporation's exercise in

either case of its rights pursuant to its security interest and lien

created under Rule 504.'' As with the other minimum required terms,

these are important contractual terms that reinforce CMESC's priority

claim to apply Independent User Funds under the Rules and are intended

to avoid competing claims to Independent User Funds between CMESC and

the authorizing Member.

For clarity, CMESC is including paragraph (b) in proposed Rule 317

to reaffirm that an Independent User may not grant any party a security

interest in or lien against the initial margin or other funds credited

to its User Account to

[[Page 34671]]

any person other than CMESC or its authorizing Member associated with

the User Account, and may only grant the lien to the authorizing Member

in accordance with Rule 317.

Finally, paragraph (c) of proposed Rule 317 provides that CMESC

will ``cooperate with the Member and Independent User to execute such

documents as the Member may reasonably request to perfect its security

interest and enforce its lien, provided, however, that any such

documentation and the terms thereof must be acceptable to the

Corporation in its sole discretion.'' This provision recognizes that

CMESC may have to execute documentation (such as a control agreement)

to enable the Member to perfect its secondary security interest in and

have an enforceable lien against the Independent User Funds

(subordinate to CMESC's) and confirms that CMESC will cooperate with

the Member to give effect to the purpose of proposed Rule 317, provided

the terms of the documentation are acceptable to CMESC, e.g., that they

are consistent with (or as appropriate contain) the minimum required

terms described above.

3. Proposed Changes Relating to a Member's Rights To Participate in the

Liquidation of an Authorized User's Positions in the Event of the

User's Default

CMESC is proposing changes to three Rules to further delineate and

clarify a Member's right to participate in the close-out of an

authorized User's positions in the event of the User's Default: (i)

changes to Rule 405(c) (User Default); (ii) related conforming and

clarifying changes to Rule 1507(b); and (iii) changes to the definition

of the term ``close-out'' in Rule 101.

Rules 405 and 1507 together address the process that CMESC will

follow in the event of the Default of a Member or User. CMESC is

proposing changes to Rule 405 and related changes to Rule 1507(b) to

set out explicitly that CMESC will promptly provide an authorizing

Member the opportunity to participate in the close-out of the

Defaulting User's positions on CMESC's behalf and to provide more

detail with respect to how the Member may participate and the Member's

obligations if it elects to participate. CMESC believes there are

benefits both to CMESC and to the Member for the Member of an

authorizing User to have the opportunity to participate in the close-

out of the positions of a Defaulting User it has authorized, given the

Member's obligation under Rule 406(b)(iii) to cover any losses that

exceed the Defaulting User's initial margin and other assets available

to CMESC and the incentive that creates for the Member to seek to

minimize losses in closing out the Defaulting User's positions on

CMESC's behalf.

Also, a core objective in managing the Default of a User is that

the Defaulting User's positions be closed out promptly. Although this

is implicit in Rule 405, to provide clarity and certainty, CMESC

proposes to set out explicitly in Rule 405(c) that when the authorizing

Member declines to close out the positions, CMESC will liquidate them

promptly in accordance with the Rule. The proposed changes to Rule

1507(b) reiterate the prompt liquidation standard, both when CMESC is

responsible for closing out the positions and when the authorizing

Member participates in the close-out.

CMESC is proposing numerous changes in Rule 405(c), which governs a

User Default. CMESC is proposing to modify subparagraph (c)(i) to set

out explicitly that CMESC will, pursuant to Rule 1507(b), promptly

notify each authorizing Member of a Defaulting User that the Member may

participate in the close-out of the positions in each User Account

associated with the Member's authorization. Proposed Rule 405(c)(i)

refers to the positions of a Defaulting User in each User Account

associated with the Member's authorization as the ``Defaulting User

Positions.'' CMESC also proposes changes to clarify that after CMESC

notifies a Member of its opportunity to participate in closing out the

Defaulting User Positions on behalf of CMESC, the Member should

promptly respond within the period CMESC prescribes and will be deemed

to decline the opportunity to participate if the Member has not

responded within such time.

CMESC is also proposing to delete the last sentence in Rule

405(c)(i), which sets out that a Member that agrees to liquidate the

Defaulting User's portfolio on behalf of CMESC ``will be directly and

primarily responsible for meeting the financial and settlement

obligations of the Corporation with respect to open positions of the

Defaulting User authorized by that Member.'' Upon further

consideration, CMESC believes that this sentence may create ambiguity

in relation to a Member's potential obligation under Rule 406(b)(iii)

to cover any losses that exceed the Defaulting User's initial margin

and other assets available to CMESC, which is the operative standard,

in the event of the Default of a User it has authorized. This sentence

also becomes unnecessary in light of the other proposed changes to Rule

405, explained below.

CMESC proposes adding new subparagraph (ii) to Rule 405(c) to

provide additional detail regarding how a Member may participate in the

close-out of the Defaulting User Positions if it elects to do so. As

set forth in proposed Rule 405(c)(ii), the Member may participate in

the manner established in this part of the Rule (i.e., Rule 405(c)(ii)

and its subparts) or in another manner, both of which would be

determined in consultation with CMESC. Proposed Rule 405(c)(ii) sets

out two manners for a Member to participate in the close-out of the

Defaulting User Positions. As provided in subparagraph (A), the

Defaulting User Positions could be liquidated promptly in the

Defaulting User's Account and reestablished in the Member's Account,

whereby positions equivalent to the liquidated Defaulting User

Positions (i.e., equivalent to the cleared positions in the Defaulting

User's Account) are novated to the Member and established as cleared

positions booked to the Member's Account. Under this approach, the

following conditions must be met.

First, because the Member will be party to the positions

reestablished in the Member's Account (i.e., positions equivalent to

those that were cleared in the Defaulting User's Account), the Member

must represent to CMESC that the Member will be able to meet its

initial margin and settlement obligations on all positions in its

Member Account following reestablishment of the Defaulting User

Position in its Member Account under proposed Rule 405(c)(ii)(A)I.

Second, proposed Rule 405(c)(ii)(A)II. sets out that the

Member, acting in a commercially reasonable manner and consistent with

market convention, is responsible for determining the liquidation value

of the portfolio of the Defaulting User Positions as of the date the

positions are liquidated and reestablished in the Member's Account as

equivalent cleared positions, which date is referred to for purposes of

Rule 405(c)(ii) as the ``Liquidation Date.'' Promptly following the

Liquidation Date, the Member must provide a detailed written statement

to CMESC, with supporting documentation, of the Member's calculation of

such liquidation value, which must be satisfactory to CMESC. As between

the Defaulting User and CMESC, if as of the Liquidation Date the

liquidation value is less than the value of the portfolio of positions

that are reestablished in the Member's Account (which as noted are

reestablished as positions equivalent to those that were cleared in the

Defaulting User's Account), the difference is fixed as the

[[Page 34672]]

amount of the losses on such positions and if such liquidation value is

greater than the value of the portfolio of positions reestablished in

the Member's Account as of the Liquidation Date, the difference is

fixed as the amount of gains on such positions.

Finally, consistent with CMESC's rights under Rule

406(b)(ii) and other Rules to apply initial margin and other assets

held by CMESC to losses associated with a User's Default, proposed Rule

405(c)(ii)(A)III. sets out that CMESC will credit the Member for the

amount of any losses fixed pursuant to Rule 405(c)(ii)(A)II., with such

amount credited using and limited to the Defaulting User's initial

margin and other assets CMESC holds in respect of the Defaulting User's

Account associated with the Member's authorization. If the amount to be

credited to the Member exceeds the Defaulting User's margin and other

assets held by CMESC in respect of the Defaulting User's Account, then

the Member would incur such loss in acquiring the positions, but that

would be consistent with the Member's obligation under Rule 406(b)(iii)

to cover the losses that exceed the Defaulting User's initial margin

and other assets available to CMESC. Conversely, CMESC will debit the

Member for the amount of any gains fixed pursuant to Rule

405(c)(ii)(A)II. After the Liquidation Date, any gains or losses on the

Defaulting User Positions that are liquidated in the Defaulting User's

Account and reestablished in the Member's Account will belong to the

Member, as provided in proposed Rule 405(c)(ii)(A)III.

As provided in proposed Rule 405(c)(ii)(B), the second manner in

which CMESC proposes to allow a Member to participate in the close-out

of the Defaulting User Positions is specific to the liquidation of any

Defaulting User Position that is a Repo Transaction for which the

Member is the contra party on the original transaction (i.e., a ``done-

with'' Repo Transaction). In this scenario, the Member may agree to

terminate the position by accelerating the Off-Leg Settlement Date to a

new Off-Leg Settlement Date that is on or before a date that CMESC

specifies, consistent with the core objective that the Defaulting User

Positions be liquidated promptly. Similar to the process in proposed

Rule 405(c)(ii)(A) described above, the Member must determine the

liquidation value of the original (i.e., pre-accelerated) Defaulting

User Position as of the accelerated Off-Leg Settlement Date, which is

used as the Liquidation Date, in the same manner as it would calculate

the liquidation value for positions reestablished in its Account

pursuant to Rule 405(c)(ii)(A)II. This liquidation value will be used

to fix the loss or gain on the position as between CMESC and the

Defaulting User and if multiple Repo Transactions between the Member

and Defaulting User are accelerated pursuant to proposed Rule

405(c)(ii)(B), the losses or gains will be determined on an aggregate

basis for such positions. CMESC will credit or debit the Member for the

losses or gains fixed pursuant to this Rule 405(c)(ii)(B) in the manner

provided in Rule 405(c)(ii)(A)III. CMESC believes a Member may find the

approach outlined in proposed Rule 405(c)(ii)(B) an effective way to

reduce losses realized upon the close-out of any Defaulting User

Positions that are ``done-with'' Repo Transactions with the Member and

is including this approach to provide additional flexibility to

determine (in consultation with CMESC) the appropriate mean(s) for the

Member to participate in the close-out of the Defaulting User

Positions.

The proposed changes described above to elaborate on how a Member

may participate in closing out the Defaulting User Positions do not

change the Member's obligation under Rule 406(b)(iii) to cover any

losses that exceed the Defaulting User's initial margin and other

assets available to CMESC. Therefore, CMESC proposes adding a new

subparagraph (iii) under Rule 405(c) to clarify that the Member's

obligation under Rule 406(b)(iii) to fully discharge the losses and

liabilities to CMESC associated with the User's Default in each User

Account associated with the Member's authorization, once such losses

and liabilities are finalized, remains in effect, notwithstanding the

Member's decision to participate in the close-out of the Defaulting

User Positions. As noted above, Rule 406(b)(iii) is the operative

provision that governs the Member's potential liability in relation to

the Default of a User it has authorized.

CMESC also proposes changes to existing subparagraph (ii) of Rule

405(c), which is proposed to be renumbered as Rule 405(c)(iv), to align

with the revised provisions discussed above regarding the actions that

CMESC will take to close-out, including liquidation of, the Defaulting

User Positions in relation to any authorizing Member that declines to

participate in the close-out of the Defaulting User Positions

associated with the Member's authorization. CMESC proposes to clarify

that CMESC will promptly initiate the close-out process described in

the Rules for the User Account of the Defaulting User associated with

the Member's authorization. CMESC also proposes to delete the last

sentence, which is a ``for avoidance of doubt'' provision that is

adequately explained in Rule 406(b)(iii), as described above.

CMESC also proposes changes to existing subparagraph (iii) of Rule

405(c), which is proposed to be renumbered as Rule 405(c)(v), to set

out more directly that CMESC will apply the financial resources

described in Rule 406(b), in the order provided in and subject to Rule

406(b), to the Defaulting User's obligations owed to CMESC, regardless

whether the authorizing Member elects to participate in the close-out

of the Defaulting User Positions pursuant to Rule 405(c).

As a result of the proposed changes to Rule 405 described above,

CMESC is proposing conforming and clarifying changes to Rule 1507(b).

First, existing Rule 1507(b) provides that in the case of a User

Default, before CMESC takes any of the actions described in Rule

1507(e), CMESC will notify the Defaulting User's authorizing Member(s)

that the Member may ``terminate the Defaulting User's obligations to

the Corporation by satisfying them in full,'' but subject to the

qualification ``if time permits.'' CMESC proposes to delete ``if time

permits'' and ``terminate the Defaulting User's obligations to the

Corporation by satisfying them in full,'' and to add new text to Rule

1507(b) to specify that CMESC will promptly notify the authorizing

Member(s) of the Member's right to close-out the Defaulting User's

positions pursuant to and in accordance with Rule 405(c), noting

parenthetically that the Member and CMESC will act promptly to effect

the close-out.

Finally, CMESC is proposing clarifying changes to the definition of

``close-out'' in Rule 101. The current definition covers extinguishing

a Member's or User's cash receipt entitlement in relation to the sale

of Eligible Securities under a Repo Transaction. The term is used in

the proposed changes to Rule 405(c) and 1507(b) in the broader sense of

liquidating or terminating any cleared Eligible Securities Transaction.

Thus, CMESC proposes to modify the definition of the term ``close-out''

to mean the liquidation or termination of a cleared Eligible Securities

Transaction. This definition is consistent with how the term is used in

other CMESC Rules.

2. Statutory Basis

For the reasons set forth below, CMESC believes the proposed rule

change is consistent with Section 17A of

[[Page 34673]]

the Act,\19\ SEC Rule 17ad-22(e)(13),\20\ SEC Rule 17ad-22(e)(18),\21\

SEC Rule 17ad-22(e)(19),\22\ and SEC Rule 17ad-22(e)(21)(i).\23\

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\19\ 15 U.S.C. 78q-1(b)(3)(F).

\20\ 17 CFR 240.17ad-22(e)(13).

\21\ 17 CFR 240.17ad-22(e)(18).

\22\ 17 CFR 240.17ad-22(e)(19).

\23\ 17 CFR 240.17ad-22(e)(21)(i).

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Consistency With Section 17A(b)(3)(F) of the Act

Section 17A(b)(3)(F) of the Act requires, in part, that the rules

of a clearing agency be designed to promote the prompt and accurate

clearance and settlement of securities transactions, to remove

impediments to and perfect the mechanism of a national system for the

prompt and accurate clearance and settlement of securities

transactions, and, in general, to protect investors and the public

interest.\24\ CMESC believes that the proposed rule change is

consistent with Section 17A(b)(3)(F) of the Act because it will further

support Members' management of risks associated with authorizing

persons as Users and enhance Members' ability to authorize Users by

addressing potential constraints imposed by bank regulatory capital

requirements and enhancing Members' abilities to enforce contractual

termination rights and secondary lien rights against authorized Users'

margin or other funds held by CMESC that Members may have under their

contractual arrangements with their authorized Users. The proposed rule

change will also further strengthen and clarify a Member's ability to

participate in the liquidation of an authorized User's positions in the

event of the User's Default. These modifications will thus support

Members' ability to participate in and authorize Users in CMESC's

Clearing Services, which will promote the prompt and accurate clearance

and settlement of transactions in or involving U.S. Treasury securities

(including eligible secondary market securities transactions that

market participants may be required to centrally clear pursuant to the

rules of a covered clearing agency adopted pursuant to SEC Rule 17ad-

22(e)(18)(iv)).\25\

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\24\ 15 U.S.C. 78q-1(b)(3)(F).

\25\ 17 CFR 240.17ad-22(e)(18)(iv).

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Consistency With Rule 17ad-22(e)(13)

SEC Rule 17ad-22(e)(13) requires, in part, that the rules of a

covered clearing agency be reasonably designed to ensure the covered

clearing agency has the authority and operational capacity to take

timely action to contain losses and liquidity demands and continue to

meet its obligations. CMESC believes that the proposed rule change is

consistent with Rule 17ad-22(e)(13) because the proposed changes to

Rule 405(c) and Rule 1507(b) are designed to achieve the core objective

in default management that the Defaulting User's positions be closed

out promptly to minimize losses and liquidity demands and continue to

meet CMESC's settlement obligations. The requirement to take prompt

action to close-out, including liquidate, the Defaulting User's

positions is reflected in multiple places in the proposed rule change.

Specifically, proposed Rule 405(c) provides that CMESC will promptly

notify each authorizing Member of a Defaulting User that the Member may

participate in closing out the positions in each User Account

associated with the Member's authorization. CMESC also proposes changes

to clarify that, after CMESC notifies a Member of its opportunity to

participate in closing out the Defaulting User Positions, the Member

should promptly respond within the period CMESC prescribes and will be

deemed to decline the opportunity if the Member has not responded

within such time. In addition, proposed Rule 405(c)(ii) provides two

non-exclusive manners in which authorizing Members may participate in

closing out positions of Defaulting Users they authorize, both

requiring that the Defaulting User Positions be closed out promptly and

that the Member provide a detailed written statement of its calculation

of the liquidation value promptly following the Liquidation Date.

Similarly, if the authorizing Member declines to participate in the

close-out of the Defaulting User's positions associated with the

Member's authorization, proposed Rule 405(d)(iv) requires CMESC to

promptly initiate the close-out process described in the Rules for the

User Account of the Defaulting User. Finally, proposed changes to Rule

1507(b) specify that CMESC will ``promptly'' notify the authorizing

Member of the Member's right to close-out the Defaulting User's

positions and make clear that the Member and CMESC will act promptly to

effect the close-out pursuant to and in accordance with proposed

changes to Rule 405(c).

All of the above proposed changes are reasonably designed to ensure

that CMESC will have the authority and operational capacity to take

timely action to promptly close-out a Defaulting User's positions. In

addition, as described in detail above, by proposing changes to Rule

405(c) to provide the authorizing Member the opportunity to participate

in a prompt close-out of the User's positions, CMESC believes that the

proposed changes to Rule 405(c) will help minimize losses from the User

Default and, thus, contain losses and liquidity demands, enabling CMESC

to continue to meet its obligations. Therefore, CMESC believes that the

proposed rule change is consistent with SEC Rule 17ad-2(e)(13).

Consistency With Rule 17ad-22(e)(18)(iv)(C)

CMESC believes that the proposed rule change is consistent with SEC

Rule 17ad-22(e)(18)(iv)(C), which requires, in part, a covered clearing

agency that provides central counterparty services for transactions in

U.S. Treasury securities to ensure that it has appropriate means to

facilitate access to clearance and settlement services for eligible

secondary market transactions in U.S. Treasury securities, including

those of indirect participants such as Independent Users and Supported

Users. As detailed above, the proposed rule change consists of (i)

proposed new Rule 316 and proposed changes to Rule 602 designed to

support Members' risk management and enhance their ability and capacity

to authorize persons as Users, by providing Members the clear means to

enforce contractual termination rights under their contractual

arrangements with authorized Users in circumstances when the authorized

Users are not in Default under CMESC's Rules; (ii) proposed changes to

Rule 513 to create a legal structure to provide an authorizing Member

with a securities entitlement under the NY UCC to excess assets in the

Supported User Account associated with such Member's authorization and

proposed new Rule 317 to provide a Member the means to obtain and

perfect a secondary security interest in and lien against Independent

User Funds held by CMESC for the Independent User Account associated

with the Member's authorization, while affirming CMESC's first priority

and unencumbered security interest in and lien against the Independent

User funds; and (iii) proposed changes to Rules 405(c) and 1507(b)

designed to strengthen and clarify Members' abilities to participate in

the close-out of positions of Users they authorize in the event of an

authorized User's Default. These proposed changes are designed to

enhance the ability and capacity of Members to authorize Users, which

will support CMESC's efforts to attract and to on-board Members and

Users prior to CMESC commencing operations of its Clearing Services and

on an ongoing basis thereafter and enhance access to

[[Page 34674]]

CMESC's Clearing Services for prospective Members and Users. As such,

CMESC believes that the proposed rule change is reasonably designed to

provide appropriate means to facilitate access to clearance and

settlement services for eligible secondary market transactions in U.S.

Treasury securities, including those of indirect participants,

consistent with Rule 17ad-22(e)(18)(iv)(C).

Consistency With Rule 17ad-22(e)(19)

SEC Rule 17ad-22(e)(19) requires that the rules of a covered

clearing agency identify, monitor and manage material risks to the

clearing agency arising from arrangements that indirect participants

have with direct participants to access the clearing agency's clearing

and settlement services. The existing Rules define a Member's rights

and obligations with respect to any User it authorizes while at the

same time recognizing (in Rule 306(c)) that a Member and an authorized

User may enter into separate commercial terms between them. Those

features are unchanged. Rather, the proposed rule change provides a

means for a Member to enforce contractual liquidation rights and any

secondary rights to User collateral it may negotiate with an authorized

User, subject to terms that protect CMESC's ability to manage risk

pursuant to its Rules. In this respect, as conditions to liquidate an

authorized User's positions under proposed Rule 316 or under Rule 602

as proposed to be revised, a Member represents that it has the

contractual authority to do so and indemnifies CMESC and related

parties against any losses, liabilities, damages, claims or expenses

they may incur arising out of any dispute between the Member and its

authorized User or in the case of action under proposed Rule 316

regarding any action taken or not taken pursuant to that Rule. With

respect to a Member's rights to collateral of an authorized User, the

proposed rule change establishes structures whereby the Member's claim

is secondary to CMESC's rights as explained above. In this respect, a

Member's claim to such collateral is limited to the return of any

excess margin or other funds remaining following CMESC's default

management process if the User is in Default or following termination

of the Member's authorization of the User and satisfaction of the

User's obligations to CMESC. For these reasons, CMESC believes that the

proposed rule change is appropriate to manage potential risks to CMESC

arising from arrangements that its Users have with Members and is

consistent with SEC Rule 27ad-22(e)(19).

Consistency With Rule 17ad-22(e)(21)(i)

SEC Rule 27ad-22(e)(21)(i) requires that a covered clearing agency

have clearing and settlement arrangements that are efficient and

effective in meeting the requirements of its participants and the

markets the clearing agency services. CMESC believes the proposed rule

change is consistent with Rule 27ad-22(e)(21)(i), meeting the needs of

Members and Users, in that it will enhance Members' ability to

authorize Users by addressing potential constraints imposed by bank

regulatory capital requirements and will further support the

enforceability of certain contractual terms that are separately

negotiated between a Member and an authorized User.

B. CMESC's Statement on Burden on Competition

Section 17A(b)(3)(I) of the Act \26\ 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 that the proposed rule change

may enhance competition because, as detailed above, the proposed rule

change would further support Members' risk management of Users they

authorize and enhance Members' ability and capacity to authorize Users,

thereby facilitating access to CMESC's Clearing Services for eligible

secondary market transactions in U.S. Treasury securities. CMESC also

believes that the proposed rule change would indirectly benefit Users

and prospective Users by enhancing their abilities to access CMESC by

supporting Members' capabilities to authorize Users.

---------------------------------------------------------------------------

\26\ 15 U.S.C. 78q-1(b)(3)(I).

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CMESC recognizes that various Members may perceive varying degrees

of benefits of the proposed rule change conferred on them, depending on

each Member's regulatory status and its entity type. CMESC believes

that the effect of the proposed rule change on competition is

distributed equally among all types of prospective Members because it

will apply to all Member types and would not disadvantage or favor any

particular type of Member in relationship to the other types of

potential Members. As such, CMESC believes that the proposed rule

change would promote competition and does not impose any burden on

competition that is not necessary or appropriate in furtherance of the

purposes of the Act.

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 https://www.sec.gov/regulatory-actions/how-to-submit-comments . 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

[email protected] 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:

[[Page 34675]]

Electronic Comments

Use the Commission's internet comment form ( https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking );

or

Send an email to [email protected] . Please include

File Number SR-CMESC-2026-004 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities and

Exchange Commission, Station Place, 100 F Street NE, Washington, DC

20549.

All submissions should refer to File Number SR-CMESC-2026-004. 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 ( https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking ). Copies of the

filing also will be available for inspection and copying at the

principal office of CMESC and on CMESC's website ( https://www.cmegroup.com/market-regulation/rule-filings.html ). 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-2026-004 and should be submitted

on or before June 29, 2026.

For the Commission, by the Division of Trading and Markets,

pursuant to delegated authority.\27\

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\27\ 17 CFR 200.30-3(a)(12).

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Sherry R. Haywood,

Assistant Secretary.

[FR Doc. 2026-11381 Filed 6-5-26; 8:45 am]

BILLING CODE 8011-01-P