Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations
| Citation | 84 FR 34819 |
| Record Number | 2019-15262 |
| Published date | 19 July 2019 |
| Court | Commodity Futures Trading Commission |
Federal Register, Volume 84 Issue 139 (Friday, July 19, 2019)
[Federal Register Volume 84, Number 139 (Friday, July 19, 2019)]
[Proposed Rules]
[Pages 34819-34838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15262]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 39 and 140
RIN 3038-AE87
Registration With Alternative Compliance for Non-U.S. Derivatives
Clearing Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
proposing amendments to its regulations that would permit derivatives
clearing organizations (DCOs) organized outside of the United States
(hereinafter referred to as ``non-U.S. clearing organizations'') that
do not pose substantial risk to the U.S. financial system to register
with the Commission yet comply with the core principles applicable to
DCOs set forth in the Commodity Exchange Act (CEA) through compliance
with their home country regulatory regime, subject to certain
conditions and limitations. The Commission is also proposing certain
related amendments to the delegation provisions in its regulations.
DATES: Comments must be received on or before September 17, 2019.
ADDRESSES: You may submit comments, identified by ``Registration with
Alternative Compliance for Non-U.S. Derivatives Clearing
Organizations'' and RIN 3038-AE87, by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (FOIA), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
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\1\ 17 CFR 145.9. Commission regulations referred to in this
release are found at 17 CFR chapter I (2018), and are accessible on
the Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected]; Parisa Abadi, Associate Director, 202-
418-6620, [email protected]; Eileen R. Chotiner, Senior Compliance
Analyst, 202-418-5467, [email protected]; Brian Baum, Special Counsel,
202-418-5654, [email protected]; August A. Imholtz III, Special Counsel,
202-418-5140, [email protected]; Abigail S. Knauff, Special Counsel,
202-418-5123, [email protected]; Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. DCO Registration Framework
B. Overview of Proposed Requirements
II. Proposed Amendments to Part 39
A. Regulation 39.2--Definitions
B. Regulation 39.3(a)--Application Procedures
C. Regulation 39.4--Procedures for Implementing DCO Rules and
Clearing New Products
D. Regulation 39.9--Scope
E. Subpart D--Provisions Applicable to DCOs Subject to
Alternative Compliance
III. Proposed Amendments to Part 140--Organization, Functions, and
Procedures of the Commission
IV. Request for Comments
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. DCO Registration Framework
Section 5b(a) of the CEA provides that a clearing organization may
not ``perform the functions of a [DCO]'' \2\ with respect to futures or
swaps unless the clearing organization is registered with the
Commission.\3\ With respect to futures, section 4(a) of the CEA
restricts the execution of a futures contract to a designated contract
market (DCM), and Sec. 38.601 of the Commission's regulations requires
any transaction executed on or through a DCM to be
[[Page 34820]]
cleared at a DCO.\4\ This is distinguished from foreign futures which,
if executed on or through a registered foreign board of trade, must be
cleared through a DCO or a clearing organization that observes the
CPMI-IOSCO Principles for Financial Market Infrastructures and is in
good regulatory standing in its home country jurisdiction.\5\
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\2\ The term ``derivatives clearing organization'' is
statutorily defined to mean a clearing organization in general.
However, for purposes of the discussion in this release, the term
``DCO'' refers to a Commission-registered DCO, the term ``exempt
DCO'' refers to a derivatives clearing organization that is exempt
from registration, and the term ``clearing organization'' refers to
a clearing organization that: (a) Is neither registered nor exempt
from registration with the Commission as a DCO; and (b) falls within
the definition of ``derivatives clearing organization'' under
section 1a(15) of the CEA, 7 U.S.C. 1a(15), and ``clearing
organization or derivatives clearing organization'' under Sec. 1.3,
17 CFR 1.3.
\3\ 7 U.S.C. 7a-1(a). Under section 2(i) of the CEA, 7 U.S.C.
2(i), activities outside of the United States are not subject to the
swap provisions of the CEA, including any rules prescribed or
regulations promulgated thereunder, unless those activities either
``have a direct and significant connection with activities in, or
effect on, commerce of the United States,'' or contravene any rule
or regulation established to prevent evasion of a CEA provision
enacted under the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (Dodd-Frank Act).
Therefore, pursuant to section 2(i), the DCO registration
requirement extends to any clearing organization whose clearing
activities outside of the United States have a ``direct and
significant connection with activities in, or effect on, commerce of
the United States.''
\4\ See 7 U.S.C. 6; and 17 CFR 38.601.
\5\ See 17 CFR 48.7(d).
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With respect to swaps, the CEA permits the Commission to exempt
from DCO registration a non-U.S. clearing organization that is
``subject to comparable, comprehensive supervision and regulation'' by
its home country regulator.\6\ The Commission has granted exemptions
from DCO registration but so far has limited exempt DCOs to clearing
only proprietary swaps for U.S. persons. As a result, a non-U.S.
clearing organization currently must register as a DCO if it wants to
clear swaps for customers of futures commission merchants (FCMs).
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\6\ Section 5b(h) of the CEA, 7 U.S.C. 7a-1(h). Section 5b(h)
also permits the Commission to exempt from DCO registration a
securities clearing agency registered with the Securities and
Exchange Commission; however, the Commission has not granted, nor
developed a framework for granting, such exemptions. In 2018, the
Commission proposed regulations that would codify the policies and
procedures that the Commission currently follows with respect to
granting exemptions from DCO registration to non-U.S. clearing
organizations. See Exemption From Derivatives Clearing Organization
Registration, 83 FR 39923 (Aug. 13, 2018). On July 11, 2019, as a
supplement to that proposal, the Commission approved a separate
notice of proposed rulemaking, entitled ``Exemption from Derivatives
Clearing Organization Registration,'' that will be published in the
Federal Register. In that release, the Commission is further
proposing to permit exempt DCOs to clear swaps for U.S. customers
through foreign intermediaries. All references to exempt DCOs
contained in this release are consistent with the existing exempt
DCO regime and are not indicative of the Commission's response to
comments received on the initial proposal.
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In order to register and maintain registration as a DCO, a clearing
organization must comply with each of the core principles applicable to
DCOs set forth in the CEA (DCO Core Principles) and any requirement
that the Commission imposes by rule or regulation.\7\ Most of the
requirements applicable to DCOs are set forth in part 39 of the
Commission's regulations (Part 39), which the Commission adopted to
implement the DCO Core Principles.\8\
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\7\ 7 U.S.C. 7a-1(c)(2)(A)(i).
\8\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334 (Nov. 8, 2011).
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Of the 16 DCOs currently registered with the Commission, six are
organized outside of the United States.\9\ These six DCOs are also
registered (or have comparable status) in their respective home
countries, which means they are subject to compliance with the CEA and
Part 39 and their home country regulatory regimes, as well as oversight
by the Commission and their home country regulators. There are,
however, meaningful differences in the extent to which U.S. persons
clear trades through these six non-U.S. DCOs. For example, nearly half
of the swaps business at LCH Limited, if measured on the basis of
required initial margin, is attributable to U.S. persons.\10\ In
contrast, certain other non-U.S. DCOs, such as LCH SA and Eurex
Clearing AG, for example, hold significantly less initial margin from
U.S. persons, both in absolute terms and as a percentage of the total
required initial margin at the DCO. The Commission, recognizing this
regulatory overlap and considering the dynamics of the marketplace, is
proposing a new DCO registration framework that would differentiate
between clearing organizations organized in the United States (U.S.
clearing organizations) and non-U.S. clearing organizations. The
proposed framework would also distinguish non-U.S. clearing
organizations that do not pose substantial risk to the U.S. financial
system from those that do.
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\9\ The six registered DCOs organized outside of the United
States are Eurex Clearing AG, ICE Clear Europe Limited, ICE NGX
Canada Inc., LCH Limited, LCH SA, and Singapore Exchange Derivatives
Clearing Limited.
\10\ Nearly half of the total required initial margin that U.S.
persons post globally in connection with cleared swaps is held at
LCH Limited.
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Under the new framework, the status of U.S. clearing organizations
would not change. A U.S. clearing organization would still be required
to register as a DCO and to comply with the CEA and all Commission
regulations applicable to DCOs. In addition, any non-U.S. clearing
organization that wants to clear futures listed for trading on a DCM
would be subject to the current registration requirements. Finally, any
non-U.S. clearing organization that wants to clear swaps, either
proprietary or customer, for U.S. persons, and is determined by the
Commission to pose substantial risk to the U.S. financial system (as
discussed further below), would be subject to the current requirements
as well.
However, a non-U.S. clearing organization that wants to clear swaps
for U.S. persons (and not futures listed for trading on a DCM) and has
not been determined by the Commission to pose substantial risk to the
U.S. financial system would have two additional options. First, the
non-U.S. clearing organization could still apply for an exemption from
DCO registration. The Commission recognizes that this option may not
appeal to some non-U.S. clearing organizations because, as previously
noted, an exempt DCO is currently limited to clearing proprietary swaps
for U.S. persons.\11\ If the non-U.S. clearing organization wants to
clear swaps for FCM customers, but does not want to be subject to full
compliance with Commission regulations, it would have the option to
register and maintain registration as a DCO by relying largely on its
home country regulatory regime, as discussed below.
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\11\ But see Exemption from Derivatives Clearing Organization
Registration, approved on July 11, 2019 (proposing to permit exempt
DCOs to clear swaps for U.S. customers through foreign
intermediaries).
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The Commission believes these proposed changes would allow the
Commission to make more effective use of its resources by focusing its
oversight almost exclusively on those DCOs that are either organized in
the United States or pose substantial risk to the U.S. financial
system. The Commission further believes this rulemaking would advance a
territorial, risk-based approach to the regulation of clearing
organizations that shows appropriate deference to non-U.S. regulation
that achieves a similar result as the DCO Core Principles where the
non-U.S. regulator itself has a substantial regulatory interest in the
DCOs located in its jurisdiction. A deference-based cross-border policy
recognizes that market participants and market facilities in a
globalized swap market are subject to multiple regulators and
potentially face duplicative regulations. Under the proposed framework,
the Commission would allow a non-U.S. DCO to satisfy the DCO Core
Principles by complying with the corresponding requirements in its home
jurisdiction, except with respect to certain Commission regulations,
including critical customer protection safeguards and swap data
reporting requirements, as discussed below. In this way, the proposed
framework would help preserve the benefits of an integrated, global
swap market by reducing the degree to which a DCO would be subject to
multiple sets of regulations, while ensuring protection for U.S.
customers. Further, the proposed approach encourages collaboration and
coordination among U.S. and foreign regulators in establishing
comprehensive regulatory standards for swaps clearing.
B. Overview of Proposed Requirements
The CEA requires a DCO to comply with the DCO Core Principles and
any requirement that the Commission imposes by rule or regulation. The
CEA further provides that, subject to any rule or regulation prescribed
by the
[[Page 34821]]
Commission, a DCO has ``reasonable discretion'' in establishing the
manner by which the DCO complies with each DCO Core Principle.\12\
Currently, a DCO is required to comply with all Commission regulations
that were adopted to implement the DCO Core Principles. The Commission
is proposing regulations that would allow a non-U.S. clearing
organization that seeks to clear swaps for U.S. persons,\13\ including
FCM customers, to register as a DCO and, in most instances, comply with
the applicable legal requirements in its home country as an alternative
means of complying with the DCO Core Principles.
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\12\ 7 U.S.C. 7a-1(c)(2)(A)(ii).
\13\ The Commission proposes to use the interpretation of ``U.S.
person'' as set forth in the Commission's Interpretive Guidance and
Policy Statement Regarding Compliance With Certain Swap Regulations,
78 FR 45292, 45316-45317 (July 26, 2013), as such definition may be
amended or superseded by a definition of the term ``U.S. person''
that is adopted by the Commission and applicable to this proposed
regulation.
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A non-U.S. clearing organization would be eligible for this
alternative compliance regime if: (1) The Commission determines that
the clearing organization's compliance with its home country regulatory
regime would satisfy the DCO Core Principles; \14\ (2) the clearing
organization is in good regulatory standing in its home country; (3)
the Commission determines that the clearing organization does not pose
substantial risk to the U.S. financial system; and (4) a memorandum of
understanding (MOU) or similar arrangement satisfactory to the
Commission is in effect between the Commission and the clearing
organization's home country regulator. Each of these requirements is
described in greater detail below.
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\14\ The Commission notes that the home country regulatory
regime would not need to satisfy the Commission's regulations under
Part 39.
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An applicant for alternative compliance would be required to file
only certain exhibits of Form DCO,\15\ including a regulatory
compliance chart in which the applicant would identify the applicable
legal requirements \16\ in its home country that correspond with each
DCO Core Principle and explain how the applicant satisfies those
requirements. Under the current registration regime, an applicant must
demonstrate compliance with the DCO Core Principles and Part 39. Under
the alternative compliance regime, an applicant must demonstrate: (1)
That compliance with its home country requirements would satisfy the
DCO Core Principles, and (2) compliance with those requirements. If the
application is approved by the Commission, the DCO would be permitted
to comply with its home country regulatory regime rather than Part 39
(with the exception of Sec. 39.15, which concerns treatment of funds).
Because the DCO would clear swaps for customers \17\ through registered
FCMs, the DCO would be required to fully comply with the Commission's
customer protection requirements,\18\ as well as the swap data
reporting requirements in part 45 of the Commission's regulations. The
DCO would also be held to certain ongoing and event-specific reporting
requirements that are more limited in scope than the reporting
requirements for existing DCOs. The proposed eligibility criteria,
conditions, and reporting requirements would be set forth in proposed
subpart D of Part 39.
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\15\ Whereas an applicant for DCO registration must file the
numerous and extensive exhibits required by Form DCO, an applicant
for alternative compliance would only be required to file certain
exhibits. See Appendix A to Part 39, 17 CFR part 39, appendix A.
\16\ Home country ``legal requirements'' would include those
standards or other requirements that are legally binding in the
applicant's home country.
\17\ Section 2(e) of the CEA makes it unlawful for any person,
other than an eligible contract participant, to enter into a swap
unless the swap is entered into on, or subject to the rules of, a
DCM. 7 U.S.C. 2(e). ``Eligible contract participant'' is defined in
section 1a(18) of the CEA and Sec. 1.3. 7 U.S.C. 1a(18); 17 CFR
1.3.
\18\ Section 4d(f)(1) of the CEA makes it unlawful for any
person to accept money, securities, or property (i.e., funds) from a
swaps customer to margin a swap cleared through a DCO unless the
person is registered as an FCM. 7 U.S.C. 6(c). Any swaps customer
funds held by a DCO are also subject to the segregation requirements
of section 4d(f)(2) of the CEA and related regulations.
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Assuming all other eligibility criteria continue to be met, the
alternative compliance regime would be available to the non-U.S. DCO
unless and until its U.S. clearing activity (as measured by initial
margin requirements) grows to the point that the Commission determines
the DCO poses substantial risk to the U.S. financial system, as
described below. If this alternative compliance regime is adopted, any
currently registered non-U.S. DCO that does not currently pose
substantial risk to the U.S. financial system would be able to apply.
II. Proposed Amendments to Part 39
A. Regulation 39.2--Definitions
1. Good Regulatory Standing
In a recent notice of proposed rulemaking regarding exempt DCOs,
the Commission proposed a definition of ``good regulatory standing''
that is consistent with the definition that the Commission has been
applying to exempt DCOs.\19\ The Commission is now proposing to add to
the definition of ``good regulatory standing'' separate language that
would cover DCOs subject to alternative compliance. The proposed
definition of ``good regulatory standing'' as it relates to exempt DCOs
remains unchanged. With the addition of the separate language, the
Commission is proposing to define ``good regulatory standing'' to mean,
with respect to a DCO subject to alternative compliance, either there
has been no finding by the home country regulator of material non-
observance of the relevant home country legal requirements, or there
has been such a finding by the home country regulator, but it has been
or is being resolved to the satisfaction of the home country regulator
by means of corrective action taken by the DCO. The Commission believes
that the proposed definition, as it relates to DCOs subject to
alternative compliance, establishes a basis for providing the
Commission with a high degree of assurance as to the DCO's compliance
with the relevant legal requirements in its home country, while only
seeking from the home country regulator a reasonable representation.
Although the Commission proposes to limit this to instances of
``material'' non-observance of relevant home country legal
requirements, the Commission requests comment as to whether it should
instead require all instances of non-observance.
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\19\ See Exemption From Derivatives Clearing Organization
Registration, 83 FR at 39924-39925 (proposing to define ``good
regulatory standing'' to mean, with respect to a non-U.S. clearing
organization that is authorized to act as a clearing organization in
its home country, that either there has been no finding by the home
country regulator of material non-observance of the Principles for
Financial Market Infrastructures or other relevant home country
legal requirements, or there has been such a finding by the home
country regulator, but it has been or is being resolved to the
satisfaction of the home country regulator by means of corrective
action taken by the clearing organization).
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2. Substantial Risk to the U.S. Financial System
For purposes of this rulemaking, the Commission is proposing to
define ``substantial risk to the U.S. financial system'' to mean, with
respect to a non-U.S. DCO, that (1) the DCO holds 20 percent or more of
the required initial margin of U.S. clearing members for swaps across
all registered and exempt DCOs; and (2) 20 percent or more of the
initial margin requirements for swaps at that DCO is attributable to
U.S. clearing members; provided, however, where one or both of these
thresholds are close to 20 percent, the Commission may exercise
discretion in determining
[[Page 34822]]
whether the DCO poses substantial risk to the U.S. financial system.
For purposes of this definition and proposed Sec. Sec. 39.6 and 39.51,
the Commission is proposing to clarify that ``U.S. clearing member''
means a clearing member organized in the United States or whose
ultimate parent company is organized in the United States, or an
FCM.\20\
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\20\ The Commission is proposing an identical definition of
``substantial risk to the U.S. financial system'' in a separate
rulemaking regarding exemption from DCO registration. See Exemption
from Derivatives Clearing Organization Registration, approved on
July 11, 2019.
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This definition sets forth the test the Commission would use to
identify those non-U.S. DCOs that pose substantial risk to the U.S.
financial system, as these DCOs would not be eligible for the
alternative compliance proposed in this release. The proposed test
consists of two prongs. The first prong, which is directly related to
systemic risk, is whether the DCO holds 20 percent or more of the
required initial margin \21\ of U.S. clearing members for swaps across
all registered and exempt DCOs. The Commission notes that its primary
systemic risk-related concern is the potential for loss of clearing
services for a significant part of the U.S. swaps market in the event
of a catastrophic occurrence affecting the DCO. The second prong is
whether U.S. clearing members account for 20 percent or more of the
initial margin requirements for swaps at that DCO. This prong of the
test, intended to respect international comity, would capture a non-
U.S. DCO only if a large enough proportion of its clearing activity
were attributable to U.S. clearing members such that the U.S. has a
substantial interest warranting more active oversight by the
Commission.\22\
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\21\ In general, initial margin requirements are risk-based and
are meant to cover a DCO's potential future exposure to clearing
members based on price movements in the interval between the last
collection of variation margin and the time within which the DCO
estimates that it would be able to liquidate a defaulting clearing
member's portfolio. The Commission believes the relative risk that a
DCO poses to the financial system can be identified by the
cumulative sum of initial margin collected by the DCO. Therefore,
the Commission has found initial margin to be an appropriate measure
of risk.
\22\ In developing this proposal, the Commission is guided by
principles of international comity, which counsel due regard for the
important interests of foreign sovereigns. See Restatement (Third)
of Foreign Relations Law of the United States (the Restatement). The
Restatement provides that even where a country has a basis for
jurisdiction, it should not prescribe law with respect to a person
or activity in another country when the exercise of such
jurisdiction is unreasonable. See Restatement section 403(1). The
reasonableness of such an exercise of jurisdiction, in turn, is to
be determined by evaluating all relevant factors, including certain
specifically enumerated factors where appropriate: (1) The link of
the activity to the territory of the regulating state, i.e., the
extent to which the activity takes place within the territory, or
has substantial, direct, and foreseeable effect upon or in the
territory; (2) the connections, such as nationality, residence, or
economic activity, between the regulating state and the persons
principally responsible for the activity to be regulated, or between
that state and those whom the regulation is designed to protect; (3)
the character of the activity to be regulated, the importance of
regulation to the regulating state, the extent to which other states
regulate such activities, and the degree to which the desirability
of such regulation is generally accepted; (4) the existence of
justified expectations that might be protected or hurt by the
regulation; (5) the importance of the regulation to the
international political, legal, or economic system; (6) the extent
to which the regulation is consistent with the traditions of the
international system; (7) the extent to which another state may have
an interest in regulating the activity; and (8) the likelihood of
conflict with regulation by another state. See Restatement section
403(2). Notably, the Restatement does not preclude concurrent
regulation by multiple jurisdictions. However, where concurrent
jurisdiction by two or more jurisdictions creates conflict, the
Restatement recommends that each country evaluate its own interests
in exercising jurisdiction and those of the other jurisdiction, and
where possible, to consult with each other.
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The Commission believes that, in the context of this test, the term
``substantial'' would reasonably apply to proportions of approximately
20 percent or greater. The Commission stresses that this is not a
bright-line test; by offering this figure, the Commission does not
intend to suggest that, for example, a DCO that holds 20.1 percent of
the required initial margin of U.S. clearing members would potentially
pose substantial risk to the U.S. financial system, while a DCO that
holds 19.9 percent would not. The Commission is instead seeking to
offer some indication of how it would assess the meaning of the term
``substantial'' in the test.
The Commission recognizes that a test based solely on initial
margin requirements may not fully capture the risk of a given DCO. The
Commission therefore proposes to retain discretion in determining
whether a non-U.S. DCO poses substantial risk to the U.S. financial
system, particularly where the DCO is close to 20 percent on both
prongs of the test. In these cases, in making its determination, the
Commission may look at other factors that may reduce or mitigate the
DCO's risk to the U.S. financial system or provide a better indication
of the DCO's risk to the U.S. financial system.
B. Regulation 39.3(a)--Application Procedures
The Commission is proposing to amend Sec. 39.3(a) to establish in
paragraph (a)(3) alternative application procedures for a non-U.S.
clearing organization that is seeking to register as a DCO to clear
swaps, does not pose substantial risk to the U.S. financial system, and
wants to comply with its home country regulatory regime as a means of
satisfying the DCO Core Principles.\23\ Specifically, any such clearing
organization may apply for registration in accordance with the terms of
Sec. 39.3(a)(3) in lieu of filing the application described in Sec.
39.3(a)(2).\24\
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\23\ The proposed rule text includes changes to Sec. 39.3(a)
that were first proposed in a separate rulemaking. See Derivatives
Clearing Organization General Provisions and Core Principles, 84 FR
22226 (May 16, 2019).
\24\ Regulation 39.3(a)(2) provides that any entity seeking to
register as a DCO shall submit to the Commission a completed Form
DCO, which shall include a cover sheet, all applicable exhibits, and
any supplemental materials, as provided in Appendix A to Part 39.
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Proposed Sec. 39.3(a)(3) would require an applicant to submit to
the Commission the following sections of Form DCO: Cover sheet, Exhibit
A-1 (regulatory compliance chart), Exhibit A-2 (proposed rulebook),
Exhibit A-3 (narrative summary of proposed clearing activities),
Exhibit A-4 (detailed business plan), Exhibit A-7 (documents setting
forth the applicant's corporate organizational structure), Exhibit A-8
(documents establishing the applicant's legal status and certificate(s)
of good standing or its equivalent), Exhibit A-9 (description of
pending legal proceedings or governmental investigations), Exhibit A-10
(agreements with outside service providers with respect to the
treatment of customer funds), Exhibits F-1 through F-3 (documents that
demonstrate compliance with the treatment of funds requirements with
respect to FCM customers), and Exhibit R (ring-fencing memorandum).
For purposes of Sec. 39.3(a)(3), the applicant would be required
to demonstrate to the Commission in Exhibit A-1 the extent to which
compliance with the applicable legal requirements in its home country
would constitute compliance with the DCO Core Principles.\25\ To
satisfy this requirement, the applicant would be required to provide in
Exhibit A-1 the citation and full text of each applicable legal
requirement in its home country that corresponds with each DCO Core
Principle and an explanation of how the
[[Page 34823]]
applicant satisfies those requirements. To the extent that the DCO's
home country regulatory regime lacks legal requirements that correspond
to those DCO Core Principles less related to risk, the Commission may,
in its discretion, grant registration subject to conditions that would
address the relevant DCO Core Principles.\26\
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\25\ By way of comparison, the Commission has made this
determination, in part, with regard to EU regulation. See
Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central
Counterparties, 81 FR 15260 (Mar. 22, 2016). The Commission notes,
however, that this determination was made by comparing EU
regulations with the Commission's regulations. Because the DCO Core
Principles are broader than the Commission's regulations in most
cases, the Commission expects it will be less burdensome for an
applicant to demonstrate that compliance with its home country legal
requirements would constitute compliance with the DCO Core
Principles.
\26\ For example, if the DCO's home country regulatory regime
lacks legal requirements that would satisfy DCO Core Principle M
(regarding information sharing), the Commission may grant
registration subject to conditions that would address information
sharing.
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C. Regulation 39.4--Procedures for Implementing DCO Rules and Clearing
New Products
Regulation 39.4(b) provides that proposed new or amended rules of a
DCO not voluntarily submitted for Commission approval pursuant to Sec.
40.5 must be submitted to the Commission pursuant to the self-
certification procedures of Sec. 40.6, as required by section 5c(c) of
the CEA,\27\ prior to their implementation.\28\ Pursuant to the
Commission's authority under section 4(c) of the CEA,\29\ the
Commission is proposing in Sec. 39.4(c) to exempt DCOs that are
subject to alternative compliance from submitting rules pursuant to
section 5c(c) of the CEA and Sec. 40.6, unless the rule relates to the
DCO's compliance with the requirements of part 45 of the Commission's
regulations,\30\ or section 4d(f) of the CEA,\31\ parts 1 or 22 of the
Commission's regulations,\32\ or Sec. 39.15,\33\ which set forth the
Commission's customer protection requirements, as such DCOs would be
subject to compliance with these requirements.
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\27\ 7 U.S.C. 7a-2(c).
\28\ 17 CFR 40.6. A ``rule,'' by definition, includes any
constitutional provision, article of incorporation, bylaw, rule,
regulation, resolution, interpretation, stated policy, advisory,
terms and conditions, trading protocol, agreement or instrument
corresponding thereto, including those that authorize a response or
establish standards for responding to a specific emergency, and any
amendment or addition thereto or repeal thereof, made or issued by a
registered entity or by the governing board thereof or any committee
thereof, in whatever form adopted. 17 CFR 40.1(i).
\29\ 7 U.S.C. 6(c). Section 4(c) of the CEA provides that, in
order to promote responsible economic or financial innovation and
fair competition, the Commission, by rule, regulation, or order, may
exempt any transaction or class of transactions (including any
person or class of persons offering, entering into, rendering
advice, or rendering other services with respect to, the
transaction) from any of the provisions of the CEA other than
certain enumerated provisions, if the Commission determines that the
exemption would be consistent with the public interest and the
purposes of the CEA, that the transactions will be entered into
solely between appropriate persons, and that the exemption will not
have a material adverse effect on the ability of the Commission or
any contract market to discharge its regulatory or self-regulatory
responsibilities under the CEA.
\30\ 17 CFR part 45 (setting forth swap data reporting and
recordkeeping requirements).
\31\ 7 U.S.C. 6d(f) (relating to segregation of customer funds).
\32\ 17 CFR parts 1 and 22 (setting forth general regulations
under the CEA, including treatment of customer funds, and
requirements for cleared swaps, respectively).
\33\ 17 CFR 39.15 (setting forth requirements for the treatment
of customer funds).
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The Commission is proposing this limited exemption from the rule
submission requirements for DCOs that are subject to alternative
compliance as they would be subject to the applicable laws in their
home country and oversight by their respective home country regulators.
Accordingly, the Commission believes that the review of any new or
amended rule unrelated to the Commission's customer protection regime
would be more appropriately handled by the DCO's home country
regulator. The Commission requests comment as to whether it should
require, as part of the application process for alternative compliance,
that there is a rule review or approval process under the home country
regime.
The Commission believes the proposed exemption in Sec. 39.4(c) is
consistent with the public interest, as it would allow the Commission
to focus on reviewing those critical rules that relate to areas where
the Commission exercises direct oversight rather than review other
rules for which duplication of review with the home country regulator
is not necessary. The proposed exemption would reflect the protection
of customers--and safeguarding of money, securities, or other property
deposited by customers--as a fundamental component of the Commission's
regulatory oversight of the derivatives markets by requiring these DCOs
to certify rules relating to the Commission's customer protection
requirements. A DCO's new or amended customer protection-related rules
would also continue to be made transparent to FCMs and their customers,
as Sec. 40.6(a)(2) requires a DCO to certify that it has posted on its
website a copy of the rule submission.\34\
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\34\ The Commission also publicly posts on its website all Sec.
40.6 rule certifications for which confidential treatment is not
requested.
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At the same time, the proposed exemption in Sec. 39.4(c) would
reduce the time and resources necessary for DCOs to file rules
unrelated to the Commission's customer protection or swap data
reporting requirements. In light of the foregoing, the Commission
believes the proposed exemption would be consistent with the public
interest and the purposes of the CEA. The Commission also believes the
proposed exemption would not have a material adverse effect on the
ability of the Commission or any contract market to discharge its
regulatory or self-regulatory duties under the CEA, as the Commission
would continue to receive submissions for new rules or rule changes
concerning customer protection and swap data reporting, matters for
which the DCO is subject to compliance with Commission regulation.\35\
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\35\ The factor under section 4(c) of whether a transaction is
entered into solely between appropriate persons does not apply here
because there are no transactions implicated by this proposed
exemption.
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D. Regulation 39.9--Scope
The Commission recently proposed to revise Sec. 39.9 to make it
clear that the provisions of subpart B apply to any DCO, as defined
under section 1a(15) of the CEA and Sec. 1.3, that is registered with
the Commission as a DCO pursuant to section 5b of the CEA, but do not
apply to any exempt DCO.\36\ The Commission is proposing to further
revise Sec. 39.9 to provide that the provisions of subpart B apply to
any DCO, except as otherwise provided by Commission order. This change
is intended to reflect the fact that a DCO registered through the
alternative compliance procedures under proposed Sec. 39.3(a)(3) would
not be held to the requirements in subpart B, with the exception of
Sec. 39.15 and those requirements for which the Commission did not
find there to be alternative compliance in the DCO's home country
regulatory regime, as provided in the DCO's order. This provision also
would allow the Commission to not apply to a particular DCO any subpart
B requirement that the Commission deems irrelevant or otherwise
inapplicable due to, for example, certain characteristics of the DCO's
business model.
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\36\ See Exemption From Derivatives Clearing Organization
Registration, 83 FR at 39929.
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E. Subpart D--Provisions Applicable to DCOs Subject to Alternative
Compliance
1. Regulation 39.50--Scope
The Commission is proposing new Sec. 39.50 to state that the
provisions of subpart D of Part 39 apply to any DCO that is registered
through the process described in Sec. 39.3(a)(3) (i.e., DCOs subject
to alternative compliance). Proposed Sec. 39.51 would be contained in
subpart D and would set forth the requirements for alternative
compliance, as discussed below.
[[Page 34824]]
2. Regulation 39.51--Alternative Compliance
a. Eligibility for Alternative Compliance
Proposed Sec. 39.51(a) would provide that the Commission may
register, subject to any terms and conditions as the Commission
determines to be appropriate, a clearing organization for the clearing
of swaps for U.S. persons if all of the eligibility requirements listed
in proposed Sec. 39.51(a)(1) and (a)(2) are met and the clearing
organization satisfies the conditions set forth in Sec. 39.51(b).\37\
Each of these requirements is described below.
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\37\ The eligibility requirements listed in proposed Sec.
39.51(a)(1) and (a)(2) and the conditions set forth in proposed
Sec. 39.51(b) would be pre-conditions to the Commission's issuance
of a registration order in this regard. Additional conditions that
are unique to the facts and circumstances specific to a particular
clearing organization could be imposed upon that clearing
organization in the Commission's registration order.
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Proposed Sec. 39.51(a)(1)(i) would require that, in order to be
eligible for alternative compliance as a DCO, the Commission must
determine that compliance with the clearing organization's home country
regulatory regime would satisfy the DCO Core Principles. Under proposed
Sec. 39.51(a)(1)(ii), a clearing organization would be required to be
in good regulatory standing in its home country. Under proposed Sec.
39.51(a)(1)(iii), the Commission must also determine that the clearing
organization does not pose substantial risk to the U.S. financial
system (as previously discussed).
Proposed Sec. 39.51(a)(1)(iv) would provide that, in order for a
clearing organization to be eligible for alternative compliance as a
DCO, an MOU or similar arrangement satisfactory to the Commission must
be in effect between the Commission and the clearing organization's
home country regulator,\38\ pursuant to which, among other things, the
home country regulator agrees to provide to the Commission any
information that the Commission deems appropriate to evaluate the
clearing organization's initial and continued eligibility for
registration or to review compliance with any conditions of such
registration. The Commission has customarily entered into MOUs or
similar arrangements in connection with the supervision of non-U.S.
clearing organizations that are registered or exempt from DCO
registration. In the context of DCOs subject to alternative compliance,
satisfactory MOUs or similar arrangements with the home country
regulator would include provisions for information sharing and
cooperation, as well as for notification upon the occurrence of certain
events.\39\ Although the Commission would retain the right to conduct
site visits, the Commission would not expect to conduct routine site
visits to such DCOs.
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\38\ In foreign jurisdictions where more than one regulator
supervises and regulates a clearing organization, the Commission
would expect to enter into an MOU or similar arrangement with more
than one regulator.
\39\ For existing non-U.S. DCOs that wish to be subject to
alternative compliance, the Commission believes the MOUs currently
in place with their respective home country regulators would be
sufficient to satisfy this requirement.
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Under proposed Sec. 39.51(a)(2), if the DCO's home country
regulatory regime lacks legal requirements that correspond to those DCO
Core Principles less related to risk, the Commission may, in its
discretion, grant registration subject to conditions that would address
the relevant DCO Core Principles.
b. Conditions of Alternative Compliance
Proposed Sec. 39.51(b) sets forth conditions of alternative
compliance. These conditions are similar to the conditions that the
Commission has imposed on exempt DCOs.\40\
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\40\ See Exemption From Derivatives Clearing Organization
Registration, 83 FR at 39926-39927.
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Under proposed Sec. 39.51(b)(1), a DCO subject to alternative
compliance would be required to comply with the DCO Core Principles
through its compliance with applicable legal requirements in its home
country, and any other requirements specified in its registration order
including, but not limited to, section 4d(f) of the CEA, parts 1, 22,
and 45 of the Commission's regulations, subpart A of Part 39, and Sec.
39.15. Because the DCO would clear swaps for FCM customers, the DCO
would be subject to the Commission's customer protection requirements
set forth in section 4d(f) of the CEA, parts 1 and 22 of the
Commission's regulations, and Sec. 39.15. The DCO would also be
subject to part 45 of the Commission's regulations, which sets forth
swap data recordkeeping and reporting requirements, and subpart A of
Part 39, which contains general provisions applicable to DCOs,
including registration procedures.
Proposed Sec. 39.51(b)(2) would codify the ``open access''
requirements of section 2(h)(1)(B) of the CEA with respect to swaps
cleared by a DCO to which one or more of the counterparties is a U.S.
person.\41\ Paragraph (b)(2)(i) would require a DCO to have rules
providing that all such swaps with the same terms and conditions (as
defined by product specifications established under the DCO's rules)
submitted to the DCO for clearing are economically equivalent and may
be offset with each other, to the extent that offsetting is permitted
by the DCO's rules. Paragraph (b)(2)(ii) would require a DCO to have
rules providing for non-discriminatory clearing of such a swap executed
either bilaterally or on or subject to the rules of an unaffiliated
electronic matching platform or trade execution facility, e.g., a swap
execution facility.
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\41\ 7 U.S.C. 2(h)(1)(B).
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Proposed Sec. 39.51(b)(3) would provide that a DCO must consent to
jurisdiction in the United States and designate an agent in the United
States, for notice or service of process, pleadings, or other documents
issued by or on behalf of the Commission or the U.S. Department of
Justice in connection with any actions or proceedings against, or any
investigations relating to, the DCO or any of its U.S. clearing
members. The name of the designated agent would be submitted as part of
the clearing organization's application for registration. If a DCO
appoints another agent to accept such notice or service of process, the
DCO would be required to promptly inform the Commission of this change.
This condition is also included in existing DCO registration orders.
Proposed Sec. 39.51(b)(4) is a general provision that would
require a DCO to comply, and demonstrate compliance as requested by the
Commission, with any condition of the DCO's registration order.
Proposed Sec. 39.51(b)(5) would require a DCO to make all
documents, books, records, reports, and other information related to
its operation as a DCO (hereinafter, ``books and records'') open to
inspection and copying by any Commission representative, and to
promptly make its books and records available and provide them directly
to Commission representatives, upon the request of a Commission
representative. The Commission notes that it does not anticipate
conducting routine site visits to DCOs subject to alternative
compliance. However, the Commission may request a DCO to provide books
and records related to its operation as a DCO subject to alternative
compliance in order for the Commission to ensure that, among other
things, the DCO continues to meet the eligibility requirements for
alternative compliance as well as the conditions of its
registration.\42\
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\42\ Although an MOU or similar arrangement would provide for
information sharing whereby the home country regulator agrees to
provide to the Commission any information that the Commission deems
appropriate to evaluate the clearing organization's initial and
continued eligibility for registration or to review compliance with
any conditions of such registration, the Commission would retain the
authority to access books and records directly from a DCO.
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[[Page 34825]]
Proposed Sec. 39.51(b)(6) would require that a DCO request and the
Commission receive an annual written representation from a home country
regulator that the DCO is in good regulatory standing, within 60 days
following the end of the DCO's fiscal year. This requirement would help
the Commission assess the DCO's compliance with its home country legal
requirements, and thus, compliance with the DCO Core Principles, and
continued eligibility for alternative compliance.
Under proposed Sec. 39.51(b)(7), the Commission may condition
alternative compliance on any other facts and circumstances it deems
relevant. In doing so, the Commission would be mindful of principles of
international comity. For example, the Commission could take into
account the extent to which the relevant foreign regulatory authorities
defer to the Commission with respect to oversight of DCOs organized in
the United States. This approach would advance the goal of regulatory
harmonization, consistent with the express directive of Congress that
the Commission coordinate and cooperate with foreign regulatory
authorities on matters related to the regulation of swaps.\43\
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\43\ In order to promote effective and consistent global
regulation of swaps, section 752 of the Dodd-Frank Act directs the
Commission to consult and coordinate with foreign regulatory
authorities on the establishment of consistent international
standards with respect to the regulation of swaps, among other
things. Section 752 of the Dodd-Frank Act, Public Law 111-203, 124
Stat. 1376 (2010), codified at 15 U.S.C. 8325.
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c. General Reporting Requirements
Proposed Sec. 39.51(c)(1) sets forth general reporting
requirements pursuant to which a DCO subject to alternative compliance
would have to provide certain information directly to the Commission:
(1) On a periodic basis (daily or quarterly); and (2) after the
occurrence of a specified event, each in accordance with the submission
requirements of Sec. 39.19(b).\44\ Such information would be used by
the Commission, among other things, to evaluate the continued
eligibility of the DCO for alternative compliance, review the DCO's
compliance with any conditions of its registration, or conduct
oversight of U.S. clearing activity.
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\44\ Regulation 39.19(b), 17 CFR 39.19(b), requires that a DCO
submit reports electronically and in a format and manner specified
by the Commission, defines the term ``business day,'' and
establishes the relevant time zone for any stated time, unless
otherwise specified by the Commission. The Commission has specified
that U.S. Central time will apply with respect to the daily reports
that must be filed by exempt DCOs pursuant to proposed Sec.
39.6(c)(2)(i).
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Proposed Sec. 39.51(c)(2)(i) would require a DCO to compile a
report as of the end of each trading day, and submit the report to the
Commission by 10:00 a.m. U.S. Central time on the following business
day, containing the following information with respect to swaps: (A)
Total initial margin requirements for all clearing members; (B) initial
margin requirements and initial margin on deposit for each U.S.
clearing member, by house origin and by each customer origin, and by
each individual customer account; and (C) daily variation margin,
separately listing the mark-to-market amount collected from or paid to
each clearing member, by house origin and by each customer origin, and
by each individual customer account. These requirements are identical
to reporting requirements in Sec. 39.19(c)(1)(i)(A) and (B) that apply
to registered DCOs and similar to reporting requirements in proposed
Sec. 39.6(c)(2)(i) that would apply to exempt DCOs.\45\ These reports
would provide the Commission with information regarding the cash flows
associated with U.S. persons clearing swaps through DCOs subject to
alternative compliance in order for the Commission to assess the risk
exposure of U.S. persons and the extent of the DCO's U.S. clearing
activity.\46\
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\45\ See 17 CFR 39.19(c)(1)(i)(A) and (c)(1)(i)(B). See also
Exemption From Derivatives Clearing Organization Registration, 83 FR
at 39927 (discussing similar reporting requirements for exempt
DCOs).
\46\ The Commission notes that, given the time-sensitive nature
of the data in these reports, the reports would need to be provided
directly from the DCO, as is the case with existing registered and
exempt DCOs.
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Proposed Sec. 39.51(c)(2)(ii) would require a DCO to compile a
report as of the last day of each fiscal quarter, and submit the report
to the Commission no later than 17 business days after the end of the
fiscal quarter, containing a list of U.S. clearing members, with
respect to the clearing of swaps. This requirement is the same as the
one that would apply to exempt DCOs in proposed Sec.
39.6(c)(2)(ii)(C).\47\ This report would help the Commission to better
understand the extent of U.S. clearing activity at the DCO.
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\47\ See Exemption From Derivatives Clearing Organization
Registration, 83 FR at 39927-39928.
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Paragraphs (c)(2)(iii) through (c)(2)(vii) of proposed Sec. 39.51
each would require a DCO to provide information to the Commission upon
the occurrence of certain specified events. These requirements are
similar to reporting requirements in proposed Sec. 39.6(c)(2)(iii)
through (c)(2)(viii) that would apply to exempt DCOs.\48\ Several of
the proposed required notifications are intended to provide the
Commission with information relevant to the DCO's continued eligibility
for alternative compliance or its compliance with the conditions of its
registration.
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\48\ See id. at 39928.
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Proposed Sec. 39.51(c)(2)(iii) would require a DCO to provide
prompt notice to the Commission regarding any change in its home
country regulatory regime. The Commission requests comment on whether
the Commission should require a DCO subject to alternative compliance
to provide prompt notice of any material change in its home country
regulatory regime. If so, should the Commission attempt to define
``material'' (and, if so, how)?
Proposed Sec. 39.51(c)(2)(iv) would require a DCO to provide to
the Commission, to the extent that it is available to the DCO, any
examination report or examination findings by a home country regulator,
and notify the Commission within five business days after it becomes
aware of the commencement of any enforcement or disciplinary action or
investigation by a home country regulator. Proposed Sec.
39.51(c)(2)(v) would require a DCO to provide immediate notice to the
Commission of any change with respect to its licensure, registration,
or other authorization to act as a clearing organization in its home
country.
In addition, the Commission is proposing some required
notifications that would assist the Commission in its oversight of U.S.
clearing members and FCMs. Proposed Sec. 39.51(c)(2)(vi) would require
a DCO to provide immediate notice to the Commission in the event of a
default (as defined by the DCO in its rules) by any clearing member,
including the amount of the clearing member's financial obligation. If
the defaulting clearing member is a U.S. clearing member, the notice
must also include the name of the U.S. clearing member and a list of
the positions it held. Proposed Sec. 39.51(c)(2)(vii) would require a
DCO to provide notice of any action that it has taken against a U.S
clearing member, no later than two business days after the DCO takes
such action. Proposed paragraphs (c)(2)(vi) and (c)(2)(vii) of Sec.
39.51 are similar to paragraphs (c)(4)(vii) and (c)(4)(xi) of Sec.
39.19, which currently apply to registered DCOs.\49\
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\49\ These provisions are also substantially similar to
paragraphs (c)(2)(vii) and (c)(2)(viii) of proposed Sec. 39.6,
which would apply to exempt DCOs. See Exemption From Derivatives
Clearing Organization Registration, 83 FR at 39928.
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[[Page 34826]]
d. Modification of Registration Upon Commission Initiative
Proposed Sec. 39.51(d) would permit the Commission to modify the
terms and conditions of an order of registration, in its discretion and
upon its own initiative, based on changes to or omissions in facts or
circumstances pursuant to which the order was issued, or if any of the
terms and conditions of the order have not been met.\50\ For example,
the Commission could modify the terms of a registration order upon a
determination that compliance with the DCO's home country regulatory
regime does not satisfy the DCO Core Principles, the DCO is not in good
regulatory standing in its home country, or the DCO poses substantial
risk to the U.S. financial system.
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\50\ The Commission notes that it has authority to suspend or
revoke a DCO's registration under the CEA. See 7 U.S.C. 7b.
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Proposed Sec. Sec. 39.51(d)(2), (d)(3), and (d)(4) would set forth
the process for modification of registration upon the Commission's
initiative. Proposed Sec. 39.51(d)(2) would require the Commission to
first provide written notification to a DCO that the Commission is
considering modifying the DCO's registration order and the basis for
that consideration.
Proposed Sec. 39.51(d)(3) would provide up to 30 days for a DCO to
respond to the Commission's notification in writing following receipt
of the notification, or at such later time as the Commission may permit
in writing. The Commission believes that a minimum 30-day timeframe
would allow the Commission to take timely action to protect its
regulatory interests while providing the DCO with sufficient time to
develop its response. In its response, the DCO may provide potential
mitigating factors for the Commission to consider where, for example,
the DCO faces a potential finding of substantial risk to the U.S.
financial system.
Proposed Sec. 39.51(d)(4) would provide that, following receipt of
a response from the DCO, or after expiration of the time permitted for
a response, the Commission may either: (i) Issue an order requiring the
DCO to comply with all requirements applicable to DCOs registered
through the process described in Sec. 39.3(a)(2),\51\ effective as of
a date to be specified in the order, which is intended to provide the
DCO with a reasonable amount of time to come into compliance with the
CEA and Commission regulations or request a vacation of registration in
accordance with Sec. 39.3(f); (ii) issue an amended order of
registration that modifies the terms and conditions of the order; or
(iii) provide written notification to the DCO that the registration
order will remain in effect without modification to its terms and
conditions.
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\51\ Regulation 39.3(a)(2) provides that any entity seeking to
register as a DCO shall submit to the Commission a completed Form
DCO, which shall include a cover sheet, all applicable exhibits, and
any supplemental materials, as provided in Appendix A to Part 39.
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III. Proposed Amendments to Part 140--Organization, Functions, and
Procedures of the Commission
The Commission is proposing amendments to Sec. 140.94(c) in order
to delegate authority to the Director of the Division of Clearing and
Risk for all functions reserved to the Commission in proposed Sec.
39.51, except for the authority to grant registration to a DCO,
prescribe conditions to alternative compliance of a DCO, and modify a
DCO's registration order. The Commission is proposing to adopt Sec.
140.94(c)(15) to reflect this delegation. The Commission notes that the
authority being delegated in this regard is ministerial in nature;
significant functions are still being reserved to the Commission.
IV. Request for Comments
In addition to the specific requests for comment noted elsewhere,
the Commission generally requests comments on all aspects of the
proposed rules. The Commission also requests comments on the following
specific issues:
1. Does the proposed alternative compliance regime, including both
the application process and the ongoing requirements, strike the right
balance between the Commission's regulatory interests and the
regulatory interests of non-U.S. DCOs' home country regulators?
2. Are there additional regulatory requirements under the CEA or
Commission regulations that should not apply to non-U.S. DCOs with
alternative compliance in the interest of deference and allowing such
DCOs to satisfy the DCO Core Principles through compliance with their
home country regulatory regimes while still protecting the Commission's
regulatory interests?
3. Should the Commission take into account regulations in Part 39,
in addition to the DCO Core Principles, in determining whether
alternative compliance is appropriate for a non-U.S. clearing
organization?
4. Should the Commission require additional, or less, information
from an applicant for alternative compliance as part of its application
under proposed Sec. 39.3(a)(3)?
5. Is the proposed test for ``substantial risk to the U.S.
financial system'' the best measure of such risk? If not, please
explain why, and if there is a better measure/metric that the
Commission should use, please provide a rationale and supporting data,
if available.
6. What is the frequency with which the Commission should reassess
a DCO's ``risk to the U.S. financial system'' for purposes of the test,
and across what time period, after it is registered under the
alternative compliance regime?
7. Does the proposed exemption from self-certification of rules in
Sec. 39.4(c) meet the standards for exemptive relief set out in
section 4(c) of the CEA?
a. In addition to rules that relate to the DCO's compliance with
the requirements of section 4d(f) of the CEA, parts 1, 22, or 45 of the
Commission's regulations, or Sec. 39.15, should the Commission require
other rules to be filed pursuant to section 5c(c) of the CEA? If so,
should the Commission retain discretion in determining which other
rules must be filed based on, for example, the particular facts and
circumstances? Or should the Commission enumerate the types of rules
that must be filed (e.g., rules related to certain products cleared by
the DCO)?
8. Should non-U.S. DCOs with alternative compliance be excused from
reporting any particular data streams in order to limit duplicative
reporting obligations in the cross-border context without jeopardizing
U.S. customer protections, particularly given the existence of an MOU
between the Commission and the DCO's home country regulator as a
requirement for eligibility for alternative compliance?
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\52\ The
regulations proposed by the Commission will affect only clearing
organizations. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its regulations on small entities in
accordance with the RFA.\53\ The Commission has previously determined
that clearing organizations
[[Page 34827]]
are not small entities for the purpose of the RFA.\54\ Accordingly, the
Chairman, on behalf of the Commission, hereby certifies pursuant to 5
U.S.C. 605(b) that the proposed regulations will not have a significant
economic impact on a substantial number of small entities.
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\52\ 5 U.S.C. 601 et seq.
\53\ 47 FR 18618 (Apr. 30, 1982).
\54\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \55\ provides that Federal
agencies, including the Commission, may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid control number from the Office of Management
and Budget (OMB). This proposed rulemaking contains reporting
requirements that are collections of information within the meaning of
the PRA. The Commission is proposing to revise Information Collection
3038-0076, which contains the requirements for DCO registration and
compliance, to include the collection of information in proposed
Sec. Sec. 39.3(a)(3) and 39.51, as well as changes to the existing
information collection requirements for registered DCOs as a result of
this proposal. The responses to the collection of information would be
necessary to obtain DCO registration under the proposed alternative
compliance process.
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\55\ 44 U.S.C. 3501 et seq.
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1. Alternative DCO Application Process Under Proposed Sec. 39.3(a)(3)
Regulation 39.3(a)(2) sets forth the requirements for filing an
application for registration as a DCO. The Commission is proposing new
Sec. 39.3(a)(3), which would establish the application procedures for
DCOs that wish to be subject to alternative compliance. Currently,
Information Collection 3038-0076 reflects that each application for DCO
registration takes 421 hours to complete, including all exhibits.
Because the alternative application procedures would require
substantially fewer documents and exhibits, the Commission is
estimating that each such application would require 100 hours to
complete.
DCO application for alternative compliance, including all exhibits,
supplements and amendments:
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 100.
Estimated gross annual reporting burden: 100.
2. Ongoing Reporting Requirements for DCOs Subject to Alternative
Compliance in Accordance With Proposed Sec. 39.51
Proposed Sec. 39.51 would include reporting requirements for DCOs
subject to alternative compliance that are substantially similar to
those proposed for exempt DCOs.\56\ The estimated number of respondents
is based on approximately three existing registered DCOs that may
choose to convert to alternative compliance and one new registrant per
year.
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\56\ See Exemption From Derivatives Clearing Organization
Registration, 83 FR 39923 (Aug. 13, 2018).
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Daily Reporting
Estimated number of respondents: 6.
Estimated number of reports per respondent: 250.
Average number of hours per report: 0.1.
Estimated gross annual reporting burden: 150.
Quarterly Reporting
Estimated number of respondents: 6.
Estimated number of reports per respondent: 4.
Average number of hours per report: 1.
Estimated gross annual reporting burden: 24.
Event-Specific Reporting
Estimated number of respondents: 6.
Estimated number of reports per respondent: 1.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 3.
Annual Certification of Good Regulatory Standing
Estimated number of respondents: 6.
Estimated number of reports per respondent: 1.
Average number of hours per report: 1.
Estimated gross annual reporting burden: 6.
As proposed under Sec. 39.4(c), DCOs subject to alternative
compliance would not be required to comply with Sec. 40.6 regarding
certification of rules, other than rules relating to customer
protection. Although this change could potentially reduce the burden
related to rule submissions by registered entities, which is covered in
Information Collection 3038-0093, the Commission is not proposing any
changes to that information collection burden because its current
estimate of 50 responses annually per respondent covers a broad range
of the number of annual submissions by registered entities. Therefore,
no adjustment to Information Collection 3038-0093 is necessary.
3. Adjustment to Part 39 Reporting and Recordkeeping Requirements
As noted above, the Commission anticipates that approximately three
currently registered DCOs may seek registration under the alternative
compliance process; accordingly, the information collection burden
applicable to DCO applicants and registered DCOs will be reduced.
Currently, collection 3038-0076 reflects that there are 2 applicants
for DCO registration annually and that it takes each applicant 421
hours to complete and submit the form, including all exhibits. The
Commission is reducing the number of applicants for full DCO
registration from two to one based on the expectation that one of the
annual DCO applicants will seek registration subject to alternative
compliance.
Form DCO--Sec. 39.3(a)(2)
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 421.
Estimated gross annual reporting burden: 421.
The information collection burden for registered DCOs, based on the
Commission's proposed alternative compliance regime, is estimated to be
reduced by three, from 16 to 13. The reduction in the number of
respondents is the sole change in the burden estimates previously
stated for registered DCOs. The revised burden estimates are as
follows:
CCO Annual Report
Estimated number of respondents: 13.
Estimated number of reports per respondent: 1.
Average number of hours per report: 73.
Estimated gross annual reporting burden: 949.
Annual Financial Reports
Estimated number of respondents: 13.
Estimated number of reports per respondent: 1.
Average number of hours per report: 2,640.
Estimated gross annual reporting burden: 34,320.
Quarterly Financial Reports
Estimated number of respondents: 13.
Estimated number of reports per respondent: 4.
Average number of hours per report: 8.
[[Page 34828]]
Estimated gross annual reporting burden: 416.
Daily Reporting
Estimated number of respondents: 13.
Estimated number of reports per respondent: 250.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 1,625.
Event-Specific Reporting
Estimated number of respondents: 13.
Estimated number of reports per respondent: 20.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 130.
Public Information
Estimated number of respondents: 13.
Estimated number of reports per respondent: 4.
Average number of hours per report: 2.
Estimated gross annual reporting burden: 104.
Governance Disclosures
Estimated number of respondents: 13.
Estimated number of reports per respondent: 6.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 234.
Registered DCOs--Recordkeeping
Estimated number of respondents: 13.
Estimated number of reports per respondent: 1.
Average number of hours per report: 150.
Estimated number of respondents-request to vacate: 1.
Estimated number of reports per respondent-request to vacate: 0.33.
Average number of hours per report-request to vacate: 1.
Estimated gross annual recordkeeping burden: 1951.\57\
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\57\ The total annual recordkeeping burden estimate reflects the
combined figures for 13 registered DCOs with an annual burden of one
response and 150 hours per response (13 x 1 x 150 = 1950), and one
vacated DCO registration every three years with an annual burden of
one hour, which is not affected by this proposal.
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Proposed Sec. 39.4(c) would exempt DCOs subject to alternative
compliance from self-certifying rules unless the rule relates to the
requirements under section 4d(f) of the CEA, parts 1, 22, or 45 of the
Commission's regulations, or Sec. 39.15. While this proposed change is
likely to reduce the number of rule certification submissions that
would otherwise be required for DCOs subject to alternative compliance,
the Commission is not expecting that this will affect the overall
burden for rule certification filings by all registered entities,
covered in Information Collection 3038-0093. The number of rule
submissions in that information collection is intended to represent an
average number of submissions per registered entity. Because the
average number of submissions covers a wide range of variability in the
actual numbers of rule certification submissions by registered
entities, the Commission believes that the small number of DCOs subject
to alternative compliance which would not be required to certify all
rules would be covered by the existing burden estimate in Information
Collection 3038-0093.
4. Request for Comments
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. The Commission will consider public
comments on this proposed collection of information in:
(1) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(2) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(3) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(4) Minimizing the burden of the proposed information collection
requirements on registered entities, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC
20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that all comments can be summarized and addressed in the final
rulemaking, and please refer to the ADDRESSES section of this
rulemaking for instructions on submitting comments to the Commission.
OMB is required to make a decision concerning the proposed information
collection requirements between 30 and 60 days after publication of
this Release in the Federal Register. Therefore, a comment to OMB is
best assured of receiving full consideration if OMB receives it within
30 calendar days of publication of this Release. Nothing in the
foregoing affects the deadline enumerated above for public comment to
the Commission on the proposed rules.
C. Cost-Benefit Considerations
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\58\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
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\58\ 7 U.S.C. 19(a).
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The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking are: (1) The DCO Core Principles;
(2) the general provisions applicable to DCOs under subparts A and B of
Part 39; (3) Form DCO in Appendix A to Part 39; (4) Parts 1, 22, and 40
of the Commission's regulations; and (5) Sec. 140.94.
The Commission notes that this consideration is based on its
understanding that the swaps market functions internationally with (i)
transactions that involve U.S. firms occurring across different
international jurisdictions; (ii) some entities organized outside of
the United States that are prospective Commission registrants; and
(iii) some entities that typically operate both within and outside the
United States and that
[[Page 34829]]
follow substantially similar business practices wherever located. Where
the Commission does not specifically refer to matters of location, the
discussion of costs and benefits below refers to the effects of the
proposed regulations on all relevant swaps activity, whether based on
their actual occurrence in the United States or on their connection
with, or effect on U.S. commerce pursuant to, section 2(i) of the
CEA.\59\
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\59\ Pursuant to section 2(i) of the CEA, activities outside of
the United States are not subject to the swap provisions of the CEA,
including any rules prescribed or regulations promulgated
thereunder, unless those activities either ``have a direct and
significant connection with activities in, or effect on, commerce of
the United States;'' or contravene any rule or regulation
established to prevent evasion of a CEA provision enacted under the
Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376. 7 U.S.C. 2(i).
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The Commission recognizes that the proposed rules may impose costs.
The Commission has endeavored to assess the expected costs and benefits
of the proposed rulemaking in quantitative terms, including PRA-related
costs, where possible. In situations where the Commission is unable to
quantify the costs and benefits, the Commission identifies and
considers the costs and benefits of the applicable proposed rules in
qualitative terms. The lack of data and information to estimate those
costs is attributable in part to the nature of the proposed rules.
Additionally, the initial and recurring compliance costs for any
particular DCO will depend on the size, existing infrastructure, level
of clearing activity, practices, and cost structure of the DCO.
2. Proposed Amendments to Part 39
a. Summary
Section 5b(a) of the CEA requires a clearing organization that
clears swaps to be registered with the Commission as a DCO. Once
registered, a DCO is required to comply with the CEA and all Commission
regulations applicable to DCOs, regardless of whether the DCO is
subject to other regulation and oversight, as non-U.S. DCOs typically
are. The proposed regulations would allow a non-U.S. DCO that the
Commission determines does not pose substantial risk to the U.S.
financial system to be subject to an alternative compliance regime that
relies in part on the DCO's home country regulatory regime and would
result in reduced regulatory obligations as compared to the existing
registration requirements. Specifically, the DCO would comply with the
DCO Core Principles in the CEA by complying with its home country's
legal requirements rather than the requirements of subpart B of Part 39
(with the exception of Sec. 39.15). The DCO still would be subject to
subpart A of Part 39 and the Commission's customer protection and swap
data reporting requirements, as well as reporting and other conditions
in its registration order. Lastly, the Commission is proposing in Sec.
39.4(c) to exempt DCOs that are subject to alternative compliance from
self-certifying rules pursuant to Sec. 40.6, unless the rule relates
to the Commission's customer protection or swap data reporting
requirements.
b. Benefits
There are currently 16 DCOs registered with the Commission, six of
which are organized outside of the United States and have comparable
registration status in their respective home countries. These non-U.S.
DCOs are regulated both by the Commission and their home country
regulators.
The proposed regulations would allow the Commission to register a
non-U.S. DCO through the alternative compliance procedures if the
Commission has determined that, among other things, compliance with the
DCO's home country regulatory regime satisfies the DCO Core Principles.
Therefore, to the extent that the DCO's home country laws and
regulations impose obligations similar to those imposed by the CEA, the
proposal would significantly reduce duplicative regulatory requirements
for the DCO.
The Commission is mindful that legal and regulatory compliance is
not costless. Compliance with two different regulatory regimes, even if
they are similar, requires legal and compliance staff capable of
understanding, interpreting, and applying both regimes, which
potentially requires hiring additional personnel or retaining
additional outside advisors. Compliance with two regimes also requires
a DCO to spend additional time and resources. Moreover, the specific
requirements of each regime may differ even if both regimes satisfy the
DCO Core Principles. For example, different legal regimes may impose
different requirements regarding acceptable accounting standards, the
methods by which clearing members may be held accountable for violating
a DCO's rules, the forms and locations in which records must be kept,
and the type and manner of making information available to the public.
Complying with both sets of requirements--that achieve effectively the
same regulatory outcomes--may be costly, operationally difficult, or
otherwise impractical. Because the proposal would substantially reduce
an eligible DCO's expenditures for duplicative compliance activities,
it would significantly decrease the overall ongoing legal and
compliance costs incurred by DCOs subject to alternative compliance.
In addition, the proposed exemption in Sec. 39.4(c) from self-
certifying certain rules to the Commission would significantly reduce
the ongoing compliance costs of DCOs subject to alternative compliance,
as they would be required to self-certify only rules that relate to the
Commission's customer protection or swap data reporting requirements.
Because Sec. 40.6 requires a DCO to include certain information in its
rule submissions, the proposed exemption would save such DCOs the time
and expense of preparing self-certifications for rules that pertain to
other matters.
Moreover, the alternative application procedures included in
proposed Sec. 39.3(a)(3) are significantly simplified compared to the
existing DCO application procedures under Sec. 39.3(a)(2). The
existing procedures require submission of a complete Form DCO, which
includes over three dozen exhibits. Commission staff carefully reviews
each such application and typically asks numerous questions and, when
necessary, requests amended exhibits and supplementary documents to
evaluate and promote compliance with the CEA and Commission
regulations. In contrast, the proposed alternative application
procedures would require the submission of relatively few sections of
Form DCO, mostly drawn from Exhibits A and F thereto. Preparing the
sections of Form DCO that would be required under the proposed
alternative application procedures should therefore be significantly
less time-consuming and expensive than preparing the entire Form DCO
under the existing application procedures. Moreover, with far fewer
items for the Commission to review, the applicant is likely to receive
significantly fewer questions from Commission staff and will require
substantially less time and expense to respond to staff questions and
prepare new or amended documents in response to staff requests. It is
also likely that, as a result, the Commission may be able to make a
final determination on an application under the proposed alternative
application procedures in less time than is typically required under
the existing procedures.
Given the lower initial application and ongoing compliance costs,
the Commission anticipates that some non-U.S. clearing organizations
that are not currently registered as DCOs, including,
[[Page 34830]]
but not limited to, exempt DCOs, would pursue registration with
alternative compliance. Because of the significantly reduced
requirements under alternative compliance, the Commission believes it
would be considerably easier for non-U.S. clearing organizations to
comply with those requirements while still fully complying with their
home country regime. As a result, the Commission believes that this
proposal may increase the number of registered DCOs over time. Because
exempt DCOs are currently not permitted to offer customer clearing,
customers would have more clearing options if exempt DCOs were to
become registered DCOs. If clearing organizations that are neither
registered nor exempt from registration were to register, both
customers and clearing members would have more clearing options. Access
to more clearing organizations may encourage more clearing of swaps,
while reducing the concentration risk among DCOs.
Moreover, given the reduced costs expected to be borne by DCOs
subject to alternative compliance and the greater competition resulting
from the likely increase in the number of registered DCOs, it is
possible that some registered DCOs may pass some of their cost savings
to their clearing members and customers. In addition to their direct
benefits, such cost reductions may have the indirect benefit of
encouraging greater use of clearing, thereby increasing the safety and
stability of the broader financial system.
Finally, the proposed regulations would promote and perhaps
encourage international comity by showing deference to non-U.S.
regulators in the oversight of non-U.S. DCOs that do not pose
substantial risk to the U.S. financial system. If regulators in other
countries deferred to U.S. oversight of U.S. DCOs active in overseas
markets, the reduced registration and compliance burdens on such DCOs
would be an additional benefit of the proposed regulation.
c. Costs
A non-U.S. clearing organization applying under the proposed
alternative application procedures would incur costs in preparing the
application. This would include preparing and submitting certain parts
of the Form DCO, including the requirement to provide in Exhibit A-1
the citation and full text of each applicable legal requirement in its
home country that corresponds with each core principle and an
explanation of how the applicant satisfies those requirements. If a
clearing organization were required instead to apply under the existing
application process, however, it would need to prepare and submit a
complete Form DCO, which is a significantly more costly and burdensome
process. Thus, although an applicant would incur costs in preparing the
application under proposed Sec. 39.3(a)(3), the proposed alternative
application procedures would represent a substantial cost savings
relative to the existing procedures.
DCOs registered under the existing procedures, including non-U.S.
DCOs that are ineligible for alternative compliance, may face a
competitive disadvantage as a result of this proposal. A DCO subject to
full Commission regulation and oversight may have higher ongoing
compliance costs than a DCO subject to alternative compliance. This
competitive disadvantage is mitigated by the fact that DCOs subject to
alternative compliance would, as a precondition of such registration,
be required to be overseen by a home country regulator that is likely
to impose costs similar to those associated with Commission regulation.
Such non-U.S. DCOs, then, may have compliance costs in their home
countries that a U.S.-based DCO might not.
The Commission does not anticipate that the proposal would impose
costs on clearing members or customers. The proposal would likely
increase the number of registered DCOs and permit some DCOs to register
under a new procedure that may allow them to pass on cost savings to
clearing members and customers. Therefore, the Commission believes that
clearing members and customers may face reduced costs as a result of
this proposal. To the extent that DCOs subject to alternative
compliance do not save costs relative to traditionally registered DCOs,
or do not pass cost savings to their clearing members or customers, the
Commission notes that, to the extent products are available for
clearing through more than one DCO, clearing members and customers may
be able to simply continue clearing through traditionally registered
DCOs, likely without any change in costs.
Furthermore, the Commission does not believe that the proposal
would materially increase the risk to the U.S. financial system. DCOs
that pose substantial risk to the U.S. financial system would not be
eligible to register under the proposed alternative process.\60\
Furthermore, a DCO cannot avail itself of this process unless the
Commission determines that a DCO's compliance with its home country
regulatory regime would satisfy the DCO Core Principles, meaning that
the DCO would be subject to regulation comparable to that imposed on
DCOs registered under the existing procedure. An MOU or similar
arrangement must be in effect between the Commission and the DCO's home
country regulator, allowing the Commission to receive information from
the home country regulator to help monitor the DCO's continuing
compliance with its legal and regulatory obligations. In addition, DCOs
that register under the proposed alternative process would remain
subject to the Commission's customer protection requirements set forth
in section 4d(f) of the CEA, parts 1 and 22 of the Commission's
regulations, and Sec. 39.15. The Commission also notes that foreign
regulators have a strong incentive to ensure the safety and soundness
of the clearing organizations that they regulate, and their oversight,
combined with the alternative compliance regime, will enable the
Commission to more efficiently allocate its own resources in the
oversight of traditionally registered DCOs. Finally, the proposal would
not increase the risks posed by exempt DCOs or by clearing
organizations that are neither registered nor exempt from registration.
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\60\ It may also be possible that the Commission's proposed test
for ``substantial risk to the U.S. financial system'' may not be
properly calibrated, allowing certain non-U.S. DCOs to register
under the alternative registration regime when they may pose
sufficient risk to the U.S. financial system to warrant greater
oversight by the Commission. However, the Commission believes that
even if these non-U.S. DCOs are permitted to register under the
alternative registration regime, this risk will be mitigated by the
Commission's determination that compliance with the foreign
jurisdiction's legal regime would satisfy the DCO Core Principles,
as discussed above, and the Commission's access to daily and
periodic reports regarding the DCO and its risks.
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Lastly, the Commission does not anticipate any costs to DCOs
associated with the exemption in proposed Sec. 39.4(c).
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
The proposed regulations would not materially reduce the
protections available to market participants and the public because
they would require, among other things, that a DCO subject to
alternative compliance: (i) Must demonstrate to the Commission that
compliance with the applicable legal requirements in its home country
would constitute compliance with the DCO Core Principles; (ii) must be
licensed, registered, or otherwise authorized to act as a clearing
organization in its home country and be in good regulatory standing;
and (iii) must not pose
[[Page 34831]]
substantial risk to the U.S. financial system. The regulations would
also protect market participants and the public by ensuring that FCM
customers clearing through a DCO subject to alternative compliance
would continue to receive the full benefits of the customer protection
regime established in the CEA and Commission regulations. Although the
Commission acknowledges the possibility that some foreign regulatory
regimes may ultimately prove to be less effective than that of the
United States, the Commission believes that this risk is mitigated for
the reasons discussed above.
b. Efficiency, Competitiveness, and Financial Integrity
The proposed regulations would promote efficiency in the operations
of DCOs subject to alternative compliance by reducing duplicative
regulatory requirements. This reduction in duplicative requirements
would likely result in most DCOs being subject largely to only their
home country regulatory regimes, which could promote competitiveness
among DCOs. Furthermore, adopting the proposed regulations might prompt
other regulators to adopt similar rules that would defer to the
Commission in the regulation of U.S. DCOs operating outside the United
States, which could increase competitiveness by reducing the regulatory
burdens on such DCOs.
The proposed regulations would be expected to maintain the
financial integrity of swap transactions cleared by DCOs because DCOs
subject to alternative compliance would be required to comply with a
home country regulatory regime that satisfies the DCO Core Principles
and because they would be required to satisfy the Commission's
regulations regarding customer protection. In addition, the proposed
regulations may contribute to the financial integrity of the broader
financial system by spreading the potential risk of particular swaps
among a greater number of DCOs, thus reducing concentration risk.
c. Price Discovery
Price discovery is the process of determining the price level for
an asset through the interaction of buyers and sellers and based on
supply and demand conditions. The Commission has not identified any
impact that the proposed regulations would have on price discovery.
This is because price discovery occurs before a transaction is
submitted for clearing through the interaction of bids and offers on a
trading system or platform, or in the over-the-counter market. The
proposed rule would not impact requirements under the CEA or Commission
regulations regarding price discovery.
d. Sound Risk Management Practices
The proposed regulations would continue to encourage sound risk
management practices because a DCO would be eligible for alternative
compliance only if it is held to risk management requirements in its
home country that satisfy the DCO Core Principles and are comparable to
the Commission's risk management requirements.
e. Other Public Interest Considerations
The Commission notes the public interest in access to clearing
organizations outside of the United States in light of the
international nature of many swap transactions. The proposed
regulations might encourage international comity by deferring, under
certain conditions, to the regulators of other countries in the
oversight of home country clearing organizations. The Commission
expects that such regulators will defer to the Commission in the
supervision and regulation of DCOs domiciled in the United States,
thereby reducing the regulatory and compliance burdens to which such
DCOs are subject.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\61\
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\61\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is the promotion of competition. The Commission
requests comment on whether the proposed rulemaking implicates any
other specific public interest to be protected by the antitrust laws.
The Commission has considered the proposed rulemaking to determine
whether it is anticompetitive. The Commission believes that the
proposed rulemaking may promote greater competition in swap clearing
because it would reduce the regulatory burden for non-U.S. clearing
organizations, which might encourage them to register to clear the same
types of swaps for U.S. persons that are currently cleared by
registered DCOs. Unlike non-U.S. DCOs subject to this alternative
compliance, U.S. DCOs, and non-U.S. DCOs that pose substantial risk to
the U.S. financial system, would be held to the requirements of the CEA
and Commission regulations and subject to the direct oversight of the
Commission. This may appear to create a competitive disadvantage for
these DCOs; however, non-U.S. DCOs subject to alternative compliance
would be meeting similar requirements through compliance with their
home country regulatory regimes and would be subject to the direct
oversight of their home country regulators. Further, to the extent that
the U.S. clearing activity of a non-U.S. DCO subject to alternative
compliance grows to the point that the DCO poses substantial risk to
the U.S. financial system, and therefore, a threat to competition, it
would be required to comply with all requirements applicable to DCOs
and be subject to the Commission's direct oversight.
The Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting the
proposed rules.
List of Subjects
17 CFR Part 39
Clearing, Customer protection, Derivatives clearing organization,
Procedures, Registration, Swaps.
17 CFR Part 140
Authority delegations (Government agencies), Organization and
functions (Government agencies).
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
1. The authority citation for part 39 is revised to read as follows:
Authority: 7 U.S.C. 2, 7a-1, and 12a(5); 12 U.S.C. 5464; 15
U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July
21, 2010, 124 Stat. 1749.
0
2. In Sec. 39.2, add the definitions of ``Good regulatory standing''
and ``substantial risk'' in alphabetical order to read as follows:
Sec. 39.2 Definitions.
* * * * *
Good regulatory standing means, with respect to a derivatives
clearing organization that is organized outside of the United States,
and is licensed,
[[Page 34832]]
registered, or otherwise authorized to act as a clearing organization
in its home country, that:
(1) In the case of an exempt derivatives clearing organization,
either there has been no finding by the home country regulator of
material non-observance of the Principles for Financial Market
Infrastructures or other relevant home country legal requirements, or
there has been a finding by the home country regulator of material non-
observance of the Principles for Financial Market Infrastructures or
other relevant home country legal requirements but any such finding has
been or is being resolved to the satisfaction of the home country
regulator by means of corrective action taken by the derivatives
clearing organization; or
(2) In the case of a derivatives clearing organization registered
through the process described in Sec. 39.3(a)(3), either there has
been no finding by the home country regulator of material non-
observance of the relevant home country legal requirements, or there
has been a finding by the home country regulator of material non-
observance of the relevant home country legal requirements but any such
finding has been or is being resolved to the satisfaction of the home
country regulator by means of corrective action taken by the
derivatives clearing organization.
* * * * *
Substantial risk to the U.S. financial system means, with respect
to a derivatives clearing organization organized outside of the United
States, that--
(1) The derivatives clearing organization holds 20% or more of the
required initial margin of U.S. clearing members for swaps across all
registered and exempt derivatives clearing organizations; and
(2) 20% or more of the initial margin requirements for swaps at
that derivatives clearing organization is attributable to U.S. clearing
members; provided, however, where one or both of these thresholds are
close to 20%, the Commission may exercise discretion in determining
whether the derivatives clearing organization poses substantial risk to
the U.S. financial system. For purposes of this definition and
Sec. Sec. 39.6 and 39.51, U.S. clearing member means a clearing member
organized in the United States, a clearing member whose ultimate parent
company is organized in the United States, or a futures commission
merchant.
* * * * *
0
3. In Sec. 39.3, revise paragraphs (a)(3), (a)(4), and (a)(5) and add
paragraphs (a)(6) and (a)(7) to read as follows:
Sec. 39.3 Procedures for registration.
(a) * * *
(3) Alternative application procedures. An entity that is organized
outside of the United States, is seeking to register as a derivatives
clearing organization for the clearing of swaps, and does not pose
substantial risk to the U.S. financial system may apply for
registration in accordance with the terms of this paragraph in lieu of
filing the application described in paragraph (a)(2) of this section.
If the application is approved by the Commission, the derivatives
clearing organization's compliance with its home country's regulatory
regime would satisfy the core principles set forth in section 5b(c)(2)
of the Act, subject to the requirements of subpart D of this part. The
applicant shall submit to the Commission the following sections of Form
DCO, as provided in the appendix to this part: cover sheet, Exhibit A-1
(regulatory compliance chart), Exhibit A-2 (proposed rulebook), Exhibit
A-3 (narrative summary of proposed clearing activities), Exhibit A-4
(detailed business plan), Exhibit A-7 (documents setting forth the
applicant's corporate organizational structure), Exhibit A-8 (documents
establishing the applicant's legal status and certificate(s) of good
standing or its equivalent), Exhibit A-9 (description of pending legal
proceedings or governmental investigations), Exhibit A-10 (agreements
with outside service providers with respect to the treatment of
customer funds), Exhibits F-1 through F-3 (documents that demonstrate
compliance with the treatment of funds requirements with respect to
customers of futures commission merchants), and Exhibit R (ring-fencing
memorandum). For purposes of this paragraph, the applicant must
demonstrate to the Commission, in Exhibit A-1, the extent to which
compliance with the applicable legal requirements in its home country
would constitute compliance with the core principles set forth in
section 5b(c)(2) of the Act. To satisfy this requirement, the applicant
shall provide in Exhibit A-1 the citation and full text of each
applicable legal requirement in its home country that corresponds with
each core principle and an explanation of how the applicant satisfies
those requirements.
(4) Submission of supplemental information. The filing of a
completed application is a minimum requirement and does not create a
presumption that the application is materially complete or that
supplemental information will not be required. At any time during the
application review process, the Commission may request that the
applicant provide supplemental information in order for the Commission
to process the application. The applicant shall provide supplemental
information in the format and manner specified by the Commission.
(5) Application amendments. An applicant shall promptly amend its
application if it discovers a material omission or error, or if there
is a material change in the information provided to the Commission in
the application or other information provided in connection with the
application. An applicant is only required to submit exhibits and other
information that are relevant to the application amendment.
(6) Public information. The following sections of an application
for registration as a derivatives clearing organization will be public:
First page of the Form DCO cover sheet (up to and including the General
Information section), Exhibit A-1 (regulatory compliance chart),
Exhibit A-2 (proposed rulebook), Exhibit A-3 (narrative summary of
proposed clearing activities), Exhibit A-7 (documents setting forth the
applicant's corporate organizational structure), Exhibit A-8 (documents
establishing the applicant's legal status and certificate(s) of good
standing or its equivalent), and any other part of the application not
covered by a request for confidential treatment, subject to Sec. 145.9
of this chapter.
(7) Extension of time for review. The Commission may further extend
the review period in paragraph (a)(1) of this section for any period of
time to which the applicant agrees in writing.
* * * * *
0
4. In Sec. 39.4, redesignate paragraphs (c) through (e) as paragraphs
(d) through (f) and add new paragraph (c) to read as follows:
Sec. 39.4 Procedures for implementing derivatives clearing
organization rules and clearing new products.
* * * * *
(c) Exemption from self-certification of rules. Notwithstanding the
rule certification requirements of section 5c(c)(1) of the Act and
Sec. 40.6 of this chapter, a derivatives clearing organization that is
registered through the process described in Sec. 39.3(a)(3) is not
required to certify a rule unless the rule relates to the requirements
under section 4d(f) of the Act, parts 1, 22, or 45 of this chapter, or
Sec. 39.15.
* * * * *
[[Page 34833]]
0
5. Revise Sec. 39.9 to read as follows:
Sec. 39.9 Scope.
Except as otherwise provided by Commission order, the provisions of
this subpart B apply to any derivatives clearing organization, as
defined under section 1a(15) of the Act and Sec. 1.3 of this chapter,
that is registered with the Commission as a derivatives clearing
organization pursuant to section 5b of the Act. The provisions of this
subpart B do not apply to any exempt derivatives clearing organization,
as defined under Sec. 39.2.
0
6. Add and reserve Sec. Sec. 39.43 through 39.49.
0
7. Add subpart D, consisting of Sec. Sec. 39.50 and 39.51, to read as
follows:
Subpart D--Provisions Applicable to Derivatives Clearing
Organizations Subject to Alternative Compliance
Sec.
39.50 Scope.
39.51 Alternative compliance.
Sec. 39.50 Scope.
The provisions of this subpart D apply to any derivatives clearing
organization that is registered through the process described in Sec.
39.3(a)(3).
Sec. 39.51 Alternative compliance.
(a) Eligibility for alternative compliance. (1) The Commission may
register, subject to any terms and conditions as the Commission
determines to be appropriate, a derivatives clearing organization for
the clearing of swaps for U.S. persons if:
(i) The Commission determines that compliance by the derivatives
clearing organization with its home country regulatory regime
constitutes compliance with the core principles set forth in section
5b(c)(2) of the Act;
(ii) The derivatives clearing organization is in good regulatory
standing in its home country;
(iii) The Commission determines the derivatives clearing
organization does not pose substantial risk to the U.S. financial
system; and
(iv) A memorandum of understanding or similar arrangement
satisfactory to the Commission is in effect between the Commission and
the derivatives clearing organization's home country regulator,
pursuant to which, among other things, the home country regulator
agrees to provide to the Commission any information that the Commission
deems appropriate to evaluate the initial and continued eligibility of
the derivatives clearing organization for alternative registration or
to review its compliance with any conditions of such registration.
(2) To the extent that the derivatives clearing organization's home
country regulatory regime lacks legal requirements that correspond to
those core principles less related to risk, the Commission may, in its
discretion, grant registration subject to conditions that would address
the relevant core principles.
(b) Conditions of alternative compliance. A derivatives clearing
organization subject to alternative compliance shall be subject to any
conditions the Commission may prescribe including, but not limited to:
(1) Applicable requirements under the Act and Commission
regulations. The derivatives clearing organization shall comply with:
The core principles set forth in section 5b(c)(2) of the Act through
its compliance with applicable legal requirements in its home country;
and other requirements applicable to derivatives clearing organizations
as specified in the derivatives clearing organization's registration
order including, but not limited to, section 4d(f) of the Act, parts 1,
22, and 45 of this chapter, and subpart A and Sec. 39.15 of this part.
(2) Open access. The derivatives clearing organization shall have
rules with respect to swaps to which one or more of the counterparties
is a U.S. person that:
(i) Provide that all swaps with the same terms and conditions, as
defined by product specifications established under the derivatives
clearing organization's rules, submitted to the derivatives clearing
organization for clearing are economically equivalent within the
derivatives clearing organization and may be offset with each other
within the derivatives clearing organization, to the extent offsetting
is permitted by the derivatives clearing organization's rules; and
(ii) Provide that there shall be non-discriminatory clearing of a
swap executed bilaterally or on or subject to the rules of an
unaffiliated electronic matching platform or trade execution facility.
(3) Consent to jurisdiction; designation of agent for service of
process. The derivatives clearing organization shall:
(i) Consent to jurisdiction in the United States;
(ii) Designate, authorize, and identify to the Commission, an agent
in the United States who shall accept any notice or service of process,
pleadings, or other documents, including any summons, complaint, order,
subpoena, request for information, or any other written or electronic
documentation or correspondence issued by or on behalf of the
Commission or the United States Department of Justice to the
derivatives clearing organization, in connection with any actions or
proceedings brought against, or investigations relating to, the
derivatives clearing organization or any of its U.S. clearing members;
and
(iii) Promptly inform the Commission of any change in its
designated and authorized agent.
(4) Compliance. The derivatives clearing organization shall comply,
and shall demonstrate compliance as requested by the Commission, with
any condition of its registration.
(5) Inspection of books and records. The derivatives clearing
organization shall make all documents, books, records, reports, and
other information related to its operation as a derivatives clearing
organization open to inspection and copying by any representative of
the Commission; and in response to a request by any representative of
the Commission, the derivatives clearing organization shall, promptly
and in the form specified, make the requested books and records
available and provide them directly to Commission representatives.
(6) Representation of good regulatory standing. On an annual basis,
within 60 days following the end of its fiscal year, a derivatives
clearing organization shall request and the Commission must receive
from a home country regulator a written representation that the
derivatives clearing organization is in good regulatory standing.
(7) Other conditions. The Commission may condition alternative
compliance on any other facts and circumstances it deems relevant.
(c) General reporting requirements. (1) A derivatives clearing
organization shall provide to the Commission the information specified
in this paragraph and any other information that the Commission deems
necessary, including, but not limited to, information for the purpose
of the Commission evaluating the continued eligibility of the
derivatives clearing organization for alternative compliance, reviewing
compliance by the derivatives clearing organization with any conditions
of its registration, or conducting oversight of U.S. clearing members,
and the swaps that are cleared by such persons through the derivatives
clearing organization. Information provided to the Commission under
this paragraph shall be submitted in accordance with Sec. 39.19(b).
(2) Each derivatives clearing organization shall provide to the
Commission the following information:
(i) A report compiled as of the end of each trading day and
submitted to the Commission by 10:00 a.m. U.S. Central
[[Page 34834]]
time on the following business day, containing with respect to swaps:
(A) Total initial margin requirements for all clearing members;
(B) Initial margin requirements and initial margin on deposit for
each U.S. clearing member, by house origin and by each customer origin,
and by each individual customer account; and
(C) Daily variation margin, separately listing the mark-to-market
amount collected from or paid to each U.S. clearing member, by house
origin and by each customer origin, and by each individual customer
account.
(ii) A report compiled as of the last day of each fiscal quarter of
the derivatives clearing organization and submitted to the Commission
no later than 17 business days after the end of the derivatives
clearing organization's fiscal quarter, containing a list of U.S.
clearing members, with respect to the clearing of swaps, as of the last
day of the fiscal quarter.
(iii) Prompt notice regarding any change in the home country
regulatory regime;
(iv) As available to the derivatives clearing organization, any
examination report or examination findings by a home country regulator,
and notify the Commission within five business days after it becomes
aware of the commencement of any enforcement or disciplinary action or
investigation by a home country regulator;
(v) Immediate notice of any change with respect to the derivatives
clearing organization's licensure, registration, or other authorization
to act as a derivatives clearing organization in its home country;
(vi) In the event of a default by a clearing member clearing swaps,
with such event of default determined in accordance with the rules of
the derivatives clearing organization, immediate notice of the default
including the amount of the clearing member's financial obligation;
provided, however, if the defaulting clearing member is a U.S. clearing
member, the notice shall also include the name of the U.S. clearing
member and a list of the positions held by the U.S. clearing member;
and
(vii) Notice of action taken against a U.S. clearing member by a
derivatives clearing organization, no later than two business days
after the derivatives clearing organization takes such action against a
U.S. clearing member.
(d) Modification of registration upon Commission initiative. (1)
The Commission may, in its discretion and upon its own initiative,
modify the terms and conditions of an order of registration granted
through the process described in Sec. 39.3(a)(3) if the Commission
determines that there are changes to or omissions in facts or
circumstances pursuant to which the order was issued, or that any of
the terms and conditions of its order have not been met, including, but
not limited to, the requirement that:
(i) Compliance with the derivatives clearing organization's home
country regulatory regime satisfies the core principles set forth in
section 5b(c)(2) of the Act;
(ii) The derivatives clearing organization is in good regulatory
standing in its home country; or
(iii) The derivatives clearing organization does not pose
substantial risk to the U.S. financial system.
(2) The Commission shall provide written notification to a
derivatives clearing organization that it is considering whether to
modify an order of registration pursuant to this paragraph and the
basis for that consideration.
(3) The derivatives clearing organization may respond to the
notification in writing no later than 30 business days following
receipt of the notification, or at such later time as the Commission
permits in writing.
(4) Following receipt of a response from the derivatives clearing
organization, or after expiration of the time permitted for a response,
the Commission may:
(i) Issue an order requiring the derivatives clearing organization
to comply with all requirements applicable to derivatives clearing
organizations registered through the process described in Sec.
39.3(a)(2), effective as of a date to be specified therein. The
specified date shall be intended to provide the derivatives clearing
organization with a reasonable amount of time to come into compliance
with the Act and Commission regulations or request a vacation of
registration in accordance with Sec. 39.3(f);
(ii) Issue an amended order of registration that modifies the terms
and conditions of the order; or
(iii) Provide written notification to the derivatives clearing
organization that the order of registration will remain in effect
without modification to its terms and conditions.
PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
0
8. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and
16(b).
0
9. Amend Sec. 140.94 by revising paragraph (c) introductory text and
paragraph (c)(1) and adding paragraph (c)(15) to read as follows:
Sec. 140.94 Delegation of authority to the Director of the Division
of Swap Dealer and Intermediary Oversight and the Director of the
Division of Clearing and Risk.
* * * * *
(c) The Commission hereby delegates, until such time as the
Commission orders otherwise, the following functions to the Director of
the Division of Clearing and Risk and to such members of the
Commission's staff acting under his or her direction as he or she may
designate from time to time:
(1) The authority to review applications for registration as a
derivatives clearing organization filed with the Commission under Sec.
39.3(a)(1) of this chapter, to determine that an application is
materially complete pursuant to Sec. 39.3(a)(2) of this chapter, to
request additional information in support of an application pursuant to
Sec. 39.3(a)(4) of this chapter, to extend the review period for an
application pursuant to Sec. 39.3(a)(7) of this chapter, to stay the
running of the 180-day review period if an application is incomplete
pursuant to Sec. 39.3(b)(1) of this chapter, to review requests for
amendments to orders of registration filed with the Commission under
Sec. 39.3(d)(1) of this chapter, to request additional information in
support of a request for an amendment to an order of registration
pursuant to Sec. 39.3(d)(2) of this chapter, and to request additional
information in support of a rule submission pursuant to Sec.
39.3(g)(3) of this chapter;
* * * * *
(15) All functions reserved to the Commission in Sec. 39.51 of
this chapter, except for the authority to:
(i) Grant registration under Sec. 39.51(a) of this chapter;
(ii) Prescribe conditions to registration under Sec. 39.51(b) of
this chapter; and
(iii) Modify registration under Sec. 39.51(d)(4) of this chapter.
* * * * *
Issued in Washington, DC, on July 12, 2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
[[Page 34835]]
Appendices to Registration With Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations--Commission Voting Summary,
Chairman's Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
This proposal addresses the registration of non-U.S. DCOs that
clear swaps for U.S. persons. The CFTC has almost two decades of
experience overseeing non-U.S. DCOs engaging in activity in U.S.
derivatives markets. LCH Ltd was the first non-U.S. DCO to register
with the CFTC 18 years ago. Other CCPs became registered after the
enactment of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act).\1\ Through its supervisory
powers, the CFTC has informally calibrated its day-to-day oversight
of these registered DCOs based on the principle of deference to the
oversight of primary regulators, while taking into account the
specific circumstances of a particular non-U.S. DCO.
---------------------------------------------------------------------------
\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
---------------------------------------------------------------------------
The main purpose of this rulemaking is to address the current
informality of the CFTC's approach and, in doing so, introduce
significant additional areas where the CFTC can defer, appropriately
and consistent with its risk oversight responsibilities, to non-U.S.
DCOs' home country supervisors. Among other things, this proposal
sets forth a framework under which non-U.S. DCOs that do not pose a
substantial risk to the U.S. financial system would have the option
of being fully registered with the CFTC as a DCO but meet their
registration requirements through compliance with their home country
requirements.
These DCOs that are ``fully registered with alternative
compliance'' would still be able to offer customer clearing through
futures commission merchants (FCMs), just like other fully
registered DCOs. Consistent with the commitment to apply supervisory
deference under Title VII of the Dodd-Frank Act where appropriate,
the home country regulator would have supervisory primacy over these
DCOs with the CFTC much more narrowly focused than is currently the
case, from both a legal and practical perspective, on U.S. customer
funds protection at these DCOs. This narrow focus on customer funds
protection is appropriate to help ensure the legal requirements
relating to segregation at both the FCM and DCO level are met, and
that, if necessary, the bankruptcy protections afforded to customers
under the CFTC's FCM model work as intended.
In determining whether a non-U.S. CCP potentially poses
``substantial risk to the U.S. financial system,'' the proposal
would use objective criteria and provide transparency about such
criteria. The proposed definition of substantial risk to the U.S.
financial system consists of two 20 percent tests. The first focuses
on the percentage of initial margin from a ``U.S. origin'' (i.e.,
initial margin posted by U.S.-domiciled clearing members and
clearing members ultimately owned by U.S.-domiciled holding
companies, regardless of the domicile of the clearing member) at a
specific non-U.S. DCO. The second focuses on the ``U.S. origin''
business of the non-U.S. DCO as a percentage of the overall U.S.
cleared swaps market. Where both of these ``20/20'' thresholds are
close to 20 percent, the Commission would be able to exercise
discretion in determining whether the DCO poses substantial risk to
the U.S. financial system.
I believe that objective and transparent criteria, such as the
ones set forth in the proposal, are what all regulators around the
world should strive for to provide appropriate predictability and
stability to the markets.
I thank CFTC staff for their fine work that resulted in today's
proposal. I look forward to reviewing comments from the public.
Appendix 3--Supporting Statement of Commissioner Brian Quintenz
This proposed rule would reduce the degree to which CFTC-
registered foreign derivatives clearing organizations (DCO) are
subject to duplicative regulation by the CFTC and their home country
regulator. The proposal would permit a foreign DCO that does not
pose ``substantial risk to the U.S. financial system'' to comply
with its home country authorities' regulations instead of most CFTC
regulations. To satisfy CFTC regulations, the foreign DCO would only
need to comply with certain of our customer protection and swap data
reporting requirements.
The proposal recognizes that foreign regulators have a
substantial interest and expertise in supervising DCOs located in
their home jurisdictions. Deference to their oversight is
appropriate when compliance with the home country regulatory regime
would achieve compliance with DCO core principles. This proposal is
consistent with, and in many ways an expansion of, the CFTC's 2016
Equivalence Agreement with the European Commission, pursuant to
which the CFTC granted substituted compliance to dually-registered
DCOs based in the European Union.\1\
---------------------------------------------------------------------------
\1\ Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central
Counterparties, 81 FR 15260 (March 22, 2016).
---------------------------------------------------------------------------
I also strongly support the proposal's transparent, fact-based
procedure for determining when a foreign DCO poses ``substantial
risk to the U.S. financial system.'' The proposal defines
``substantial risk'' to mean two simple criteria: (i) The foreign
DCO holds 20 percent or more of the required initial margin of U.S.
clearing members for swaps across all registered and exempt DCOs;
and (ii) 20 percent or more of the initial margin requirements for
swaps at that foreign DCO is attributable to U.S. clearing members.
I think this two-prong test correctly assesses the DCO's focus on
U.S. firms and impact on the U.S. marketplace.
Today's proposal contrasts starkly with the European Securities
and Markets Authority's (ESMA) recent proposal to determine the
systemic importance of a foreign DCO to the European Union and
thereby apply the European Market Infrastructure Regulation (EMIR)
and ESMA oversight. Unlike today's CFTC proposal, ESMA has not
proposed any quantitative thresholds for assessing systemic
importance. Instead, ESMA proposed 14 ``indicators'' for determining
systemic importance that would grant it considerable discretion and
raise serious questions about the judgement and consistency of the
indicators' application. I hope that, through its consultative
process, ESMA decides to revise its criteria and ultimately adopts a
predictable, transparent, and appropriately calibrated threshold
regime for such an important and extraterritorial regulatory
determination.
I welcome comments and suggestions from market participants and
foreign jurisdictions about all aspects of the Commission's proposed
alternative compliance regime for non-U.S. DCOs. It is also my hope
that incoming Chairman Tarbert will prioritize finalizing a version
of this proposal. Lastly, I look forward to discussing this
proposal, and advocating for its deference-based approach, with our
regulatory colleagues around the globe.
Appendix 4--Statement of Commissioner Dawn D. Stump
Overview
In responding to the financial crisis, both the Group of 20
Nations (G-20) and the U.S. Congress recognized that the derivatives
markets are global and in doing so provided for international
coordination and a practical application of regulatory deference. I
want to commend the Chairman for his leadership in reminding us of
the global commitments made in 2009 and the subsequent efforts
Congress made to encourage global regulatory harmonization.
Specifically, the G-20 leaders stated the clear responsibility we
have ``to take action at the national and international level to
raise standards together so that our national authorities implement
global standards consistently in a way that ensures a level playing
field and avoids fragmentation of markets, protectionism, and
regulatory arbitrage.'' \1\ More directly related to the subjects
before us today, Congress, in the Dodd-Frank Act, amended the
Commodity Exchange Act to provide: ``The Commission may exempt,
conditionally or unconditionally, a derivatives clearing
organization from registration . . . for the clearing of swaps if
the Commission determines that the derivatives clearing organization
is subject to comparable, comprehensive supervision and regulation
by. . . the appropriate government
[[Page 34836]]
authorities in the home country of the organization.'' \2\
---------------------------------------------------------------------------
\1\ Leaders' Statement from the 2009 G-20 Summit in Pittsburgh,
Pa. 7 (Sept. 24-25, 2009), http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
\2\ 7 U.S.C. 7a-1(h) (2012).
---------------------------------------------------------------------------
I believe deference to comparable regulatory regimes is
essential. Historically, such deference has been the guiding
principle of the CFTC's approach to regulating cross-border
derivatives. We cannot effectively supervise central counterparties
(CCPs) in every corner of the world. We can, however, evaluate the
regulatory requirements in a CCP's home country to determine if they
are sufficiently commensurate to our own. We will never have the
exact same rules around the globe. We should rather strive to
minimize the frequency and impact of duplicative regulatory
oversight while also demanding high comparable standards, just as
Congress intended.
Had we previously established a more comprehensive structure for
those comparably-regulated, foreign CCPs seeking to offer swaps
clearing to U.S. customers, then CCPs wishing to seek an exemption
would have been able to do so under a regime that Congress provided
for in the Dodd-Frank Act. Alternatively, those that wanted to
register as a DCO would have done so voluntarily in response to a
business rationale demanded by their clearing members and customers.
However, by not having previously established an exemption process,
the CFTC left only one path for customer clearing on non-U.S. DCOs,
which resulted in compelling several non-U.S. CCPs to become dually
registered with both their home country regulator and the CFTC.
As a result, relationships with our global regulatory
counterparts became strained, and there have been many unfortunate
consequences such that now we must provide new ground rules. So
today, we are advancing an overdue conversation on applying
international regulatory deference through the establishment of a
test to identify non-U.S. CCPs that pose substantial risk to the
U.S. financial system. To be clear, neither of the proposals we are
considering today would be available to DCOs that pose such risk. I
fear that this point may be lost or confused by the fact that we are
presenting these as two separate rulemakings. While I would have
preferred a single rulemaking to alleviate any confusion, I want to
make clear that we are simply proposing two regulatory options, each
of which is only available to those DCOs that do NOT pose
substantial risk to the U.S. financial system under the proposed
test. I encourage commenters to provide input on the proposals as if
they are a single package, particularly where the request for
comments in one proposal may be relevant or more applicable to
consideration of the other proposal.
These proposals are a step towards achieving the goals
established in 2009--an effort I wholeheartedly support. However, I
have concerns that these proposals may be a bit too rigid to
pragmatically facilitate increased swaps clearing by U.S. customers,
as we are committed to do by the original G-20 and Congressional
directives. Under the Alternative Compliance proposal, non-U.S. DCOs
can permit customer access only if a futures commission merchant
(FCM) is directly facilitating the clearing while the other
available option--provided for in the Exempt DCO proposal--
completely disallows the FCM from being involved in customer
clearing. While I recognize that the blunt nature of these bright
line distinctions makes it easier to regulate, I worry that it may
not be workable in practice. I support putting these proposals out
for public comment in hopes that those who participate in these
markets and who are expected to apply the new swap clearing mandates
will be able to lend their voices to the discussion. However, I
anticipate that the elements left unaddressed in these proposals,
which are detailed in the requests for comments, may require a re-
proposal at some future date. Nonetheless, if that is to occur we
will be well served to have that discussion with the benefit of
public comments.
Registration With Alternative Compliance for Non-U.S. DCOs
This proposal is designed to more clearly spell out how we would
provide regulatory oversight for those clearinghouses that do not
pose substantial risk to the U.S. financial system and that may
obtain Alternative Compliance by demonstrating fulfillment of
statutorily-established core principles.
Unfortunately, the proposal fails to address, and in my opinion
may even worsen, a challenge of great concern to this Commission--
the increased strain on our registered FCMs. Under the Alternative
Compliance proposal, any non-U.S. DCO seeking to apply the regime
would be required to do so ONLY through clearing members that are
FCMs, and may not do so through an affiliate of the FCM in the home
country that is already acting as a clearing member of the DCO. This
is the status quo, and frankly it often makes very little economic
sense for both the FCM and its affiliate to be capitalizing a
clearinghouse simultaneously. Consideration should be given to the
efficiency of utilizing an affiliated entity, which would allow this
to be a business decision between FCMs and their customers, rather
than a regulatory impediment to sustaining FCMs that play a critical
role in cleared derivatives markets.
It is costly for an FCM to join any clearinghouse and may be
especially uneconomic if the FCM only has a few customers who wish
to access a particular non-U.S. DCO. It may make more sense to
structure the arrangement with the assistance of a non-U.S.
affiliate, already actively participating as a member of the DCO. To
do otherwise limits U.S. customer choice and access to clearing of
the product in a foreign jurisdiction, which seems at odds with the
reform agenda of encouraging clearing--mandated or not.
To be clear, two affiliated entities may each be subjected to
risk mutualization obligations at the same CCP, and unfortunately,
this proposal does not discuss how we might address this duplicative
burden. Rather, we are requesting comment in the separate Exempt DCO
proposal about how this problem might be addressed through an
affiliate guarantee arrangement such that an FCM could potentially
participate as a ``special'' member whose obligations to the DCO
could be guaranteed by its non-FCM affiliate acting as a
``traditional'' member of the DCO. I hope commenters will consider
and discuss this concept in the context of the proposed Alternative
Compliance regime where it is more applicable to CFTC-registered
FCMs at non-U.S., CFTC-registered DCOs. I hope that commenters will
also provide other potential solutions to help alleviate undue
burdens on FCMs and their customers in the context of the
Alternative Compliance proposal.
As a Commission, I believe we are all concerned about the
consolidation these clearing service providers are already
experiencing and the constraint on the availability of clearing
services for market participants. I hope we will be able to avoid
policies that unnecessarily challenge the economics of, or otherwise
impede, operating as an FCM. Otherwise, we might find that our
mandate to increase swaps clearing is futile: Simply put, the
clearinghouses don't work without clearing members and so we must
seek to preserve both.
Closing
At the beginning of this year I penned an opinion piece in the
Financial Times \3\ in which I attempted to appeal to our
international regulatory partners to recommit to a coordinated
approach, ensuring that our alliance remains strong rather than
fractured. Regulatory conflicts are at odds with our shared mission
and do a disservice to global market participants. I am committed to
advancing a coordinated approach, and I believe the proposals we are
putting forward today are a first step in that process. There is,
however, more work to be done both in the way of the CFTC extending
deference to other jurisdictions and vice versa. I hope our
international regulatory partners will also take the opportunity to
reset and recognize that our shared interest of advancing
derivatives clearing is best achieved by respecting each
jurisdiction's successful implementation of the principles agreed to
ten years ago. Otherwise, it might unfortunately become challenging
to advance the concept of deference under consideration today to the
next stage of the process.
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\3\ Dawn DeBerry Stump, Opinion, We Must Rethink Our
Clearinghouse Rules, Fin. Times (Jan. 24, 2019).
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Appendix 5--Supporting Statement of Commissioner Dan M. Berkovitz
I support issuing for public comment the proposed rulemaking
(``Proposal'') to permit registration with alternative compliance
for non-U.S. derivatives clearing organizations (``non-U.S. DCOs'').
Under the Proposal, a non-U.S. DCO that does not pose
``substantial risk to the U.S. financial system'' would be permitted
to elect to comply with certain Commodity Exchange Act (``CEA'')
core principles for DCOs through compliance with its home country
regulatory regime.\1\ The non-U.S. DCO still would be required to
comply with the CFTC's customer protection and swap data reporting
requirements. This registration
[[Page 34837]]
alternative would permit U.S. persons to access foreign swap markets
while benefitting from customer protections under the U.S.
Bankruptcy Code and CFTC regulations without introducing significant
new risks into the financial system.
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\1\ Proposal, section I.A.
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The alternative compliance framework seeks to satisfy both the
CFTC interest in protecting U.S. customers accessing a non-U.S. DCO
and the interests of the home regulator in overseeing the activities
of the non-U.S. DCO within its jurisdiction. It maintains key U.S.
customer protection requirements and U.S. Bankruptcy Code treatment
for U.S. customer funds held by CFTC-registered futures commission
merchants (``FCMs'').\2\ At the same time, this framework recognizes
the interests of the non-U.S. DCO's home country regulator by
relying on its oversight of other DCO activities. I look forward to
comments on whether the Proposal maintains for the Commission an
appropriate level of regulatory oversight for non-U.S. DCOs
operating within this framework.
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\2\ The Proposal would require each applicant for registration
with alternative compliance to: (a) Address compliance with certain
Commission customer protection and reporting rules in its
application; (b) submit DCO rules that relate to protection of
customer funds and swap reporting to the Commission; and (c) comply
with the Commission's customer protection rules and reporting
requirements largely through the required use of registered FCMs.
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The effective regulation of central clearinghouses for
derivatives is critical to managing risk throughout global financial
markets. Under the CEA, the Commission may exempt a non-U.S. DCO
from the registration requirement if the Commission determines that
the non-U.S. DCO is subject to ``comparable, comprehensive
supervision and regulation'' by its home regulator.\3\ The Exempt
DCO Proposal, which the Commission also is considering today, would
set forth, for the first time, objective standards for determining
whether a particular non-U.S. DCO is eligible for such an
exemption.\4\ The threshold for permitting non-U.S. DCOs under the
Exempt DCO Proposal to be eligible to elect exemption from
registration--that the DCO not pose a ``substantial risk to the U.S.
financial system''--is the same standard for permitting a non-U.S.
DCO to be eligible to register with alternative compliance under
this Proposal. Thus, under the set of proposals the Commission is
considering today, a non-U.S. DCO that does not pose substantial
risk to the U.S. financial system could apply, at its election,
either for an exemption from DCO registration, or for registration
with alternative compliance. Of course, it could apply for full DCO
registration as well.
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\3\ See Commodity Exchange Act sec. 5b(h), 7 U.S.C. 7a-1(h).
\4\ Although I support the development of objective standards
for this purpose, I cannot support the Exempt DCO Proposal because,
among other things, it fails to maintain appropriate protections for
U.S. customers. Please see my dissenting statement for further
detail on the failures of the Exempt DCO Proposal.
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I support the Commission's movement towards objective standards
and defined processes for establishing registration alternatives for
non-U.S. DCOs. Non-U.S. DCOs that conduct a substantial amount of
U.S. customer-related activity will remain subject to full CFTC
registration and regulation and U.S. customers on such DCOs are
generally protected under the U.S. Bankruptcy Code and CFTC customer
protection regulations.
For a non-U.S. DCO that is below that ``substantial risk''
threshold, this Proposal creates an ``alternative compliance
mechanism'' that would permit the non-U.S. DCO to register with the
Commission and provide clearing for U.S. customers, but also to
comply with certain DCO core principles by complying with its home
country requirements. Under this alternative, the non-U.S. DCO would
still be subject to some CFTC customer protection regulations and
U.S. customers would continue to receive protections under the U.S.
Bankruptcy Code for funds held at the FCMs that must be used as
intermediaries.\5\
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\5\ The ability of non-U.S. DCOs that are registered with
alternative compliance to provide clearing services to U.S.
customers with the customer protections provided under U.S. law
obviates the need for the Commission's contortions found in the
Exempt DCO Proposal to allow exempt DCOs to provide customer
clearing but without any U.S. customer protections established by
the CFTC.
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``Substantial Risk'' Threshold Issues
As noted above, only those non-U.S. DCOs that do not pose a
``substantial risk to the U.S. financial system'' would be permitted
to register with alternative compliance. A non-U.S. DCO would be
deemed to present a ``substantial risk to the U.S. financial
system'' if: (1) It holds 20% or more of the required initial margin
of U.S. members for swaps aggregated across all registered and
exempt DCOs; and (2) 20% or more of the initial margin for swaps
required at the DCO is attributable to U.S. members. The 20/20
criteria would not be a bright line test. If either of the
conditions is present, or close to present, the Commission may
nonetheless determine that the non-U.S. DCO presents substantial
risk to the U.S. financial system and therefore must fully register.
Although I support issuance of this Proposal, I have significant
concerns about adopting the 20/20 criteria as a ``risk-based''
standard. Although the 20/20 criteria are characterized as a risk-
based standard (i.e., ``substantial risk to the U.S. financial
system''), the criteria would more accurately be described as
establishing an activity-based test. The proposed 20/20 criteria
directly measure the level of initial margin deposited at the non-
U.S. DCO rather than risk presented to the U.S. financial system.
The Proposal is devoid of reasoned analysis as to the basis for the
20/20 criteria in terms of actual risk presented to the U.S.
financial system. It is not difficult to envision scenarios in which
a lesser amount of initial margin at a non-U.S. DCO by U.S.
participants may actually represent increased risk to the U.S.
financial system, and a greater amount of margin may represent
lesser risk. In the Proposal, the Commission concedes that ``a test
based solely on initial margin requirements may not fully capture
the risk of a given DCO.'' \6\
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\6\ Proposal, section II.A.2.
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In my view, an activity-related test is, in fact, the more
appropriate standard for determining registration requirements. In
effect, the Proposal gets the result right, but for the wrong
reasons. ``Substantial risk to the U.S. financial system'' is
difficult--if not impossible--to measure in a straightforward,
objective formula, especially as markets change over time. The
activity-based thresholds in the Dodd-Frank Act for the regulation
of swaps markets and entities were adopted largely due to the
spectacular failure of the risk-based approach prior to the
financial crisis. Other registration thresholds and registration
exemptions in the CEA and the Commission's regulations, for example
for swap dealers, FCMs, commodity pool operators, and commodity
trading advisors, are based on activity rather than risk.
Importantly, the standard in CEA Section 2(i) for the application of
the swaps provisions to activities outside the U.S. (``direct and
significant connection with activities in, or effect on, commerce of
the United States'') is activity-based and not risk-based. The
threshold for exemption from registration for non-U.S. DCOs should
be activity-based as well.
It is not apparent from the information provided in the Proposal
why the 20/20 test should be the appropriate standard for
determining whether a non-U.S. DCO need not fully register with the
CFTC. Do the proposed criteria accurately measure the appropriate
level of clearing activity? Are additional or different metrics more
appropriate for measuring when clearing activity for U.S. customers
becomes substantial and full registration becomes appropriate? I
look forward to reviewing comments addressing these and the other
issues regarding the 20/20 test.
No Substituted Compliance Review
I also am concerned that the Proposal may not establish
sufficiently clear or adequate standards for the review of a non-
U.S. DCO's application for alternative compliance. In contrast to
the standard and proposed process for granting a request for
exemption from DCO registration,\7\ the Proposal would not require
the CFTC to make any determination that the home jurisdiction's
requirements for the DCO are comparable to, and as comprehensive as,
the core principles for which alternative compliance is being
sought.\8\ It is not clear why a vaguer standard should apply to
DCOs seeking registration with alternative compliance. The Proposal
establishes what, in essence, appears to be a regime similar to
substituted compliance for certain DCO core principles, yet it does
not follow the process the CEA requires and the CFTC has implemented
in other circumstances for establishing a substituted compliance
regime.\9\ Further, the Proposal
[[Page 34838]]
does not require that the non-U.S. DCO observe the Principles for
Financial Market Infrastructure. I look forward to comments on, and
further clarification of, these issues.
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\7\ See Commodity Exchange Act sec. 5b(h), 7 U.S.C. 7a-1(h).
\8\ See Exemption from Derivatives Clearing Organization
Registration, section I (July 11, 2019).
\9\ See Commodity Exchange Act secs. 5b(h), 5h(g), 4(b)(1)(A) (7
U.S.C. 7a-1(h), 7b-3(g), 6(b)(1)(A)) (establishing a ``comparable,
comprehensive supervision and regulation'' standard for exempt DCOs,
exempt swap execution facilities, and foreign boards of trade,
respectively); 78 FR 45,292, 45,342-45 (July 22, 2013) (establishing
the ``comparable and comprehensive'' standard for substituted
compliance determinations by the Commission for swap dealer
regulations in foreign jurisdictions).
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Reciprocity
In this rulemaking the Commission proposes to recognize the
interests of other jurisdictions in the regulation of non-U.S. DCOs.
To the extent that non-U.S. jurisdictions adopt similar approaches
that recognize the interests of the U.S. in the regulation of DCOs
located in the U.S., the global marketplace as a whole will benefit.
However, to the extent that another jurisdiction does not
appropriately recognize the interests of the U.S. in regulating U.S.
DCOs, then U.S. DCOs could be fully regulated by both the U.S. and
the other non-U.S. jurisdiction, subjecting the U.S. DCOs to
unnecessary additional costs and potentially conflicting
requirements.\10\ Prior to granting any applications for alternative
compliance for a non-U.S. DCO, the Commission should determine that
the home jurisdiction of the non-U.S. DCO has adopted a comparable
approach to the regulation (including exemption from regulation) of
U.S. DCOs.\11\ I invite comment on whether reciprocity or a similar
mechanism should be incorporated into the regulation.
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\10\ This situation presents a classic ``prisoner's dilemma,''
in which the overall welfare of the two parties is maximized by the
parties acting cooperatively (in this case, mutual recognition of
regulatory interests), whereas individual welfare may be maximized
by defection (no recognition of the other party's interests) when
the other party cooperates (recognition of the other party's
interests). The most rational and effective strategy for a party in
a prisoner's dilemma where parties repeatedly interact with one
another and one party seeks cooperation but the other party may
defect is for the cooperating party to respond to any defection with
tit-for-tat. See Robert Axelrod, The Evolution of Cooperation (Basic
Books, 2006).
\11\ The Restatement (Third) of Foreign Relations Law of the
United States recognizes that, in the exercise of international
comity, reciprocity is an appropriate consideration in determining
whether to exercise jurisdiction extraterritorially. Restatement
(Third) of Foreign Relations Law of the United States sec. 403 (Am.
Law Inst. 2018).
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I thank the staff of the Division of Clearing and Risk for their
work on this Proposal and appreciate their professional engagement
with my office to address many of our comments.
[FR Doc. 2019-15262 Filed 7-18-19; 8:45 am]
BILLING CODE 6351-01-P
