Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations
| Published date | 21 October 2020 |
| Citation | 85 FR 67160 |
| Record Number | 2020-21306 |
| Section | Rules and Regulations |
| Court | Commodity Futures Trading Commission |
Federal Register, Volume 85 Issue 204 (Wednesday, October 21, 2020)
[Federal Register Volume 85, Number 204 (Wednesday, October 21, 2020)]
[Rules and Regulations]
[Pages 67160-67200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21306]
[[Page 67159]]
Vol. 85
Wednesday,
No. 204
October 21, 2020
Part IIICommodity Futures Trading Commission-----------------------------------------------------------------------17 CFR Parts 39 and 140Registration With Alternative Compliance for Non-U.S. Derivatives
Clearing Organizations; Final Rule
Federal Register / Vol. 85, No. 204 / Wednesday, October 21, 2020 /
Rules and Regulations
[[Page 67160]]
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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: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
adopting regulations that will permit derivatives clearing
organizations (DCOs) organized outside of the United States
(hereinafter referred to as ``non-U.S. DCOs'') to be registered 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 regimes, subject to certain conditions
and limitations. The Commission is also amending certain related
delegation provisions in its regulations.
DATES: This rule is effective November 20, 2020.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
(202) 418-5096, [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; Theodore Z. Polley III,
Associate Director, (312) 596-0551, [email protected]; Joe Opron,
Special Counsel, (312) 596-0653, [email protected]; Division of Clearing
and Risk, Commodity Futures Trading Commission, 525 West Monroe Street,
Chicago, Illinois 60661.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Introduction
B. DCO Registration Framework
C. Overview of the New Requirements
D. Comments on the Notice of Proposed Rulemaking
II. Amendments to Parts 39 and 140 of the Commission's Regulations
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
F. Part 140--Organization, Functions, and Procedures of the
Commission
G. Responses to Additional Requests for Comment
H. Additional Comments
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Introduction
In July 2019, the Commission proposed changes to its registration
and compliance framework for DCOs that would permit a non-U.S. DCO to
be registered with the Commission yet comply with the core principles
applicable to DCOs set forth in the CEA (DCO Core Principles) through
compliance with its home country regulatory regime, subject to certain
conditions and limitations.\1\ To implement these changes, the
Commission proposed a number of amendments to part 39 of the
Commission's regulations (Part 39), as well as select amendments to
part 140. After considering the comments received in response to the
proposal, the Commission is adopting the amendments largely as
proposed.\2\
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\1\ See Registration With Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, 84 FR 34819 (July 19, 2019).
\2\ The Commission has made several clarifying changes to the
rule text that do not otherwise alter the substance of the rules. In
addition, in light of comments received, the Commission is adding a
process for current non-U.S. DCOs to avail themselves of the new
compliance regime without requiring de novo registration, but rather
by amending the DCO's registration order in accordance with Sec.
39.3(d).
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B. DCO Registration Framework
Section 5b(a) of the CEA provides that a clearing organization may
not ``perform the functions of a [DCO]'' \3\ with respect to futures
\4\ or swaps unless the clearing organization is registered with the
Commission.\5\ The CEA permits the Commission to exempt a non-U.S.
clearing organization from registration as a DCO for the clearing of
swaps if the clearing organization 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 due to uncertainty regarding the
bankruptcy treatment of funds used to margin, guarantee, or secure
cleared swaps customer positions if cleared at an exempt DCO.\7\ As a
result, some non-U.S. clearing organizations have opted to register
with the Commission as a DCO in order to clear swaps for customers of
futures commission merchants (FCMs).
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\3\ The term ``derivatives clearing organization'' is defined in
the CEA 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.
\4\ 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 cleared at a DCO. See 7 U.S.C. 6; 17 CFR 38.601.
Trades 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. See 17 CFR 48.7(d).
\5\ 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.''
\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.
\7\ 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
proposed to permit exempt DCOs to clear swaps for U.S. customers
through foreign intermediaries. See Exemption From Derivatives
Clearing Organization Registration, 84 FR 35456 (Jul. 23, 2019). All
references to exempt DCOs contained in this release relate to the
existing exempt DCO regime and are not indicative of the
Commission's response to comments received on either of the
proposals referenced in this paragraph.
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The CEA requires that, in order to register and maintain
registration as a DCO, a clearing organization must comply with each of
the DCO Core Principles and any requirement that the Commission imposes
by rule or
[[Page 67161]]
regulation.\8\ The Commission adopted the regulations in subpart B of
Part 39 to implement the DCO Core Principles.\9\
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\8\ 7 U.S.C. 7a-1(c)(2)(A)(i).
\9\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334 (Nov. 8, 2011).
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Of the 15 DCOs currently registered with the Commission, five are
organized outside of the United States.\10\ These DCOs are also
registered (or have comparable status) in their respective home
countries, which means they are required to comply with the CEA and
Part 39 as well as their home country regulatory regimes, and they are
subject to oversight by both the Commission and their home country
regulators. There are, however, meaningful differences in the extent to
which these non-U.S. DCOs clear swaps for U.S. persons. For example,
nearly half of the swap clearing activity at LCH Limited, if measured
on the basis of required initial margin, is attributable to U.S.
persons,\11\ whereas the percentage of clearing activity generated by
U.S. persons at other non-U.S. DCOs is far less. The Commission,
recognizing this regulatory overlap yet mindful of its
responsibilities, proposed and is adopting changes to its DCO
registration and compliance framework to differentiate between DCOs
organized in the United States (U.S. DCOs) and non-U.S. DCOs. The
framework also distinguishes non-U.S. DCOs that do not pose substantial
risk to the U.S. financial system from those that do.
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\10\ The five DCOs organized outside of the United States are
Eurex Clearing AG, ICE Clear Europe Ltd, ICE NGX Canada Inc., LCH
Ltd, and LCH SA.
\11\ 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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The alternative compliance framework is not available to U.S. DCOs.
U.S. DCOs must comply with the CEA and all Commission regulations
applicable to DCOs, including all of subparts A and B of Part 39.\12\
In addition, any non-U.S. DCO registered to clear futures listed for
trading on a DCM is not eligible for the alternative compliance regime
at this time. Most non-U.S. DCOs are registered for the purpose of
clearing swaps only, and as noted in the proposal, the Commission's
regulatory framework already distinguishes between clearing of futures
executed on a DCM, for which DCO registration is required, and clearing
of foreign futures, for which it is not.
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\12\ In addition, any DCO that has elected to be subject to
subpart C of Part 39, or that has been designated as systemically
important by the Financial Stability Oversight Council, must comply
with subpart C.
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Under Part 39 as now amended, a non-U.S. clearing organization that
wants to clear only swaps for U.S. persons has two registration
options. First, the non-U.S. clearing organization may apply for DCO
registration under the existing procedures in Sec. 39.3(a)(2) and be
subject to all Commission regulations applicable to DCOs, including
subpart B of Part 39. If, however, the non-U.S. clearing organization
does not pose substantial risk to the U.S. financial system and meets
the requirements of Sec. 39.51, as discussed below, it now has the
option to be registered and maintain registration as a DCO by relying
largely on its home country regulatory regime, in lieu of full
compliance with Commission regulations.
C. Overview of the New Requirements
The CEA requires a DCO to comply with the DCO Core Principles and
any requirement that the Commission imposes by rule or regulation.\13\
The CEA further provides that, subject to any rule or regulation
prescribed by the Commission, a DCO has ``reasonable discretion'' in
establishing the manner by which the DCO complies with each DCO Core
Principle.\14\ Currently, a DCO is required to comply with all of the
regulations in subpart B of Part 39, which were adopted to implement
the DCO Core Principles. The Commission is amending its regulations to
allow a non-U.S. clearing organization that seeks to clear swaps for
U.S. persons,\15\ 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.\16\
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\13\ 7 U.S.C. 7a-1(c)(2)(A)(i).
\14\ 7 U.S.C. 7a-1(c)(2)(A)(ii).
\15\ 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) (``Cross-Border
Guidance''), as such definition may be amended or superseded by a
definition of the term ``U.S. person'' that is adopted by the
Commission.
\16\ The Commission is promulgating the final rule pursuant to
its authority in section 5b(c)(2)(A), 7 U.S.C. 7a-1(c)(2)(A). The
section confers on the Commission the authority and discretion to
establish requirements for meeting DCO Core Principles through rules
and regulations issued pursuant to section 8a(5), 12 U.S.C. 12a(5).
In exercise of that discretion, the Commission has developed an
alternative compliance regime whereby a non-U.S. DCO may comply with
the Core Principles through compliance with its home jurisdiction's
requirements.
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A non-U.S. clearing organization applying for registration as a DCO
subject to alternative compliance will be eligible if: (1) The
Commission determines that the clearing organization's compliance with
its home country regulatory regime would satisfy the DCO Core
Principles; \17\ (2) the clearing organization is in good regulatory
standing in its home country; and (3) 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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\17\ As described further below, if a non-U.S. DCO fails to
demonstrate compliance with a particular DCO Core Principle, the DCO
may nevertheless be able to rely on alternative compliance for those
DCO Core Principles for which it is able to demonstrate compliance.
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An applicant for DCO registration subject to alternative compliance
will be required to file only certain exhibits of Form DCO,\18\
including a regulatory compliance chart in which the applicant
identifies the applicable, legally binding requirements in its home
country that correspond with each DCO Core Principle and explains how
the applicant satisfies those requirements. If the application is
approved by the Commission, the DCO will be permitted to comply with
its home country regulatory regime rather than the regulations in
subpart B of Part 39, with the exception of Sec. 39.15, which concerns
treatment of funds, and certain regulations related to those Core
Principles for which the applicant has not demonstrated that compliance
with the home country requirements satisfies them. Because the DCO will
be permitted to clear swaps for customers \19\ through registered FCMs,
the DCO will be required to fully comply with the Commission's customer
protection requirements,\20\ as well as the swap data reporting
requirements in part 45 of the Commission's regulations. The DCO also
will be required to comply with
[[Page 67162]]
certain ongoing and event-specific reporting requirements that are more
limited in scope than the reporting requirements for existing DCOs. The
eligibility criteria, conditions, and reporting requirements will be
set forth in new subpart D of Part 39.
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\18\ Whereas an applicant for DCO registration must file the
numerous and extensive exhibits required by Form DCO, an applicant
for alternative compliance will only be required to file certain
exhibits. See Appendix A to Part 39, 17 CFR part 39, appendix A.
\19\ 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 of the Commission's
regulations. 7 U.S.C. 1a(18); 17 CFR 1.3.
\20\ 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. 6d(f)(1). 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
non-U.S. DCO will be eligible for alternative compliance unless and
until its U.S. clearing activity (as measured by initial margin
requirements attributable to U.S. clearing members) increases to the
point that the Commission determines the DCO poses substantial risk to
the U.S. financial system, as described below.
D. Comments on the Notice of Proposed Rulemaking
The Commission requested comment on the proposed rulemaking and
invited commenters to provide data and analysis regarding any aspect of
the proposal. The Commission received a total of 15 substantive comment
letters in response.\21\ After the initial sixty-day comment period
expired, the Commission extended the comment period for an additional
sixty days.\22\ After considering the comments, the Commission is
largely adopting the rule changes as proposed, for the reasons
explained below. In the discussion below, the Commission highlights
topics of particular interest to commenters and discusses comments that
are representative of the views expressed on those topics. The
discussion does not explicitly respond to every comment submitted;
rather, it addresses the most significant issues raised by the proposed
rulemaking and analyzes those issues in the context of specific
comments.
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\21\ The Commission received comment letters addressing the
proposal submitted by the following: ASX Clear (Futures) Pty Ltd
(ASX); Better Markets, Inc. (Better Markets); CCP12; The Clearing
Corporation of India Ltd. (CCIL); Citadel; Eurex Clearing AG
(Eurex); Futures Industry Association (FIA); Intercontinental
Exchange, Inc. (ICE); International Swaps and Derivatives
Association, Inc. (ISDA); Japan Securities Clearing Corporation
(JSCC); Kermit R. Kubitz; LCH Ltd and LCH SA (LCH); Securities
Industry and Financial Markets Association (SIFMA); World Federation
of Exchanges (WFE); and ASX, JSCC, Korea Exchange Inc., and OTC
Clearing Hong Kong Limited (``ASX, JSCC, KRX, and OTC Clear'').
\22\ See Registration With Alternative Compliance For Non-U.S.
Derivatives Clearing Organizations, 84 FR 49072 (Sept. 18, 2019).
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II. Amendments to Parts 39 and 140 of the Commission's Regulations
A. Regulation 39.2--Definitions
1. Good Regulatory Standing
The Commission proposed that, to be eligible for registration with
alternative compliance, a DCO would have to be in good regulatory
standing in its home country. The Commission further proposed that
``good regulatory standing'' be defined to mean either that 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 DCO.
In connection with the proposed definition of ``good regulatory
standing,'' the Commission also requested comment on the following
question: ``Although the Commission proposes to incorporate a standard
of `material' non-observance in the definition, should it instead
remove references to materiality, and thus capture all instances of
non-observance?''
The Commission did not receive any comments on the requirement that
a DCO be in good regulatory standing in its home country to be eligible
for registration with alternative compliance, but several commenters
addressed the definition of ``good regulatory standing.'' Eurex, ICE,
and CCIL supported the definition's standard of ``material'' non-
observance. In contrast, Better Markets argued that the definition does
not provide sufficient assurance of the DCO's compliance with relevant
home country regulations because it allows non-U.S. DCOs that have been
found non-compliant with certain home country regulations to maintain
good regulatory standing. Better Markets argued that a non-U.S. DCO
should be required to secure a representation from its regulator that
it remains in good regulatory standing, without allowing for ``material
non-observance'' of applicable law when that non-observance is in the
process of being resolved to the satisfaction of the home country
regulator.
The Commission is adopting the definition of ``good regulatory
standing'' largely as proposed.\23\ The Commission's supervisory
experience with DCOs has shown that even well-functioning DCOs will
experience instances of non-observance of applicable requirements--both
material and immaterial. The Commission therefore seeks to refrain from
adopting a mechanical or hyper-technical approach whereby isolated
instances of non-observance would be disqualifying.\24\ The Commission
further believes that the definition provides adequate assurance of
compliance with home country regulation, because any material non-
observance must be resolved to the satisfaction of the home country
regulator in order for the DCO to be deemed to be in good standing.
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\23\ In an earlier, separate rulemaking, the Commission had
proposed to define ``good regulatory standing'' in a way that would
apply only to exempt DCOs. See Exemption From Derivatives Clearing
Organization Registration, 83 FR 39933 (Aug. 13, 2018). Therefore,
in the proposal for this rulemaking, the Commission proposed a
definition of ``good regulatory standing'' that retained the
previously proposed definition for exempt DCOs but added a separate
provision that would apply only to DCOs subject to alternative
compliance. See Registration With Alternative Compliance for Non-
U.S. Derivatives Clearing Organizations, 84 FR 34831 (July 19,
2019). The Commission is adopting only that portion of the
definition that applies to DCOs subject to alternative compliance.
The Commission will amend the definition of ``good regulatory
standing'' as necessary if it finalizes the rulemaking on exempt
DCOs.
\24\ While the Commission expects, in almost all cases, to defer
to the home country regulator's determination of whether an instance
of non-compliance is or is not material, it does retain the
discretion, in the context of the application of these rules of the
Commission, to make that determination itself, and, in order to make
such a determination, to obtain information from the home country
regulator pursuant to the relevant MOU.
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2. Substantial Risk to the U.S. Financial System
The Commission has a strong supervisory interest in any DCO that is
registered, or required to register, with the Commission, regardless of
its location. Given the global nature of the swaps market, these DCOs
typically operate in multiple jurisdictions and are subject to
overlapping or duplicative regulations. In developing the alternative
compliance regime, the Commission has strived to allow for greater
deference to foreign jurisdictions so as to reduce overlapping
supervision and regulatory inefficiencies, while retaining direct
oversight over non-U.S. DCOs that--due to the level of their U.S.
clearing activity--raise a greater level of supervisory interests
(relative to other non-U.S. DCOs).\25\ The proposed
[[Page 67163]]
``substantial risk'' test is designed to assist the Commission's
assessment of its supervisory interest in a particular non-U.S. DCO.
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\25\ In developing the alternative compliance regime, the
Commission is guided by principles of international comity, which
counsel courts and agencies to act reasonably and with due regard
for the important interests of foreign sovereigns in exercising
jurisdiction with respect to activities taking place abroad. See
Restatement (Third) of Foreign Relations Law of the United States
(the Restatement). With regard to deference, the G20 ``agree[d] that
jurisdictions and regulators should be able to defer to each other
when it is justified by the quality of their respective regulatory
and enforcement regimes, based on similar outcomes, in a non-
discriminatory way, paying due respect to home country regulation
regimes.'' G20 Leaders' Declaration, St. Petersburg Summit, para. 71
(Sept. 6, 2013).
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For purposes of this rulemaking, the Commission proposed to define
the term ``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 \26\ 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 whether the DCO poses substantial
risk to the U.S. financial system.
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\26\ 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. This risk-based element of the test focuses on
the initial margin attributable to those clearing members who, by
virtue of their relationship and connection to the U.S. financial
system, raise systemic risk concerns. Accordingly, the Commission
believes the relative risk that a DCO poses to the U.S. financial
system can be identified by the cumulative sum of initial margin
attributable to U.S. clearing members collected by the DCO.
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The first prong of the test addresses systemic risk, and the
Commission's primary systemic risk concern arises from 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 respects international comity \27\ by ensuring that the
substantial risk test captures only those non-U.S. DCOs with clearing
activity attributable to U.S. clearing members sufficient to warrant
more active oversight by the Commission. Even if a non-U.S. DCO
satisfies the first prong, it may still qualify for registration
subject to alternative compliance if the proportion of U.S. activity it
clears does not satisfy the second prong.
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\27\ In developing this rulemaking, the Commission was 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).
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Under the test, the term ``substantial'' would apply to proportions
of approximately 20 percent or greater. The Commission reiterates 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
indicating how it would assess the meaning of the term ``substantial''
in the test.
The Commission recognizes that if a test were to rely solely on
initial margin requirements of U.S. clearing members, it may not fully
capture the risk of that DCO to the U.S. financial system. Therefore,
under the substantial risk test, the Commission retains a degree of
discretion to determine whether a non-U.S. DCO poses substantial risk
to the U.S. financial system. 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 other indication of
the systemic risk presented by the DCO.
The Commission specifically requested comment on the following
question: ``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.''
The Commission received a variety of comments regarding the
substantial risk test. Some comments were generally supportive of the
test and its component parts, but the majority of comments raised
questions and concerns about the test, including the elements of the
test, the discretion afforded to the Commission, and the operation of
the test and its ramifications. LCH and CCIL both supported the
substantial risk test. In particular, LCH supported using initial
margin as an indicator of a non-U.S. DCO's risk to the U.S. financial
system. LCH asserted that initial margin is superior to gross notional
for analyzing risk, arguing that for cleared swaps gross notional does
not provide a clear indication of risk and could lead to an over-
estimation of the underlying risk managed by the DCO. CCIL agrees with
the proposed test for substantial risk to the U.S. financial system
based on the joint application of the two thresholds in the test.
Two commenters questioned how the Commission developed the
substantial risk test, particularly the thresholds in the test, and
requested additional information regarding this process. ICE stated
that it is not clear from the proposal how the Commission determined
that the 20 percent thresholds indicate that a non-U.S. DCO poses a
substantial risk to the U.S. financial system. ICE requested that the
Commission provide an explanation of the basis for this determination.
Citadel requested that the Commission provide further information
regarding how the criteria were developed, as well as the expected
practical impact if the test were applied, including how many currently
registered non-U.S. DCOs the Commission would identify as posing
substantial risk to the U.S. financial system. Better Markets
specifically opposed the first prong of the substantial risk test,
which asks whether 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. It argued that because the Commission did not provide
data regarding the value of 20 percent of the U.S. clearing members'
initial margin across all swaps, and did not provide a data-based
rationale for choosing 20 percent as the appropriate threshold, the
implications of this prong of the test are highly speculative, which in
turn limits the ability of the public to meaningfully comment on the
proposal. Based on its analysis of 2018 data from ISDA, Better Markets
suggested that LCH Ltd. would be the only non-U.S. DCO to meet the
criteria for presenting a substantial risk to the U.S. financial
system. Better Markets further noted that, based on the ISDA data, ICE
Clear Credit (were it not U.S.-based) would be eligible for alternative
compliance under the first prong of the definition, despite being
deemed systemically important by the Financial Stability Oversight
Council (FSOC).
In developing the ``substantial risk'' test, the Commission applied
its experience in regulating non-U.S. DCOs, including circumstances in
which there can be substantial overlap between the regulatory and
supervisory activity of the DCO's home country regulator and that of
the Commission, as well as any associated benefits and challenges. The
Commission anticipates that based on current clearing activity, one
non-U.S. DCO, LCH Ltd, would satisfy the substantial risk test. With
respect to the reference to FSOC designation, the Commission observes
that while both the substantial risk inquiry and FSOC designation
relate generally to issues of systemic risk, the related assessments
will necessarily differ given their different purposes and
consequences.\28\
[[Page 67164]]
The substantial risk test is designed to better calibrate the
Commission's oversight of non-U.S. DCOs, based on the principle of
deference to their home country regulators, while at the same time
taking into consideration risk to U.S. clearing members and ultimately,
the U.S. financial system. If a non-U.S. DCO is determined to pose
``substantial risk,'' the Commission may not defer to the home country
regulatory regime and the DCO will be required to comply with both
Commission requirements and its home country requirements if it
conducts activities requiring registration with the Commission. On the
other hand, the FSOC designation process focuses on identifying those
FMUs whose failure or disruption could threaten the U.S. financial
system.\29\ The consequence of FSOC designation is that the FMU becomes
subject to enhanced regulatory supervision. To date, the only DCOs
designated by FSOC have been U.S. DCOs. Nevertheless, a non-U.S. DCO
designated by FSOC would not be eligible for alternative
compliance.\30\
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\28\ Section 804 of the Dodd-Frank Act provides the FSOC the
authority to designate a financial market utility (FMU), including a
DCO, that the FSOC determines is or is likely to become systemically
important because the failure of or a disruption to the functioning
of the FMU could create, or increase, the risk of significant
liquidity or credit problems spreading among financial institutions
or markets and thereby threaten the stability of the U.S. financial
system. See Authority to Designate Financial Market Utilities as
Systemically Important, 76 FR 44763 (July 27, 2011).
\29\ In making a determination with respect to whether a FMU is,
or is likely to become, systemically important, the FSOC takes into
consideration: The aggregate monetary value of transactions
processed by the FMU; the aggregate exposure of the FMU to its
counterparties; the relationship, interdependencies, or other
interactions of the FMU with other FMUs or payment, clearing, or
settlement activities; the effect that the failure of or a
disruption to the FMU would have on critical markets, financial
institutions, or the broader financial system; and any other factors
the FSOC deems appropriate. See 12 CFR 1320.10.
\30\ The Commission did not propose to amend Sec. 39.30(b),
which subjects a ``systemically important [DCO]'' (defined in Sec.
39.2 as a DCO designated by the FSOC for which the Commission acts
as the Supervisory Agency) to the provisions of subparts A and B of
Part 39.
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The Commission disagrees that commenters did not have access to
sufficient information to comment on the first prong of the substantial
risk test. Better Markets' analysis of how the test would apply to
various DCOs based on publicly available information is inconsistent
with that claim. The Commission continues to believe that the first
prong of the test is properly calibrated to capture those non-U.S. DCOs
that pose substantial risk to the U.S. financial system. The Commission
also observes that no commenter offered an alternative version of the
test.
Several commenters supported the first prong of the substantial
risk test but questioned the wisdom and utility of the second prong.
ISDA opposed the second prong and requested that it be eliminated. ISDA
stated that although it generally supports clear thresholds for
determining whether a DCO poses substantial risk to the U.S. financial
system, the second prong of the test does not gauge the risk of the
relevant non-U.S. DCO to the U.S. financial system, but instead
signifies the importance of U.S. clearing members to that particular
DCO.\31\ ISDA further argued that the second prong may incentivize non-
U.S. DCOs to limit clearing for U.S. persons to avoid being designated
as posing substantial risk to the U.S. financial system, and thus being
ineligible for registration with alternative compliance. ISDA argued
that this situation would harm U.S. banking groups, and could be viewed
as violating the spirit of the Principles for Financial Market
Infrastructures requirement to provide non-discriminatory treatment of
all clearing members.\32\ WFE and Eurex also acknowledged the first
prong as an appropriate measure of risk, but questioned the second
prong on similar grounds.
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\31\ ISDA also did not recognize that the proposed definition of
``substantial risk to the financial system'' requires that both
prongs of the test, and not only one or the other, be satisfied in
order for a non-U.S. DCO to satisfy the test. Based on this
misunderstanding, ISDA argued that the second prong does not provide
an independent basis for finding that a non-U.S. DCO presents
substantial risk to the financial system. In response to this
comment, the Commission reaffirms that the substantial risk test is
a two-prong test in which both the first and second prongs must be
satisfied.
\32\ See CPMI-IOSCO, Principles for Financial Market
Infrastructures (PFMIs), at Principle 18 (Apr. 2012), available at
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf.
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As the Commission explained previously, the second prong ensures
that the test will capture a non-U.S. DCO only if a sufficiently large
portion of its clearing activity is attributable to U.S. clearing
members such that the United States has a substantial interest
warranting more active Commission oversight. While a non-U.S. DCO could
theoretically be incentivized to discriminate against U.S. clearing
members to avoid satisfying the second prong, the Commission does not
view this as a significant risk as a practical matter. It is unlikely
that a DCO would have enough U.S. clearing member activity to satisfy
the first prong, but would be able to avoid satisfying the second prong
by manipulating its U.S. clearing member activity. In any event, the
discretion afforded the Commission in the substantial risk test should
dull any incentive for a DCO to reject U.S. clearing member business
for the purposes of the test.
Three commenters questioned whether the substantial risk test
should account for other factors, including the market share a non-U.S.
DCO has with respect to clearing certain classes of products, as well
as the DCO's size. Citadel questioned, given the relative size of the
interest rate swap market, whether a DCO clearing swaps in another
asset class (such as CDS) could ever be considered to pose substantial
risk to the U.S. financial system under the proposed criteria. Citadel
asserted that it would be a strange outcome if only non-U.S. DCOs
clearing interest rate swaps would be subject to the Commission's full
regulatory framework for DCOs. Similarly, Better Markets argued that
the systemic risk of a non-U.S. DCO does not turn solely on the
percentage of U.S. clearing member initial margin posted as a
percentage of the clearing market as a whole, but also depends on other
critical systemic risk factors, such as the prominence of a particular
clearing organization in a particular market (such as credit-related
swaps), and the potential for correlated losses to occur across U.S.
and non-U.S. DCO clearing members participating in that and other
markets. Because these considerations are not part of the substantial
risk test, Better Markets believes that the substantial risk test does
not sufficiently addresses systemic risk concerns.
The Commission recognizes that a test based solely on initial
margin requirements may not fully capture the risk of a given DCO. That
is why the Commission proposed 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. The Commission noted that, in making its
determination in these cases, it would 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.\33\ In appropriate circumstances, the factors cited by the
commenters, along with other similar factors, may be considered in
connection with an exercise of Commission discretion. The Commission
discusses these considerations in additional detail below, in
connection with the discussion of Commission discretion. The Commission
disagrees with the assertion that the test does not account for the
size of the DCO. The first prong of the test, whether the DCO holds 20
percent or more of the required initial margin of U.S. clearing members
for swaps across all registered and exempt
[[Page 67165]]
DCOs, is closely correlated with the size of the DCO in that only a
large DCO will hold that amount of initial margin.
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\33\ See Registration with Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, 84 FR 3822 (Feb. 13, 2019).
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Some commenters supported the proposal that the Commission retain
the ability to exercise discretion for a prong of the substantial risk
test that is close to the 20 percent threshold, as opposed to being
limited to a mechanical application. WFE warned against any automatic
trigger, stating that the Commission should be able to determine that a
non-U.S. DCO does not pose substantial risk to the U.S. financial
system, even if the DCO exceeds both thresholds in the substantial risk
test. LCH supports the Commission's ability to exercise its discretion,
but only when the non-U.S. DCO is close to 20 percent on both prongs of
the substantial risk test. Similarly, CCP12 and JSCC requested that the
Commission clarify that the Commission would exercise its discretion
only if both of the two thresholds are close to 20 percent. Citadel
recommended that the Commission retain sufficient discretion to conduct
a thorough analysis of the systemic risks associated with each non-U.S.
DCO seeking to use the alternative compliance framework, taking into
account both U.S. participation on that DCO (including clearing
members, customers, and affiliates of U.S. firms) and the DCO's market
position within the relevant asset class.
Multiple commenters questioned or criticized the scope of the
Commission's discretion under the substantial risk test. ICE argued
that the potential scope of discretion, and the lack of definition of
relevant factors that the Commission may consider, could create
significant uncertainty as to how the Commission may classify a DCO,
even potentially resulting in inconsistent determinations. ICE also
argued that this lack of specificity could lead to unnecessary delays
in the assessment of an applicant, which would increase compliance
costs and may discourage clearing organizations from submitting an
application. FIA similarly argued that the Commission's discretion
should be subject to some parameters so as to create more transparency
and clarity. FIA suggested that the Commission list factors it will
consider in determining whether a non-U.S. DCO poses substantial risk.
Similarly, LCH recommended there be greater transparency around the
qualitative factors that may be considered in a non-U.S. DCO's
substantial risk assessment, noting that any such factors should be
measurable and relevant to addressing risk in the U.S. financial
system. ISDA expressed concern about the Commission's proposed ability
to retain discretion, arguing that this discretion undermines the
Commission's objective to provide a bright-line test, and may lead to
legal and compliance uncertainty. ISDA requested that the Commission
clarify the factors that might reduce, mitigate, or provide a better
indication of a non-U.S. DCO's risk to the U.S. financial system.
CCIL cautioned that the Commission's discretion to determine
whether a non-U.S. DCO poses substantial risk based on one or both of
the thresholds may have the effect of ``undoing'' the proposed test.
FIA argued that if the Commission can exercise its discretion even when
a DCO is approaching the threshold of only one prong of the test, then
there would be no clarity or certainty regarding whether any particular
DCO satisfies the test. Both FIA and CCP12 argued that the possibility
that the Commission might exercise discretion and determine that a
small non-U.S. DCO presents substantial risk to the U.S. financial
system based on being close to the threshold on the second prong may
create uncertainty that could lead to market fragmentation, possibly
exacerbate systemic risk, or otherwise harm market participants,
especially if the DCO attempts to reduce its existing U.S. clearing
business, or limit new U.S. clearing business, to mitigate against
perceived uncertainty.
Better Markets argued that the Commission retained too much
discretion in its proposed definition of substantial risk, including
discretion to determine that non-U.S. DCOs above both thresholds do not
pose substantial risk to the U.S. financial system and therefore remain
eligible for alternative compliance. Better Markets further stated that
due to the breadth of this discretion, the substantial risk test
effectively only provides one indication of how the Commission might
consider eligibility for alternative compliance. In the view of Better
Markets, the level of discretion appears to justify determinations that
a given DCO does or does not pose substantial risk based on almost any
criteria or factors, and thus asks the public to foresee the
discretionary application of vague regulations with a potentially wide
range of possible outcomes.
In response to comments expressing concern about the Commission
exercising discretion on the substantial risk determination as a whole
based on only one of the two prongs being close to a 20 percent
threshold, the Commission has revised the rule text to clarify when it
will exercise discretion. Specifically, the rule text has been revised
to provide that where one or both of these thresholds are identified as
being close to 20 percent, the Commission may exercise discretion in
determining whether an identified threshold is satisfied for the
purpose of determining whether the DCO poses substantial risk to the
U.S. financial system. This was always the Commission's intent with
respect to the exercise of discretion, but the Commission agrees with
commenters who indicated that the language in the proposal was not
sufficiently clear.
The Commission intends to consider all factors it believes are
relevant to determine whether a non-U.S. DCO poses substantial risk to
the U.S. financial system. The following non-exclusive examples
illustrate the factors the Commission may consider in exercising
discretion under the substantial risk test: The market share of the DCO
in clearing a given asset class, and the importance of those products
to the U.S. financial system; whether positions cleared at the DCO are
portable to another DCO and the potential disruptions associated with
transferring positions; whether the sudden failure of the DCO would
significantly reduce the availability of clearing services to U.S.
clearing members; and whether settlements at the DCO are primarily
denominated in U.S. dollars.
As one commenter correctly observed, the Commission retained
discretion to determine that non-U.S. DCOs above both thresholds
nevertheless remain eligible for alternative compliance. The Commission
wishes to clarify, however, that it does not intend to exercise
discretion in a manner that would have the effect of negating the test.
Exercising discretion is the exception, not the rule, and the
Commission accordingly intends to exercise its discretion sparingly,
and on a case-by-case basis, weighing and considering factors that
possibly are unique to the DCO and its profile in the marketplace.
Lastly, the Commission wishes to clarify that it intends to exercise
its discretion on a sliding scale where the further the non-U.S. DCO is
from the thresholds, the more numerous or compelling the factors will
need to be for the Commission to exercise discretion.
The Commission received a number of process-related comments
regarding the substantial risk test. Some of the comments were directly
responsive to the Commission's request in the proposal for comment
regarding the frequency with which the Commission should reassess
whether a DCO presents substantial risk to the U.S. financial system,
and across what time period after the DCO is registered under the
[[Page 67166]]
alternative compliance regime, or otherwise addressed that same
topic.\34\ Additionally, a number of commenters had other comments,
questions, and recommendations regarding the process by which the
Commission would apply the substantial risk test, as well as the nature
and scope of a DCO's obligations in connection with that process.
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\34\ See Registration With Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, 84 FR 34826 (July 19, 2019).
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With regard to the frequency with which the Commission will assess
whether a DCO poses substantial risk to the U.S. financial system, LCH
suggested that the Commission reassess a DCO's risk to the U.S.
financial system annually. CCIL, CCP12, and JSCC stated that the
Commission should reassess a DCO every two years, and CCP12 added that
the Commission should also reassess following a material change to the
DCO's clearing services or home country regulatory framework. CCP12
also suggested that the reassessment be regarded more as a ``check-up''
than a complete re-application process in which the DCO would have to
resubmit already available data, because the Commission already would
have been receiving regular reports from the DCO. FIA stated that the
substantial risk test should not be applied too frequently, to avoid
DCOs oscillating between being eligible or ineligible for alternative
compliance. CCP12 and JSCC suggested that the Commission look at an
average of the previous 12 months when reassessing each threshold to
ensure that the results are not overly influenced by any specific
event, such as quarter-end or year-end.
With regard to reassessments of a DCO's status under the
substantial risk test, ICE asserted that it would be difficult for a
DCO to determine where it stands in relation to the threshold in the
first prong of the test because this information is not available to
DCOs. ICE argued that although the Commission may have this
information, the standard needs to be one that is predictable and
assessable for the DCOs themselves. ICE further stated that it is not
clear how often a DCO must test whether it poses substantial risk to
the U.S. financial system, or how long it would have to come into
compliance with all requirements applicable to DCOs that are not
eligible for alternative compliance if it ceases to be eligible.
Similarly, ISDA requested that the Commission affirm that the
Commission will monitor the 20 percent threshold test by analyzing the
data DCOs already report to the Commission, and that a non-U.S. DCO has
no obligations with respect to the monitoring of the 20 percent
threshold apart from its reporting requirements. CCP12 recommended that
the Commission use an observation period of sufficient duration before
determining that a non-U.S. DCO exceeds the thresholds in the
substantial risk test, to verify whether the breach is a structural
trend or a temporary condition.
FIA stated that there should be a formal process to designate a DCO
as one that poses substantial risk to the U.S. financial system, and
that the Commission should clearly establish the frequency with which
the substantial risk test will be applied to DCOs. WFE suggested that
the Commission adopt and implement formal milestones in the substantial
risk determination process. Specifically, WFE suggested that when a DCO
approaches a threshold in the substantial risk test, but prior to any
Commission determination that the DCO poses substantial risk, the
Commission should initiate discussions with both the DCO and its home
country supervisor, and allow the DCO to raise substantive and
procedural issues with the Commission. In addition, WFE stated that if
the Commission determines that a DCO poses substantial risk to the U.S.
financial system, that the determination should be accompanied by a
communication outlining the factors the Commission took into
consideration in making the determination, and that DCOs should be able
to appeal the determination.
FIA stated that the DCO, home country regulator, and, if
practicable, other interested parties should be given the opportunity
to provide feedback to the Commission when it is determining whether a
DCO presents substantial risk, and that the DCO should be given a grace
period during which time it can attempt to drop under the relevant
thresholds. FIA stated that the Commission should make clear what is
expected to occur if a DCO that is registered subject to alternative
compliance and clears for U.S. customers becomes ineligible for
alternative compliance, and should allow an appropriate timeframe for
the orderly transfer or close out of any accounts held by U.S.
customers at the relevant DCO in the event the non-U.S. DCO decides to
limit clearing activity by U.S. clearing members to attempt to remain
below the thresholds in the substantial risk test. FIA argued that it
is vital that clearing members be given ample notice of a proposed
determination by the Commission, together with the basis for such
determination. CCP12 also requested that the Commission provide
sufficient notice to the DCO to permit it to adjust its clearing
business prior to a determination that the DCO poses substantial risk
to the U.S. financial system.
FIA asserted that because the substantial risk test is applied on
an ongoing basis, the Commission should commit to publishing and
updating as appropriate a list of non-U.S. DCOs that pose substantial
risk to the U.S. financial system and are therefore ineligible for
alternative compliance. FIA explained that market participants will
assume that a DCO that does not currently pose substantial risk to the
U.S. financial system will continue to be able to facilitate U.S.
customer clearing. Firms will be better positioned to plan for, and
potentially mitigate, the business and market disruptions that could
result from a DCO's addition to the list if they have notice of the
Commission's intention.
The Commission is mindful of the concerns raised by commenters
regarding the frequency with which the Commission should assess whether
a DCO presents substantial risk to the U.S. financial system. At this
time, however, the Commission declines to define a specific time period
for reassessment of whether a DCO presents substantial risk. The
Commission notes that because it will be receiving the relevant data
from DCOs daily, it intends to monitor whether a non-U.S. DCO subject
to alternative compliance presents ``substantial risk to the U.S.
financial system'' on an ongoing basis.
In response to the concerns commenters expressed regarding the
process that the Commission will use to determine whether a non-U.S.
DCO satisfies the substantial risk test, and to inform the DCO of that
determination, the Commission notes that it has extensive experience
with engaging DCOs on a cooperative basis, and anticipates doing so in
circumstances in which a non-U.S. DCO may pose substantial risk to the
U.S. financial system. The Commission anticipates early and significant
dialogue with non-U.S. DCOs if they approach the thresholds, and
welcomes engagement with the DCO and its home country regulators,
especially if it appears that the DCO is projected to exceed the
thresholds in the substantial risk test. In applying the test, the
Commission will focus on the non-U.S. DCO's current U.S. clearing
member activity relative to the thresholds, and whether any increases
in activity by U.S. clearing members appear to be temporary, or are
part of a persistent trend. The Commission does not intend that, absent
extraordinary circumstances,
[[Page 67167]]
non-U.S. DCOs will alternate between traditional registration and
registration with alternative compliance, as that would not benefit the
non-U.S. DCO, market participants, or the Commission. Lastly, the
Commission does not intend to publish a list of non-U.S. DCOs that pose
substantial risk to the U.S. financial system. If a non-U.S. DCO
subject to alternative compliance becomes ineligible for alternative
compliance for any reason, the Commission will modify the DCO's
registration order, which is public, to provide that it must comply
with all Commission regulations applicable to DCOs and to provide a
reasonable period of time for it to do so, pursuant to Sec.
39.51(d)(4). This process should not result in any disruption to market
participants. In the unlikely event that a non-U.S. DCO responds to a
determination that it is no longer eligible for alternative compliance
by requesting a vacation of its registration, the Commission will work
with the DCO and market participants to minimize market disruption.
The Commission is adopting the substantial risk test as proposed,
with one exception. As explained above, the Commission is modifying the
rule text to clarify the scope of Commission discretion under the test.
3. U.S. Clearing Member
The substantial risk test focuses on the clearing activity of U.S.
clearing members at non-U.S. DCOs. For purposes of the test, the
Commission proposed to define ``U.S. clearing member'' as a clearing
member of a non-U.S. DCO that falls within one of three categories: It
is organized in the United States; it is an FCM, which means it may
clear for U.S. customers; or it is a non-U.S. entity whose ultimate
parent company is organized in the United States.
The comments focused on one aspect of the proposed definition of
U.S. clearing member. Specifically, ICE, ISDA, WFE, CCP12, FIA, JSCC,
and Eurex opposed the definition's inclusion of clearing members that
are organized outside of the United States, but whose ultimate parent
company is organized in the United States.\35\ For example, ICE stated
that the definition of ``U.S. clearing member'' is overbroad and should
instead focus only on the location and activity of the clearing member
itself. ICE argued that the fact that a clearing member located outside
of the United States has a U.S. parent does not mean that its clearing
activity at a non-U.S. DCO has or can be expected to have an effect on
U.S. markets. FIA stated that affiliates with parent companies in the
U.S. are significant participants in the four currently exempt DCOs and
that it is not clear why all trades cleared by such a clearing member
would be considered to pose risk to the U.S. financial system. WFE
argues that rather than considering a non-U.S. clearing member with a
U.S. parent to be a U.S. clearing member in every instance, that the
Commission consider clearing members' legal organization (including
with respect to separate capitalization) and parent organization
recovery and resolution plans and make a determination based on the
particular facts and circumstances.
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\35\ CCP12, JSCC, and ISDA expressed concern that defining U.S.
clearing member to include non-U.S. entities could lead small non-
U.S. DCOs with significant clearing activity from non-U.S.
subsidiaries of U.S. parents to satisfy the substantial risk test,
given the increased likelihood that they would satisfy the second
prong. As discussed above, both prongs of the test must be satisfied
for the Commission to determine that a non-U.S. DCO poses
substantial risk, and small DCOs will not satisfy the test because
they will not satisfy the first prong.
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Two commenters argued that this aspect of the proposed definition
of U.S. clearing member is inconsistent with the Commission's existing
cross-border risk management framework for swaps.\36\ ISDA recommended
that non-U.S. subsidiaries of U.S. swap dealers be excluded from the
definition of U.S. clearing member, on the basis that the Commission's
Cross-Border Guidance provides that non-U.S. subsidiaries of U.S. swap
dealers are not considered U.S. persons simply because they are part of
a U.S. banking group. CCP12 argued that section 2(i) of the CEA
requires that the focus be on whether a non-U.S. clearing
organization's activities have a direct and significant connection with
activities in, or effect on, commerce of the United States. CCP12
believes that, under this approach, the focus should be on the non-U.S.
clearing organization's clearing for U.S. participants.
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\36\ See Cross-Border Guidance, 78 FR 45292, 45316-45317 (July
26, 2013).
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The Commission is adopting the definition of ``U.S. clearing
member'' as proposed, including in the definition those clearing
members that are organized outside of the United States, but whose
ultimate parent company is organized in the United States. The
Commission acknowledges that the definition of ``U.S. clearing member''
is more expansive than the definition of ``U.S. person'' in the Cross-
Border Guidance in that a clearing member organized outside of the
United States is always considered to be a ``U.S. clearing member'' if
it has a U.S. parent. Because the risk associated with a non-U.S.
clearing member can potentially flow to its U.S. parent, the Commission
believes that it is appropriate to consider that activity, aggregated
together with other relevant activity, in applying the substantial risk
test. This approach has the important advantage of being easily
administered as a bright-line test, making the calculation more
predictable than it would be under an approach based on specific facts
and circumstances. The Commission believes this is appropriate here,
where the definition does not have jurisdictional consequences
impacting issues such as the need for registration. Furthermore, this
definition will be used in both the numerator and denominator to
measure clearing activity as a percentage for the purposes of the first
prong, limiting its impact in terms of the number of non-U.S. DCOs
satisfying the test.
B. Regulation 39.3(a)(3)--Application Procedures
The Commission proposed to amend Sec. 39.3(a) to establish
application procedures for a non-U.S. clearing organization seeking to
register as a DCO subject to alternative compliance. Proposed Sec.
39.3(a) would require an applicant to submit to the Commission the
following sections of Form DCO, in some instances modified as
described: 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).
As proposed, an 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. To satisfy this requirement,
the applicant would be required to provide in Exhibit A-1 the citation
and
[[Page 67168]]
full text of each applicable legal requirement in its home country that
corresponds with each DCO Core Principle and an explanation of how the
applicant satisfies those requirements. In the event the home country
lacks legal requirements that correspond with a particular DCO Core
Principle, the applicant should explain how it would satisfy the DCO
Core Principle nevertheless.
The Commission requested comment on whether it should require
additional, or less, information from an applicant for alternative
compliance as part of its application under proposed Sec. 39.3(a)(3).
Several commenters stated that the Commission should require less
information from applicants. CCP12 stated that the proposed application
procedure is substantial and therefore burdensome in terms of processes
and administrative filings. ICE stated that the requirement that an
applicant submit a chart comparing its home country's requirements to
each DCO Core Principle would require extensive work. ICE suggested
that the Commission permit applicants to meet this requirement in a
more flexible manner than by requiring the provision of a mapping
document, such as by allowing applicants to address categories of
regulatory objectives under the Dodd-Frank Act or Commission
regulations. CCIL stated that the Commission should require applicants
to provide only the information required to be disclosed by the
quantitative and qualitative disclosure requirements under the PFMI
standards. ICE similarly stated that the Commission should benchmark
its comparability assessment with regard to compliance with
international standards and, in particular, the PFMIs. Eurex and LCH
recommended that an existing DCO applying for alternative compliance
should not have to submit all of the exhibits required under proposed
Sec. 39.3(a)(3) because the Commission would already be aware of many
of the documents required by the application.
One commenter, Mr. Kubitz, suggested that the Commission should
require additional information from applicants, and specifically, the
applicant's current clearing volume, an explanation of any differences
between the DCO Core Principles and the applicant's home country
regulatory regime, and a justification for any differences in the
applicant's home country reporting requirements.
After reviewing the comments, the Commission continues to believe
that the information required of applicants under proposed Sec.
39.3(a)(3) is appropriate and necessary to evaluate an applicant's
eligibility for alternative compliance. This includes the regulatory
compliance chart in Exhibit A-1 of Form DCO, which is necessary to
ensure that an applicant is subject to requirements in its home country
jurisdiction that would satisfy the DCO Core Principles. The Commission
must receive this information also to ensure that an applicant for
alternative compliance actually satisfies the DCO Core Principles, as
is required of all registered DCOs under the CEA.\37\ In addition, the
Commission could not evaluate an application based on PFMI compliance
because the CEA specifically requires compliance with the DCO Core
Principles.
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\37\ 7 U.S.C. 7a-1(c)(2)(A)(i).
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The Commission also does not believe that it needs to require
additional information beyond that contained in proposed Sec.
39.3(a)(3). If the Commission determines that it needs additional
information to process a particular application, existing Sec.
39.3(a)(3) (proposed to be renumbered as Sec. 39.3(a)(4)) permits the
Commission to request that the applicant provide that information.
With respect to a DCO that has already registered with the
Commission pursuant to the procedures in Sec. 39.3(a)(2), and that may
wish to be subject to alternative compliance, those DCOs would not need
to follow the procedures set forth in proposed Sec. 39.3(a)(3).
Rather, a currently registered DCO that wishes to be subject to
alternative compliance would need to submit a request to amend its
order of registration pursuant to Sec. 39.3(d). The initial request
would need to include only Exhibits A-1 and A-8 as described in
proposed Sec. 39.3(a)(3). Recognizing that many of the current non-
U.S. DCOs are subject to the European Market Infrastructure Regulation
(EMIR), the Commission has undertaken an analysis of EMIR against the
DCO Core Principles that a non-U.S. DCO that wishes to apply for
alternative compliance may use in preparing Exhibit A-1.\38\
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\38\ The analysis is provided in the appendix to this release.
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The Commission received some additional comments on proposed Sec.
39.3(a) that do not relate to the request for comment. LCH stated that
it supports the alternative compliance application process under
proposed Sec. 39.3(a)(3). Citadel and Mr. Kubitz suggested that the
Commission provide a public comment period for alternative compliance
applications, and Mr. Kubitz specifically suggested a period of 90-120
days. Citadel stated that market participants should be provided with
an opportunity to comment on each application because the costs and
benefits of alternative compliance, including the impact on U.S. market
participants, may vary greatly depending on the specific application
and the associated home country regulatory regime. Mr. Kubitz suggested
that the MOU between the Commission and the applicant's home country
regulator should be made public, and that alternative compliance
applications should be provided to relevant Congressional committees,
the Federal Reserve, and the Department of Treasury.
The Commission is declining to require a public comment period for
alternative compliance applications. There is no Commission regulation
requiring a comment period for applications for DCO registration, and
the Commission believes that it is well-equipped, with the benefit of
the information applicants will need to submit to the Commission
pursuant to Sec. 39.3(a)(3), to determine whether an applicant should
be registered subject to alternative compliance. However, the
Commission notes that, even without a required comment period, DCO
applications may be posted for public comment when the Commission
believes it is warranted.\39\ In response to Mr. Kubitz, the Commission
notes that it already publishes MOUs on its website.\40\ Finally, the
Commission does not believe that it should require that alternative
compliance applications be provided to Congressional committees, the
Federal Reserve, or the Department of Treasury given that these bodies
have no role assigned by statute or regulation in deciding whether to
approve or deny an application.
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\39\ See, e.g., CFTC Press Release, CFTC Requests Public Comment
on Related Applications Submitted by LedgerX, LLC for Registration
as a Derivatives Clearing Organization and Swap Execution Facility
(Dec. 15, 2014), https://www.cftc.gov/PressRoom/PressReleases/pr7078-14.
\40\ See Memoranda of Understanding, available at: https://www.cftc.gov/International/MemorandaofUnderstanding/index.htm.
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The Commission is adopting Sec. 39.3(a)(3) as proposed, but with
one modification. In those cases where an applicant's home country
lacks legal requirements that correspond to a particular DCO Core
Principle, the applicant would need to explain how it would comply with
the DCO Core Principle nevertheless. The Commission is adding a
sentence at the end of Sec. 39.3(a)(3) to clarify that point.
[[Page 67169]]
C. Regulation 39.4--Procedures for Implementing DCO Rules and Clearing
New Products
Regulation 39.4(b) requires a DCO to submit proposed new or amended
rules to the Commission pursuant to the self-certification procedures
of Sec. 40.6,\41\ as required by section 5c(c) of the CEA,\42\ unless
the rules are voluntarily submitted for Commission approval pursuant to
Sec. 40.5. Pursuant to the Commission's authority under section 4(c)
of the CEA,\43\ the Commission proposed to revise Sec. 39.4(c) \44\ 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 is related to the DCO's compliance with the requirements of part
45 of the Commission's regulations,\45\ or with section 4d(f) of the
CEA,\46\ parts 1 or 22 of the Commission's regulations,\47\ or Sec.
39.15,\48\ which set forth the Commission's customer protection
requirements, as such DCOs would remain subject to compliance with
these requirements. The Commission proposed to adopt this limited
exemption from the standard rule submission requirements given that
DCOs subject to alternative compliance will be subject to the
applicable laws in their home country and oversight by their respective
home country regulators.
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\41\ 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).
\42\ 7 U.S.C. 7a-2(c).
\43\ 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 subject to futures
trading restrictions under section 4(a), 7 U.S.C. 6(a), (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. Section 2(d) of the CEA, 7 U.S.C.
2(d), extends the Commission's section 4(c) exemptive authority to
swaps.
\44\ The Commission is also renumbering existing Sec. 39.4(c)
through (e) as Sec. 39.4(d) through (f).
\45\ 17 CFR part 45 (setting forth swap data reporting and
recordkeeping requirements).
\46\ 7 U.S.C. 6d(f) (relating to segregation of customer funds).
\47\ 17 CFR parts 1 and 22 (setting forth general regulations
under the CEA, including treatment of customer funds, and
requirements for cleared swaps, respectively).
\48\ 17 CFR 39.15 (setting forth requirements for the treatment
of customer funds).
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1. Rule Submission and Review Requirement
The Commission requested comment on whether it should require, as a
condition of eligibility for alternative compliance, that an applicant
be subject to a home country regulatory regime that has a rule review
or approval process.
CCIL stated that it is unnecessary for the Commission to require an
applicant's home country regime to have a rule review or approval
process given the requirement that the home country regulator represent
that an applicant is in good regulatory standing. ICE noted that
regulators take different approaches to rule reviews and as such, the
Commission should not require that the home country regulator have a
process to review every rule, but rather should consider only whether
material rule changes are reviewed by the home country regulator. ICE
commented that the review process of the Bank of England, the home
country regulator for central counterparties (CCPs) within the United
Kingdom, only requires CCPs to file major initiatives and does not
require a CCP to file each rule amendment for approval. ICE argued that
as long as material rule changes are subject to review by the home
country regulator, the Commission should neither deny alternative
compliance nor impose a review of every rule change by either the home
country regulator or the Commission for a non-U.S. DCO to be eligible
for alternative compliance. Better Markets argued that permitting
alternative compliance for a DCO with a home country regulatory regime
that does not have a rule submission and review process commensurate
with at least the Commission's part 40 rule certification process would
constitute a ``black hole in DCO oversight.''
The Commission agrees with the general premise of CCIL and ICE's
comments that the Commission should defer to the home country
regulator, which is best situated to determine what rule submissions,
if any, are necessary to effectively oversee a non-U.S. DCO's clearing
activities given the other regulatory and supervisory elements of the
home country regulatory regime. A DCO subject to alternative compliance
will still be required to submit to the Commission rules related to
critical customer protection safeguards and swap data reporting
requirements. In addition, the DCO will be subject to the full extent
of its home country regulator's oversight of the DCO's compliance with
its home country legal requirements, compliance with which must
constitute compliance with the DCO Core Principles. Even if that home
country regime does not include a rule review or approval process, the
lack of that specific process does not amount to an absence of
oversight. The Commission further believes that its MOU with a non-U.S.
DCO's home country regulator will provide the Commission with access to
any additional information that it might need to evaluate or review the
DCO's continued compliance with registration requirements. Therefore,
the Commission is not adopting a requirement that the home country
regulator of an applicant for alternative compliance have a rule review
or approval process that is comparable to the Commission's part 40 rule
submission procedures.
The Commission also requested comment on whether it should require
a DCO to file other rules pursuant to section 5c(c) of the CEA 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. If so, the Commission further
requested comment on whether it should retain discretion in determining
which other rules must be filed based on, for example, the particular
facts and circumstances, or whether it should enumerate the types of
rules that must be filed (e.g., rules related to certain products
cleared by the DCO).
Citadel argued that part 40 of the Commission's regulations, which
among other things requires that a DCO publicly disclose its rule
filings, is critical to providing U.S. market participants with
sufficient transparency into a DCO's governance and operations,
including with respect to the DCO's risk management and default
management frameworks. Citadel argued that the Commission should ensure
that market participants continue to have access to this information
from DCOs registered under the alternative compliance framework. The
Commission believes that the rules of a DCO subject to alternative
compliance will remain sufficiently transparent, as the DCO will be
subject to requirements that satisfy Core Principle L, which, among
other things, requires a DCO to make information concerning the rules
and operating and default procedures governing its
[[Page 67170]]
clearing and settlement systems available to market participants.\49\
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\49\ 7 U.S.C. 7a-1(c)(2)(L).
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Better Markets criticized the scope of the Commission's rule
certification exemption in Sec. 39.4(c) as ``fatally and legally
flawed'' because the Commission determined that it only needed to
receive rule submissions in the customer protection and swap data
reporting areas in which it will continue to exercise direct oversight.
Better Markets did not, however, identify any specific additional rules
that the Commission should require DCOs subject to alternative
compliance to submit. Better Markets also suggested that the Commission
require a DCO subject to alternative compliance to provide a notice
filing for rules subject to the exemption in Sec. 39.4(c) that
demonstrates that a rule was filed with the home country regulator, and
that discloses the nature and content of such a rule. The Commission is
not adopting this suggestion, as a requirement along these lines would
be inconsistent with the Commission's approach of deferring to the home
country regulator on whether and to what extent the regulator reviews a
DCO's rules.
2. CEA Section 4(c) Exemptive Authority
As noted in the proposal, the Commission believes the exemption in
Sec. 39.4(c) is consistent with the public interest and the purposes
of the CEA, as required by section 4(c),\50\ as it will allow the
Commission to focus on reviewing those rules that relate to areas where
the Commission exercises direct oversight. The exemption reflects the
Commission's view that the protection of customers--and safeguarding of
money, securities, or other property deposited by customers--is a
fundamental component of the Commission's regulatory oversight of the
derivatives markets and hence, DCOs subject to alternative compliance
should be required to certify rules relating to the Commission's
customer protection requirements. These customer protection-related
rules will remain 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.\51\ At the same time, the exemption in
Sec. 39.4(c) will reduce the time and resources necessary for DCOs to
file rules unrelated to the Commission's customer protection or swap
data reporting requirements.
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\50\ CEA section 4(c)(1) permits the Commission to exempt any
agreement, contract, or transaction (or class thereof) that is
otherwise subject to subsection (a) (including any person or class
of persons offering, entering into, rendering advice or rendering
other services with respect to, the agreement, contract, or
transaction) from any of the requirements of subsection (a), which
pertains to futures trading, or from any other provision of the CEA.
7 U.S.C. 6(c)(1).
\51\ 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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The Commission also believes 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 duties under the CEA, as
the Commission will continue to receive submissions for new rules or
rule changes concerning customer protection and swap data reporting,
matters for which a DCO subject to alternative compliance will still be
subject to compliance with Commission regulation. Further, DCOs subject
to alternative compliance satisfy section 4(c)(2)'s ``appropriate
person'' element in clearing transactions (a rendered service) for U.S.
persons.\52\ These DCOs exclusively clear off-DCM swaps, which by
virtue of section 2(e) of the CEA, a U.S. person cannot lawfully
transact unless they qualify as an eligible contract participant
(``ECP'').\53\ As the Commission has previously affirmed, ECPs are
appropriate persons within the scope of CEA section 4(c)(3)(K).\54\
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\52\ 7 U.S.C. 6(c)(2). Under section 4(c)(2)(B)(i) of the CEA,
in order for DCOs subject to alternative compliance--i.e., a class
of persons that render clearing services for swap transactions--to
be exempted from CEA provisions, the transactions they clear must
``be entered into solely between appropriate persons.'' 7 U.S.C.
6(c)(2)(B)(i). Section 4(c)(3) specifies categories of persons
within the defined term ``appropriate person.'' 7 U.S.C. 6(c)(3).
Subparagraph (K) defines ``appropriate person'' to include such
other persons that the Commission determines to be appropriate in
light of their financial or other qualifications, or the
applicability of appropriate regulatory protections. 7 U.S.C.
6(c)(3)(K).
\53\ 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 of the Commission's
regulations. 7 U.S.C. 1a(18); 17 CFR 1.3. See also, Clearing
Exemption for Swaps Between Certain Affiliated Entities, 78 FR
21750, 21754 (Apr. 11, 2013) (noting that the elements of the ECP
definition set forth in section 1a(18)(A) and Commission regulation
1.3(m) generally are more restrictive than the comparable elements
of the enumerated section 4(c)(3) ``appropriate person''
definition).
\54\ See, e.g., Exemption from Derivatives Clearing Organization
Registration, 84 FR 35458 (July 23, 2019); Clearing Exemption for
Swaps Between Certain Affiliated Entities, 78 FR 21754 (April 11,
2013).
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The Commission requested comment as to whether the proposed
exemption in Sec. 39.4(c) from the rule submission requirements of
section 5c(c) of the CEA meets the standards for exemptive relief set
out in section 4(c) of the CEA.
Better Markets stated that the Commission should have proposed an
exemption under section 5b(h) of the CEA (i.e., the provision that
permits the Commission to exempt DCOs from registration) instead of
section 4(c). It argued that section 4(c)'s exemptive authority cannot
be used to exempt non-U.S. DCOs from rule submission requirements, as
doing so would impermissibly expand the Commission's general exemptive
authority beyond its plain language. Better Markets contended that the
plain language of section 4(c) limits the Commission to exempt
agreements, contracts, or transactions that are subject to section
4(a), which only applies to futures, and that section 4(c) is best read
not to contemplate an exemption with respect to swap activities at all.
Therefore, Better Markets indirectly concluded that section 4(c) cannot
be relied on to exempt non-U.S. DCOs, which may only list swaps, from
rule submission procedures.\55\ Further, Better Markets argued that
relying on section 4(c) would inappropriately supersede the CEA's more
specific exemptive authority within section 5b(h), and without
specific, required statutory analyses.
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\55\ See Better Markets, Inc. Letter on Exemption for Non-U.S.
Derivatives Clearing Organizations, RIN 3038-AE65 (Nov. 22, 2019) at
7-8 (as cross-referenced in Better Markets Inc. Letter on
Registration with Alternative Compliance for Non-U.S. Derivatives
Clearing Organizations (Nov. 18, 2019) at n. 74).
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The Commission disagrees with Better Markets' arguments. Section
5b(h) permits the Commission to exempt a DCO from registration if the
Commission determines that the DCO is subject to ``comparable,
comprehensive supervision and regulation'' by its home country
regulator. The exemption at issue, however, is not an exemption from
registration, and section 5b(h) does not provide the Commission with
the ability to exempt a registered DCO from other requirements of the
CEA. In addition, Better Markets' interpretation that the Commission's
exemptive authority under section 4(c) is strictly limited to futures
agreements, contracts, or transactions subject to section 4(a) of the
CEA ignores section 2(d) of the CEA,\56\ which extends the Commission's
section 4(c) exemptive authority for futures transactions to swaps
transactions.\57\
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\56\ 7 U.S.C. 2(d).
\57\ The Commission also notes that section 4(c) provides that
the Commission may use the exemptive authority thereunder ``except''
with respect to certain enumerated swap provisions, unless there is
an expressed authorization within the specific provision. Section
4(c) does not provide that the Commission may only use the 4(c)
exemptive authority with respect to the enumerated provisions. Thus,
a plain reading of the relevant text, joined with section 2(d),
indicates that Congress extended the Commission's general exemptive
authority under section 4(c) to swaps transactions with respect to
those provisions that are not in the enumerated list. Section 5c(c)
of the CEA is not included in the enumerated list. Further, the
Commission has previously exercised its 4(c) exemptive authority
with respect to swaps. See, e.g., Exemptive Order Regarding
Compliance with Certain Swap Regulations, 78 FR 43785 (July 22,
2013).
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[[Page 67171]]
The Commission believes that section 5b(h) reflects Congress's
intent that the Commission defer to other regulators that offer
``comparable, comprehensive supervision and regulation'' of DCOs, in
appropriate circumstances and to an appropriate extent. With this
rulemaking, the Commission has endeavored to defer to a non-U.S. DCO's
home country regulator while allowing the DCO to maintain its
registration and clear for FCM customers. The Commission believes its
use of its section 4(c) exemptive authority in this context is
appropriate and fully meets the requisite statutory standards, as
outlined in the proposal and explained above.
The Commission is adopting Sec. 39.4(c) as proposed.
D. Regulation 39.9--Scope
The Commission proposed to amend Sec. 39.9 to provide that the
provisions of subpart B of Part 39 apply to any DCO, except as
otherwise provided by Commission order. In the context of alternative
compliance, the Commission's order of registration would provide for
the inapplicability of most subpart B provisions and address those that
do apply, such as Sec. 39.15 and those requirements corresponding to
any DCO Core Principle for which the Commission does not find there to
be alternative compliance in the DCO's home country regulatory regime
(in those cases in which the Commission determines nevertheless to
grant alternative compliance). Amended Sec. 39.9 would also 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. The
Commission did not receive any comments on this proposal. The
Commission is adopting Sec. 39.9 largely as proposed.\58\
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\58\ The Commission had included in the proposal a previously
proposed change to Sec. 39.9 that would clarify that the provisions
of subpart B do not apply to any exempt DCO. See Exemption from
Derivatives Clearing Organization Registration, 83 FR 39929 (Aug.
13, 2018) (proposing an addition to Sec. 39.9 providing that the
provisions of subpart B do not apply to any exempt DCO, as defined
in Sec. 39.2). The Commission will amend Sec. 39.9 as necessary if
it finalizes the rulemaking on exempt DCOs.
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E. Subpart D--Provisions Applicable to DCOs Subject to Alternative
Compliance
1. Regulation 39.50--Scope
The Commission proposed 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., registration
with alternative compliance). The Commission did not receive any
comments on this proposal. However, the Commission is modifying Sec.
39.50 by adding language that would allow subpart D to apply to a DCO
``as otherwise provided by order of the Commission.'' This will allow
for subpart D to apply to a DCO registered pursuant to Sec. 39.3(a)(2)
that subsequently applies to amend its DCO registration order in
accordance with Sec. 39.3(d).
2. Regulation 39.51--Alternative Compliance
a. Eligibility for Alternative Compliance
The Commission proposed new Sec. 39.51(a) to permit the Commission
to register a non-U.S. clearing organization subject to alternative
compliance 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. Proposed Sec. 39.51(a) also provides that the
Commission could subject registration to any terms and conditions that
the Commission determines to be appropriate.
The Commission proposed Sec. 39.51(a)(1)(i) to require a
Commission determination that a clearing organization's compliance with
its home country regulatory regime would satisfy the DCO Core
Principles; Sec. 39.51(a)(1)(ii) to require that a clearing
organization be in good regulatory standing in its home country; and
Sec. 39.51(a)(1)(iii) to require a Commission determination that the
clearing organization does not pose substantial risk to the U.S.
financial system.
The Commission proposed Sec. 39.51(a)(1)(iv) to require that the
Commission and the clearing organization's home country regulator \59\
have an MOU or similar arrangement satisfactory to the Commission in
effect. Among other things, the Commission proposed to require the home
country regulator to agree within the MOU to provide the Commission
with any information that the Commission deems appropriate to evaluate
the clearing organization's initial and continued eligibility for
registration and to review compliance with any conditions of
registration. The Commission clarified in the proposal that
satisfactory MOUs or similar arrangements would include provisions for
information sharing and cooperation, as well as for notification upon
the occurrence of certain events.\60\ Although the Commission would
retain the right to conduct site visits, the Commission stated that it
did not expect to conduct routine site visits to DCOs subject to
alternative compliance.
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\59\ In 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. See Registration With Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, 84 FR 34824 (July 19, 2019)
n.38.
\60\ 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. Id. at n.39.
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The Commission proposed Sec. 39.51(a)(2) to provide the Commission
with discretion to grant registration with alternative compliance
subject to conditions if the clearing organization's home country
regulatory regime lacks legal requirements that correspond to certain
DCO Core Principles, if the relevant DCO Core Principles are less
related to risk.
The Commission specifically requested comment on whether the
Commission should 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.
Eurex opined that the set of requirements applicable to non-U.S
DCOs under the proposed alternative compliance framework was already
substantial and therefore should not take into account additional
regulations in Part 39.
Citadel argued that while the Commission should not require a
foreign regulatory regime to precisely replicate the U.S. framework,
the Commission should take into account more than just the ``relatively
high-level'' DCO Core Principles when conducting its analysis. Citadel
argued that several aspects of the Commission's implementing
regulations, such as non-discriminatory access within various
subsections of Sec. 39.12, straight-through processing within Sec.
39.12(b)(7), and public rule certifications pursuant to part 40,
provide critical protections to U.S. market participants that are not
explicit in the DCO Core Principles. Citadel was concerned that not
requiring DCOs to provide these
[[Page 67172]]
``fundamental protections'' to U.S. market participants could
negatively impact market transparency, liquidity, and competition, as
swaps cleared by such DCOs may be accessible to only certain types of
market participants, thereby impairing market access and choice of
trading counterparties. Citadel argued that the Commission recognized
the importance of these key aspects of its underlying regulations when
it assessed the comparability of the EU regulatory framework. Citadel
urged the Commission to ``maintain this approach for purposes of other
jurisdictions,'' and further recommended that the Commission reserve
sufficient flexibility to conduct a case-by-case analysis of each non-
U.S. clearing organization's application for alternative compliance.
The Commission agrees with Citadel that it should not require a
non-U.S. DCO's home country regulatory regime to precisely replicate
the U.S. framework. The Commission, however, disagrees with Citadel's
suggestion that it should add other Commission regulations to the list
of core customer protection and swap data reporting regulations with
which all DCOs subject to alternative compliance will be required to
comply. To provide a meaningful framework for deference to home country
regulators, the Commission has determined to limit the universe of
applicable regulations to those that provide critical protections such
as those related to customer protection. In all cases, the non-U.S. DCO
must still comply with home country requirements that constitute
compliance with the DCO Core Principles, which the Commission's
regulations were intended to implement. For example, DCO Core Principle
C requires all DCOs to establish appropriate admission and continuing
eligibility standards for members and participants of the DCO that are
objective, publicly disclosed, and permit fair and open access to the
DCO. Beyond that, the Commission may require that a given non-U.S. DCO
comply with additional Commission regulations as specified in its
registration order based on its particular facts and circumstances,
most significantly if the Commission finds the DCO's home country
requirements lacking, but the Commission does not believe it is
appropriate to require compliance with additional Commission
regulations as a matter of course.
While a non-U.S. DCO subject to alternative compliance will only be
required to certify new and amended rules related to customer
protection and swap data reporting pursuant to Sec. 39.4(c), the DCO
will still have to publicly disclose its rules and operating and
default procedures governing its clearing and settlement systems
pursuant to DCO Core Principle L.\61\ This will provide transparency
for the DCO's rules even if the DCO does not certify all of its rules
pursuant to part 40.
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\61\ 7 U.S.C. 7a-1(c)(2)(L).
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The Commission believes that Citadel's reference to the review that
the Commission undertook to determine comparability with the European
Union's regulations for dually-registered DCOs and CCPs in 2016 is
misplaced.\62\ That exercise was by its nature a regulation-by-
regulation review to determine comparability with respect to Commission
regulatory requirements, and the fact that the Commission examined
individual regulations in that context is not determinative of the
degree of deference that should be extended to a DCO's home
jurisdiction in the context at issue here.
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\62\ See Comparability Determination for European Union: Dually-
Registered Derivatives Clearing Organizations and Central
Counterparties, 81 FR 15260 (Mar. 22, 2016).
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The Commission believes that Sec. 39.51(a) establishes clear
eligibility standards by which the Commission can determine whether a
non-U.S. DCO's home country regulatory regime is consistent with the
DCO Core Principles, and also reserves adequate flexibility for the
Commission to grant exceptions, in its discretion, as appropriate. If a
non-U.S. clearing organization's home country regulatory regime lacks
legal requirements that correspond to the DCO Core Principles less
related to risk (e.g., Core Principle N on antitrust considerations),
or if the Commission determines that other conditions are appropriate
to achieve compliance with a specific DCO Core Principle(s), Sec.
39.51(a)(2) and (b)(7) would allow the Commission to, in its
discretion, grant registration with alternative compliance subject to
conditions that address the specific facts and circumstances at issue.
Better Markets argued that the Commission must consider Part 39 and
other applicable regulations when determining whether alternative
compliance is appropriate for a non-U.S. clearing organization, as
section 5b(c)(2)(A)(i) of the CEA \63\ requires all registered DCOs to
comply with both the DCO Core Principles and ``any [DCO] requirement
that the Commission may impose by rule or regulation.'' Better Markets
argued that the alternative compliance framework should be re-proposed
as the Commission failed to properly cite to and rely upon its
exemptive authority under section 5b(h) of the CEA,\64\ which Better
Markets believes provides the appropriate basis for exemptions from the
statutory requirements in section 5b(c) of the CEA. Better Markets
argued that section 5b(h) requires that the Commission must have a
reasonable basis to conclude not only that a non-U.S. DCO has satisfied
all statutory elements of section 5b(c) of the CEA, but also that the
applicable home country regulatory framework is comparable to, and as
comprehensive as, the statutory and regulatory requirements for
registered DCOs to be able to grant an exemption pursuant to section
5b(h). Better Markets premised this conclusion on Congress' inclusion
of the phrase ``supervision and regulation'' within section 5b(h) of
the CEA, which Better Markets opined made no distinction between U.S.
statutory and U.S. regulatory requirements with respect to the
Commission's exemptive authority for DCOs. Better Markets argued that
as a result, non-U.S. DCOs could not receive an exemption unless their
home country regulatory regime essentially mirrors the statutory and
regulatory regime for U.S. DCOs.
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\63\ 7 U.S.C. 7a-1(c)(2)(A)(i).
\64\ 7 U.S.C. 7a-1(h).
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The Commission believes that Better Markets' analysis
misunderstands the status of DCOs that would be subject to the
alternative compliance framework. A non-U.S. DCO subject to alternative
compliance will still be a registered DCO pursuant to section 5b(a) of
the CEA. In contrast, section 5b(h) of the CEA relates to exempting
DCOs from registration, which is not at issue here.
Better Markets correctly notes that section 5b(c)(2)(A)(i) of the
CEA requires DCOs to comply with the DCO Core Principles and any
requirement that the Commission may impose by rule or regulation
pursuant to section 8a(5) of the CEA, which provides the Commission
with discretionary rulemaking authority to make and promulgate such
rules and regulations as, in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of the CEA.\65\ The Commission exercised
that authority in adopting Part 39 and initially applying it to all
DCOs. Here, the Commission is further exercising that authority to
provide in new Sec. 39.51 that DCOs subject to alternative compliance
are subject to the DCO Core Principles and other specified
requirements, but not to
[[Page 67173]]
all of the provisions that have until now applied to all DCOs.
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\65\ 7 U.S.C. 12a(5).
---------------------------------------------------------------------------
Three commenters discussed the potential role of the PFMIs in the
Commission's approach to registration with alternative compliance. LCH
commented that the use of the DCO Core Principles to determine whether
an applicant's home country requirements are comparable to the
Commission's requirements is appropriate. LCH opined that the DCO Core
Principles are consistent with the PFMIs, which have been agreed by the
international regulatory community as essential to strengthening and
preserving financial stability.
ICE commented that an outcomes-based approach that assesses an
applicant's home country regulatory regime as a whole, instead of with
a rule-by-rule comparison, would provide appropriate deference to the
foreign jurisdiction. However, ICE questioned how the Commission would
make an assessment of the home country regulatory regime. ICE cautioned
that the Commission should not determine that a jurisdiction is non-
comparable or non-equivalent on the basis of ``discrete'' differences
from a Part 39 requirement. ICE further argued that an assessment of
comparability or equivalence should accept that there will be
differences between the manner in which a clearing organization's home
country regulator achieves international standards and the Commission's
regulations, and these differences should not be disqualifying.
Otherwise, ICE warned that the alternative compliance regime would
likely be of little benefit, or result in substantial delays in
implementation as equivalence is determined. ICE encouraged the
Commission to benchmark its comparability assessment with regard to
compliance with international standards such as the PFMIs as an
alternative to the DCO Core Principles. CCIL also suggested that the
Commission should be satisfied with adherence by a non-U.S. DCO to the
PFMIs, as certified by its home country regulator.
The Commission notes that a determination of whether compliance
with a home country regulatory regime constitutes compliance with the
DCO Core Principles is not a comparability or equivalence
determination. The Commission nevertheless agrees with the general
premise of LCH and ICE's comments, and the alternative compliance
framework reflects an outcomes-based approach rather than a regulation-
by-regulation comparison between Commission regulations and a non-U.S.
DCO's home country regulatory regime, which is suboptimal in this
context in which the Commission is showing appropriate deference to the
home country regulator. The Commission must however look to the DCO
Core Principles, and not the PFMIs, as the basis for determining
compliance. As previously noted, all DCOs, including those DCOs subject
to alternative compliance, are required by the CEA to comply with each
DCO Core Principle in order to be registered and to maintain
registration.
The Commission is adopting Sec. 39.51(a) as proposed.
b. Conditions of Alternative Compliance
The Commission proposed new Sec. 39.51(b) to set forth the
conditions that a non-U.S. clearing organization must satisfy for the
Commission to grant registration with alternative compliance.\66\
Proposed Sec. 39.51(b)(1) provides that a DCO subject to alternative
compliance must comply with the DCO Core Principles through compliance
with applicable legal requirements in its home country, and any other
requirements specified in its registration order including, but not
limited to, the customer protection requirements of section 4d(f) of
the CEA, parts 1 and 22, and Sec. 39.15 of the Commission's
regulations; the part 45 swap data reporting requirements; and subpart
A of Part 39.
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\66\ In doing so, the Commission explained that 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. Registration With Alternative Compliance for
Non-U.S. Derivatives Clearing Organizations, 84 FR 34824 (July 19,
2019) n.37.
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The Commission proposed Sec. 39.51(b)(2) to 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. Proposed Sec. 39.51(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 would be economically
equivalent and could be offset with each other, to the extent that
offsetting is permitted by the DCO's rules. Proposed Sec.
39.51(b)(2)(ii) would require that a DCO 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.
The Commission proposed Sec. 39.51(b)(3) to require that a DCO:
Consent to jurisdiction in the United States; designate, authorize, and
identify to the Commission an agent in the United States to accept any
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 brought against, or any
investigations relating to, the DCO or any of its U.S. clearing
members; and promptly inform the Commission of any change of agent to
accept such notice or service of process.
The Commission proposed Sec. 39.51(b)(4) to require a DCO to
comply, and demonstrate compliance as requested by the Commission, with
any condition of the DCO's registration order.
The Commission proposed Sec. 39.51(b)(5) to 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 proposed Sec. 39.51(b)(6) to 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.
Finally, under proposed Sec. 39.51(b)(7), the Commission may
condition alternative compliance on any other facts and circumstances
it deems relevant.
As discussed below, the Commission received comments on the
applicable requirements proposed in Sec. 39.51(b)(1) including
customer protection and swap data reporting requirements; the open
access condition proposed in Sec. 39.51(b)(2); the inspection of books
and records condition proposed in Sec. 39.51(b)(5); and the
Commission's ability to grant registration subject to other conditions
as proposed in Sec. 39.51(b)(7).
i. Applicable Requirements of the CEA and Commission Regulations
Proposed Sec. 39.51(b)(1) provided that a DCO subject to
alternative compliance must comply with the DCO Core Principles through
compliance with
[[Page 67174]]
applicable legal requirements in its home country, and any other
requirements specified in its registration order including, but not
limited to, the customer protection requirements of section 4d(f) of
the CEA, parts 1 and 22, and Sec. 39.15 of the Commission's
regulations; the part 45 swap data reporting requirements; and subpart
A of Part 39. The Commission received comments on customer segregation
and customer portability aspects of the proposed customer protection
requirements and comments on the proposed part 45 swap data reporting
requirements.
(1) Customer Segregation Requirements
ASX, JSCC, KRX, and OTC Clear, all currently exempt DCOs, opined in
a joint letter that requiring DCOs subject to alternative compliance to
comply with the Commission's customer segregation requirements,
including the treatment of U.S. customer collateral under the U.S.
Bankruptcy Code, lacked any deference by the Commission to foreign
regulators. They indicated that, as a result, none of them plan to
register under the alternative compliance framework.
JSCC separately argued that because the alternative compliance
framework is limited to DCOs that do not pose substantial risk to the
U.S. financial system, the Commission should not impose its own unique
customer protection requirements. JSCC recommended that the Commission
defer to a home country's customer protection requirements so long as
they are consistent with the PFMIs. JSCC reasoned that the direct
application of the U.S. Bankruptcy Code for the protection of customer
funds would create little benefit while imposing a significant burden
on non-U.S. DCOs whose home country regulators have implemented their
own customer protection framework in compliance with the PFMIs. JSCC
stated that requiring non-U.S. DCOs to comply with both their home
country regime and the U.S. regime in this regard could be impractical
when those regimes are incompatible with each other.
JSCC explained that it cannot strictly comply with section 4d(f) of
the CEA, which requires that customer funds be segregated at all times,
as Japanese law and JSCC's rulebook require JSCC to settle customer
collateral for a period of a few hours through an account at the Bank
of Japan.\67\ JSCC argued that, as a result, it would be unable to
register under the alternative compliance regime, despite the fact that
swaps customers would be protected under regulations and supervision
that fully conforms with the relevant PFMIs and provides sufficient
safety for customers in all of the jurisdictions where JSCC operates.
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\67\ JSCC attempted to register with the Commission as a DCO
but, due to the issues JSCC discussed in its comment letter, JSCC
ultimately sought and received an exemption from DCO registration.
See JSCC Order of Exemption from Registration (Oct. 26, 2015),
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf.
Exempt DCOs are not currently permitted to clear for U.S. customers.
See Exemption from Derivatives Clearing Organization Registration,
83 FR 39923, 39926 (Aug. 13, 2018).
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Similarly, ASX opined that its client protection model is
consistent with the PFMIs and meets Australian financial stability
standards, but that because it is not exactly aligned with U.S.
customer protection requirements, ASX would not be able to register
under the alternative compliance framework.
The Commission is not persuaded by the comments. While the PFMIs
are the international standards for FMIs, they are not designed to
address all of the Commission's responsibilities in this area.
The focus of the PFMIs is ``to limit systemic risk and foster
transparency and financial stability. . . . Other objectives, which
include . . . specific types of investor and consumer protections, can
play important roles in the design of [FMIs], but these issues are
generally beyond the scope of'' the PFMIs.\68\ By contrast, the
purposes of the CEA and thus the responsibilities of the Commission
notably include ``avoidance of systemic risk'' and ``ensur[ing] the
financial integrity of all transactions subject to [the CEA],'' but
also include ``protect[ing] all market participants from . . . misuses
of customer assets.'' \69\
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\68\ CPMI-IOSCO, PFMIs, ] 1.15 and n. 16.
\69\ 7 U.S.C. 5(b).
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While no FCM customer should suffer a loss of access to their
assets for any period of time, customers of clearing members registered
as FCMs have fared uniquely well in cases of FCM bankruptcy, both in
protecting against loss of customer assets, and particularly in
transferring all, or at least most, customer assets to a solvent FCM in
the days (rather than months or years) following a bankruptcy. These
very positive outcomes are a result of the combination of the customer
collateral segregation requirements of section 4d of the CEA and the
regulations thereunder, operating in an interlinked and mutually
supporting manner with the relevant provisions of the Bankruptcy Code,
Subchapter IV of Chapter 7,\70\ the Commission's authorities under
section 20 of the CEA,\71\ and the Commission's bankruptcy regulations
under part 190.
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\70\ See 11 U.S.C. 761-767.
\71\ See 7 U.S.C. 24.
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The Commission is adopting Sec. 39.51(b)(1) as proposed, including
the requirement that the DCO comply with section 4(d)(f) of the CEA,
parts 1 and 22 of the Commission's regulations, and Sec. 39.15.
(2) Customer Portability in the Event of a Default
ASX and JSCC both commented that they would not be able to register
pursuant to the alternative compliance framework as they could not
feasibly maintain a sufficient number of FCM clearing members to
support U.S. customer clearing. ASX believes that it would be difficult
to add multiple FCMs as clearing members of ASX as an FCM may already
have a non-U.S. affiliate clearing member of ASX that provides access
to exchange-traded futures and options products under the foreign board
of trade model. Similarly, JSCC noted that entities active in swaps
customer clearing are global banking groups, many of which serve
customers for swaps clearing through subsidiaries in the non-U.S.
markets, including Japan. JSCC noted that very few non-U.S. entities
are registered as FCMs, and the overall number of FCMs has been
decreasing. ASX and JSCC commented that the cost of onboarding an FCM,
such as an additional foreign affiliate, solely to provide over-the-
counter swaps clearing services to U.S. customers would be
prohibitively expensive. As a result, ASX and JSCC concluded that non-
U.S. DCOs would be unlikely to find enough FCM clearing members,
particularly to achieve portability of customer positions in the event
of an FCM default, as required by Commission regulations and the PFMIs.
JSCC believes the requirement to have swaps customers clear through an
FCM at a non-U.S. DCO likely would continue to concentrate U.S.
customers at a limited number of DCOs.
The Commission is not persuaded by the commenters' suggestion that
a dearth of FCMs clearing at non-U.S. DCOs should negate the
requirement that a U.S. swaps customer clear through an FCM at a DCO,
including a DCO subject to alternative compliance. There are multiple
non-U.S. DCOs that have successfully implemented an FCM customer
clearing model. The Commission believes the alternative compliance
option will make registration less burdensome for non-
[[Page 67175]]
U.S. clearing organizations, which may incentivize additional ones to
register. As a result, U.S. customers could have more clearing options
without sacrificing any of the protections they have come to expect and
rely upon.\72\ As stated above, the Commission is adopting Sec.
39.51(b)(1) as proposed.
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\72\ Moreover, while both Commission regulations and the PFMIs
call for a DCO to have rules (arrangements) that foster portability
(see 17 CFR 190.06(a); CPMI-IOSCO, PFMIs, Principle 14, Key
Consideration 3), neither Commission regulations nor the PFMIs
require DCOs to ensure that there are clearing members that are
willing and able transferees.
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(3) Swap Data Reporting
ICE commented that, if an applicant's home country reporting rules
correspond with the Commission's swap data reporting regulations in
part 45, the Commission should consider obtaining swap data from the
applicant's home country regulator through an MOU. ICE noted that
compliance with the Commission's rules in addition to home jurisdiction
swap reporting rules could be very costly for DCOs, and provide little
additional benefit. The Commission intends for this rule to provide
deference to foreign regulators on non-U.S. DCO supervision, depending
on the risk the DCO poses to the U.S. financial system, and notes that
the part 45 swap data reporting regulations, to which DCOs are already
subject, are unrelated to DCO supervision and outside the intended
scope of this rule. The Commission believes that issues relating to
deference on swaps data reporting by DCOs have broad real and potential
cross-border implications and should instead be addressed in a larger,
comprehensive review of swaps data reporting by non-U.S. entities that
the Commission may undertake through future Commission action.
Therefore, the Commission is adopting the requirement that DCOs subject
to alternative compliance comply with part 45 as proposed.
ii. Open Access
With respect to proposed Sec. 39.51(b)(2) which the Commission
proposed to require a DCO to treat swaps with the same terms and
conditions as economically equivalent, allow offset to the extent
permitted by the DCO, and provide non-discriminatory clearing for swaps
executed bilaterally or on unaffiliated trading platforms, ICE stated
that it is not clear why this requirement is necessary if a DCO's home
jurisdiction has a comparable requirement. Regulation 39.51(b)(2) would
codify for DCOs subject to alternative compliance the 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. Even if
the Commission did not adopt Sec. 39.51(b)(2), the statutory
requirements would still apply. The Commission is codifying these
requirements and adopting Sec. 39.51(b)(2) as proposed.
iii. Consent to Jurisdiction; Designation of Agent for Service of
Process
The Commission proposed Sec. 39.51(b)(3) to require that a DCO:
Consent to U.S. jurisdiction; designate, authorize, and identify an
agent in the United States; and promptly inform the Commission of any
change of its U.S. agent. The Commission did not receive any comments
on this aspect of the proposal. The Commission is adopting Sec.
39.51(b)(3) as proposed.
iv. Compliance
The Commission proposed Sec. 39.51(b)(4) to require a DCO to
comply, and demonstrate compliance as requested by the Commission, with
any condition of the DCO's registration order. The Commission did not
receive any comments on this aspect of the proposal. The Commission is
adopting Sec. 39.51(b)(4) as proposed.
v. Inspection of Books and Records
The Commission proposed Sec. 39.51(b)(5) to require a DCO to make
all 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.
CCIL stated that the proposed approach may create a ``parallel
structure of regulatory bodies.'' CCIL also argued that it may
undermine and conflict with principles of international comity and the
home country laws and regulations of the DCO.
ICE stated that the Commission should state explicitly that it
would defer to the home country regulator's examination of the DCO's
books and records provided that the home country regulator shares the
results of the examination with the Commission. As explained in the
proposal, the Commission does not anticipate conducting routine site
visits to DCOs subject to alternative compliance. However, the
Commission may request a DCO to provide access to its books and records
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. The
Commission is adopting Sec. 39.51(b)(5) as proposed.
vi. Representation of Good Regulatory Standing
The Commission proposed Sec. 39.51(b)(6) to 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. The
Commission received comments on the definition of ``good regulatory
standing'' as discussed above, but did not receive comments on the
existence of the condition. The Commission is adopting Sec.
39.51(b)(6) as proposed.
vii. Other Conditions
The Commission proposed Sec. 39.51(b)(7) to provide that the
Commission may condition alternative compliance on any other facts and
circumstances it deems relevant. ICE supported the Commission's ability
to, in its discretion, grant registration subject to conditions,
provided that this flexibility is applied consistently for similarly
situated DCOs from the same jurisdiction and that sufficient deference
is granted to the overall home country regulatory regime. ICE agreed
that the Commission should be mindful of the principles of
international comity, noting that the proposal stated that the
Commission may take into account, in placing conditions on alternative
compliance, the extent to which the home country regulator defers to
the Commission with respect to the oversight of U.S. DCOs.\73\ ICE
cautioned that any such approach should not be applied to create
uncertainty for a DCO relying on the relief, and that such an approach
might result in other regulators taking similar positions, which could
have the effect of lessening cross-border cooperation. The Commission
appreciates ICE's comments. As noted in the proposal, the Commission
intends to use its discretion to ``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.'' \74\ The
recognition
[[Page 67176]]
that market participants and market facilities in a global swap market
are subject to multiple regulators and potentially duplicative
regulations, and can therefore benefit from regulatory harmonization
and mutual deference among regulators, underpins the alternative
compliance framework. The framework is intended to encourage
collaboration and coordination among U.S. and foreign regulators in
establishing comprehensive regulatory standards for swaps clearing. In
addition, the framework seeks to promote fair competition and a level
playing field for all DCOs. As a result, the Commission will consider
the degree of deference that a home country regulator extends to the
Commission's oversight of U.S. DCOs in determining whether to extend
the benefits of alternative compliance to DCOs in that jurisdiction,
both at the point of initially registering a non-U.S. DCO subject to
alternative compliance, and in determining whether compliance under
that framework should continue. The Commission is adopting Sec.
39.51(b)(7) as proposed.
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\73\ See Registration With Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, 84 FR 34825 (July 19, 2019).
\74\ 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 Requirement
Proposed Sec. 39.51(c) sets forth general reporting requirements
pursuant to which a DCO subject to alternative compliance must 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).
Proposed Sec. 39.51(c)(1) requires a DCO to provide to the
Commission the information specified in Sec. 39.51(c) (and described
below), as well as any other information that the Commission deems
necessary, including, but not limited to, information for use in
evaluating the continued eligibility of the DCO for alternative
compliance, reviewing the DCO's compliance with any conditions of its
registration, and conducting oversight of U.S. clearing activity.
Proposed Sec. 39.51(c)(2)(i) requires a DCO to compile a report as
of the end of each trading day, and submit the report to the Commission
by 10 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.
Proposed Sec. 39.51(c)(2)(ii) requires 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.
Proposed Sec. 39.51(c)(2)(iii) through (vii) requires a DCO to
provide information to the Commission upon the occurrence of certain
specified events. Proposed Sec. 39.51(c)(2)(iii) requires a DCO to
provide prompt notice to the Commission regarding any change in its
home country regulatory regime. Proposed Sec. 39.51(c)(2)(iv) requires
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) requires 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. Proposed Sec. 39.51(c)(2)(vi) requires 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) requires 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.
The Commission requested comment on whether DCOs subject to
alternative compliance should 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.\75\
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\75\ See Registration With Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, 84 FR 34826 (July 19, 2019).
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In response to the Commission's request for comment, CCP12 and
Eurex stated that a global harmonization of reporting requirements
would eliminate duplicative requirements and enable regulators to share
data on the basis of MOUs. Eurex stated that the Commission should
eliminate proposed Sec. 39.51(c)(2)(i) and (ii) in order to enhance
the benefits of alternative compliance as compared to traditional
registration. CCP12 suggested that the Commission limit the daily
reporting requirements of proposed Sec. 39.51(c)(2)(i) to information
related to FCM clearing members. Without specifying particular
provisions, CCP12 also argued that in some cases the proposed reporting
requirements would be costly and would overlap with requirements
imposed by home country regulators. CCIL generally supported avoiding
duplicative reporting through the use of MOUs.
Because none of the commenters identified specific proposed
reporting requirements as duplicative of existing obligations, the
Commission is declining to modify proposed Sec. 39.51(c). In this
rulemaking, the Commission has attempted to limit required reporting to
that information it will need to perform its supervisory function. The
Commission believes that the reporting requirements in Sec. 39.51(c)
are appropriately tailored to accomplish that goal with respect to DCOs
subject to alternative compliance. For this reason, the Commission
disagrees with Eurex that Sec. 39.51(c)(2)(i) and (ii) should be
eliminated, and notes that Eurex did not identify any particular faults
with these provisions. The Commission also disagrees that the daily
reports required by Sec. 39.51(c)(2)(i) should be limited to
information related to FCM clearing members. Limiting daily reports in
this way would provide the Commission with incomplete data and would
thus frustrate its ability to assess the risk exposure of U.S. persons
and the extent of a non-U.S. DCO's U.S. clearing activity.\76\
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\76\ The Commission noted in the proposal that the goal of Sec.
39.51(c)(2)(i) is to 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. See Registration With
Alternative Compliance for Non-U.S. Derivatives Clearing
Organizations, 84 FR 34825 (July 19, 2019).
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The Commission also requested comment on the proposed requirement
[[Page 67177]]
in Sec. 39.51(c)(2)(iii) that a DCO provide prompt notice to the
Commission regarding any change in its home country regulatory regime.
Specifically, the Commission asked whether it should instead require a
DCO subject to alternative compliance to provide prompt notice of any
material change in its home country regulatory regime. The Commission
did not receive any comments directly responsive to this question.
The Commission did receive several comments on proposed Sec.
39.51(c)(1) that do not relate to the specific requests for comment.
Mr. Kubitz stated that the reporting requirements for DCOs subject to
alternative compliance should be at least as comprehensive as the
requirements for other DCOs. The Commission believes that the reporting
requirements in Sec. 39.51(c) are appropriately tailored to protect
its regulatory interests without requiring information on topics on
which it intends to defer to the home country regulator, and notes that
Mr. Kubitz did not identify why he believes the reporting requirements
in Sec. 39.51(c) are insufficient. If the Commission subsequently
determines that it needs additional information, Sec. 39.51(c)(1)
requires a DCO subject to alternative compliance to provide the
Commission with any information that it deems necessary.
In regards to proposed Sec. 39.51(c)(2)(iii), CCIL stated that a
DCO subject to alternative compliance should not have to notify the
Commission regarding a change in its home country regulatory regime
because notification could be addressed through an MOU between the
Commission and the home country regulator. The Commission notes than an
MOU would not obligate the home country regulator to notify the
Commission and believes that it is therefore appropriate to require the
DCO, as the Commission's registrant, to be responsible for reporting
this information.
With regard to the event-specific reporting requirements of Sec.
39.51(c)(2)(vi) and (vii), ICE noted that events involving U.S.
clearing members would be subject to greater reporting requirements
than those related to non-U.S. clearing members, and argued that
requirements related to U.S. clearing members should be no greater than
those related to other clearing members. The Commission has a greater
supervisory interest in U.S clearing members and believes that this
incremental difference in reporting obligations is justified as a
result.
In light of the foregoing, the Commission is adopting Sec.
39.51(c) as proposed.
d. Modification of Registration Upon Commission Initiative
Proposed Sec. 39.51(d) permits the Commission to modify the terms
and conditions of a DCO's 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. 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.
Proposed Sec. 39.51(d)(2) through (4) set forth the process for
modification of registration upon the Commission's initiative. Proposed
Sec. 39.51(d)(2) requires the Commission to first provide written
notification to a DCO that the Commission is considering modifying the
DCO's order of registration and the basis for that consideration.
Proposed Sec. 39.51(d)(3) provides 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. Proposed Sec. 39.51(d)(4) provides that, following receipt of
a response from the DCO, or after expiration of the time permitted for
a response, the Commission may: (i) Issue an order requiring the DCO to
comply with all requirements applicable to DCOs registered pursuant to
Sec. 39.3(a)(2), 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 its order of registration will remain in effect without
modification to its terms and conditions.
The Commission received four comments on proposed Sec. 39.51(d).
ICE stated that modification should be limited to instances covered by
proposed Sec. 39.51(d)(1)(i), where there has been a change in the
home country regulatory regime such that it no longer satisfies the DCO
Core Principles. ICE argued that the Commission should identify the
process by which the Commission will notify the DCO subject to
alternative compliance of the basis for a modification and provide the
DCO with an opportunity to respond. LCH recommended that, if after
registering a DCO subject to alternative compliance the Commission
determines that the DCO poses substantial risk to the U.S. financial
system, the Commission should clearly indicate the timeframe by which
the DCO needs to become fully compliant with Commission regulations.
CCP12 and Eurex stated that the Commission should establish a
streamlined ``re-application'' process for any DCO registered under the
existing framework which later applies for alternative compliance but
then is subsequently deemed to pose substantial risk to the U.S.
financial system and thus must again become DCOs, including all of
subpart B of Part 39.
The Commission disagrees that it should only modify an order of
registration granted to a DCO subject to alternative compliance when
there has been a change in the DCO's home country regulatory regime
such that it no longer satisfies the DCO Core Principles. The
Commission must be able to modify an order if there are changes to the
facts and circumstances pursuant to which the order was issued, or if
any of the terms and conditions of the order have not been met.\77\
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\77\ The Commission also notes that it has the authority to
suspend or revoke a DCO's registration for the failure to comply
with any provision of the CEA, regulations promulgated thereunder,
or any order of the Commission, pursuant to section 5e of the CEA. 7
U.S.C. 7b.
---------------------------------------------------------------------------
In response to ICE's suggestion that the Commission identify the
process by which the Commission will notify a DCO subject to
alternative compliance of the basis for a modification of its order and
provide the DCO with an opportunity to respond, the Commission notes
that this process is provided in Sec. 39.51(d)(2) and (3). In response
to LCH's comment that the Commission should clearly indicate the
timeframe within which a DCO determined to pose substantial risk to the
U.S. financial system would need to become fully compliant with
Commission regulations, the Commission notes that Sec. 39.51(d)(4)(i)
requires the Commission to provide the DCO ``with a reasonable amount
of time to come into compliance.'' The Commission believes it is
inappropriate to set a specific timeframe in the regulation because how
much time a DCO would need will depend on how far removed its current
practices are from what is required by Commission regulations. In
response to
[[Page 67178]]
CCP12 and Eurex, the Commission notes that a DCO that is no longer
eligible for alternative compliance would not have to re-apply for
registration because it would already be registered. The DCO would only
have to be able to demonstrate that it has come into compliance with
the applicable requirements of the CEA and Commission regulations by
the date specified by the Commission pursuant to Sec. 39.51(d)(4)(i),
which it could do through the annual compliance report required by
Sec. 39.10(c)(3) (a requirement which would now apply to the DCO).
For the above stated reasons, the Commission is adopting Sec.
39.51(d) as proposed.
F. Part 140--Organization, Functions, and Procedures of the Commission
The Commission proposed amendments to Sec. 140.94(c) 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 did not receive any comments on the proposed
changes to Sec. 140.94(c) and is adopting them as proposed.
G. Responses to Additional Requests for Comment
In section IV of the proposal, the Commission requested comment on
eight specific issues. In the six instances in which these requests
related to particular aspects of the proposal, the responses were
included in the discussion above. This section addresses the other two
requests.
1. Request for Comment No. 1
In the proposal, the Commission asked whether the proposed
alternative compliance regime, including both the application process
and the ongoing requirements, strikes the right balance between the
Commission's regulatory interests and the regulatory interests of non-
U.S. DCOs' home country regulators.
Several commenters expressed support for the proposed alternative
compliance regime. SIFMA stated that it supports the steps taken by the
proposal to provide greater deference to home country regulation of
non-U.S. DCOs. SIFMA also supported the proposal's risk-based measures
to calibrate the extent of extraterritorial U.S. regulations. LCH
stated that the proposal adequately balances the Commission's
regulatory interests with the regulatory interests of home country
regulators, and noted that the proposal appropriately accounts for both
the Commission's risk-related concerns and international comity. CCIL
stated that the proposed alternative compliance framework provides a
better alternative to the existing structure. Specifically, CCIL
supported the definitions of ``good regulatory standing'' and
``substantial risk'' in proposed Sec. 39.2, stating that these
definitions and the alternative compliance framework as a whole rightly
endorse the primacy of the home country regulator and compliance under
home country requirements. CCP12 stated that it welcomes the
Commission's alternative compliance approach because it recognizes the
importance of regulatory deference and increased cross-border
cooperation. Eurex stated that the proposed framework brings welcome
relief from the Part 39 rules for non-U.S. DCOs that do not pose
systemic risk to the U.S. financial system. WFE advocated for an
approach of regulatory deference and international comity, without
taking a position on whether the proposed alternative compliance regime
is such an approach. WFE added that departing from the international
principle of regulatory deference should only be required if there is a
clear and truly substantial risk to the financial stability of the
host-authority jurisdiction.
Many of the commenters that expressed support for the proposed
alternative compliance regime also recommended improvements. CCP12
recommended alleviating some of the requirements of alternative
compliance, but it did not identify the requirements to which it
objected. Eurex argued that the Commission should reduce the number of
reporting requirements applicable to DCOs subject to alternative
compliance. CCIL stated that a DCO subject to alternative compliance
should not have to comply with the DCO Core Principles because its home
country regulator will alternatively assess its compliance with the
PFMIs. Furthermore, CCIL argued that if each country requires
compliance with its own regulations, it could create a complex web of
requirements that could result in a huge compliance burden on clearing
organizations and confusion as to how to comply with conflicting
regulations.
After reviewing these comments, the Commission continues to believe
that the alternative compliance regime strikes the right balance
between the Commission's regulatory interests and the regulatory
interests of home country regulators. As previously discussed, the
Commission does not agree that the level of reporting required of DCOs
subject to alternative compliance should be further reduced. In
response to CCIL, the Commission notes that the CEA requires a DCO to
meet the DCO Core Principles in order to be registered and to maintain
its registration, and therefore the Commission must ensure that DCOs,
including DCOs subject to alternative compliance, meet the DCO Core
Principles, not simply the PFMIs as implemented by each home country
regulator. The Commission further notes that a non-U.S. clearing
organization that wishes to meet only the PFMIs can apply for an
exemption from DCO registration.
2. Request for Comment No. 2
In the proposal, the Commission asked whether there are additional
regulatory requirements under the CEA or Commission regulations that
should not apply to DCOs subject to 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.
CCIL argued that the Commission should be satisfied with a
certification by a home country regulator that a DCO subject to
alternative compliance complies with the PFMIs. As previously noted,
the CEA requires DCOs to comply with the DCO Core Principles. The
Commission could not permit a DCO to be registered solely on the basis
of a home country regulator's certification that the DCO complies with
the PFMIs.
CCP12 stated that DCOs subject to alternative compliance could face
a significant challenge complying with section 4d(f) of the CEA and the
Commission's customer protection requirements, mainly because these
requirements apply customer protections consistent with the U.S.
Bankruptcy Code and part 190 of the Commission's regulations
irrespective of the home country laws applicable to a non-U.S. DCO and
its FCM clearing members. The Commission notes that all DCOs, including
non-U.S. DCOs, are currently subject to these customer protection
requirements. The proposal would simply leave the requirements in
place. Given that CCP12 did not identify how the customer protection
requirements would present new challenges for DCOs subject to
alternative compliance, the Commission continues to believe that the
protections afforded to customers by the requirements outweigh the
burdens of compliance for these DCOs, for the reasons previously
discussed.
[[Page 67179]]
Eurex and CCP12 each identified reporting requirements that they
argued should not apply to DCOs subject to alternative compliance. In
regards to the reporting requirements of Sec. 39.51(c), CCP12 stated
that oversight of U.S. customers' swaps clearing activity could be
fulfilled with ``less regular and more relevant data information,'' and
suggested that the daily reports required by Sec. 39.51(c)(2)(i) be
limited to FCMs. Eurex stated that the reporting requirements of
proposed Sec. 39.51(c)(2)(i) and (ii) and the part 45 reporting
requirements should not apply to non-U.S. DCOs because these
requirements are costly and overlap to a large degree with existing
requirements imposed by home country regulators. Eurex recognized that
the Commission needs data to evaluate eligibility for and compliance
with the alternative compliance framework; however, Eurex would instead
prefer a global standardization of reporting and cooperation among data
repositories. CCP12 also encouraged international standard-setting
bodies to standardize data fields and promote cooperation among
repositories to avoid duplicative reporting.
As previously discussed, the Commission disagrees that the
reporting required under Sec. 39.51(c) should not apply to DCOs
subject to alternative compliance, and that the daily reports required
by Sec. 39.51(c)(2)(i) should be limited to FCMs. With respect to the
part 45 requirements, the Commission believes that the transparency
into the swaps market provided by the swap data recordkeeping and
reporting requirements--requirements applicable to all currently
registered DCOs, including non-U.S., and exempt DCOs--strongly warrants
the burden of requiring non-U.S. DCOs subject to alternative compliance
to report such information. In response to Eurex and CCP12's comments
about international reporting standards, the Commission agrees that
global harmonization of reporting standards and cooperation between
international regulators could reduce duplicative reporting. However,
such an arrangement is beyond the scope of this rulemaking, and in the
absence of such a regime, the Commission must require reporting at a
level that will allow it to protect its regulatory interests. The
Commission believes that the reporting requirements in proposed Sec.
39.51(c) are appropriately tailored to accomplish that goal with
respect to DCOs subject to alternative compliance.
H. Additional Comments
In addition to the comments discussed above, the Commission
received several comments that did not directly relate to a specific
part of the proposal or respond to a specific request for comment. The
Commission appreciates the additional feedback. In the instances where
these comments do not address proposed changes and are therefore
outside the scope of this rulemaking, the Commission may take the
comments under advisement for future rulemakings.
Citadel argued that the proposed alternative compliance framework
did not appear to be specifically contemplated in the CEA. Citadel
suggested that the Commission should proceed cautiously based on the
lack of clear statutory guidance.
As discussed in the proposal, the Commission believes the CEA
provides the Commission with the authority to adopt the regulations
implementing the alternative compliance framework. The Commission has
broad authority under section 8a(5) of the CEA to make and promulgate
such rules and regulations as, in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of the CEA.\78\ Section 5b(c)(2)(A)(i)
of the CEA provides that, to be registered and to maintain registration
as a DCO, a DCO must comply with each DCO Core Principle and any
requirement that the Commission may impose by rule or regulation
pursuant to section 8a(5). Section 5b(c)(2)(A)(ii) of the CEA further
provides that, subject to any rule or regulation prescribed by the
Commission, a DCO has reasonable discretion in establishing the manner
by which it complies with each DCO Core Principle. The Commission first
adopted regulations to implement the DCO Core Principles in subpart B
of Part 39, which, until now, have applied to all DCOs. With the
adoption of the regulations implementing the alternative compliance
framework, the Commission is using its authority under section 8a(5) of
the CEA to establish a second, separate path to compliance with the DCO
Core Principles for non-U.S. DCOs that do not pose substantial risk to
the U.S. financial system.
---------------------------------------------------------------------------
\78\ 7 U.S.C. 12a(5).
---------------------------------------------------------------------------
ICE noted that the proposal does not address the requirement under
Sec. 39.5 for DCOs to make certain filings before clearing new swaps
or categories of swaps, and asked that the Commission clarify that
Sec. 39.5 filings would not be required of DCOs subject to alternative
compliance. The Commission notes that because DCOs subject to
alternative compliance would still be registered, they, in fact, would
be required to comply with subpart A of Part 39, which includes Sec.
39.5.
ICE noted that there are non-U.S. clearing organizations that clear
both swaps and futures, and believes that to the extent possible, any
relief for swaps clearing (including under the alternative compliance
framework) should also apply to swaps cleared at a DCO that clears both
futures and swaps, and suggests that the final rules be clarified to
make this explicit. As explained in the proposal, the Commission's
regulatory framework already distinguishes between clearing of futures
executed on a DCM, for which DCO registration is required, and clearing
of foreign futures, for which it is not. The Commission had not
contemplated permitting a non-U.S. DCO that clears futures listed for
trading on a DCM to be eligible for alternative compliance as most non-
U.S. DCOs are registered to clear swaps only. The Commission would have
to amend the rules being adopted herein to allow non-U.S. DCOs that
clear DCM futures to be eligible; for example, the Commission would
have to adjust the substantial risk test to account for futures. The
Commission will give this idea further consideration.
FIA requested that the Commission confirm that its 2016 EU
comparability determination \79\ remains in place and is not replaced
or amended in any way by this rulemaking such that market participants
may continue to rely on it. The EU comparability determination compared
Part 39 with EU regulations and identified those instances where the
requirements are so similar that compliance with the Part 39
regulation(s) would constitute compliance with the EU regulation(s) as
well. Unless any of the regulations included in the determination have
been amended or repealed, the Commission's determination stands.
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\79\ See Comparability Determination for the European Union:
Dually-Registered Derivatives Clearing Organizations and Central
Counterparties, 81 FR 15260 (Mar. 22, 2016).
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Better Markets argued that providing DCOs with the options of
traditional registration, exemption from registration, and registration
subject to alternative compliance is unnecessarily complex and over
time would create competitive disparities and differences in DCO risk
management and other practices. Better Markets further argued that the
proposed framework would facilitate forum shopping and regulatory
[[Page 67180]]
arbitrage, deferring to non-U.S. DCOs to determine for themselves how
they comply with U.S. requirements.
The Commission does not believe that presenting clearing
organizations with the additional option of registration with
alternative compliance will result in material disparities in DCO risk
management practices because all registered DCOs will still be required
to satisfy the DCO Core Principles. Moreover, the Commission does not
believe that the alternative compliance framework will result in
regulatory arbitrage because it will only be available to an applicant
that can demonstrate, among other things, that compliance with its home
country requirements would satisfy the DCO Core Principles.
Citadel suggested that the primary beneficiaries of the alternative
compliance framework will be non-U.S. DCOs which are already registered
with the Commission (and not exempt DCOs or clearing organizations that
currently have no status with the Commission). Citadel stated that
permitting certain non-U.S. DCOs to use an alternative compliance
framework means that these DCOs will be able to provide clearing
services to U.S. market participants without complying with as many
U.S. regulatory requirements as U.S. DCOs, potentially creating an un-
level competitive playing field where lower operational and regulatory
costs allow non-U.S. DCOs to increase market share at the expense of
U.S. DCOs. Such a concern may be particularly relevant where the home
jurisdiction of the non-U.S. DCO has failed to grant similar deference
to U.S. DCOs. As a result, Citadel recommends that the Commission
assess the foreign jurisdiction's treatment of U.S. DCOs prior to
granting a non-U.S. DCO's application for alternative compliance.
The Commission believes that non-U.S. DCOs, exempt DCOs, and non-
U.S. clearing organizations that are neither registered nor exempt may
benefit from the alternative compliance framework, but notes that each
current non-U.S. DCO had to demonstrate compliance with each of the
requirements of subpart B of Part 39 during its application process,
which will not be required of new applicants for registration subject
to alternative compliance. The Commission noted in the proposal that
one of the goals of the alternative compliance framework is to ease the
regulatory burden on non-U.S. DCOs that do not pose substantial risk to
the U.S. financial system, including some current DCOs. The Commission
believes that doing so is appropriate because these DCOs are subject to
multiple regulators and regulatory regimes, and face duplicative
regulations. However, as previously noted here and in the proposal, 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. The Commission could
take into account the extent to which the relevant foreign regulatory
authorities defer to the Commission with respect to oversight of U.S.
DCOs, in light of international comity.
SIFMA argued that the Commission should use this opportunity to
promote the competitiveness of U.S. FCMs and swap dealers by expanding
their ability to access non-U.S. clearing organizations. Specifically,
SIFMA believes the Commission should (1) permit U.S. FCMs to use an
omnibus clearing structure for foreign cleared swaps like they
currently use for foreign futures and (2) allow a non-U.S. clearing
organization to accept foreign branches of U.S. bank swap dealers as
members without requiring the non-U.S. clearing organization to
register with the Commission as a DCO or obtain an exemption from DCO
registration. SIFMA argues that these changes would also promote
customer choice and reduce market concentration. The Commission
appreciates this additional feedback and will give it further
consideration.
ASX, JSCC, KRX, and OTC Clear argued that the Commission should
finalize the exempt DCO rulemaking notwithstanding the outcome of this
rulemaking.
ASX, JSCC, KRX, and OTC Clear stated that a clearing member of a
non-U.S. DCO should be able to clear swaps for U.S. customers without
registering as an FCM. ASX, JSCC, KRX, OTC Clear, and ICE specifically
suggested that the Commission adopt an exemption similar to the Sec.
30.10 exemption for foreign futures and foreign options. ASX believes
that adopting a part 30-type regime for swaps could achieve cost
savings and improved customer experience for some U.S. customers of
non-FCM clearing members by allowing them to access both foreign
futures markets and exempt DCOs for swaps under an aligned framework.
In addition, ASX, JSCC, KRX, and OTC Clear suggested that an exemption
could help address their concern that U.S. customers are being forced
to concentrate their clearing in a limited number of DCOs and FCM
clearing members. They argued that the situation is further exacerbated
for those U.S. customers who must clear swaps denominated in foreign
currencies subject to the Commission's clearing requirement, as they
cannot always access swaps markets in the home country of the relevant
currency where, as JSCC observed, the highest liquidity and best prices
are available.
The Commission believes that the alternative compliance framework
for non-U.S. DCOs registered with the Commission should retain
protections available to U.S. customers by clearing through FCMs. The
Commission appreciates the several comments on this topic and will give
them further consideration in connection with the exempt DCO
rulemaking.
III. 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.\80\ The
regulations being adopted by the Commission will affect only DCOs. 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.\81\ The
Commission has previously determined that DCOs are not small entities
for the purpose of the RFA.\82\ Accordingly, the Chairman, on behalf of
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the
regulations adopted herein will not have a significant economic impact
on a substantial number of small entities.
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\80\ 5 U.S.C. 601 et seq.
\81\ See 47 FR 18618 (Apr. 30, 1982).
\82\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \83\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring a collection of
information as defined by the PRA. The regulations adopted herein would
result in such a collection, as discussed below. A person is not
required to respond to a collection of information unless it displays a
currently valid control number issued by the Office of Management and
Budget (OMB). The regulations include a collection of information for
which the Commission has previously received control numbers from OMB.
The title for this collection of information is ``Requirements for
Derivatives Clearing
[[Page 67181]]
Organizations, OMB control number 3038-0076.''
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\83\ 44 U.S.C. 3501 et seq.
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The Commission did not receive any comments regarding its PRA
burden analysis in the preamble to the proposal. The Commission is
revising Information Collection 3038-0076 to include the collection of
information in revised Sec. 39.3(a)(3) and new Sec. 39.51, as well as
changes to the existing information collection requirements for DCOs as
a result of these changes. The Commission does not believe the
regulations as adopted impose any other new collections of information
that require approval of OMB under the PRA.
1. Alternative DCO Application Procedures Under 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 adopting new
Sec. 39.3(a)(3), which establishes 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 will 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 New Sec. 39.51
New Sec. 39.51 includes reporting requirements for DCOs subject to
alternative compliance that are substantially similar to those proposed
for exempt DCOs.\84\ 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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\84\ 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.
Under Sec. 39.4(c), DCOs subject to alternative compliance will
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
current DCOs may seek registration under the alternative compliance
process; accordingly, the information collection burden applicable to
DCO applicants and DCOs will be reduced. Currently, collection 3038-
0076 reflects that there are two 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 traditional 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 DCOs, based on the
Commission's 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 DCOs.\85\
The revised burden estimates are as follows:
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\85\ There are minor differences in the burden estimates for
quarterly and annual financial reports and event-specific reporting
from the proposal, which was based on the burden estimates stated in
the Commission's proposed amendments to Part 39 (84 FR 22226 (May
16, 2019)). The Commission adopted the amendments to Part 39 (85 FR
4800 (Jan. 27, 2020)) with some minor changes, so the corresponding
revisions to the burden estimates are reflected in the figures
stated herein.
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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: 2,626.
Estimated gross annual reporting burden: 34,138.
Quarterly Financial Reports
Estimated number of respondents: 13.
Estimated number of reports per respondent: 4.
Average number of hours per report: 7.
Estimated gross annual reporting burden: 364.
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.
[[Page 67182]]
Estimated number of reports per respondent: 14.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 91.
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.
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: 1,951.\86\
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\86\ The total annual recordkeeping burden estimate reflects the
combined figures for 13 DCOs with an annual burden of one response
and 150 hours per response (13 x 1 x 150 = 1,950), and one vacated
DCO registration every three years with an annual burden of one
hour, which is not affected by this rulemaking.
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New Sec. 39.4(c) exempts DCOs subject to alternative compliance
from 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 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 will not be required to certify all rules would be
covered by the existing burden estimate in Information Collection 3038-
0093.
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.\87\ 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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\87\ 7 U.S.C. 19(a).
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2. Amendments to Part 39
a. Summary and Baseline for the Final Rule
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 regulation and oversight in other legal jurisdictions. The
Commission is adopting amendments to Part 39 that allow a non-U.S. DCO
that the Commission determines does not pose substantial risk to the
U.S. financial system, as defined in an amendment to Sec. 39.2, to be
subject to an alternative compliance regime that relies in part on the
DCO's home country regulatory regime and will result in reduced
regulatory obligations as compared to the existing registration
requirements. Specifically, under the final rule, the non-U.S. DCO will
comply with the DCO Core Principles established in section 5b(c)(2) of
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 non-U.S. DCO will remain subject to subpart A of Part
39 and the Commission's customer protection and swap data reporting
requirements, as well as certain reporting requirements and other
conditions in its registration order. Lastly, under the final rule,
Sec. 39.4(c) exempts non-U.S. 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.
The baseline for these cost and benefit considerations is the
current statutory and regulatory requirements applicable to non-U.S.
DCOs, including those related to application procedures for
registration and self-certification of rules. Under current
requirements, a non-U.S. DCO seeking to clear for U.S. participants has
two options: (1) It can pursue registration under part 39 as it exists
today (and comply with the DCO Core Principles and relevant Commission
regulations) and have the same access to U.S. customer business as a
registered U.S. DCO; or (2) it can seek exemption from DCO registration
pursuant to CEA section 5b(h), but forgo access to U.S. customers
(while accepting business from self-clearing U.S. proprietary traders).
Where reasonably feasible, the Commission has endeavored to
estimate quantifiable costs and benefits. Where quantification is not
feasible, the Commission identifies and describes costs and benefits
qualitatively. Additionally, the initial and recurring compliance costs
for any particular non-U.S. DCO will depend on its size, existing
infrastructure, level of clearing activity, practices, and cost
structure. In considering the effects of the final rule and the
resulting costs and benefits, the Commission acknowledges that the
swaps markets have several types of market participants including DCOs,
clearing members, and their clients (who could be professional
investors, public and non-public operating firms) and function
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 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 amendments on all
relevant swaps activities, 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.\88\
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\88\ 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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[[Page 67183]]
b. Benefits
The Commission believes that the primary benefit of the alternative
compliance framework for non-U.S. DCOs is that it will promote and
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. The second prong of the
substantial risk test in particular is directed at comity by making a
non-U.S. DCO that satisfies the first prong of the test eligible for
registration subject to alternative compliance if the proportion of
U.S. activity it clears is not at a level that warrants more active
oversight by the Commission. Based on its past, and continued,
coordination with non-U.S. regulators, the Commission expects that non-
U.S. regulators will, in turn, defer to the Commission in the
supervision and regulation of DCOs organized in the United States,
thereby reducing the regulatory and compliance burdens of these U.S.
DCOs.\89\ While the Commission believes that international comity will
occur, it acknowledges that the realization of the benefit from
international comity is dependent on the actions of non-U.S. regulators
and therefore, may not come to fruition.
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\89\ As the Commission previously noted, the G20 ``agree[d] that
jurisdictions and regulators should be able to defer to each other
when it is justified by the quality of their respective regulatory
and enforcement regimes, based on similar outcomes, in a non-
discriminatory way, paying due respect to home country regulation
regimes.'' G20 Leaders' Declaration, St. Petersburg Summit, para. 71
(Sept. 6, 2013).
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There are currently 15 DCOs registered with the Commission, five of
which are organized outside of the United States and have comparable
registration status in their respective home countries. The Commission
expects that, in light of the substantial risk test as discussed below,
four of these DCOs may be eligible for alternative compliance.
The Commission reviewed quarterly statistics for six registered
DCOs, including four non-U.S. DCOs, that account for the vast majority
of swaps initial margin (IM) held in the United States. The statistics
included the share of total U.S. swaps IM held by each DCO and the U.S.
share of total IM held by each DCO. These statistics were calculated by
Commission staff for the period from first quarter 2018 through second
quarter 2020. Regarding the first prong of the substantial risk test
(the DCO's share of U.S. swaps IM), Commission staff found that one
non-U.S. DCO consistently accounted for at least 47% of U.S. swaps IM,
while none of the other three non-U.S. DCOs ever exceeded 5% of U.S.
swaps IM (and thus may be eligible for alternative compliance). Any
threshold between 10% and 40% would have yielded the same results, but
the 20% level is more likely to result in a stable set of DCOs eligible
for alternative compliance than other possible thresholds. This is
because the share of the three smaller non-U.S. DCOs would have to at
least quadruple to approach 20% while the share of the largest non-U.S.
DCO (LCH Limited) would have to be cut in half to approach the
threshold. A stable set of eligible DCOs due to large distances from
the threshold should benefit DCOs by reducing concerns that a DCO could
lose its eligibility for alternative compliance.
Regarding the second prong (U.S. IM as a share of DCO IM), U.S.
swaps IM as a share of IM at LCH Limited has consistently been at least
45%, which is more than double the 20% threshold. The Commission notes
that the level of the second prong does not matter if a DCO is below
the threshold for the first prong.
The adoption of the alternative compliance framework will benefit
qualifying non-U.S. DCOs by potentially reducing their regulatory
requirements to the extent that the non-U.S. DCOs' home country laws
and regulations impose obligations similar to those imposed by the CEA.
Furthermore, the option of seeking registration with alternative
compliance will also benefit the qualifying non-U.S. DCOs by allowing
them to accept U.S. customer business at lower cost.
The Commission also believes that the non-U.S. DCOs that qualify
for the alternative compliance framework will benefit from amendments
to Sec. 39.4(c), which remove the requirement to certify their rules
that do not relate to the Commission's customer protection or swap data
reporting requirements, by reducing their ongoing compliance costs. In
2019, the four non-U.S. DCOs potentially eligible for alternative
compliance submitted 108 rule certifications to the Commission, ranging
from a low of 10 submissions for one DCO to a high of 62 submissions
for another DCO. Based on its experience reviewing DCO rule
submissions, the Commission expects that a DCO subject to alternative
compliance would make few, if any, rule submissions each year. The
Commission receives very few rule submissions from DCOs that relate to
customer protection or swap data reporting.
Non-U.S. clearing organizations applying for DCO registration with
alternative compliance will benefit from new Sec. 39.3(a)(3), which
simplifies and reduces the application procedures from the current list
of over three dozen exhibits to only a dozen sections of Form DCO,
mostly drawn from Exhibits A and F thereto. The Commission has
estimated that an applicant must spend 421 hours preparing a complete
Form DCO.\90\ As noted in the PRA discussion above, the Commission
estimates that preparing the sections of Form DCO that would be
required under the alternative compliance application procedures would
take 100 hours.
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\90\ See Derivatives Clearing Organization General Provisions
and Core Principles, 85 FR 4800, 4828-4829 (Jan. 27, 2020).
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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, but not limited
to, exempt DCOs, may pursue registration with alternative compliance.
Exempt DCOs in particular would receive the additional benefit of being
able to accept U.S. customer clearing through FCMs.\91\ Because of the
reduced requirements under the alternative compliance regime, the
Commission believes it may be eliminating barriers to entry for these
non-U.S. clearing organizations that are not currently registered with
the Commission, which may increase the number of non-U.S. DCOs
providing services to U.S. customers over time. To the extent that new
non-U.S. DCO entrants decide to compete with existing DCOs to increase
their share of the U.S. customer market, U.S. customers and clearing
members may benefit from more clearing options, including potentially
lower fees and access to cleared products that are not otherwise
available.
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\91\ If the Exempt DCO rulemaking is finalized, exempt DCOs
would be able to accept U.S. customer clearing through non-FCM
intermediaries, which could reduce, but would not eliminate, the
relative benefit of registering with alternative compliance. All
DCOs would still need to register with (or without) alternative
compliance to accept U.S. customer clearing through FCMs.
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The Commission received several comments on the proposing release
describing the benefits of the alternative compliance framework. SIFMA
stated that by enhancing deference to foreign regulation of non-U.S.
DCOs and implementing risk-based measures to calibrate the extent of
U.S. regulations,
[[Page 67184]]
the alternative compliance framework will help expand opportunities for
U.S. customers, promote globally integrated swaps markets, reduce undue
regulatory duplication and burdens, responsibly make more effective use
of the Commission's resources, and encourage reciprocal deference by
foreign regulators. LCH commended the Commission's efforts to enhance
regulatory deference and cooperation and stated that it believes that
the alternative compliance framework will continue to drive progress
towards a more harmonized regulatory approach that supports the global
nature of the cleared swaps markets. CCIL stated that the alternative
compliance framework provides a better alternative to the existing
structure. CCP12 stated that it welcomes the Commission's alternative
compliance approach because it recognizes the importance of regulatory
deference and increased cross-border cooperation. CCP12 added that the
alternative compliance framework will allow local policymakers to adopt
legal and regulatory requirements that are appropriate for the markets
they oversee, while increasing cross-border cooperation.
c. Costs
One effect of adopting the amendments is that it may increase
competition among U.S. and non-U.S. DCOs. Some academic research
indicates that competition among DCOs may result in negative effects,
such as lower margin or increased counterparty risk.\92\
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\92\ See, e.g., Duffie, D., and Zhu, H. (2011). Does a Central
Clearing Counterparty Reduce Counterparty Risk. The Review of Asset
Pricing Studies, 1, 74-95.
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However, the Commission expects that these potential ill effects
will be mitigated because DCOs subject to alternative compliance would
still need to comply with the DCO core principles through their home
regulators and that these DCOs would be subject to rules that would,
for example, prevent them from competing on margin.
The Commission recognizes that 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.\93\ However, this competitive disadvantage, based on
reduced costs, may be mitigated by the fact that DCOs subject to
alternative compliance would, as a precondition of such registration,
be subject to a home country regulator that is likely to impose costs
similar to those associated with Commission regulation, as the home
country regulation would have to meet the same standards as set out in
the Commission's DCO Core Principles. This competitive disadvantage
also would only arise where DCOs are competing to clear the same or
similar products.\94\
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\93\ The Commission notes that these costs would include
complying with at least two sets of regulations for the non-U.S. DCO
and may include additional costs to the U.S. DCO to the extent that
they are subject to another jurisdiction's requirements.
\94\ It is possible that a DCO subject to alternative compliance
could begin clearing the same products as a DCO that is not eligible
for alternative compliance and attempt to take advantage of the
lower costs associated with alternative compliance by offering a
lower clearing fee for these products. It is not certain that the
cost savings associated with alternative compliance would be
sufficient to cover the cost of lowering fees enough to induce
clearing members to change DCOs.
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The Commission also recognizes that currently unregistered non-U.S.
clearing organizations applying for registration under the alternative
compliance application procedures would incur costs in preparing the
application. This would include preparing and submitting certain parts
of 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 will incur costs in preparing the
application under Sec. 39.3(a)(3), the alternative compliance
application procedures represent a substantial cost savings relative to
the existing procedures. As discussed in connection with the PRA above,
the Commission estimates that an application for registration with
alternative compliance pursuant to Sec. 39.3(a)(3) will take
approximately 100 hours to complete, as opposed to an estimated 421
hours for an application pursuant to Sec. 39.3(a)(2).
A currently registered DCO that wishes to be subject to alternative
compliance would not need to file a new application but would need to
submit a request to amend its order of registration. The initial
request would need to include only Exhibits A-1 and A-8 as described in
Sec. 39.3(a)(3). The currently registered DCO would typically not need
to file the other exhibits required in a new application for
registration with alternative compliance, thus reducing costs further.
Furthermore, because a DCO subject to alternative compliance will
not be held to many of the Commission's requirements, there may be an
increase in the potential for systemic risk. However, the Commission
does not believe that the alternative compliance framework will
materially increase the risk to the U.S. financial system because DCOs
that pose substantial risk to the U.S. financial system as defined in
Sec. 39.2 would not be eligible for alternative compliance.
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
subject to alternative compliance 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 home country 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 substantial risk test is
designed to identify those DCOs that pose substantial risk to the U.S.
financial system and will be administered frequently, so in the event
that one of these non-U.S. DCOs meets the test, it will be required to
comply with all of the Commission's DCO requirements.
The amendments will have no effect on the risks posed by exempt
DCOs or by clearing organizations that are neither registered nor
exempt from registration.
The Commission believes that determining eligibility for
alternative compliance should generally be a simple, low-cost process
given that it is in large part based on objective initial margin
figures and, as discussed in the benefits section above, eligibility is
[[Page 67185]]
expected to be stable with changes in eligibility for alternative
compliance for particular DCOs likely to be very rare in the
foreseeable future.
The Commission notes that non-U.S. DCOs that are eligible for
alternative compliance because they satisfy the first prong, but not
the second prong, of the substantial risk test could potentially impose
costs associated with an increase in systemic risk. It is very
unlikely, however, that a non-U.S. DCO will meet this profile in the
foreseeable future given current initial margin shares. To do so, a
non-U.S. DCO would have to hold over 20% of the total initial margin
for U.S. clearing members while also having less than 20% of its
initial margin provided by those clearing members, a situation that is
unlikely to occur unless non-U.S. DCOs were to experience explosive
growth in initial margin provided by non-U.S. clearing members.
Moreover, there are significant mitigating factors even in the unlikely
event that a non-U.S. DCO eventually meets that profile. The DCO would,
even when registered with alternative compliance, be required to meet
the DCO Core Principles and critical customer protection provisions and
would be subject to supervision from its home country regulator. The
home country regulator's incentive to provide intensive oversight is
likely to be particularly high in this scenario given that the largest
share of the DCO's clearing activity would likely have been generated
from within the home country jurisdiction. Thus, the Commission
believes that the risk associated with this unlikely scenario is low.
Lastly, the Commission does not anticipate any costs to DCOs
associated with the exemption in Sec. 39.4(c), as amended.
d. Consideration of Alternatives
The Commission received several comments suggesting alternatives
that the commenters believe would further reduce costs of the
alternative compliance framework. ICE argued that the Commission should
identify the specific factors that it will consider when exercising its
discretion to deem a DCO to pose substantial risk to the U.S. financial
system. ICE stated that without a list of relevant factors, the
Commission could unnecessarily delay its assessment, which would
increase compliance costs for the DCO. As discussed above, the
Commission reserves the right to consider all factors it believes are
relevant, and does not believe that it is helpful to attempt to list
every possible factor given that it is impossible to anticipate all
possible facts and circumstances. However, the Commission did provide
in the discussion above a non-exclusive list of examples to illustrate
the factors that it could consider in exercising discretion under the
substantial risk test.
Three commenters argued that the Commission could reduce the costs
to DCOs by not requiring DCOs to follow certain reporting requirements.
CCP12 stated generally that in some cases the alternative compliance
reporting requirements would be costly, and believes that oversight of
U.S. customers' swaps clearing activity could be fulfilled with less
frequent and more relevant data reporting. ICE stated that if an
applicant's home country reporting rules correspond with part 45 swap
data reporting rules, the Commission should consider obtaining swap
data from the applicant's home country regulator through an MOU. ICE
claimed that compliance with the Commission's rules in addition to home
country rules would be very costly for DCOs, and provide little
additional benefit. Eurex similarly stated that the general reporting
requirements and part 45 swap data reporting requirements are
substantial and costly, and overlap to a large degree with existing
requirements from home country regulators.
The Commission notes that the reporting required by the alternative
compliance framework is considerably less than that required by the
baseline. In particular, as noted in the PRA section, each DCO with
alternative compliance is expected to spend about 31 hours per year
preparing various reports to the Commission as compared to 2,892 hours
for each DCO registered under current procedures. Thus, DCOs will face
significantly reduced legal and compliance costs associated with
reporting as a result of the amendments.
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
The amendments will 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 substantial risk
to the U.S. financial system. The regulations 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.
b. Efficiency, Competitiveness, and Financial Integrity
The amendments promote efficiency in the operations of DCOs subject
to alternative compliance by reducing duplicative regulatory
requirements. This reduction in duplicative requirements will reduce
compliance costs for DCOs, which may promote competitiveness.
Furthermore, adopting the amendments might prompt other regulators to
adopt similar deference frameworks, which could further reduce
compliance costs and increase competitiveness among DCOs.
The Commission expects the amendments 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 amendments may
contribute to the financial integrity of the broader financial system
if they encourage additional non-U.S. clearing organizations to
register as DCOs, which could spread the risk of clearing 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 amendments will 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 amendments would
not impact requirements under the CEA or Commission regulations
regarding price discovery.
d. Sound Risk Management Practices
The amendments 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, which
[[Page 67186]]
include that a DCO: (1) Ensure that it possesses the ability to manage
the risks associated with discharging its responsibilities through the
use of appropriate tools and procedures; (2) measure and monitor its
credit exposures to each clearing member daily; (3) through margin
requirements and other risk control mechanisms, limit its exposure to
potential losses from a clearing member default; (4) require sufficient
margin from its clearing members to cover potential exposures in normal
market conditions; and (5) use risk-based models and parameters in
setting margin requirements and review them on a regular basis.
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 amendments 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.\95\
---------------------------------------------------------------------------
\95\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission believes that the public interest to be protected by
the antitrust laws is the promotion of competition. The Commission
requested, but did not receive, any comments on whether the proposed
rulemaking implicated any other specific public interest to be
protected by the antitrust laws.
The Commission has considered the amendments to determine whether
they are anticompetitive. The Commission believes that the amendments
may promote greater competition in swap clearing because they 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. While this may
appear to create a competitive disadvantage for these DCOs, 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, 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 requested but did not
receive any comments on whether there are less anticompetitive means of
achieving the purposes of the CEA that would be served by adopting the
amendments.
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 amends 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, 6(c), 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 definitions of ``Good regulatory standing'' and
``Substantial risk to the U.S. financial system'' 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, registered, or otherwise 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 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) Twenty percent 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 identified as being close to 20%, the Commission may
exercise discretion in determining whether an identified threshold is
satisfied for the purpose of determining whether the derivatives
clearing organization poses substantial risk to the U.S. financial
system. For purposes of this definition and Sec. 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. Amend Sec. 39.3 by:
0
a. Redesignating paragraphs (a)(3) through (6) as paragraphs (a)(4)
through (7);
0
b. Adding new paragraph (a)(3); and
0
c. Revising newly redesignated paragraphs (a)(5) and (6).
The addition and revisions 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
[[Page 67187]]
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 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 appendix A 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. If there is no
applicable legal requirement for a particular core principle, the
applicant shall provide an explanation of how it would satisfy the core
principle.
* * * * *
(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.
* * * * *
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
subject to subpart D of this part 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.
* * * * *
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.
Sec. Sec. 39.43 through 39.49 [Reserved]
0
6. Add and reserve Sec. Sec. 39.43 through 39.49 to subpart C.
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 Compliance with Core Principles Through
Compliance with Home Country Regulatory Regime
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) of this part or as otherwise provided by order of the
Commission.
Sec. 39.51 Compliance with the core principles through compliance
with home country regulatory regime.
(a) Eligibility. (1) A derivatives clearing organization shall be
eligible for registration for the clearing of swaps subject to
compliance with this subpart 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 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. A derivatives clearing organization subject to
compliance with this subpart 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
[[Page 67188]]
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, subpart A of this part and Sec. 39.15.
(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 compliance with
this subpart 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 compliance with this subpart,
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 a.m. U.S. central 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, 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 subject to
compliance with this subpart 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
[[Page 67189]]
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 in the Act and this chapter, 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 as follows:
0
a. Revise paragraph (c) introductory text and paragraph (c)(1);
0
b. Add and reserve paragraph (c)(14); and
0
c. Add paragraph (c)(15).
The revisions and addition 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 September 22, 2020, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Registration With Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations--Commission Voting Summary,
Chairman's Statement, Commissioners' Statements, and Regulatory
Compliance Demonstration for an EU-Based Applicant for Registration
Subject to Compliance With the Core Principles Applicable to
Derivatives Clearing Organizations in Accordance With Subpart D of Part
39
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Support of Chairman Heath P. Tarbert
Nations have borders, but markets rarely do. That is certainly
the case with the global derivatives markets.
For more than a century, U.S. derivatives markets have provided
hedging and price discovery opportunities not only for Americans but
also to individuals and businesses from abroad. In the 21st century,
these markets involve participants domiciled in the Americas,
Europe, Asia and elsewhere each and every day. And the
clearinghouses that provide the credit risk management services for
our exchanges have members and ultimate customers from around the
world. The same is true for clearinghouses based in, for example,
Europe. So the question that has naturally arisen is how the home
regulator of the clearinghouse--which in the United States we refer
to as a derivatives clearing organization (DCO)--should work with
regulators in home jurisdictions of the DCO's members and customers.
When it comes to international regulatory comity, I find the
concept of the ``categorical imperative'' of the great philosopher
Immanuel Kant instructive.\1\ Basically, Kant asks us to consider
what would happen if everyone was bound by the same regulation--that
is, we should take a particular obligation (imperative) and make it
universal (categorical). If the result is chaos, then it is probably
not a good regulation. Therefore, if every jurisdiction mandated
that its own detailed, domestic DCO regulations applied to every
foreign DCO that accepted its members or customers from that
domestic jurisdiction, the result would likely be a mishmash of
duplicative or contradictory regulations at best. At worst, the
result would be market fragmentation, because DCOs might not accept
members or customers from certain jurisdictions.\2\ Neither result
is good for the integrity, resilience, and vibrancy of global
derivatives markets. Consequently, such an approach cannot be
considered sound regulation.
---------------------------------------------------------------------------
\1\ ``Act only according to that maxim whereby you can, at the
same time, will that it should become a universal law.'' Immanuel
Kant, Grounding for the Metaphysics of Morals (1785) [1993],
translated by James W. Ellington (3rd ed.).
\2\ See CFTC Chairman J. Christopher Giancarlo, Cross-Border
Swaps Regulation Version 2.0: A Risk-Based Approach with Deference
to Comparable Non-U.S. Regulation (Oct. 1, 2018), at 34 (noting that
``overlapping regulation and supervision create inefficiencies that
limit the ability and increase the costs of U.S. persons accessing
non-U.S. CCPs and hamper the growth of the global economy''),
available at https://www.cftc.gov/sites/default/files/2018-10/Whitepaper_CBSR100118_0.pdf.
_____________________________________-
Today we are finalizing a rule that meets the categorical
imperative_a rule for non-U.S. DCOs that we would hope foreign
jurisdictions would impose on U.S.DCOs in return. Specifically, I am
pleased to support today's final rule for Registration with
Alternative Compliance for Non-U.S. DCOs under Parts 39 and 140 of
our regulations. This rule is a significant step in building an
effective, efficient and cooperative international regulatory
framework for the oversight of DCOs operating in the international
derivatives markets. The alternative compliance rule takes a
principles-based approach, and also reflects deference in the form
of international regulatory cooperation. The rule recognizes that
certain foreign regulatory systems can mirror the requirements of
the CFTC's Core Principles for DCOs, but not necessarily all our
detailed rules implementing those Core
[[Page 67190]]
Principles. Provided that a foreign regulatory system produces
similar outcomes to the CFTC's Core Principles, it makes sense to
afford it flexibility in how to do it. The rule acknowledges that,
while a foreign jurisdiction may take a different route, it can
still reach the same endpoint.
In terms of the particulars, the final rule allows a DCO
organized outside the United States to comply with our Core
Principles through compliance with its home country's regulatory
regime, provided:
1. The CFTC determines that compliance by the DCO with its home
country regulatory regime constitutes compliance with the Core
Principles set forth in section 5b(c)(2) of the Act;
2. The DCO is in good regulatory standing in its home
jurisdiction;
3. The DCO does not pose a substantial risk to the U.S.
financial system; and
4. A memorandum of understanding or similar arrangement
satisfactory to the CFTC is in effect with the DCO's home country
regulator.
As we vote to adopt this rule today, our approach is already
bearing fruit. I am pleased to note that the European Union has
finalized its Delegated Acts addressing EU oversight of DCOs
domiciled abroad. The Delegated Acts take a similar approach as does
our final rule,\3\ insofar as they allow non-EU clearinghouses to
meet EU requirements by following their home jurisdiction's rules if
the EU determines those rules are designed to have equivalent
outcomes. In short, both the United States and European Union are
recognizing our respective national borders without being unduly
confined by them.
---------------------------------------------------------------------------
\3\ European Commission C(2020)4892: Commission delegated
regulation supplementing regulation (EU) No 648/2012 with regard to
the criteria that ESMA should take into account to determine whether
a central counterparty established in a third-country is
systemically important or likely to become systemically important
for the financial stability of the Union or of one or more of its
Member States.
---------------------------------------------------------------------------
Appendix 3--Supporting Statement of Commissioner Brian Quintenz
Today's final rule providing for registration with alternative
compliance for non-U.S. derivatives clearing organizations (DCOs) is
a significant milestone in the CFTC's policy of deferring to foreign
regulatory counterparts that have taken a serious and committed
approach, similar to the CFTC's, to adopting the swaps reforms
called for by the 2009 G20 Summit in Pittsburgh and championed by
important international bodies like the International Organization
of Securities Commissions (IOSCO) and the Financial Stability Board
(FSB). Like the CFTC, several foreign regulatory authorities have
issued numerous regulations over the past decade regulating the
swaps markets at clearinghouses, exchanges, and dealers.\1\ Specific
to CCP oversight, numerous jurisdictions, including the CFTC, have
implemented the CPMI-IOSCO Principles for Financial Market
Infrastructures (PFMIs).\2\ Throughout my tenure at the Commission,
I have stated that deference to our foreign counterparts is a
necessary way to reduce compliance burdens for industry and to
conserve the Commission's precious resources.\3\ Previous CFTC
Chairman Giancarlo promoted a workable deference policy, as
evidenced by the publication, during his chairmanship, of the
proposed version of the final rule before the Commission today.\4\ I
am pleased to see Chairman Tarbert continue this policy, exemplified
not only with this final rule, but also with the final rule
published by this Commission in July, which sets forth the cross-
border application of many of the Commission's regulations for swap
dealers (SDs).\5\
---------------------------------------------------------------------------
\1\ See, e.g., FSB OTC Derivatives Market Reforms: 2019 Progress
Report on Implementation (Oct. 15, 2019), https://www.fsb.org/wp-content/uploads/P280519-2.pdf and FSB, Implementation and Effects of
the G20 Financial Regulatory Reforms: Fifth Annual Report (Oct. 16,
2019), https://www.fsb.org/2019/10/implementation-and-effects-of-the-g20-financial-regulatory-reforms-fifth-annual-report/.
\2\ PFMI Implementation Database, https://www.bis.org/pfmi/index.htm.
\3\ See, e.g., Remarks of CFTC Commissioner Brian Quintenz at
2019 ISDA Annual Japan Conference, ``Significant's Significance''
(Oct. 25, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz20.
\4\ Registration with Alternative Compliance for Non-U.S. DCOs,
84 FR 34819 (July 19, 2019).
\5\ Cross-Border Application of the Registration Thresholds and
Certain Requirements Applicable to SDs and MSPs, 85 FR 56924 (Sept.
14, 2020).
---------------------------------------------------------------------------
The alternative registration rule for non-U.S. DCOs will prevent
non-U.S. DCOs registered with the CFTC from being subject to
unnecessary duplicative regulation by both the CFTC and their home
country regulator that has issued comparable rules. The rule will
permit a non-U.S. DCOs that does not pose ``substantial risk to the
U.S. financial system'' to be registered with the CFTC but comply
with regulations issued by its home country regulator instead of
with CFTC regulations, with the limited exception of certain CFTC
customer protection and swap data reporting requirements. The rule
recognizes that non-U.S. regulators have a substantial regulatory
interest in supervising the DCOs located in their home jurisdictions
and appropriately defers to their oversight when compliance with the
home country regulatory regime would constitute compliance with DCO
core principles. I note that this rule is consistent with, and an
expansion of, the CFTC's 2016 Equivalence Agreement with the
European Union (E.U.), pursuant to which the CFTC granted
substituted compliance to dually-registered DCOs based in the
E.U.\6\
---------------------------------------------------------------------------
\6\ Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central
Counterparties, 81 FR 15260 (March 22, 2016).
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While the alternative DCO registration rule would provide for a
deference-based approach for certain clearinghouses organized
abroad, it would not be available to a non-U.S. clearinghouse posing
``substantial risk to the U.S. financial system.'' The final rule,
like the proposal which I supported, defines this term according to
two simple criteria: (i) The foreign DCO holds 20 percent or more of
the required initial margin 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.\7\ I believe this two-prong
test correctly assesses the DCO's focus on U.S. firms and impact on
the U.S. marketplace.
---------------------------------------------------------------------------
\7\ Regulation 39.2.
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In voting to adopt the alternative DCO registration final rule,
I recognize that E.U. authorities have recently adopted regulations
for clearinghouses located outside of the E.U. that access the E.U.
market, which are in the spirit of the 2016 agreement on CCPs
between the CFTC and the European Commission.\8\ These regulations,
issued by the European Commission in July, will only require a U.S.
CCP to be generally subject to E.U. regulation and supervision (as a
``tier 2 CCP'') if its E.U. presence exceeds certain clear
thresholds.\9\ I am pleased that these regulations have now been
agreed to by the European Council and by the European Parliament.
The adoption of these regulations represents a marked shift in E.U.
policy from the one that existed at the beginning of my term as CFTC
Commissioner. In March of 2018, I stated that I would neither
support the CFTC granting additional equivalence determinations
within the E.U., nor would I support any relief requested by E.U.
authorities, until the E.U. recommitted to honoring its 2016
agreements with the CFTC on CCP oversight.\10\ That agreement had
been in jeopardy since the E.U.'s issuance of a revised European
Market Infrastructure Regulation (``EMIR 2.2'') in 2017, which
raised the possibility of E.U. authorities directly supervising US
clearinghouses and requiring them to comply with EMIR. I am very
pleased to see this shift in E.U. policy, which I already recognized
in July when voting to expand the Commission's exemption
registration for E.U.-recognized swap trading platforms for
additional platforms in several E.U. member states.\11\
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\8\ Joint Statement from CFTC Chairman Timothy Massad and
European Commissioner Jonathan Hill, CFTC and the European
Commission: Common approach for transatlantic CCPs (Feb. 10, 2016),
https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.
\9\ European Commission Delegated Regulation (``Delegated
Acts''), dated July 14, 2020, supplementing Regulation (EU) No. 648/
2012 of the European Parliament . . . with regard to the criteria
that ESMA should take into account to determine whether a CCP
established in a third-country is systemically important . . . for
the financial stability of the Union. . . , https://webgate.ec.europa.eu/regdel/#/delegatedActs/1382.
\10\ Keynote Address of Commissioner Brian Quintenz before FIA
Annual Meeting, Boca Raton, Florida (March 14, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz9.
\11\ Supporting Statement of Commissioner Brian Quintenz
Regarding the Amendment to the Commission's Order Exempting EU Swap
Trading Facilities from SEF Registration (July 23, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement072320b.
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In conclusion, I look forward to the CFTC continuing to work
cooperatively with our E.U. counterparts in the crucial area of CCP
[[Page 67191]]
oversight, in a manner that eliminates unnecessary duplicative
burdens at both the regulator and registered entity.
Appendix 4--Statement of Support of Commissioner Rostin Behnam
I support today's final rule permitting derivatives clearing
organizations (``DCOs'') organized outside of the United States
(``non-U.S. DCOs'') that the CFTC determines do not pose substantial
risk to the U.S. financial system to register with the Commission
and comply with the core principles applicable to DCOs (``Core
Principles'') set forth in the Commodity Exchange Act (``CEA'')
through compliance with their home country regulatory regime. This
registration category establishes a new model for regulatory
deference aimed at reducing regulatory burdens and ongoing
compliance costs for non-U.S. clearing organizations.
As we move forward in executing this new framework, the
Commission's evaluation of the suitability of any particular non-
U.S. DCO and the comparability of its home country's regulatory
regime to the Core Principles will be closely watched and analyzed
by regulatory and supervisory bodies as well as market participants
around the world. To the extent the Commission is codifying a
definition for ``substantial risk to the U.S. financial system''
that commingles a bright-line test with autonomous agency
discretion, its aptitude for exercising a policy rooted in
relationships aimed at leveling the global playing field for all,
with favoritism towards none will be routinely tested. As demand for
U.S. customer swap clearing evolves and risk neither contemplated
nor captured by the dual 20 percent criteria of the substantial risk
threshold emerges, the CFTC's commitments to transparency, ongoing
monitoring and market surveillance, preservation of customer
protections, and coordination with home country regulators must not
fall by the wayside.
I am encouraged by the Commission's efforts to take a leading
role in injecting greater international coordination and mutual
respect and deference into the supervision of DCOs, the majority of
which operate on a cross-border basis. Inasmuch as the CFTC's
registration of non-U.S. DCOs with alternative compliance is an
expression of the CFTC's efforts to engage foreign regulators in
establishing reciprocity regarding DCO supervision and regulatory
oversight, delivering on comity should not overtake fulfilling the
core purposes under the CEA, particularly in regard to the avoidance
of systemic risk and protection of market participants. The
decisions we make as a Commission, whether driven by policy,
statute, regulatory agenda--or even budget--impact and alter risk
profiles and interdependencies within the markets we oversee
directly and in which U.S. persons participate. Our markets
facilitate both the creation and management of risks in an
interconnected web of systems and operations. It is critical that in
all of our undertakings, we consider how our actions alter the
landscape and ensure to the greatest extent possible that we build
end-to-end resilience into the overall financial system.
Appendix 5--Statement of Commissioner Dan M. Berkovitz
I support today's final rule permitting derivative clearing
organizations (``DCOs'') organized outside of the United States
(``non-U.S. DCOs'') to register with the Commission and provide
clearing to U.S. customers, yet comply with certain DCO Core
Principles through their home country regulatory regime. This final
rule maintains the Commission's authority to protect U.S. customers
and markets, while also recognizing the interests of foreign
regulators in supervising DCOs located in their home jurisdictions.
It will foster U.S. market participants' access to foreign clearing
organizations while maintaining key customer protections.
This rule is being adopted in furtherance of the Commission's
work with our international colleagues to, where appropriate,
mutually recognize third-country central counterparties.
International comity was a key pillar of the 2009 G20 Pittsburgh
Summit and effective cooperation among financial regulators bolsters
the safety and utility of our global derivatives markets. Central
clearing is critical to managing risk throughout our financial
markets, but can only be fully achieved where international
regulators work together toward a common goal. This rule is
consistent with the spirit of the CFTC-EU Common Approach \1\
regarding requirements for central counterparties, and builds upon
the EU equivalence determination \2\ and the CFTC comparability
determination,\3\ issued in connection with the Common Approach.
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\1\ The U.S. Commodity Futures Trading Commission and the
European Commission: Common Approach for Transatlantic CCPs (Feb.
10, 2016), at https://www.cftc.gov/PressRoom/PressReleases/cftc_euapproach021016.
\2\ See European Commission adopts equivalence decision for CCPs
in USA (Mar. 15, 2016), at https://ec.europa.eu/commission/presscorner/detail/en/IP_16_807.
\3\ Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central
Counterparties, 81 FR 15260 (Mar. 22, 2016).
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For a non-U.S. DCO that would like to clear only swaps for U.S.
persons and does not pose ``substantial risk to the U.S. financial
system,'' the final rule would provide two options for CFTC
registration. The non-U.S. DCO may apply for DCO registration
through the normal course and be subject to all Commission
regulations applicable to DCOs. In the alternative, if the non-U.S.
DCO is in good regulatory standing with its home country, it may
apply for registration by relying in large part on its home country
regime, provided it can demonstrate that the regime satisfies
certain DCO Core Principles. The non-U.S. DCO will still be required
to comply with CFTC regulations that provide critical protections to
U.S. customers and markets. The home country regulator must have a
memorandum of understanding with the Commission that includes
provisions for information sharing and cooperation, so that the
Commission may evaluate initial and continued eligibility for
registration. The goal is to encourage registration with the
Commission, which enhances our oversight and maintains certain
important safeguards, while providing greater clearing options for
U.S. market participants.
Non-U.S. DCOs subject to registration under this alternative
path will still need to clear swaps for U.S. customers through
registered futures commission merchants. Accordingly, they will be
required to fully comply with the requirements under Commission
Regulation 39.15 covering treatment of funds, swap data reporting
requirements in part 45 of the Commission's regulations, certain
ongoing and event-specific reporting requirements, and the
segregation requirements of Commodity Exchange Act (``CEA'') section
4d(f)(2) and related regulations. In addition, a non-U.S. DCO is
required to comply with CEA section 39.51(c)(2), which requires it
to provide notice to the Commission upon the occurrence of certain
important regulatory events. These events include any change in its
home country regime or registration status, an examination report or
notice of enforcement action issued by a home country regulator, the
default of a clearing member, or any action taken by the non-U.S.
DCO against any U.S. clearing member.
Only non-U.S. DCOs that do not pose substantial risk to the U.S.
financial system will be eligible for registration with alternative
compliance. A non-U.S. DCO that poses substantial risk to the U.S.
financial system will still be required to comply with the CEA and
all Commission regulations applicable to DCOs, including all of
subparts A and B of Part 39, in the same manner as a domestic DCO.
The final rule defines ``substantial risk'' to mean that (i) the
non-U.S. 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 the non-U.S. DCO is attributable to U.S. clearing
members. Despite being characterized as a risk-based test, this is
in fact more in the nature of an activity-based test. I believe an
activity-based test is appropriate as a proxy in this instance, as
it represents a transparent, objective, and relatively easy-to-
measure benchmark. The 20/20 test, however, may not always
accurately measure when the risk to the U.S. financial system
presented by the non-U.S. DCO becomes ``substantial.'' Accordingly,
the Commission will retain the discretion to evaluate other factors
in determining whether a non-U.S. DCO poses substantial risk to the
U.S. financial system.
I thank the staff of the Division of Clearing and Risk for their
work in finalizing this rule. I also would like to recognize the
staff in the Office of International Affairs, the Chairman's office,
and the New York regional office for their hard and productive work
over the past few years with our international counterparts. These
efforts to promote harmonization and mutual recognition have
provided the foundation for today's rulemaking.
[[Page 67192]]
Appendix 6--Regulatory Compliance Demonstration for an EU-Based
Applicant for Registration Subject to Compliance With the Core
Principles Applicable to Derivatives Clearing Organizations in
Accordance With Subpart D of Part 39
I. Introduction
Section 5b(a) of the Commodity Exchange Act (CEA) provides that
a clearing organization may not ``perform the functions of a
derivatives clearing organization'' (DCO) with respect to futures or
swaps unless the clearing organization is registered with the
Commission.\1\ The CEA further requires that, to register and
maintain registration as a DCO, a DCO 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.\2\ The Commission adopted the regulations in subpart
B of part 39 of the Commission's regulations (part 39) to implement
the DCO Core Principles.\3\ Subpart B of part 39 sets forth most of
the requirements applicable to DCOs.
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\1\ 7 U.S.C. 7a-1(a).
\2\ 7 U.S.C. 7a-1(c)(2)(A)(i).
\3\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334 (Nov. 8, 2011).
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The Commission has adopted amendments to its regulations that
will permit qualifying DCOs organized outside of the United States
to be registered with the Commission yet comply with the DCO Core
Principles through compliance with their home country regulatory
regime, subject to certain conditions and limitations. Under this
regime, an option now available to non-U.S. DCOs that clear only
swaps for U.S. persons and meet other qualifying criteria, a non-
U.S. DCO may demonstrate compliance with the DCO Core Principles by
complying with the applicable legal requirements in its home country
in lieu of many of the provisions of part 39.
To provide a meaningful framework for deference to home country
regulators, the Commission has determined to limit the universe of
applicable regulations that it imposes upon non-U.S. DCOs in this
context to those that provide critical protections, such as those
related to customer protection. Registered DCOs subject to
compliance with the DCO Core Principles in accordance with subpart D
of part 39 (subpart D compliance) are required by the CEA to comply
with each DCO Core Principle, and other specified requirements--but
not to all of the provisions set forth in part 39--in order to be
registered and to maintain registration. In all cases, these DCOs
must still comply with home country requirements that constitute
compliance with the DCO Core Principles, which the Commission's
regulations were intended to implement.
A DCO subject to subpart D compliance remains a registered DCO
pursuant to section 5b(a) of the CEA. A non-U.S. DCO would be
eligible for this subpart D compliance regime if, among other
things, the Commission determines that the DCO's compliance with its
home country regulatory regime would satisfy the DCO Core
Principles.\4\ As discussed in the release, an applicant for
registration subject to subpart D compliance, or a currently
registered DCO seeking to avail itself of this regime, would be
required to file only certain exhibits of Form DCO, including a
regulatory compliance chart in which the applicant would identify
the applicable legal requirements \5\ in its home country that
correspond with each DCO Core Principle and explain how the
applicant satisfies those home country 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 certain exceptions and subject to potential
conditions that the Commission may determine appropriate.\6\
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\4\ The Commission notes that the home country regulatory regime
would not need to satisfy the Commission's regulations under part
39.
\5\ Home country ``legal requirements'' would include those
standards or other requirements that are legally binding in the
applicant's home country.
\6\ Because a DCO subject to subpart D compliance would clear
swaps for customers through registered futures commission merchants,
the DCO would be required to fully comply with the Commission's
customer protection requirements, including those under Sec. 39.15
covering treatment of funds, as well as the swap data reporting
requirements in part 45 of the Commission's regulations.
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Central counterparties (CCPs) authorized in the European Union
(EU) are subject to the legal requirements set forth in the European
Market Infrastructure Regulation (EMIR),\7\ the Regulatory Technical
Standards (RTS), and the Settlement Finality Directive \8\
(collectively, the EMIR Framework). The EMIR Framework establishes
uniform legal requirements for EU CCPs that, as EU-level
legislation, have an immediate, binding, and direct effect in all EU
member states without the need for additional action by national
authorities.\9\ The European Parliament and the European Council
passed EMIR on July 4, 2012, and it entered into force on August 16,
2012. The relevant technical standards for CCPs referenced herein
include the RTS for CCPs (RTS-CCP), which generally entered into
force on March 15, 2013.\10\
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\7\ Regulation (EU) No 648/2012 of the European Parliament and
the Council on OTC derivatives, central counterparties and trade
repositories of 4 July 2012.
\8\ Directive 98/26/EC of the European Parliament and of the
Council of 19 May 1998 on settlement finality in payment and
securities settlement systems.
\9\ See EMIR (stating that ``[t]his Regulation shall be binding
in its entirety and directly applicable in all Member States.'').
\10\ Commission Delegated Regulation No. 153/2013 with regard to
regulatory technical standards on requirements for central
counterparties. For purposes of this Appendix, the Commission
considered only those EMIR Framework provisions published as of the
date of this Appendix.
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In 2016, the Commission undertook a review of the legal
requirements applicable to CCPs authorized in the EU as compared
with the Commission's regulations (EU Comparability
Determination).\11\ The EU Comparability Determination compared part
39 regulations with EU regulations and identified those instances
where the requirements are so similar that compliance with the part
39 regulation(s) would constitute compliance with the EU
regulation(s) as well. Unless any of the regulations included in the
determination have been amended or repealed, the Commission's
determination stands. Given the Commission's previous review in the
EU Comparability Determination, the Commission has further
endeavored to identify the legal requirements in the EU that appear
to correspond to the DCO Core Principles.\12\
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\11\ Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central
Counterparties, 81 FR 15260 (Mar. 22, 2016).
\12\ The Commission offers this as a potential aid to guide
applicants in completing the regulatory compliance chart as part of
an application for registration subject to subpart D compliance.
While the charts, provided in this Appendix as non-binding guidance
that does not create new rights or obligations, may be used to
assist applicants in identifying and citing to EU legal requirements
that correspond to specific DCO Core Principles, applicants are
nevertheless responsible for completing another compulsory element
of the regulatory compliance chart, i.e., explaining how they
satisfy each requirement. Applicants may submit the required
regulatory compliance chart using a different format.
---------------------------------------------------------------------------
Since the publication of the Commission's EU Comparability
Determination covering the EMIR Framework, both the U.S. and EU CCP
supervisory frameworks have continued to evolve. On October 23,
2019, the European Parliament and the European Council adopted a
substantial set of amendments to EMIR as to the authorization of
CCPs in the EU and requirements for the recognition of non-EU (or
third country) CCPs to operate in the EU (EMIR 2.2).\13\ EMIR 2.2
entered into force on January 1, 2020. In establishing a more
deferential framework through the subpart D compliance regime, and
in recognition of the decades of supervisory experience the
Commission has regarding non-U.S. DCOs (including with respect to
compliance with the Commission's regulations and their applicable
home country regulations), the Commission sees merit to this
demonstration to provide further transparency and clarity to market
participants, including DCOs that are dually registered with the
Commission and authorized by the European Securities and Markets
Authority.
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\13\ Regulation (EU) No 2019/2099, 23 Oct. 2019, of the European
Parliament and the Council, amending Regulation (EU) No 648/2012 as
regards the procedures and authorities involved for the
authorisation of CCPs and requirements for the recognition of third-
country CCPs, 2019 O.J. (L322) 1.
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The analysis set forth below presents the DCO Core Principles
and the corresponding provisions of the EMIR Framework. The
descriptions provided herein of the DCO Core Principles and the
corresponding provisions of the EMIR Framework are summaries of the
actual provisions. Statements of regulatory objectives are general
in nature and provided only for purposes of this Appendix. Likewise,
the discussion below identifies provisions of the EMIR Framework
that correspond to the DCO Core Principles. There may be aspects
that are not cited, including particular features
[[Page 67193]]
that may not be comparable, but that may not affect the overall
determination with respect to that provision or set of provisions.
Furthermore, the Commission relied on the plain language of the EMIR
Framework; the Commission recognizes that there may be
interpretations of the EMIR Framework or other applicable laws that
could impact the Commission's determination. To the extent that the
EMIR Framework lacks legal requirements that correspond to certain
DCO Core Principles, as identified herein, the Commission may, in
its discretion, grant or amend registration subject to conditions
that would address those DCO Core Principles.
II. Regulatory Compliance Demonstration
A. Compliance (DCO Core Principle A)
DCO Core Principle A requires a DCO to comply with each DCO Core
Principle and any requirement that the Commission may impose by rule
or regulation, provided that a DCO shall have reasonable discretion
in establishing the manner by which it complies with each DCO Core
Principle. The Commission adopted the requirements in Sec. 39.10 to
implement DCO Core Principle A.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle A.
EMIR, Art. 26(2): A CCP shall adopt policies and procedures
which are sufficiently effective so as to ensure compliance with
EMIR, including compliance of its managers and employees with all
the provisions of EMIR.
RTS-CCP, Art. 5: A CCP shall establish, implement, and maintain
adequate policies and procedures designed to detect any risk of
failure by the CCP and its employees to comply with its obligations
under this RTS and EMIR, as well as the associated risks, and put in
place adequate measures and procedures designed to minimize such
risk.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle A.
Table A--Compliance
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Compliance.................... A................ EMIR, Art. 26(2); RTS-
CCP, Art. 5.
------------------------------------------------------------------------
B. Financial Resources (DCO Core Principle B)
DCO Core Principle B requires a DCO to: (1) Have adequate
financial, operational, and managerial resources to discharge each
of its responsibilities; and (2) possess financial resources that,
at a minimum, exceed the total amount that would: (a) Enable the DCO
to meet its financial obligations to its members and participants
notwithstanding a default by the member or participant creating the
largest financial exposure for the DCO in extreme but plausible
market conditions; and (b) enable the DCO to cover its operating
costs for a period of one year, as calculated on a rolling basis.
The Commission adopted the requirements in Sec. 39.11 to implement
DCO Core Principle B.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle B.
EMIR, Art. 43: At all times, a CCP shall maintain sufficient
prefunded available financial resources to enable the CCP to
withstand the default of at least the two clearing members to which
it has the largest exposure under extreme but plausible market
conditions.
EMIR, Art. 16(2): A CCP's capital, including retained earnings
and reserves, shall be proportionate to the risk stemming from the
activities of the CCP.
EMIR, Art. 44(1): At all times, a CCP shall have access to
adequate liquidity to perform its services and activities and, on a
daily basis, shall measure its potential liquidity needs.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle B, as they
set standards to ensure that DCOs have adequate financial resources.
These standards seek to ensure that DCOs can meet their financial
obligations to market participants, thus contributing to the
financial integrity of the derivatives market as a whole.
Table B--Financial Resources
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Default financial resources... B................ EMIR, Art. 43.
General business risks........ ................. EMIR, Art. 16(2).
Liquidity of financial ................. EMIR, Art. 44(1).
resources.
------------------------------------------------------------------------
C. Participant and Product Eligibility (DCO Core Principle C)
DCO Core Principle C requires a DCO to: (1) Establish
appropriate admission and continuing eligibility standards
(including sufficient financial resources and operational capacity
to meet obligations arising from participation in the DCO) for
members of, and participants in, the DCO; (2) establish appropriate
standards for determining eligibility of agreements, contracts, or
transactions submitted to the DCO for clearing; and (3) establish
and implement procedures to verify, on an ongoing basis, compliance
with the DCO's participation and membership requirements, which must
be objective, be publicly disclosed, and permit fair and open
access. The Commission adopted the requirements in Sec. 39.12 to
implement DCO Core Principle C.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle C.
EMIR, Art. 37(1): A CCP shall establish, where relevant per type
of product cleared, the categories of admissible clearing members
and the admission criteria, upon the advice of the risk committee.
Such criteria shall be non-discriminatory, transparent, and
objective so as to ensure fair and open access to the CCP and shall
ensure that clearing members have sufficient financial resources and
operational capacity to meet the obligations arising from
participation in a CCP. Criteria that restrict access shall be
permitted only to the extent that their objective is to control the
risk for the CCP.
EMIR, Art. 37(2): A CCP shall ensure that the application of the
criteria referred to in Article 37(1) of EMIR is met on an ongoing
basis and shall have timely access to the information relevant for
such assessment. A CCP shall conduct, at least once a year, a
comprehensive review of compliance with this Article by its clearing
members.
EMIR, Art. 37(3): Clearing members that clear transactions on
behalf of their clients shall have the necessary additional
financial resources and operational capacity to perform this
activity. The CCP's rules for clearing members shall allow it to
gather relevant basic information to identify, monitor, and manage
relevant concentrations of risk relating to the provision of
services to clients. Clearing members shall, upon request, inform
the CCP about the criteria and arrangements they adopt to allow
their clients to access the services of the CCP. Responsibility for
ensuring that clients comply with their obligations shall remain
with clearing members.
EMIR, Art. 37(4): A CCP shall have objective and transparent
procedures for the suspension and orderly exit of clearing members
that no longer meet the criteria referred to in Article 37(1) of
EMIR.
[[Page 67194]]
EMIR, Art. 37(5): A CCP may only deny access to clearing members
meeting the criteria referred to in Article 37(1) of EMIR where duly
justified in writing and based on a comprehensive risk analysis.
EMIR, Art. 7(1): A CCP that has been authorized to clear over-
the-counter derivatives contracts shall accept clearing such
contracts on a non-discriminatory and transparent basis, including
as it relates to collateral requirements and fees related to access,
regardless of the trading venue. A CCP may require that a trading
venue comply with the operational and technical requirements
established by the CCP, including the risk-management requirements.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would substantially satisfy DCO Core
Principle C. While EMIR Art. 7(1) sets forth a standard for
eligibility of transactions and permits the CCP to require that the
trading venue offering the products meet requirements that the CCP
has established, the EMIR Framework does not specifically require a
CCP to establish standards for determining eligibility of
agreements, contracts, or transactions submitted to it for clearing.
Therefore, an applicant would be required to explain how it will
satisfy this aspect of DCO Core Principle C nevertheless.
Table C--Participant and Product Eligibility
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Eligibility standards and C................ EMIR, Art. 37(1)-(5).
ongoing requirements for
members and participants.
Standards for determining ................. EMIR, Art. 7(1).
eligibility of contracts
submitted for clearing.
------------------------------------------------------------------------
D. Risk Management (DCO Core Principle D)
DCO Core Principle D requires a DCO to: (1) Ensure that it
possesses the ability to manage the risks associated with
discharging its responsibilities through the use of appropriate
tools and procedures; (2) measure and monitor its credit exposures
to each clearing member daily; (3) through margin requirements and
other risk control mechanisms, limit its exposure to potential
losses from a clearing member default; (4) require sufficient margin
from its clearing members to cover potential exposures in normal
market conditions; and (5) use risk-based models and parameters in
setting margin requirements and review them on a regular basis. The
Commission adopted the requirements in Sec. 39.13 to implement DCO
Core Principle D.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle D.
RTS-CCP, Art. 4(1): A CCP shall have a sound framework for the
comprehensive management of all material risks to which it is or may
be exposed. A CCP shall establish documented policies, procedures,
and systems that identify, measure, monitor, and manage such risks.
In establishing risk management policies, procedures, and systems, a
CCP shall structure them in a way to ensure that clearing members
properly manage and contain the risks they pose to the CCP.
RTS-CCP, Art. 4(3): A CCP shall develop appropriate risk
management tools to be in a position to manage and report on all
relevant risks.
EMIR, Art. 40: A CCP shall measure and assess its liquidity and
credit exposures to each clearing member on a near to real-time
basis.
RTS-CCP, Art. 4(5): A CCP shall employ robust information and
risk-control systems to provide the CCP and, where appropriate, its
clearing members and, where possible, clients with the capacity to
obtain timely information and to apply risk management policies and
procedures appropriately. These systems shall ensure at least that
credit and liquidity exposures are monitored continuously at the CCP
level as well as at the clearing member level and, to the extent
practicable, at the client level.
EMIR, Art. 41(1): A CCP shall impose, call, and collect margins
to limit its credit exposures from its clearing members. Such
margins shall be sufficient to cover potential exposures that the
CCP estimates will occur until the liquidation of the relevant
positions. A CCP shall regularly monitor and, if necessary, revise
the level of its margins to reflect current market conditions taking
into account any potentially procyclical effects of such revisions.
EMIR, Art. 48(2): A CCP shall take prompt action to contain
losses and liquidity pressures resulting from defaults and shall
ensure that the closing out of any clearing member's positions does
not disrupt its operations or expose non-defaulting clearing members
to losses that they cannot anticipate or control.
EMIR, Art. 41(4): A CCP shall call and collect margins that are
adequate to cover the risk stemming from the positions registered in
each account kept in accordance with Article 39 of EMIR with respect
to specific financial instruments.
EMIR, Art. 41(2): A CCP shall adopt models and parameters in
setting its margin requirements that capture the risk
characteristics of the products cleared and take into account the
interval between margin collections, market liquidity, and the
possibility of changes over the duration of the transaction. The
models and parameters shall be validated by the competent authority.
EMIR, Art. 49(1): A CCP shall regularly review the models and
parameters adopted to calculate its margin requirements, default
fund contributions, collateral requirements, and other risk control
mechanisms. It shall subject the models to rigorous and frequent
stress tests to assess their resilience in extreme but plausible
market conditions and shall perform back tests to assess the
reliability of the methodology adopted.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle D. Both
regimes require that a DCO have a comprehensive framework for risk
management, the ability to measure and monitor its credit exposures,
mechanisms to limit its potential exposure to clearing member
default, sufficient margin coverage, and use of risk-based models
that are regularly reviewed.
Table D--Risk Management
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Management of risks........... D................ RTS-CCP, Art. 4(1),
4(3).
Monitoring of credit exposures ................. EMIR, Art. 40; RTS-
CCP, Art. 4(5).
Limiting exposure to clearing ................. EMIR, Art. 41(1),
member default. 41(4), 48(2).
Sufficiency of margin ................. EMIR, Art. 41(4).
requirements.
Use of risk-based models...... ................. EMIR, Art. 41(2),
49(1).
------------------------------------------------------------------------
[[Page 67195]]
E. Settlement Procedures (DCO Core Principle E)
DCO Core Principle E requires a DCO to: (1) Complete money
settlements on a timely basis, but not less frequently than once
each business day; (2) employ money settlement arrangements to
eliminate or strictly limit the DCO's exposure to settlement bank
risks; (3) ensure that money settlements are final when effected;
(4) maintain an accurate record of the flow of funds associated with
each money settlement; (5) possess the ability to comply with each
term and condition of any permitted netting or offset arrangement
with any other DCO; and (6) regarding physical settlements,
establish rules that clearly state the obligations of the DCO with
respect to physical deliveries, while ensuring that each risk
arising from any such obligation is identified and managed. The
Commission adopted the requirements in Sec. 39.14 to implement DCO
Core Principle E.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle E.
EMIR, Art. 41(3): A CCP shall call and collect margins on an
intraday basis, at least when predefined thresholds are exceeded.
Settlement Finality Directive, Art. 3: Transfer orders used to
transfer financial instruments and payments must be finally settled,
regardless of whether the sending participant has become insolvent
or the transfer orders have been revoked in the meantime.
EMIR, Art. 50(1): A CCP shall, where practical and available,
use central bank money to settle its transactions. Where central
bank money is not used, steps shall be taken to strictly limit cash
settlement risks.
EMIR, Art. 50(3): Where a CCP has an obligation to make or
receive deliveries of financial instruments, it shall eliminate
principal risk through the use of delivery-versus-payment mechanisms
to the extent possible.
RTS-CCP, Art. 4(2): A CCP shall take an integrated and
comprehensive view of all relevant risks. These shall include the
risks it bears from and poses to settlement banks.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle E. Both
regimes require a DCO to have procedures designed to reduce the risk
exposure to settlement banks or otherwise attributable to
settlement, including through the frequent collection of margin, and
require that money settlements are final when effected.
Table E--Settlement Procedures
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Settlement procedures......... E................ EMIR, Art. 41(3),
50(1), 50(3); RTS-
CCP, Art. 4(2).
Settlement finality........... ................. Settlement Finality
Directive, Art. 3.
------------------------------------------------------------------------
F. Treatment of Funds (DCO Core Principle F)
DCO Core Principle F requires a DCO to: (1) Establish standards
and procedures that are designed to protect and ensure the safety of
member and participant funds and assets; (2) hold such funds and
assets in a manner that would minimize the risk of loss or of delay
in the DCO's access to the funds and assets; and (3) hold such funds
and assets invested by the DCO in instruments with minimal credit,
market, and liquidity risks. The Commission adopted the requirements
in Sec. 39.15 to implement DCO Core Principle F.
Unlike other Commission requirements discussed herein, a DCO
subject to subpart D compliance would be required to comply with the
Commission's customer protection requirements, including DCO Core
Principle F and the Commission's regulations thereunder. The EMIR
Framework seeks to achieve the same outcome of protecting customers
by requiring, for example: That a CCP keep separate records and
accounts to enable it to distinguish the assets and positions held
for the account of one clearing member from the assets and positions
held for the account of any other clearing member and from its own
assets; \14\ that a clearing member keep separate records and
accounts that enable it to distinguish its own assets and positions
from the assets and positions held for the account of its clients at
the CCP; \15\ and that a CCP invest its financial resources only in
cash or highly liquid financial instruments with minimal market and
credit risk.\16\ However, because a DCO subject to subpart D
compliance would clear swaps for U.S. customers, the DCO would be
held to the Commission's customer protection requirements.
Therefore, an applicant would not be required to identify the
applicable legal requirements in its home country that would satisfy
DCO Core Principle F; however, the applicant would be required to
explain how it will satisfy DCO Core Principle F and the
Commission's regulations thereunder.
---------------------------------------------------------------------------
\14\ EMIR, Art. 39(1).
\15\ EMIR, Art. 39(4).
\16\ EMIR, Art. 47(1).
---------------------------------------------------------------------------
G. Default Rules and Procedures (DCO Core Principle G)
DCO Core Principle G requires a DCO to: (1) Have rules and
procedures designed to allow for the efficient, fair, and safe
management of events when members or participants become insolvent
or otherwise default on their obligations to the DCO; (2) clearly
state its default procedures; (3) make its default rules publicly
available; and (4) ensure that it may take timely action to contain
losses and liquidity pressures, and to continue meeting each of its
obligations. The Commission adopted the requirements in Sec. 39.16
to implement DCO Core Principle G.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle G.
EMIR, Art. 48(1): A CCP shall have detailed procedures in place
to be followed where a clearing member does not comply with the
participation requirements of the CCP within the time limit and in
accordance with the procedures established by the CCP. The CCP shall
set out in detail the procedures to be followed in the event the
default of a clearing member is not declared by the CCP. Those
procedures shall be reviewed annually.
EMIR, Art. 48(2): A CCP shall take prompt action to contain
losses and liquidity pressures resulting from defaults and shall
ensure that the closing out of any clearing member's positions does
not disrupt its operations or expose the non-defaulting clearing
members to losses that they cannot anticipate or control.
EMIR, Art. 48(4): A CCP shall verify that its default procedures
are enforceable. It shall take all reasonable steps to ensure that
it has the legal powers to liquidate the proprietary positions of
the defaulting clearing member and to transfer or liquidate the
clients' positions of the defaulting clearing member.
RTS-CCP, Art. 61(2): A CCP shall make available to the public
key aspects of its default procedures, including: (a) The
circumstances in which action may be taken; (b) who may take those
actions; (c) the scope of the actions which may be taken, including
the treatment of both proprietary and client positions, funds and
assets; (d) the mechanisms to address a CCP's obligations to non-
defaulting clearing members; and (e) the mechanisms to help address
the defaulting clearing member's obligations to its clients.
RTS-CCP, Art. 10(1)(b)(i): A CCP shall make its default
management procedures available to the public.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle G. Both
regimes require a DCO to have procedures to follow in the event of a
default and public disclosure of such procedures. These standards
seek to ensure that DCOs may take timely action to contain losses
and liquidity pressures and to continue meeting their obligations.
[[Page 67196]]
Table G--Default Rules and Procedures
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Default rules and procedures.. G................ EMIR, Art. 48(1),
48(4); RTS-CCP, Art.
61(2), 10(1)(b)(i).
Ability to contain losses..... ................. EMIR, Art. 48(2).
------------------------------------------------------------------------
H. Rule Enforcement (DCO Core Principle H)
DCO Core Principle H requires a DCO to: (1) Maintain adequate
arrangements and resources for the effective monitoring and
enforcement of compliance with its rules and for resolution of
disputes; (2) have the authority and ability to discipline, limit,
suspend, or terminate a clearing member's activities for violations
of those rules; and (3) report to the Commission regarding rule
enforcement activities and sanctions imposed against members and
participants. The Commission adopted the requirements in Sec. 39.17
to implement DCO Core Principle H.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle H.
EMIR, Art. 36(2): A CCP shall have accessible, transparent, and
fair rules for the prompt handling of complaints.
EMIR, Art. 37(4): A CCP shall have objective and transparent
procedures for the suspension and orderly exit of clearing members
that no longer meet the CCP's participation requirements.
EMIR, Art. 38(5): A CCP shall publicly disclose any breaches by
clearing members of the CCP's participation requirements.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle H. Because
participation requirements generally include ongoing compliance with
a DCO's rules, both regimes require procedures to discipline
clearing members that do not follow the DCO's rules, including
through suspension or termination. Both regimes also require a DCO
to have adequate dispute resolution mechanisms.
A DCO subject to subpart D compliance would be required to
comply with Sec. 39.51(c)(2)(vii), which requires a DCO to provide
notice of any action that it has taken against a U.S. clearing
member. Therefore, an applicant would not be required to identify
the applicable legal requirements in its home country that would
satisfy DCO Core Principle H's requirement that a DCO report to the
Commission regarding rule enforcement activities and sanctions
imposed against members and participants; however, the applicant
would be required to explain how it will satisfy Sec.
39.51(c)(2)(vii).
Table H--Rule Enforcement
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Rule enforcement.............. H................ EMIR, Art. 36(2),
37(4), 38(5).
------------------------------------------------------------------------
I. System Safeguards (DCO Core Principle I)
DCO Core Principle I requires a DCO to: (1) Establish and
maintain a program of risk analysis and oversight to identify and
minimize sources of operational risk through appropriate controls,
procedures, and automated systems, that are reliable, secure, and
have adequate scalable capacity; (2) establish and maintain
emergency procedures, backup facilities, and a plan for disaster
recovery that allows for the timely recovery and resumption of the
DCO's operations and the fulfillment of each of its obligations and
responsibilities; and (3) periodically conduct tests to verify that
the DCO's backup resources are sufficient to ensure daily
processing, clearing, and settlement. The Commission adopted the
requirements in Sec. 39.18 to implement DCO Core Principle I.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle I.
EMIR, Art. 26(6): A CCP shall maintain information technology
systems adequate to deal with the complexity, variety, and type of
services and activities performed so as to ensure high standards of
security and the integrity and confidentiality of the information
maintained.
RTS-CCP, Art. 9(1): A CCP shall design and ensure that its
information technology systems are reliable, secure, and capable of
processing the information necessary for the CCP to perform its
activities and operations in a safe and efficient manner. The
systems shall be designed to deal with the CCP's operational needs
and the risks the CCP faces; resilient, including in stressed market
conditions; and scalable, if necessary, to process additional
information. The CCP shall provide for procedures and capacity
planning as well as for sufficient redundant capacity to allow the
system to process all remaining transactions before the end of the
day in circumstances where a major disruption occurs.
RTS-CCP, Art. 9(2): A CCP must base its information technology
systems on internationally recognized technical standards and
industry best practices.
RTS-CCP, Art. 9(3): A CCP must maintain a robust information
security framework that appropriately manages its information
security risk, including policies to protect information from
unauthorized disclosure, ensure data accuracy and integrity, and
guarantee the availability of the CCP's services.
EMIR, Art. 34(1): A CCP shall establish, implement, and maintain
an adequate business continuity policy and disaster recovery plan
aimed at ensuring the preservation of its functions, the timely
recovery of operations and the fulfillment of the CCP's obligations.
Such a plan shall at least allow for the recovery of all
transactions at the time of disruption to allow the CCP to continue
to operate with certainty and to complete settlement on the
scheduled date.
RTS-CCP, Art. 19(1): A CCP shall have in place arrangements to
ensure continuity of its critical functions based on disaster
scenarios. These arrangements shall at least address the
availability of adequate human resources, the maximum downtime of
critical functions, and fail over and recovery to a secondary site.
RTS-CCP, Art. 20(1): A CCP shall test and monitor its business
continuity policy and disaster recovery plan at regular intervals
and after significant modifications or changes to the systems or
related functions to ensure the business continuity policy achieves
the stated objectives, including the two hour maximum recovery time
objective. Tests shall be planned and documented.
RTS-CCP, Art. 20(2): Testing of the business continuity policy
and disaster recovery plan shall fulfill the following conditions:
(a) Involve scenarios of large scale disasters and switchovers
between primary and secondary sites; and (b) include involvement of
clearing members, external providers and relevant institutions in
the financial infrastructure with which interdependencies have been
identified in the business continuity policy.
RTS-CCP, Art. 21(1), (2): A CCP shall regularly review and
update its business continuity policy to include all critical
functions and the most suitable recovery strategy for them, and
shall regularly review and update its disaster recovery plan to
include the most suitable recovery strategy for all critical
functions.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle I.
Requirements under both regimes are intended to ensure that a DCO
has appropriate procedures and controls for the reliability,
security, and capacity of its automated systems; has a plan for
disaster recovery and the ability to resume operations and meet all
of its obligations; and conducts tests to verify that the DCO's
backup resources are sufficient.
[[Page 67197]]
Table I--System Safeguards
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Identify and minimize I................ EMIR, Art. 26(6); RTS-
operational risks through CCP, Art. 9(1),
appropriate controls, 9(2), 9(3).
procedures and automated
systems.
Emergency procedures, backup ................. EMIR, Art. 34(1); RTS-
facilities, and disaster CCP, Art. 19(1).
recovery plan.
Periodic testing of ................. RTS-CCP, Art. 20(1),
sufficiency of backup 20(2), 21(1), 21(2).
resources.
------------------------------------------------------------------------
J. Reporting (DCO Core Principle J)
DCO Core Principle J requires a DCO to provide to the Commission
all information necessary for the Commission to conduct oversight of
the DCO. The Commission adopted the requirements in Sec. 39.19 to
implement DCO Core Principle J.
Relevant EU Laws and Regulations: The following provision of the
EMIR Framework appears to correspond to DCO Core Principle J.
RTS-CCP, Para. 16: To carry out its duties effectively, the
relevant competent authority should be provided with access to all
necessary information to determine whether the CCP is in compliance
with its conditions of authorization. Such information should be
made available by the CCP without undue delay.
Conclusion: A DCO's compliance with the cited provision of the
EMIR Framework would satisfy DCO Core Principle J. Both regimes
require a DCO to provide all information necessary to enable the
regulator to conduct oversight of the DCO.
Table J--Reporting
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Reporting..................... J................ RTS-CCP, Para. 16.
------------------------------------------------------------------------
K. Recordkeeping (DCO Core Principle K)
DCO Core Principle K requires a DCO to maintain records of all
activities related to its business as a DCO in a form and manner
acceptable to the Commission for a period of not less than five
years. The Commission adopted the requirements in Sec. 39.20 to
implement DCO Core Principle K.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle K.
EMIR, Art. 29(1): A CCP shall maintain, for a period of at least
10 years, all the records on the services and activity provided so
as to enable the competent authority to monitor the CCP's compliance
with EMIR, and shall make such records available upon request.
RTS-CCP, Art. 5(2): The rules, procedures and contractual
arrangements of the CCP shall be recorded in writing or another
durable medium, and shall be accurate, up-to-date, and readily
available to the competent authority, clearing members and, where
appropriate, clients.
RTS-CCP, Art. 12-16: These provisions set forth general
requirements regarding records and specific requirements for
transaction records, position records, business records, and records
related to reporting to a trade repository.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle K. Both
regimes require that the DCO maintain records related to its
business activities as a DCO, and the EMIR Framework requires that
these records be kept for at least 10 years, which exceeds the
minimum period of five years required under DCO Core Principle K.
Table K--Recordkeeping
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Recordkeeping................. K................ EMIR, Art. 29(1); RTS-
CCP Art. 5(2), 12-
16.
------------------------------------------------------------------------
L. Public Information (DCO Core Principle L)
DCO Core Principle L requires a DCO to: (1) Provide market
participants with sufficient information to enable them to identify
and evaluate accurately the risks and costs associated with using
the DCO's services; (2) make information concerning the rules and
operating and default procedures governing its clearing and
settlement systems available to market participants; and (3)
disclose publicly and to the Commission information concerning: (a)
The terms and conditions of each contract, agreement, and
transaction cleared and settled by the DCO; (b) the fees that the
DCO charges its members and participants; (c) the DCO's margin-
setting methodology, and the size and composition of its financial
resource package; (d) daily settlement prices, volume, and open
interest for each contract the DCO settles or clears; and (e) any
other matter relevant to participation in the DCO's settlement and
clearing activities. The Commission adopted the requirements in
Sec. 39.21 to implement DCO Core Principle L.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle L.
EMIR, Art. 26(7): A CCP shall make its governance arrangements,
the rules governing the CCP, and its admission criteria for clearing
membership, publicly available.
EMIR, Art. 38(1): A CCP and its clearing members shall publicly
disclose the prices and fees associated with the services provided.
They shall disclose the prices and fees of each service provided
separately, including discounts and rebates and the conditions to
benefit from those reductions.
EMIR, Art. 38(2): A CCP shall disclose to clearing members and
clients the risks associated with the services provided.
EMIR, Art. 38(3): A CCP shall disclose to its clearing members
and to its competent authority the price information used to
calculate its end-of-day exposures to its clearing members. A CCP
shall publicly disclose the volumes of the cleared transactions for
each class of instruments cleared by the CCP on an aggregated basis.
EMIR, Art. 38(7): A CCP shall provide its clearing members with
information on the initial margin models it uses, which shall: (a)
Clearly explain the design of the initial margin model and how it
operates; (b) clearly describe the key assumptions and limitations
of the initial margin model and the circumstances under which those
assumptions are no longer valid; and (c) be documented.
RTS-CCP, Art. 10(1): A CCP must make information relating to the
following available to the public: (a) Its governance arrangements;
(b) its rules (including default procedures, risk management
systems, rights and obligations of clearing members and clients,
clearing services and rules governing access to the CCP (including
admission, suspension and exit criteria for clearing membership),
contracts with clearing
[[Page 67198]]
members and clients, interoperability arrangements and use of
collateral and default fund contributions); (c) eligible collateral
and applicable haircuts; and (d) a list of all current clearing
members.
RTS-CCP, Art. 61(1): A CCP shall publicly disclose the general
principles underlying its models and their methodologies, the nature
of tests performed, with a high level summary of the test results
and any corrective actions undertaken.
RTS-CCP, Art. 61(2): A CCP shall make available to the public
key aspects of its default procedures, including: (a) The
circumstances in which action may be taken; (b) who may take those
actions; (c) the scope of the actions which may be taken, including
the treatment of both proprietary and client positions, funds and
assets; (d) the mechanisms to address a CCP's obligations to non-
defaulting clearing members; and (e) the mechanisms to help address
the defaulting clearing member's obligations to its clients.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle L. Both
regimes require disclosure to clearing members and the public of key
information regarding the clearing services provided, the costs and
risks of such services, the DCO's margin methodology, its financial
resources and default procedures, the volume of contracts cleared,
and its rules.
Table L--Public Information
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Disclosure of costs and risks L................ EMIR, Art. 38(1),
of DCO's services. 38(2).
Disclosure of rules, and ................. EMIR, Art. 26(7); RTS-
operating and default CCP, Art. 10(1).
procedures.
Information on cleared ................. EMIR, Art. 38(3),
transactions, margin 38(7); RTS-CCP, Art.
methodology, and financial 10(1), 61(1), 61(2).
resources.
------------------------------------------------------------------------
M. Information Sharing (DCO Core Principle M)
DCO Core Principle M requires a DCO to enter into and abide by
the terms of each appropriate and applicable domestic and
international information-sharing agreement, and use relevant
information obtained from each agreement in carrying out the DCO's
risk management program. As set out in Sec. 39.22, the Commission
has not adopted specific requirements to further implement DCO Core
Principle M; rather, the Commission provides DCOs with discretion in
how they meet this DCO Core Principle. Therefore, an applicant for
DCO registration subject to subpart D compliance would not need to
demonstrate that compliance with its home country requirements would
satisfy DCO Core Principle M; however, the applicant would be
required to explain how it will satisfy DCO Core Principle M
nevertheless.
N. Antitrust Considerations (DCO Core Principle N)
DCO Core Principle N requires a DCO to avoid, unless necessary
or appropriate to achieve the purposes of the CEA, adopting any rule
or taking any action that results in any unreasonable restraint of
trade, or imposing any material anticompetitive burden. As set out
in Sec. 39.23, the Commission has not adopted specific requirements
to further implement DCO Core Principle N; rather, the Commission
provides DCOs with discretion in how they meet this DCO Core
Principle. Therefore, an applicant for DCO registration subject to
subpart D compliance would not need to demonstrate that compliance
with its home country requirements would satisfy DCO Core Principle
N; however, the applicant would be required to explain how it will
satisfy DCO Core Principle N nevertheless.
O. Governance Fitness Standards (DCO Core Principle O)
DCO Core Principle O requires a DCO to establish governance
arrangements that are transparent to fulfill public interest
requirements and to permit the consideration of the views of owners
and participants. A DCO must also establish and enforce appropriate
fitness standards for directors, members of any disciplinary
committee, members of the DCO, any other individual or entity with
direct access to the settlement or clearing activities of the DCO,
and any party affiliated with any of the foregoing individuals or
entities. The Commission adopted the requirements in Sec. 39.24 to
implement DCO Core Principle O.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle O.
EMIR, Art. 26(1): A CCP shall have robust governance
arrangements, which include a clear organizational structure with
well-defined, transparent, and consistent lines of responsibility,
effective processes to identify, manage, monitor, and report the
risks to which it is or might be exposed, and adequate internal
control mechanisms, including sound administrative and accounting
procedures.
EMIR, Art. 26(7): A CCP shall make its governance arrangements,
the rules governing the CCP, and its admission criteria for clearing
membership, publicly available.
EMIR, Art. 27(1): The senior management of a CCP shall be of
sufficiently good repute and shall have sufficient experience so as
to ensure the sound and prudent management of the CCP.
EMIR, Art. 27(2): The members of a CCP's board, including its
independent members, shall be of sufficiently good repute and shall
have adequate expertise in financial services, risk management, and
clearing services.
EMIR, Art. 27(3): A CCP shall clearly determine the roles and
responsibilities of the board and shall make the minutes of the
board meetings available to the competent authority and auditors.
EMIR, Art. 36(1): When providing services to its clearing
members, and where relevant, to their clients, a CCP shall act
fairly and professionally in accordance with the best interests of
such clearing members and clients and sound risk management.
EMIR, Art. 36(2): A CCP shall have accessible, transparent, and
fair rules for the prompt handling of complaints.
RTS-CCP, Art. 3(1): The key components of a CCP's governance
arrangements that define its organizational structure as well as
clearly specified and well-documented policies, procedures, and
processes by which its board and senior management operate shall
include the roles and responsibilities of the management, the
reporting lines between the senior management and the board, and the
processes for ensuring accountability to stakeholders.
RTS-CCP, Art. 3(3): A CCP shall establish lines of
responsibility that are clear, consistent, and well-documented.
RTS-CCP, Art. 4(4): The governance arrangements shall ensure
that the CCP's board assumes final responsibility and accountability
for managing the CCP's risks.
RTS-CCP, Art. 7(1): A CCP shall define the composition, role,
and responsibilities of the board and senior management and any
board committees. These arrangements shall be clearly specified and
well-documented.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle O. Both
regimes require fitness standards for directors and others, and both
require transparent governance arrangements.
[[Page 67199]]
Table O--Governance Fitness Standards
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Governance arrangements....... O................ EMIR, Art. 26(1),
26(7), 27(3), 36(1),
36(2); RTS-CCP, Art.
3(1), 3(3), 4(4),
7(1).
Governance fitness standards.. ................. EMIR, Art. 27(1),
27(2).
------------------------------------------------------------------------
P. Conflicts of Interest (DCO Core Principle P)
DCO Core Principle P requires a DCO to establish and enforce
rules to minimize conflicts of interest in the decision-making
process of the DCO, and establish a process for resolving such
conflicts of interest. The Commission adopted the requirements in
Sec. 39.25 to implement DCO Core Principle P.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle P.
EMIR, Art. 26(5): A CCP shall adopt, implement, and maintain a
remuneration policy that promotes sound and effective risk
management and does not create incentives to relax risk standards.
EMIR, Art. 27(2): The compensation of the independent and other
non-executive members of the board shall not be linked to the
business performance of the CCP.
EMIR, Art. 33(1): A CCP shall maintain and operate effective
written organizational and administrative arrangements to identify
and manage any potential conflicts of interest between itself,
including its managers, employees, or any person with direct or
indirect control or close links, and its clearing members or their
clients known to the CCP. It shall maintain and implement adequate
procedures aimed at resolving possible conflicts of interest.
RTS-CCP, Art. 7(5): The arrangements by which the board and
senior management operate shall include processes to identify,
address, and manage potential conflicts of interest of members of
the board and senior management.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle P. Both
regimes require a DCO to manage or minimize conflicts of interest
and to establish or maintain a process for resolving conflicts of
interest.
Table P--Conflicts of Interest
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Conflicts of interest......... P................ EMIR, Art. 26(5),
27(2), 33(1); RTS-
CCP, Art. 7(5).
------------------------------------------------------------------------
Q. Composition of Governing Boards (DCO Core Principle Q)
DCO Core Principle Q requires a DCO to ensure that the
composition of its governing board or committee includes market
participants, as set out in Sec. 39.26.
Relevant EU Laws and Regulations: The following provision of the
EMIR Framework appears to correspond to DCO Core Principle Q.
EMIR, Art. 27(2): A CCP shall have a board. At least one third,
but no less than two, of the members of that board shall be
independent. Representatives of the clients of clearing members
shall be invited to board meetings for certain matters. The members
of a CCP's board, including its independent members, shall be of
sufficiently good repute and shall have adequate expertise in
financial services, risk management, and clearing services.
Conclusion: A DCO's compliance with the cited provision of the
EMIR Framework would satisfy DCO Core Principle Q. Both regimes
require a DCO to ensure that its board of directors includes members
that are independent of the DCO and have market expertise, and that
the board receives input from market participants.
Table Q--Composition of Governing Boards
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Composition of governing Q................ EMIR, Art. 27(2).
boards.
------------------------------------------------------------------------
R. Legal Risk (DCO Core Principle R)
DCO Core Principle R requires a DCO to have a well-founded,
transparent, and enforceable legal framework for each aspect of its
activities. The Commission adopted the requirements in Sec. 39.27
to implement DCO Core Principle R.
Relevant EU Laws and Regulations: The following provisions of
the EMIR Framework appear to correspond to DCO Core Principle R.
EMIR, Art. 26(2): A CCP shall adopt policies and procedures
which are sufficiently effective so as to ensure compliance with
EMIR, including compliance of its managers and employees with all
the provisions of EMIR.
EMIR, Art. 36(1): When providing services to its clearing
members, and where relevant, to their clients, a CCP shall act
fairly and professionally in accordance with the best interests of
such clearing members and clients and sound risk management.
RTS-CCP, Art. 5(2): A CCP shall ensure that its rules,
procedures, and contractual arrangements are clear and comprehensive
and they ensure compliance with relevant EU requirements as well as
all other applicable regulatory and supervisory requirements. A CCP
shall identify and analyze the soundness of the rules, procedures,
and contractual arrangements of the CCP.
RTS-CCP, Art. 5(4): A CCP's rules and procedures shall clearly
indicate the law that is intended to apply to each aspect of the
CCP's activities and operations.
Conclusion: A DCO's compliance with the cited provisions of the
EMIR Framework together would satisfy DCO Core Principle R. Both
regimes require a DCO to have a clear legal framework grounded in
the applicable legal and regulatory regime.
Table R--Legal Risk
------------------------------------------------------------------------
DCO core
Subject area principle EMIR framework
------------------------------------------------------------------------
Legal risk.................... R................ EMIR, Art. 26(2),
36(1); RTS-CCP, Art.
5(2), 5(4).
------------------------------------------------------------------------
[[Page 67200]]
[FR Doc. 2020-21306 Filed 10-20-20; 8:45 am]
BILLING CODE 6351-01-P
