December 18, 2012

CFTC’s Division of Clearing and Risk Issues No-Action Letter for Japan Securities Clearing Corporation and its Clearing Participants

Washington, DC – The Commodity Futures Trading Commission’s (Commission) Division of Clearing and Risk (DCR) today issued a letter stating that DCR will not recommend that the Commission take enforcement action against Japan Securities Clearing Corporation (JSCC) for failing to register as a derivatives clearing organization (DCO) under section 5b(a) of the Commodity Exchange Act (CEA). The letter also states that DCR will not recommend enforcement action against JSCC’s qualified clearing participants, or a parent or affiliate of a JSCC qualified clearing participant, for failing to clear yen-denominated interest rate swaps subject to the Commission’s clearing requirement under section 2(h)(1)(A) of the CEA through a registered DCO.

Under this relief, JSCC would be permitted to clear credit default swaps (CDS) based on an iTraxx Japan index and yen-denominated interest rate swaps referencing either LIBOR or the Tokyo Interbank Offered Rate (TIBOR), provided that JSCC will not accept, and no JSCC qualified clearing participant will offer, swaps for clearing on behalf of a U.S. customer.

The Commission recently finalized its first clearing requirement determination, which requires market participants to clear certain classes of CDS based on North American and European corporate entities and certain classes of interest rate swaps, including yen-denominated interest rate swaps referencing LIBOR. As of November 1, 2012, subject to certain exemptions, the Japanese government requires market participants to clear CDS based on an iTraxx Japan index that references 50 or fewer domestic Japanese corporations and yen-denominated interest rate swaps referencing LIBOR.

In the absence of no-action relief, certain market participants may be subject to conflicting requirements under Japan’s clearing requirement, which requires clearing of yen-denominated interest rate swaps at a clearing organization recognized by Japanese authorities, and (2) the Commission’s clearing requirement, which requires clearing at a registered DCO or a DCO that is exempt from registration. Thus, for purposes of complying with its obligations under the Commission’s clearing requirement, a JSCC qualified clearing participant or a parent or affiliate of a JSCC qualified clearing participant, subject to a Japanese clearing requirement, is permitted to clear proprietary, yen-denominated interest rate swaps that reference LIBOR, through JSCC.

This relief will be effective until the earlier of December 31, 2013, or the date upon which JSCC registers as a DCO.

Last Updated: December 18, 2012