I am disappointed that Shanghai Clearing House (SHCH) is again receiving an extension of relief permitting it to clear swaps for the proprietary accounts of SHCH clearing members that are U.S. persons or affiliates of U.S. persons.  SHCH has for too long been permitted to do so without registering with the Commodity Futures Trading Commission (CFTC or Commission) as a derivatives clearing organization (DCO) or obtaining from the Commission an exemption from registration as a DCO.  I am troubled by SHCH’s lack of engagement with Commission staff regarding its application for an exemption from DCO registration, its sudden re-engagement as the expiration date for its prior no-action letter looms, and issues surrounding the feasibility of securing a memorandum of understanding with the People’s Bank of China (PBOC) that satisfies the requirements for such an exemption.

A DCO’s eligibility for an exemption from registration as a DCO is based upon meeting certain requirements.  One critical requirement is that

A memorandum of understanding or similar arrangement satisfactory to the Commission is in effect between the Commission and the [DCO’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 necessary to evaluate the initial and continued eligibility of the [DCO] for exemption from registration or to review its compliance with any conditions of such exemption.[1]

The CFTC does not currently have a memorandum of understanding with the PBOC.  Nor did the CFTC have such a memorandum of understanding in 2016, when SHCH first received relief, or at any time since then.  Nevertheless, this relief to SHCH has been extended time and time again, and it is now being extended for a seventh year.

I appreciate the global nature of the markets we regulate and the need for the CFTC to work in coordination with our counterparts in other jurisdictions.  Indeed, the CFTC has been a leader in international regulatory cooperation, and this coordination is memorialized in memoranda of understanding between the CFTC and many other regulators.  But six years after SHCH first sought an exemption from the Commission’s DCO registration requirement, we are still unable to arrive at an adequate memorandum of understanding with the PBOC.  Six years’ worth of relief is beyond what should be considered a reasonable amount of flexibility and international diplomacy.

The PBOC, SHCH, and SHCH’s clearing members that are U.S. persons or affiliates of U.S. persons should not be able to avoid Commission requirements through perpetual extensions of no-action relief.