2020-26527
Federal Register, Volume 86 Issue 4 (Thursday, January 7, 2021)
[Federal Register Volume 86, Number 4 (Thursday, January 7, 2021)]
[Rules and Regulations]
[Pages 949-971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26527]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 39 and 140
RIN 3038-AE65
Exemption From Derivatives Clearing Organization Registration
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
adopting policies and procedures that the Commission will follow with
respect to granting exemptions from registration as a derivatives
clearing organization (DCO). In addition, the Commission is amending
certain related delegation provisions in its regulations.
DATES: Effective February 8, 2021.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected]; Parisa Nouri, Associate Director, 202-
418-6620, [email protected]; Eileen R. Chotiner, Senior Compliance
Analyst, 202-418-5467, [email protected]; Brian Baum, Special Counsel,
202-418-5654, [email protected]; August A. Imholtz III, Special Counsel,
202-418-5140, [email protected]; Abigail S. Knauff, Special Counsel,
202-418-5123, [email protected]; Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581; Theodore Z. Polley III, Associate
Director, 312-596-0551, [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. Existing Exempt DCO Orders
II. Amendments to Part 39
A. Regulation 39.1--Scope
B. Regulation 39.2--Definitions
C. Regulation 39.6--Exemption From DCO Registration
D. Regulation 39.9--Scope
III. Amendments to Part 140
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
[[Page 950]]
I. Background
A. Introduction
Section 5b(a) of the Commodity Exchange Act (''CEA'') provides that
a clearing organization \1\ may not ``perform the functions of'' a
clearing organization with respect to swaps \2\ unless the clearing
organization is a DCO registered with the Commission.\3\ However, the
CEA also permits the Commission to conditionally or unconditionally
exempt a clearing organization from DCO registration for the clearing
of swaps if the Commission determines that the clearing organization is
subject to ``comparable, comprehensive supervision and regulation'' by
its home country regulator.\4\ The Commission issued the first
exemption from DCO registration in 2015 and, to date, has exempted four
clearing organizations organized outside of the United States
(hereinafter referred to as ``non-U.S. clearing organizations'') from
DCO registration.\5\
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\1\ The term ``derivatives clearing organization'' is
statutorily defined to mean a clearing organization in general.
However, for purposes of the discussion in this release, the term
``registered DCO'' refers to a Commission-registered DCO, the term
``exempt DCO'' refers to a DCO 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 of the Commission's
regulations, 17 CFR 1.3.
\2\ Section 5b(a) also provides that a clearing organization may
not perform the functions of a clearing organization with respect to
futures unless it is a registered DCO. This, however, is limited to
futures executed on a designated contract market. Regulation 48.7
provides that a foreign board of trade registered with the
Commission may clear its contracts through a registered DCO or a
clearing organization that observes the Recommendations for Central
Counterparties (RCCPs) or successor standards and is in good
regulatory standing in its home country jurisdiction. 17 CFR 48.7.
The Principles for Financial Market Infrastructures (PFMIs) are the
successor standards to the RCCPs. See Committee on Payment and
Settlement Systems and the Technical Committee of the International
Organization of Securities Commissions, Principles for financial
market infrastructures (Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf. Because an
exempt DCO is required to observe the PFMIs and be in good
regulatory standing it its home country, it is eligible to clear
contracts executed on a foreign board of trade.
\3\ 7 U.S.C. 7a-1(a). Under section 2(i) of the CEA, 7 U.S.C.
2(i), activities outside of the United States are not subject to the
swap provisions of the CEA, including any rules prescribed or
regulations promulgated thereunder, unless those activities either
have a direct and significant connection with activities in, or
effect on, commerce of the United States, or contravene any rule or
regulation established to prevent evasion of a CEA provision enacted
under the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (Dodd-Frank Act). Therefore,
pursuant to section 2(i), the DCO registration requirement extends
to any clearing organization whose clearing activities outside of
the United States have a direct and significant connection with
activities in, or effect on, commerce of the United States.
\4\ 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.
\5\ See ASX Clear (Futures) Pty Amended Order of Exemption from
Registration (Jan. 28, 2016), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexemption.pdf; Korea Exchange, Inc. Order of
Exemption from Registration (Oct. 26, 2015), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-15.pdf; Japan Securities Clearing Corporation
Order of Exemption from Registration (Oct. 26, 2015), available at
http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf; OTC Clearing Hong Kong Limited Order
of Exemption from Registration (Dec. 21, 2015), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf.
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In August 2018, the Commission proposed to codify the policies and
procedures it implemented in 2015 with respect to granting exemptions
from DCO registration, including permitting exempt DCOs to clear only
proprietary swap positions of U.S. persons and futures commission
merchants (FCMs), and not customer positions (2018 Proposal).\6\ The
Commission received four substantive comment letters on the 2018
Proposal.\7\
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\6\ See Exemption From Derivatives Clearing Organization
Registration, 83 FR 39923 (Aug. 13, 2018).
\7\ The Commission received comment letters from the following
in 2018: Japan Securities Clearing Corporation (JSCC); ASX Clear
(Futures) Pty (ASX); Futures Industry Association (FIA) and
Securities and Financial Markets Association (SIFMA); and
International Swaps and Derivatives Association, Inc. (ISDA).
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In response to a specific request for comment as to whether the
Commission should consider permitting an exempt DCO to clear swaps for
U.S. customers,\8\ three commenters expressed support.\9\ In light of
these comments, the Commission further proposed in July 2019 to permit
foreign intermediaries to clear swaps for U.S. customers at exempt DCOs
(2019 Proposal).\10\
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\8\ 2018 Proposal, 83 FR at 39930.
\9\ See ASX Clear (Futures) Pty comment letter at 1 (stating
that ``ASXCF supports the CFTC permitting exempt DCOs to clear swaps
for U.S. person customers. ASXCF believes it would be beneficial to
allow U.S. person customers to access the broadest possible range of
central clearing facilities (``CCPs'') as this would provide U.S.
person customers with flexibility and choice in accessing the best
commercial solutions for the products that they use subject to those
CCPs meeting global QCCP standards under the CPMI-IOSCO Principles
for Financial Market Infrastructures (PFMIs).''); JSCC comment
letter at 5 (stating that ``JSCC would like the CFTC to consider the
potential benefits of allowing U.S. customers to access exempt DCOs,
using a similar approach to the correspondent clearing structure
adopted for foreign futures markets, by permitting . . . non-U.S.
clearing members in an exempt DCO to clear for U.S. customers,
without the necessity to register as a FCM, as long as those non-
U.S. clearing members can demonstrate that they are properly
supervised, regulated, and licensed to provide customer clearing
services in their home countries, where the regulatory authority
maintains appropriate cooperative arrangements with the CFTC.'');
and ISDA comment letter at 3 (stating ``[i]n response to the
Commission's question about customer clearing, ISDA strongly
believes that the CFTC should permit exempt DCOs to clear swaps for
customers.'').
\10\ See Exemption From Derivatives Clearing Organization
Registration, 84 FR 35456 (Jul. 23, 2019).
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After considering the comments received in response to the 2019
Proposal,\11\ the Commission is adopting the 2018 Proposal and, with
limited exceptions,\12\ declining to adopt the 2019 Proposal at this
time. The Commission may consider permitting U.S. customer clearing at
exempt DCOs or establishing a substantial risk test for exempt DCOs at
a later time.
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\11\ The Commission received comment letters from the following
in 2019: ASX; Americans for Financial Reform Education Fund (AFR Ed
Fund); Better Markets, Inc. (Better Markets); CCP12; Citadel; CME
Group, Inc. (CME); FIA; OTC Clearing Hong Kong Limited (OTC Clear);
Intercontinental Exchange, Inc. (ICE); International Bankers
Association of Japan (IBA Japan) and Japan Financial Markets Council
(JFMC); ISDA; JSCC; LCH Group (LCH); Milbank LLP (Milbank); SIFMA;
and World Federation of Exchanges (WFE).
\12\ As discussed further below, the Commission is adopting
Sec. 39.6(b)(6), as modified in the 2019 Proposal, to specify the
information that an exempt DCO must provide to the Commission if it
is unable to provide an unconditional certification that it
continues to observe the PFMIs in all material respects; Sec.
39.6(b)(9) (renumbered as Sec. 39.6(b)(8)), which provides that the
Commission may condition an exemption from DCO registration on any
other facts and circumstances it deems relevant; and Sec. 39.6(f),
which establishes a process for modification or termination of an
exemption from DCO registration upon Commission initiative.
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B. Existing Exempt DCO Orders
As previously noted, a clearing organization must be subject to
comparable, comprehensive supervision and regulation by appropriate
government authorities in the clearing organization's home country to
be eligible for an exemption from registration as a DCO for the
clearing of swaps. To date, the Commission has issued four exempt DCO
orders, subject to conditions, consistent with the statute. In granting
these exemptions, the Commission determined that a supervisory and
regulatory framework that conforms to the PFMIs is comparable to, and
as comprehensive as, the supervisory and regulatory requirements
applicable to registered DCOs.\13\ This conclusion is consistent
[[Page 951]]
with previous Commission determinations.\14\ Under exempt DCO orders
granted to date, an exempt DCO is required to observe the PFMIs in all
material respects and be in good regulatory standing in its home
country, as evidenced by an annual written representation by its home
country regulator. A memorandum of understanding (MOU) must be in
effect between the Commission and the home country regulator.
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\13\ The Commission holds systemically important DCOs and
subpart C DCOs to requirements that are fully consistent with the
PFMIs. See 17 CFR 39.30, 39.40.
\14\ See, e.g., Sec. 50.52(b)(4)(i)(E), 17 CFR
50.52(b)(4)(i)(E) (permitting eligible affiliate counterparties that
are located in certain jurisdictions to satisfy a condition to
electing the exemption by clearing the swap through a DCO or a
clearing organization that is subject to supervision by appropriate
government authorities in the clearing organization's home country
and that has been assessed to be in compliance with the PFMIs).
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The existing exempt DCO orders also require the exempt DCO to
supply the Commission with certain reports and information, some on a
periodic basis and others based on the occurrence of specified events.
For example, exempt DCOs are required to provide daily and quarterly
reporting of certain information regarding the clearing activity of
U.S. persons and FCMs. An exempt DCO also is required to report to the
Commission if there is any change in its licensure, registration or
authorization to act as a clearing organization in its home country; if
the exempt DCO takes action against a U.S. person or FCM; if there is a
default by a U.S. person or FCM; or if there is any change in the home
country regulatory regime that is material to the exempt DCO's
continuing observance of the PFMIs or compliance with the requirements
of the Commission's order. In addition, existing exempt DCO orders
require the exempt DCO to make its books and records available for
inspection by the Commission and, where a clearing member has reported
information regarding a swap to a swap data repository (SDR), to also
report information regarding that swap to the SDR.
Because the regulations being adopted herein are consistent with
existing exempt DCO orders, the Commission does not anticipate amending
any of the exempt DCO orders it has issued to date.
II. Amendments to Part 39
A. Regulation 39.1--Scope
The Commission proposed to amend Sec. 39.1 to expand the scope of
subpart A of part 39 to include a clearing organization applying for an
exemption from DCO registration. This change was meant to address the
inclusion in subpart A of new Sec. 39.6 (discussed below), which sets
forth the requirements for an exemption from DCO registration. The
Commission did not receive any comments on this provision and is
adopting it as proposed.
B. Regulation 39.2--Definitions
In connection with the proposed regulations, the Commission
proposed to add five definitions to Sec. 39.2, which apply only for
purposes of part 39.
1. Exempt Derivatives Clearing Organization
The Commission proposed to define ``exempt derivatives clearing
organization'' to mean a clearing organization that the Commission has
exempted from registration under section 5b(a) of the CEA, pursuant to
section 5b(h) of the CEA and Sec. 39.6. The Commission did not receive
any comments on this proposed definition and is adopting it as
proposed.
2. Good Regulatory Standing
The Commission proposed that, to be eligible for an exemption from
registration, a clearing organization would have to be in good
regulatory standing in its home country. The Commission proposed to
define ``good regulatory standing'' to mean either there has been no
finding by the home country regulator of material non-observance of the
PFMIs or other relevant home country legal requirements, or there has
been such a finding by the home country regulator, but it has been or
is being resolved to the satisfaction of the home country regulator by
means of corrective action taken by the clearing organization.
Although the Commission proposed to reference ``material'' non-
observance of the PFMIs or other relevant home country legal
requirements, the Commission requested comment in the 2018 Proposal as
to whether the definition should instead refer to all instances of non-
observance. In their responses to the 2019 Proposal, ASX, JSCC, and
CCP12 supported the proposed definition of ``good regulatory
standing.'' CCP12 and JSCC commented that the proposed definition is
appropriate, as individual regulators have taken differing approaches
to how they apply the PFMIs in the context of the markets that they
regulate and supervise. CCP12 and JSCC did not recommend extending the
definition to all instances of non-observance of the PFMIs. JSCC
further stated that regulatory changes in the home country of an exempt
DCO affecting the exempt DCO's continuing observance of the PFMIs
``occur infrequently and are easily identifiable,'' due to the
familiarity of exempt DCOs with the legal and regulatory framework in
their home countries. ASX added that an exempt DCO is best placed to
determine whether a change is material and advise the Commission
accordingly.
The Commission is adopting the definition of ``good regulatory
standing'' largely as proposed.\15\ The Commission's supervisory
experience with registered and exempt 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.\16\ The Commission further believes that the
definition provides adequate assurance of observance of the PFMIs or
compliance with other relevant home country requirements, because any
material non-observance must be resolved to the satisfaction of the
home country regulator in order for the exempt DCO to be deemed to be
in good standing.
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\15\ In the 2018 Proposal, 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 at 39933. In a separate, subsequent proposal,
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 34819, 34831
(July 19, 2019); see also Exemption From Derivatives Clearing
Organization Registration, 84 FR at 35471. The Commission has
adopted the definition as it relates to DCOs subject to alternative
compliance (see Registration with Alternative Compliance for Non-
U.S. Derivatives Clearing Organizations, 85 FR 67160, 67186 (Oct.
21, 2020)); therefore, the Commission is adopting here only that
portion of the definition that applies to exempt DCOs.
\16\ 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 memorandum of understanding.
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3. Home Country
The Commission proposed to define ``home country'' to mean, with
respect to a non-U.S. clearing organization, the jurisdiction in which
the clearing organization is organized. The Commission did not receive
any comments on this proposed definition and is adopting it as
proposed.
[[Page 952]]
4. Home Country Regulator
The Commission proposed to define ``home country regulator'' to
mean, with respect to a non-U.S. clearing organization, an appropriate
government authority which licenses, regulates, supervises, or oversees
the clearing organization's clearing activities in the home country.
The Commission did not receive any comments on this proposed definition
and is adopting it as proposed.
5. Principles for Financial Market Infrastructures
The Commission proposed to define ``Principles for Financial Market
Infrastructures'' to mean the PFMIs published by the Committee on
Payment and Settlement Systems (CPSS) and the Technical Committee of
the International Organization of Securities Commissions (IOSCO) in
April 2012, as updated, revised, or otherwise amended. The Commission
proposed the ``as updated, revised, or otherwise amended'' language in
the 2018 Proposal to recognize that CPMI-IOSCO \17\ could offer further
interpretation of or guidance on the PFMIs.\18\ As proposed in the 2019
Proposal,\19\ the Commission is striking ``as updated, revised, or
otherwise amended'' from the definition to clarify that while a home
country regulator may voluntarily adopt or amend its statutes, rules,
regulations, policies or combination thereof to incorporate subsequent
interpretations and guidance, the home country regulator is not
required to do so to maintain a regulatory regime that is comparable to
and as comprehensive as the PFMIs. The Commission believes that
striking that portion of the proposed definition would provide exempt
DCOs with greater regulatory certainty, as a DCO's eligibility to
remain exempt from registration would not be contingent on whether a
home country regulator has adopted CPMI-IOSCO's latest interpretations
or guidance. The Commission also does not believe it is appropriate to
allow any future change to the PFMIs themselves to be incorporated into
the definition without the Commission and other regulators first having
the opportunity to consider the change. However, the Commission
reserves the ability to incorporate future amendments to the PFMIs
within the definition if the Commission determines that such amendments
are appropriate. The Commission did not receive any comments on this
proposed definition and is adopting it as proposed.
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\17\ The name of CPSS was changed to the Committee on Payment
and Market Infrastructures (CPMI) in 2014.
\18\ 2018 Proposal, 83 FR at 39925 n.14.
\19\ 2019 Proposal, 84 FR at 35459.
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C. Regulation 39.6--Exemption From DCO Registration
The Commission proposed new Sec. 39.6 to establish a regulatory
framework for the granting of exemptions from DCO registration
consistent with the policies and procedures that the Commission has
been following with respect to granting exemptions from DCO
registration. The specific provisions of Sec. 39.6 are discussed in
greater detail below.
1. Regulation 39.6(a)--Eligibility for Exemption
The Commission proposed Sec. 39.6(a) to provide that the
Commission may exempt a non-U.S. clearing organization from
registration as a DCO for the clearing of swaps for U.S. persons \20\
and thereby exempt such clearing organization from compliance with the
provisions of the CEA and Commission regulations applicable to
registered DCOs, if the Commission determines that all of the
eligibility requirements listed in Sec. 39.6(a) are met, and that the
clearing organization satisfies the conditions set forth in Sec.
39.6(b).\21\
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\20\ The Commission proposed to use the interpretation of ``U.S.
person'' as set forth in the 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 and applicable to
this final rule. See Cross-Border Guidance, 78 FR 45292, 45316-
45317.
\21\ The eligibility requirements listed in Sec. 39.6(a) and
the conditions set forth in Sec. 39.6(b) are pre-conditions to the
Commission's issuance of any order exempting a clearing organization
from the DCO registration requirement of the CEA and Commission
regulations. 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 order
of exemption, as permitted by section 5b(h) of the CEA.
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a. Subject to Comparable, Comprehensive Supervision and Regulation
The Commission proposed to codify in Sec. 39.6(a)(1) the statutory
authority in section 5b(h) of the CEA that the Commission may exempt a
clearing organization from DCO registration for the clearing of swaps
provided that the Commission determines that the clearing organization
is subject to comparable, comprehensive supervision and regulation by a
home country regulator. To satisfy this condition, the clearing
organization would need to demonstrate that: (i) It is organized in a
jurisdiction in which a home country regulator applies to the clearing
organization, on an ongoing basis, statutes, rules, regulations,
policies, or a combination thereof that, taken together, are consistent
with the PFMIs; (ii) it observes the PFMIs in all material respects;
(iii) and it is in good regulatory standing in its home country.
In determining that adherence to the PFMIs \22\ satisfies the
``comparable, comprehensive supervision and regulation'' standard set
forth in CEA section 5b(h), the Commission takes a holistic, outcomes-
based approach. That is, the Commission has assessed whether, taken
together in their entirety, the PFMIs provide a comprehensive framework
for DCO supervision and regulation that is comparable to the statutory
and regulatory requirements that comprise the DCO regulatory
framework--focusing, in particular, on the core principles applicable
to registered DCOs set forth in CEA section 5b (DCO Core
Principles).\23\ The use of the PFMIs as the benchmark in this context
builds upon the global effort to develop an effective and consistent
set of regulatory and supervisory standards for CCPs. More
specifically, the PFMIs address major elements critical to the safe and
efficient operation of CCPs, such as risk management, adequacy of
financial resources, default management, margin, settlement, and
participation requirements.\24\
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\22\ In addition to the principles applicable to central
counterparties (CCPs) and other financial market infrastructures,
the PFMIs provide that central banks, market regulators, and other
relevant authorities should observe five responsibilities.
Consistent with this, the Commission expects that, in order to meet
the standard of being subject to comparable, comprehensive
supervision and regulation, a clearing organization's home country
regulator will observe these responsibilities. In particular,
Responsibility D, Explanatory Note 4.4.1 provides that the home
country regulator should adopt the PFMIs, and, ``[w]hile the precise
means through which the principles are applied may vary from
jurisdiction to jurisdiction, all CPSS and IOSCO members are
expected to apply the principles to the relevant [financial market
infrastructures] in their jurisdictions to the fullest extent
allowed by the legal framework in their jurisdiction.'' PFMIs, ]
4.4.1. Therefore, the Commission would not find a home country
regulator's statement that it requires a clearing organization to
observe the PFMIs to be sufficient to meet the above standard for
exemption, if the home country regulator has not itself adopted a
regulatory framework that is consistent with the PFMIs.
\23\ 7 U.S.C. 7a-1(c)(2).
\24\ See, e.g., Derivatives Clearing Organizations and
International Standards, 78 FR 72476 (Dec. 2, 2013) (adopting final
rules).
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The Commission recognizes that the requirements of the PFMI-
compliant jurisdiction will not be identical to the Commission's
regulations in every aspect. Nevertheless, a foreign jurisdiction's
observance of the PFMIs provides assurance that its supervision and
regulation are sufficiently similar in purpose and effect while
avoiding a
[[Page 953]]
demand for strict compliance with U.S. regulation that would subject
CCPs to a patchwork of U.S. and foreign regulations. In summary, the
PFMI-focused ``comparability'' framework strikes the proper balance by
showing an appropriate level of deference to the legal and supervisory
regime of the home country jurisdiction, while fulfilling the
Commission's supervisory duty to ensure that foreign DCOs clearing for
U.S. market participants are subject to a sound regulatory framework.
CME, ISDA, IBA Japan, and JFMC supported the Commission's reliance
on the PFMIs as the standard for determining whether a non-U.S.
clearing organization's home country regulatory regime is comparable
and comprehensive. IBA Japan and JFMC believe this approach strikes the
correct balance between addressing risk to the United States and
promoting cross-border harmonization. ISDA encouraged the Commission to
continue its dialogue with foreign regulators in the EU and other
jurisdictions to ensure that supervision in each jurisdiction is based
on deference to home country regulations and compliance with the PFMIs.
ISDA argued that applying inconsistent and duplicative regulatory
frameworks to clearing organizations will lead to the fragmentation of
global cleared derivatives markets.
AFR Ed Fund, Citadel, and Better Markets opposed using the PFMIs to
determine whether a clearing organization is subject to comparable,
comprehensive supervision and regulation by its home country regulator.
These commenters argued that section 5b(h) of the CEA requires that the
Commission compare the CEA with the clearing organization's home
country regime and that the Commission cannot use the fact that the
foreign regulatory regime conforms to the PFMIs as a substitute for
determining whether the regulatory regimes are comparable, as required
by section 5b(h).
AFR Ed Fund argued that the Commission's decision to deem
compliance with any foreign regulatory regime that conforms to the
PFMIs as fulfilling the statutory requirements for exempting a clearing
organization from registration under U.S. law means that a foreign
clearing organization can be exempted from registration without any
determination that it is subject to supervision and regulation that is
``in any way'' comparable to the relevant U.S. laws or regulations. AFR
Ed Fund further argued that the Commission ``cannot substitute its
judgement as to whether a foreign regime conforms to the PFMIs, a set
of broad principles with no standing under U.S. law, for the statutory
mandate to ensure that a DCO is subject to a regime comparable to U.S.
regulation and supervision.''
Similarly, Better Markets argued that the proposal unlawfully
treats the PFMIs as being the equivalent of U.S. law for purposes of
making a comparability determination under section 5b(h). Better
Markets also argued that the U.S. statutory and regulatory requirements
for DCOs are not the equivalent of the PFMIs because the PFMIs do not
have the force of law until they are incorporated into the home
jurisdiction's laws or regulations, and because, even when the PFMIs
are implemented, material differences may exist between the PFMI-
compliant regulatory regime and the PFMI principles. Better Markets
further argued that because section 5b(h) is only implicated if the
non-U.S. clearing organization is subject to the DCO registration
requirement of section 5b(a) in the first instance, Congress limited
the Commission's comparability inquiry to determining whether the non-
U.S. regime is comparable to the U.S. regulatory requirements that
would otherwise apply to the clearing organization. Better Markets
claimed that the 2018 Proposal and the four existing exemptive orders
suffer from the same legal deficiencies alleged in its comment.
Citadel believes the Commission should directly compare its
regulatory regime with that of the clearing organization's home
country. Citadel pointed out that the PFMIs do not address a number of
important elements of the Commission's regulatory framework for DCOs,
including non-discriminatory access, straight-through processing, gross
margining, public disclosure of rule filings, and public information.
Lastly, Citadel stated that U.S. customer access should be considered
as a part of the overall comparability assessment.
The Commission notes that section 5b(h) provides that the
Commission may exempt a clearing organization from DCO registration
``if the Commission determines that the [ ] clearing organization is
subject to comparable, comprehensive supervision and regulation . . .
.'' Accordingly, the Commission may, and does, determine that a foreign
regulatory regime that conforms to the PFMIs constitutes ``comparable,
comprehensive supervision and regulation by . . . the appropriate
government authorities in the home country of the organization,'' and
therefore that a clearing organization subject to such a regime may be
exempted from the DCO registration requirements.\25\ As mentioned
previously, the PFMIs are comparable to the DCO Core Principles and the
implementing Commission regulations in purpose and scope. Both address
major elements critical to the safe and efficient operations of
clearing organizations, such as risk management, adequacy of financial
resources, default management, margin, settlement, and participation
requirements.\26\ Regulation 39.40 expressly states that subpart C of
part 39 of the Commission's regulations ``is intended to establish
standards which, together with subparts A and B of [part 39], are
consistent with'' section 5b(c) of the CEA and the PFMIs and should be
interpreted in that context.
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\25\ As stated previously, this conclusion is consistent with
other previous Commission determinations. See, e.g., Regulation
50.52(b)(4)(i)(E), 17 CFR 50.52(b)(4)(i)(E) (permitting eligible
affiliate counterparties that are located in certain jurisdictions
to satisfy a condition to electing the exemption by clearing the
swap through a DCO or a clearing organization that is subject to
supervision by appropriate government authorities in the clearing
organization's home country and that has been assessed to be in
compliance with the PFMIs).
\26\ See, e.g., Derivatives Clearing Organizations and
International Standards, 78 FR 72476 (Dec. 2, 2013) (adopting final
rules).
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Regarding Citadel's comment, the Commission acknowledges that the
PFMIs are not identical to, nor as detailed as, part 39. However,
``comparable and comprehensive'' does not mean identical. The
Commission adopted the part 39 requirements for registered DCOs, which
may generally clear futures, swaps, and other instruments for various
U.S. persons to the extent permissible under the CEA. Here, in light of
the scope of an exempt DCO's clearing activities, the PFMIs are
sufficiently comparable and comprehensive to provide the appropriate
framework for the supervision and regulation of exempt DCOs permitted
to clear in accordance with this final rule and other relevant
conditions contained within any exemptive order granted by the
Commission. Application of the PFMIs in the context of U.S. customer
clearing, which is not part of the final rule, can be considered if the
Commission takes up the issue of customer clearing at exempt DCOs.
The Commission is adopting Sec. 39.6(a)(1) as proposed.
b. Memorandum of Understanding
The Commission proposed Sec. 39.6(a)(2) to require that, in order
for a clearing organization to be eligible for an exemption from
registration, an MOU or similar arrangement satisfactory to the
Commission must be in effect between
[[Page 954]]
the Commission and the 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 necessary to evaluate the clearing organization's initial and
continued eligibility for exemption or to review compliance with any
conditions of such exemption.
ISDA commented that the Commission should identify the types of
information that it expects to require under the MOU. ISDA argued that
it is important for the Commission to provide additional clarity
regarding the specific information it will require to evaluate the
exempt DCO's initial and continued eligibility for exemption to ensure
that providing such information would not violate any local laws. ISDA
believes that doing so would allow the Commission to access necessary
information while, at the same time, taking into account any
prohibitions on providing certain types of information under local
laws.
In response to ISDA's comment, the Commission notes that Sec.
39.6(e)(2) sets forth the information that an applicant for exemption
from DCO registration must provide to the Commission. That information
would not be specified in an MOU because it must be provided by the
applicant, not the applicant's home country regulator. However, an MOU
between the Commission and the home country regulator would allow the
Commission to seek the home country regulator's assistance in analyzing
and interpreting the information as necessary to determine the
applicant's eligibility for an exemption. If the applicant is granted
an exemption, the MOU would allow the Commission to gather additional
information from the home country regulator as necessary to determine
the exempt DCO's continued eligibility. For example, if an exempt DCO
provides notice to the Commission of a change in its home country
regulatory regime pursuant to Sec. 39.6(c)(2)(iii), the Commission may
wish to discuss the change with the home country regulator to
understand what impact, if any, the change may have on the exempt DCO's
ability to comply with the conditions of its exemption.
The Commission notes that it already has several MOUs with other
regulators in place, and those specific to the oversight of clearing
organizations are generally similar in content and scope.\27\ To the
extent that local laws limit a regulator's ability to share information
with the Commission, the Commission works closely with the regulator to
resolve any issues.
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\27\ CFTC Memoranda of Understanding: Cooperation for
Supervisory, Prudential, and Risk Assessment Purposes, https://www.cftc.gov/International/MemorandaofUnderstanding/mouInfo_Sharing_for_Supervisor.html.
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The Commission is adopting Sec. 39.6(a)(2) as proposed.
2. Regulation 39.6(b)--Conditions of Exemption
The Commission proposed Sec. 39.6(b) to set forth the conditions
to which an exempt DCO would be subject. These are the same conditions
the Commission has imposed on exempt DCOs through the orders of
exemption that it has issued to date.
a. Clearing by or for U.S. Persons and Futures Commission Merchants
The Commission proposed Sec. 39.6(b)(1) to prohibit the clearing
of U.S. customer positions at an exempt DCO. An FCM would be permitted
to be a clearing member of an exempt DCO, or maintain an account with
an affiliated broker that is a clearing member, for the purpose of
clearing swaps only for the FCM itself and those persons identified in
the definition of ``proprietary account'' in Sec. 1.3 of the
Commission's regulations.
The Commission requested comment in the 2018 Proposal as to whether
the Commission should consider permitting an exempt DCO to clear swaps
for U.S. customers. The Commission received four comments in response
to that request. As noted above, the Commission responded to these
comments by issuing the 2019 Proposal, which proposed to permit U.S.
customers to clear at an exempt DCO, but only through foreign
intermediaries, not FCMs. However, at this time, the Commission is
adopting Sec. 39.6(b)(1) largely as proposed in the 2018 Proposal, to
permit an exempt DCO to clear only proprietary positions of U.S.
persons and FCMs, and not customer positions. Specifically, Sec.
39.6(b)(1) provides that an exempt DCO must have rules that limit swaps
clearing services for U.S. persons and FCMs as follows: (i) A U.S.
person that is a clearing member of the exempt DCO may clear swaps for
itself and those persons identified in the definition of ``proprietary
account'' set forth in Sec. 1.3; \28\ (ii) a non-U.S. person that is a
clearing member of the exempt DCO may clear swaps for any affiliated
U.S. person identified in the definition of ``proprietary account'' set
forth in Sec. 1.3 of this chapter; \29\ and (iii) an FCM may be a
clearing member of the exempt DCO, or otherwise maintain an account
with an affiliated broker that is a clearing member, for the purpose of
clearing only proprietary swaps positions for itself and those persons
identified in the definition of ``proprietary account'' set forth in
Sec. 1.3.\30\
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\28\ The reference to ``those persons identified in the
definition of `proprietary account' set forth in Sec. 1.3,'' refers
to those persons associated with the U.S. person that is a clearing
member in the manner provided in the definition of ``proprietary
account'' as if the U.S. person is the ``individual, a partnership,
corporation or other type of association'' that carries the
proprietary account on its books and records, and not simply to such
types of persons identified in the definition generally.
\29\ This provision is intended to permit what would be
considered clearing of ``proprietary'' positions under the
Commission's regulations, even if the positions would qualify as
``customer'' positions under the laws and regulations of an exempt
DCO's home country. This provision clarifies that an exempt DCO may
clear positions for FCMs if the positions are not ``customer''
positions under the Commission's regulations.
\30\ The reference to ``those persons identified in the
definition of `proprietary account' set forth in Sec. 1.3,'' is
intended to refer to those persons associated with the FCM in the
manner provided in the definition of ``proprietary account'' as if
the FCM is the individual, a partnership, corporation or other type
of association that carries the proprietary account on its books and
records, and not simply to such types of persons identified in the
definition generally.
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b. Open Access
The Commission proposed Sec. 39.6(b)(2) to codify the ``open
access'' requirements of section 2(h)(1)(B) of the CEA, which applies
to both registered and exempt DCOs, with respect to swaps cleared by an
exempt DCO to which one or more of the counterparties is a U.S.
person.\31\ Paragraph (b)(2)(i) would require an exempt DCO to maintain
rules providing that all such swaps with the same terms and conditions
(as defined by product specifications established under the exempt
DCO's rules) submitted to the exempt DCO for clearing are economically
equivalent and may be offset with each other, to the extent that
offsetting is permitted by the exempt DCO's rules. Paragraph (b)(2)(ii)
would require an exempt DCO to maintain 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 did not receive any comments on this provision. The
Commission is adopting Sec. 39.6(b)(2) as proposed.
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\31\ 7 U.S.C. 2(h)(1)(B).
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[[Page 955]]
c. Consent to Jurisdiction; Designation of Service of Process
The Commission proposed Sec. 39.6(b)(3) to require that an exempt
DCO consent to jurisdiction in the United States and designate an agent
in the United States, for notice or service of process, pleadings, or
other documents issued by or on behalf of the Commission or the U.S.
Department of Justice in connection with any actions or proceedings
against, or any investigations relating to, the exempt DCO or any U.S.
person or FCM that is a clearing member or that clears swaps through an
affiliated clearing member. The name of the designated agent would be
submitted as part of the clearing organization's application for
exemption. If an exempt DCO appoints another agent to accept such
notice or service of process, the exempt DCO would be required to
promptly inform the Commission of this change. This is consistent with
requirements currently imposed in the registration orders of DCOs that
are organized outside of the United States as well as in each of the
orders of exemption that the Commission has issued thus far. The
Commission did not receive any comments on this provision. The
Commission is adopting Sec. 39.6(b)(3) as proposed.
d. Compliance
The Commission proposed Sec. 39.6(b)(4) as a general provision
that would require an exempt DCO to comply, and demonstrate compliance
as requested by the Commission, with any condition of the exempt DCO's
order of exemption. The Commission did not receive any comments on this
provision. The Commission is adopting Sec. 39.6(b)(4) as proposed.
e. Inspection of Books and Records
The Commission proposed Sec. 39.6(b)(5) to require an exempt DCO
to make all documents, books, records, reports, and other information
related to its operation as an exempt DCO (books and records) open to
inspection and copying by any Commission representative, and to
promptly make its books and records available and provide them to
Commission representatives upon request. This condition is consistent
with section 5b(h) of the CEA, which provides that the Commission may
exempt a DCO from registration with conditions that may include
requiring that the DCO be available for inspection by the Commission
and make available all information requested by the Commission.
ISDA believes that the proposed condition is too broad and that the
Commission should specify how and when it would undertake inspections
of exempt DCOs. ISDA also believes, to foster cross-border regulatory
cooperation, the Commission should consider obtaining consent for
inspections from an exempt DCO's home country regulator prior to
conducting onsite inspections. ISDA suggested, at a minimum, the
Commission should provide prior notice to an exempt DCO's home country
regulator in connection with any inspection or ask the home country
regulator for the required information. ISDA argued that, not only
would this promote comity and coordination, but it would also ensure
that such inspections are not overly burdensome or in violation of
local laws. ISDA further suggested that the Commission should consider
including an exempt DCO's home country regulator during inspections,
which would assist the Commission in interpreting and analyzing the
exempt DCO's books and records in the context of the regulatory
requirements of a particular jurisdiction.
The Commission is adopting Sec. 39.6(b)(5) as proposed. The
Commission notes that it does not anticipate conducting routine site
visits to exempt DCOs. However, the Commission may request a DCO's
books and records to ensure that, among other things, the exempt DCO
continues to meet the eligibility requirements for an exemption as well
as the conditions of its exemption. The Commission further notes that
it already follows many of ISDA's recommendations in the context of
examining non-U.S. DCOs, and it would expect to do the same in the
context of an exempt DCO; such interactions with the home country
regulator would be addressed in the MOU.
f. Observance of the PFMIs
In the 2018 Proposal, the Commission proposed Sec. 39.6(b)(6) to
require that an exempt DCO provide an annual certification that it
continues to observe the PFMIs in all material respects, within 60 days
following the end of its fiscal year. In the 2019 Proposal, the
Commission proposed to modify (and renumber) this condition to specify
the information that an exempt DCO must provide to the Commission if it
is unable to provide an unconditional certification that it continues
to observe the PFMIs in all material respects. Specifically, the exempt
DCO would be required to identify the underlying material non-
observance of the PFMIs and explain whether and how such non-observance
has been or is being resolved by the exempt DCO. The Commission
proposed this modification in recognition of the fact that at some
point an exempt DCO may not be able to certify that it observes the
PFMIs in all material respects. The exempt DCO must disclose that
information to the Commission and allow the Commission to consider its
impact on the exempt DCO's standing.
The Commission did not receive comments on this provision. The
Commission is adopting Sec. 39.6(b)(6) as proposed.
g. Representation of Good Regulatory Standing
The Commission proposed Sec. 39.6(b)(7) to require that the
Commission receive an annual written representation from a home country
regulator that an exempt DCO is in good regulatory standing, within 60
days following the end of the exempt DCO's fiscal year. The Commission
received comments on the definition of ``good regulatory standing,'' as
discussed above, but did not receive comments on this provision. The
Commission is adopting Sec. 39.6(b)(7) as proposed.
h. Other Conditions
Lastly, the Commission proposed Sec. 39.6(b)(9) in the 2019
Proposal to provide that the Commission may condition an exemption from
DCO registration on any other facts and circumstances it deems
relevant.\32\ The Commission stated that, in doing so, it would be
mindful of principles of international comity. For example, the
Commission could take into account the extent to which the relevant
foreign regulatory authorities defer to the Commission with respect to
oversight of registered DCOs organized in the United States.
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\32\ See 7 U.S.C. 7a-1(h) (stating, in relevant part, that the
Commission may exempt, conditionally or unconditionally, a DCO from
registration under that section for the clearing of swaps).
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CME strongly supported the Commission's retaining discretion to
condition an exemption from DCO registration on principles of
international comity and the extent to which the relevant home country
regulator defers to the Commission with respect to oversight of
registered DCOs organized in the United States that are accessed by
local participants. CME believes the Commission's efforts to support
mutual deference among regulators across the globe will foster
efficient markets and cooperative behavior to the benefit of all. As a
result, CME suggested that the Commission codify its ability to
condition an
[[Page 956]]
exemption from DCO registration on matters of international comity and
reciprocity within the regulatory text.
The Commission is declining to specifically condition an exemption
from DCO registration on matters of international comity and
reciprocity, but only because it believes Sec. 39.6(b)(9) as proposed
is sufficient for those purposes. As noted in the 2019 Proposal, the
Commission could use its discretion under Sec. 39.6(b)(9) 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.\33\ The recognition that market participants and market
facilities in a global swaps market are subject to multiple regulators
and potentially duplicative regulations, and can therefore benefit from
regulatory harmonization and mutual deference among regulators,
underpins the exempt DCO 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 exemption from registration to DCOs
in that jurisdiction, both at the point of initially exempting a non-
U.S. DCO, and in determining whether compliance under that framework
should continue. The Commission is adopting Sec. 39.6(b)(9) as
proposed (renumbered as Sec. 39.6(b)(8)).
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\33\ 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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3. Regulation 39.6(c)--General Reporting Requirements
The Commission proposed Sec. 39.6(c) to require an exempt DCO to
report certain information that would assist the Commission in
evaluating the continued eligibility of the exempt DCO for exemption,
reviewing the exempt DCO's compliance with any conditions of its
exemption, or monitoring the risk of U.S. persons and their affiliates
clearing swaps at the exempt DCO.
Specifically, the Commission proposed Sec. 39.6(c)(2)(i) to
require that an exempt DCO compile a report as of the end of each
trading day, and submit it to the Commission by 10:00 a.m. U.S. Central
time on the following business day, containing with respect to swaps:
(A) Initial margin requirements and initial margin on deposit for each
U.S. person; and (B) daily variation margin, separately listing the
mark-to-market amount collected from or paid to each U.S. person.
However, if a clearing member margins on a portfolio basis its own
positions and the positions of its affiliates, and either the clearing
member or any of its affiliates is a U.S. person, the exempt DCO would
be required to report initial margin requirements and initial margin on
deposit for all such positions on a combined basis for each such
clearing member on a combined basis and separately list the mark-to-
market amount collected from or paid to each such clearing member, on a
combined basis. These requirements are similar to certain reporting
requirements applicable to registered DCOs in Sec. 39.19(c)(1). These
reports will provide the Commission with information regarding the cash
flows associated with U.S. persons clearing swaps through exempt DCOs
in order to analyze the risks presented by such U.S. persons and to
assess the extent to which U.S. business is being cleared by each
exempt DCO.
The Commission proposed Sec. 39.6(c)(2)(ii)(A) and (B) to require
an exempt DCO to compile a report as of the last day of each fiscal
quarter, and submit it to the Commission no later than 17 business days
after the end of the fiscal quarter, containing the aggregate clearing
volume of U.S. persons during the fiscal quarter, and the average open
interest of U.S. persons during the fiscal quarter, respectively. If a
clearing member is a U.S. person, this data would include the
transactions and positions of the clearing member and all affiliates
for which the clearing member clears; if a clearing member is not a
U.S. person, the data would only have to include the transactions and
positions of affiliates that are U.S. persons. The Commission proposed
Sec. 39.6(c)(2)(ii)(C) to require that an exempt DCO's quarterly
report to the Commission contain a list of U.S. persons and FCMs \34\
that are either clearing members or affiliates of any clearing member,
with respect to the clearing of swaps, as of the last day of the fiscal
quarter. This information would enable the Commission, in conducting
risk surveillance of U.S. persons and swaps markets more broadly, to
better understand and evaluate the nature and extent of the cleared
swaps activity of U.S. persons.
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\34\ Such FCMs may or may not be U.S. persons. The Commission
will not require that exempt DCOs provide daily information
regarding initial margin requirements, initial margin on deposit,
and daily variation margin, or quarterly aggregate clearing volume
or average open interest, with respect to swaps, for FCMs that are
not U.S. persons (unless reporting would otherwise be required
because such FCMs are affiliates of U.S. persons). However, the
Commission has a supervisory interest in receiving information
regarding which of its registered FCMs are clearing members or
affiliates of clearing members, with respect to the clearing of
swaps at an exempt DCO.
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The Commission proposed paragraphs (c)(2)(iii) through (viii) of
Sec. 39.6 to require an exempt DCO to provide information to the
Commission upon the occurrence of certain specified events. The
Commission proposed Sec. 39.6(c)(2)(iii) to require an exempt DCO to
provide prompt notice to the Commission regarding any change in its
home country regulatory regime that is material to the exempt DCO's
continuing observance of the PFMIs or with any requirements set forth
in Sec. 39.6, or the order of exemption issued by the Commission.
The Commission proposed Sec. 39.6(c)(2)(iv) to require an exempt
DCO to provide to the Commission, to the extent that it is available to
the exempt DCO, any assessment of the exempt DCO's or the home country
regulator's observance of the PFMIs by a home country regulator or
other national authority, or an international financial institution or
international organization.\35\
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\35\ Such an international organization may include the
International Monetary Fund or World Bank. See PFMIs, ] 1.33.
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The Commission proposed Sec. 39.6(c)(2)(v) to require an exempt
DCO to provide to the Commission, to the extent that it is available to
the exempt DCO, any examination report, examination findings, or
notification of the commencement of any enforcement or disciplinary
action by a home country regulator.
The Commission proposed Sec. 39.6(c)(2)(vi) to require an exempt
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.
The Commission proposed Sec. 39.6(c)(2)(vii) to require an exempt
DCO to provide immediate notice to the Commission in the event of a
default (as defined by the exempt DCO in its rules) by a U.S. person or
FCM clearing swaps, including the name of the U.S. person
[[Page 957]]
or FCM, a list of the positions held by the U.S. person or FCM, and the
amount of the U.S. person's or FCM's financial obligation.
Finally, the Commission proposed Sec. 39.6(c)(2)(viii) to require
an exempt DCO to provide notice to the Commission of any action the
exempt DCO has taken against a U.S. person or FCM, no later than two
business days after taking such action.
The Commission requested comment in the 2018 Proposal, with regard
to proposed Sec. 39.6(c)(2)(iii), on whether, instead of requiring an
exempt DCO to provide prompt notice to the Commission regarding any
change in its home country regulatory regime that is material to the
exempt DCO's continuing observance of the PFMIs, any requirements set
forth in Sec. 39.6, or the order of exemption issued by the Commission
(thereby requiring the exempt DCO to determine whether a change is
material), the Commission should require an exempt DCO to provide
prompt notice of any change in its home country regulatory regime.
ASX and JSCC supported requiring an exempt DCO to determine whether
a change to its home country regulatory regime constitutes a material
change. ASX and JSCC believe an exempt DCO is best situated to easily
identify changes to its home country regulatory regime as well as
determine whether such changes are material. JSCC also commented that
having the exempt DCO make this materiality determination would avoid
redundant reporting and review for an exempt DCO and the Commission of
any change to the home country regulatory regime.
The Commission agrees with the commenters that an exempt DCO should
be required to determine whether a change to its home country
regulatory regime would constitute a material change, especially as the
Commission would otherwise need to review changes to home country
regulatory regimes in multiple jurisdictions.
The Commission is adopting Sec. 39.6(c) as proposed.
4. Regulation 39.6(d)--Swap Data Reporting Requirements
The Commission proposed Sec. 39.6(d) to require an exempt DCO, if
it accepts for clearing a swap that has been reported to an SDR
pursuant to part 45 of the Commission's regulations, to report to an
SDR data for the two swaps that result from the novation of the
original swap. The exempt DCO would also be required to report the
termination of the original swap to the same SDR that received the
original swap report. To avoid duplicative reporting for such
transactions, the Commission also proposed to require an exempt DCO to
have rules that prohibit the reporting of the two new swaps by the
counterparties to the original swap.
Citadel commented that the Commission should ensure that reporting
requirements pursuant to parts 43 and 45 of the Commission's
regulations continue to be fulfilled in an accurate manner for in-scope
transactions, including the ``cleared or uncleared'' field in part 43
and the ``clearing indicator'' and ``clearing venue'' fields in part
45. JSCC supported clearly defining an exempt DCO's swap data reporting
obligations within part 39. However, JSCC was concerned that the
counterparties to the original swap would still be required to report
the cleared transaction arising from the novation of the original swap
at an exempt DCO to an SDR under part 45, which JSCC viewed as in
conflict with proposed Sec. 39.6(d). JSCC commented that proposed
Sec. 39.6(d) could create confusion about reporting expectations for
exempt DCOs and their respective clearing members.\36\ JSCC was hopeful
that part 45 would be amended to address this issue.
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\36\ JSCC cited CFTC Letter 18-03: Extension of No-Action Relief
from Certain Reporting Obligations for Counterparties Clearing Swaps
through Derivatives Clearing Organizations Acting Under Exemptive
Orders or No-Action Relief (Feb. 20, 2018).
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CCP12 acknowledged that transparency in the swaps markets, which it
believes is supported by SDR reporting, provides a number of benefits.
However, CCP12 argued that the current SDR reporting requirements
applied to exempt DCOs pose significant operational challenges, such as
on-boarding with a U.S. SDR that has a different reporting format than
that of the exempt DCO's home country. CCP12 also commented that SDR
reporting fees are a burden based on the number of reported
transactions. The Commission believes that transparency in the swaps
market as provided by the swap data reporting requirements, which are
applicable to all registered DCOs, including non-U.S. DCOs and existing
exempt DCOs, strongly warrants requiring exempt DCOs to report such
information pursuant to Sec. 39.6(d).
In response to JSCC's concern that Sec. 39.6(d) could cause
confusion given the time-limited no-action relief provided in CFTC
Letter 18-03, the Commission notes that Sec. 39.6(d) specifically
requires an exempt DCO to have rules that prohibit the counterparties
to the original swap from reporting to an SDR pursuant to part 45 the
two new swaps which result from novation of the original swap. As
explained in the 2018 Proposal, the exempt DCO's rules prohibiting
reporting by the counterparties to the original swap are intended to
avoid duplicative reporting.\37\
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\37\ See Exemption From Derivatives Clearing Organization
Registration, 83 FR at 39928, n.32.
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In response to CCP12's concern related to onboarding with an SDR
that uses a different reporting format than the exempt DCO's home
country, the Commission notes that it recently adopted revisions to
part 45 of the Commission's regulations that include standardized data
fields that accommodate reporting for swaps cleared under either the
``agency'' clearing model or the ``principal'' clearing model.\38\ In
regards to SDR fees, the Commission notes that SDRs are required to
provide their services on a fair, open, and equal basis and an SDR's
fees must be equitable and applied in a uniform and non-discriminatory
manner.\39\ As such, the burdens associated with SDR fees for exempt
DCOs will be no different than the burdens for other DCOs that clear
swaps that must be reported to SDRs. The Commission is adopting Sec.
39.6(d) as proposed.
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\38\ See Swap Data Recordkeeping and Reporting Requirements, 85
FR 75503, 75567 (Nov. 25, 2020) (appendix 1 to part 45 contains the
``clearing member'' field, which contains instructions for reporting
the field under the agency clearing model or the principal clearing
model). See also Technical Specification Document: Parts 43 and 45
swap reporting and public dissemination requirements at 1-2,
available at https://www.cftc.gov/media/3496/DMO_Part43_45TechnicalSpecification022020/download (containing the
technical specifications for the ``clearing member'' field).
\39\ See 17 CFR 49.27 (containing the SDR access and fees
requirements).
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5. Regulation 39.6(e)--Application Procedures
The Commission proposed Sec. 39.6(e) to codify the procedures a
non-U.S. clearing organization must follow when applying for an
exemption from DCO registration.
Specifically, the Commission proposed Sec. 39.6(e)(1) to require a
clearing organization to file an application for exemption with the
Secretary of the Commission in the format and manner specified by the
Commission. After reviewing the application, the Commission may: (1)
Grant an exemption without conditions; (2) grant an exemption with
conditions; or (3) deny the application.
Proposed Sec. 39.6(e)(2) requires an applicant to submit a
complete application, including all applicable information and
documentation as outlined therein, and provide that the Commission will
not commence processing an application unless the
[[Page 958]]
application is complete. The application must include: (i) A cover
letter providing general information identifying the applicant, its
regulatory licenses or registrations, and relevant contact information;
(ii) a description of the applicant's business plan, including swap
asset classes that it would clear and whether the swaps are subject to
a clearing requirement issued by the Commission or the applicant's home
country regulator; (iii) documents that demonstrate that the applicant
is held to requirements consistent with the PFMIs; (iv) a written
representation from the applicant's home country regulator that the
applicant is in good regulatory standing; (v) copies of the applicant's
most recent disclosures necessary to observe the PFMIs, including the
financial market infrastructure disclosure template set forth in Annex
A to the Disclosure Framework and Assessment Methodology for the PFMIs;
\40\ (vi) a representation that the applicant will comply with each of
the requirements and conditions of its exemption; (vii) a draft of the
applicant's rules showing compliance with various requirements for an
exemption; and (viii) the applicant's consent to jurisdiction in the
United States, with contact information for the applicant's designated
U.S. agent.
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\40\ See CPSS-IOSCO, Principles for financial market
infrastructures: Disclosure framework and Assessment methodology
(Dec. 2012), at 82 et seq., available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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Proposed Sec. 39.6(e)(3) provides that, at any time during the
Commission's review of an application for exemption, the Commission may
request that the applicant submit supplemental information in order for
the Commission to process the application, and require an applicant to
file such supplemental information in the format and manner specified
by the Commission. Regulation 39.3(a)(4), which applies to applications
for DCO registration, contains a similar provision.
Proposed Sec. 39.6(e)(4) requires an applicant to 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. This provision is similar to Sec.
39.3(a)(5), which addresses amendments to applications for DCO
registration.
Proposed Sec. 39.6(e)(5) identifies those sections of an
application for exemption from registration that would be made public,
including the cover letter required in proposed Sec. 39.6(e)(2)(i);
documents demonstrating that the applicant is organized in a
jurisdiction in which its home country regulator applies to the
applicant statutes, rules, regulations, and/or policies that are
consistent with the PFMIs as proposed in Sec. 39.6(e)(2)(iii);
disclosures necessary to observe the PFMIs as proposed in Sec.
39.6(e)(2)(v); \41\ draft rules that meet the requirements of proposed
Sec. 39.6(b)(1) (U.S. persons clearing requirements), Sec. 39.6(b)(2)
(open access requirements); and Sec. 39.6(d) (swap data reporting
requirements), as applicable; and any other part of the application not
covered by a request for confidential treatment, subject to Sec.
145.9. This provision is similar to Sec. 39.3(a)(6), which identifies
those portions of an application for registration as a DCO that are
made public.
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\41\ The Disclosure Framework contemplates that CCPs will make
public disclosures pursuant to the Disclosure Framework. See id. at
1.
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The Commission did not receive comments on this aspect of the
proposal. The Commission is adopting Sec. 39.6(e) as proposed.
6. Regulation 39.6(f), (g), and (h)--Modification or Termination of
Exemption; Notice to Clearing Members of Termination of Exemption
The Commission initially proposed to provide in Sec. 39.6(f) that
the Commission may modify the terms and conditions of an order of
exemption, either at the request of the exempt DCO or on the
Commission's own initiative, based on changes to or omissions in
material facts or circumstances pursuant to which the order of
exemption was issued, or for any reason in the Commission's discretion.
This is a further expression of the Commission's discretionary
authority under section 5b(h) of the CEA to exempt a clearing
organization from registration ``conditionally or unconditionally,''
and it reflects the Commission's authority to act with flexibility in
responding to changed circumstances affecting an exempt DCO. In the
2019 Proposal, the Commission proposed to also provide for the
termination of an exemption upon the Commission's initiative, and to
set forth the process by which the Commission would issue a
modification or termination.
Under proposed Sec. 39.6(f)(1), the Commission may modify or
terminate an exemption from DCO registration, in its discretion and
upon its own initiative, if the Commission determines that there are
changes to or omissions in material facts or circumstances pursuant to
which the order of exemption was issued. The Commission may also modify
or terminate an exemption from DCO registration if any of the terms and
conditions of the order of exemption are not met, including: (i) The
exempt DCO observing the PFMIs in all material respects; and (ii) the
exempt DCO being subject to comparable, comprehensive supervision and
regulation by its home country regulator.\42\
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\42\ In the 2019 Proposal, proposed Sec. 39.6(f)(1) included a
subparagraph (iii) that is not being adopted at this time.
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The Commission proposed Sec. 39.6(f)(2), (f)(3), and (f)(4) to set
forth the process for modification or termination of an exemption upon
the Commission's initiative. Under proposed Sec. 39.6(f)(2), the
Commission must first provide written notification to an exempt DCO
that the Commission is considering whether to modify or terminate the
DCO's exemption and the basis for that consideration.
Under proposed Sec. 39.6(f)(3), an exempt DCO may respond to the
notification in writing no later than 30 business days following
receipt of the Commission's notification, or at such later time as the
Commission may permit in writing. The Commission believes that a
minimum 30-business day timeframe would allow the Commission to take
timely action to protect its regulatory interests while providing the
exempt DCO with sufficient time to develop its response.
The Commission proposed Sec. 39.6(f)(4) to provide that, following
receipt of a response from the exempt DCO, or after expiration of the
time permitted for a response, the Commission may either: (i) Issue an
order terminating the exemption as of a date specified in the order;
(ii) issue an amended order of exemption that modifies the terms and
conditions of the exemption; or (iii) provide written notification to
the exempt DCO that the Commission has determined to neither modify nor
terminate the exemption.
ASX, JSCC, and ISDA believe that an automatic termination of
exemptions could result in market disruption and legal uncertainty,
particularly for U.S. persons clearing through the exempt DCO. However,
the commenters recognized that the Commission must ensure that exempt
DCOs continue to operate safe and efficient clearing operations under a
regime that is consistent with the PFMIs. Therefore, the commenters
suggested that the Commission should first commit to working with the
exempt DCO and its home country regulator(s) to resolve any issues with
compliance with the terms and conditions of the order of exemption. If
these efforts are not
[[Page 959]]
successful, the commenters suggested that the Commission allow for an
appropriate transitional period so that affected clearing members and
customers may migrate to other clearing organizations in an orderly
manner.
The Commission agrees with the commenters that sufficient time for
transition will be needed in the event that it terminates an exemption
from registration. That is why the Commission proposed in Sec.
39.6(f)(4)(i) that it would issue an order of termination with an
effective date intended to provide the exempt DCO with a reasonable
amount of time to wind down its swap clearing services for U.S.
persons, including the liquidation or transfer of the positions and
related collateral of U.S. persons, as necessary. The Commission is
adopting Sec. 39.6(f) as proposed.
Furthermore, the Commission proposed Sec. 39.6(g) to set forth the
framework under which an exempt DCO may petition the Commission to
terminate its exemption and the applicable procedures. Specifically,
pursuant to proposed Sec. 39.6(g)(1), an exempt DCO may request that
the Commission terminate its exemption if the exempt DCO: (i) No longer
qualifies for an exemption as a result of changed circumstances; (ii)
intends to cease clearing swaps for U.S. persons; or (iii) submits an
application for registration in accordance with Sec. 39.3(a)(2) or
Sec. 39.3(a)(3), as applicable. The Commission further proposed in
Sec. 39.6(g)(2) that the petition for termination must include a
detailed explanation for the request and describe the exempt DCO's
plans for liquidation or transfer of the positions and related
collateral of U.S. persons, if applicable. Under proposed Sec.
39.6(g)(3), the Commission would issue an order of termination within a
reasonable time appropriate to the circumstances or in conjunction with
the issuance of an order of registration, if applicable.
The Commission did not receive any comments on Sec. 39.6(g). The
Commission is adopting this provision as proposed.
Lastly, the Commission proposed Sec. 39.6(h) to provide that,
following the Commission's issuance of an order of termination (unless
issued in conjunction with the issuance of an order of registration),
the exempt DCO must provide immediate notice of such termination to its
clearing members. The notice must include: (1) A Copy of the
Commission's order of termination; (2) a description of the procedures
for orderly disposition of any open swaps positions that were cleared
for U.S. persons; and (3) an instruction to clearing members, requiring
that they provide the exempt DCO's notice of such termination to all
U.S. persons clearing swaps through such clearing members. The
Commission did not receive any comments on this provision. The
Commission is adopting Sec. 39.6(h) as proposed.
D. Regulation 39.9--Scope
The Commission proposed to revise Sec. 39.9 to make it clear that
the provisions of subpart B apply to any DCO, as defined under section
1a(15) of the CEA and Sec. 1.3, that is registered with the Commission
as a DCO pursuant to section 5b of the CEA, but do not apply to any
exempt DCO. This revision was intended to clarify that the subpart B
regulations that address compliance with the DCO Core Principles
applicable to registered DCOs do not impose any obligations upon exempt
DCOs. The Commission did not receive any comments on this proposal. The
Commission is adopting Sec. 39.9 largely as proposed.\43\
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\43\ Subsequent to the 2018 Proposal, the Commission amended
Sec. 39.9 in the Alternative Compliance rulemaking to take into
account a DCO registered subject to alternative compliance. See
Registration with Alternative Compliance for Non-U.S. Derivatives
Clearing Organizations, 85 FR at 67171. The Commission is adding to
those amendments the changes it had originally proposed in the 2018
Proposal. See Exemption From Derivatives Clearing Organization
Registration, 83 FR at 39929.
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III. Amendments to Part 140
The Commission initially proposed amendments to Sec. 140.94(c) to
delegate authority to the Director of the Division of Clearing and Risk
(DCR) for all functions reserved to the Commission in proposed Sec.
39.6, subject to certain exceptions. Specifically, the Commission did
not propose to delegate its authority to grant, modify, or terminate an
exemption or prescribe conditions to an exemption order. Consistent
with that proposal, the Commission further proposed to supplement its
delegation to DCR to include certain functions related to the
modification or termination of an exemption order upon the Commission's
initiative. These functions would include, but would not be limited to,
sending an exempt DCO notice of an intention to modify or terminate its
exemption order. However, the Commission alone would retain the
authority to modify or terminate the exemption order. The Commission
did not receive any comments on this proposal. The Commission is
adopting the changes to Sec. 140.94(c) as proposed.
IV. 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.\44\ The
regulations being adopted by the Commission will affect clearing
organizations. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its regulations on small entities in
accordance with the RFA. The Commission has previous determined that
clearing organizations are not small entities for the purpose of the
RFA.\45\ 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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\44\ 5 U.S.C. 601 et seq.
\45\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \46\ 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 Commission requested a new OMB control number for the
collection of information in connection with the proposal.
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\46\ 44 U.S.C. 3501 et seq.
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The Commission received one comment regarding its cost burden
analysis in the preamble to the Proposal. JSCC stated in its October
2018 comment letter that the Commission's cost estimate of $10,500 \47\
for an application for exemption from DCO registration substantially
underestimated an applicant's costs, which JSCC stated would require a
significant amount of resources to understand any legal and/or
regulatory implications arising from the DCO exemption, as well as to
identify any potential conflicts with the applicant's
[[Page 960]]
home country regulatory and supervisory frameworks. However, JSCC did
not provide any estimate of what the expected cost of an application
would be. As stated in the Proposal, the Commission based its cost
estimate of $10,500 for the exempt DCO application on the significantly
reduced requirements as compared to a DCO registration application,
which the Commission estimated would cost $100,000. The Commission has
not received any information indicating what the amount of additional
costs over $10,500 would be, nor has it revised any of the elements of
the proposal that would affect the cost estimate. Therefore, the
Commission is retaining the burden estimates it included in the
proposal.
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\47\ Due to minor adjustments to the burden estimate for an
exempt DCO application due to consolidating the burden estimates for
components of the application, the current estimated cost is $10,000
per application.
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1. Application for Exemption From DCO Registration Under Sec. 39.6
Based on its experience in addressing petitions for exemption, the
Commission anticipates receiving one application for exemption per
year, and one request for termination of an exemption every three
years.\48\ Burden hours and costs were estimated based on existing
information collections for DCO registration and reporting, adjusted to
reflect the significantly lower burden of the proposed regulations. The
Commission has estimated the burden hours for this collection of
information as follows:
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\48\ The Commission has determined that one termination every
three years is a more appropriate estimate than one per year, which
was used in the information burden estimate for the 2018 Proposal.
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Application for exemption, including all exhibits, supplements
and amendments \49\
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\49\ Although the 2018 Proposal included separate burden
estimates for the application and for information requested by the
Commission during its review, these estimates were combined in the
2019 Proposal and in this final rule. The estimated number of
applications has been revised to one per year from two in the 2018
Proposal in response to the Commission's adoption of the Alternative
Compliance framework, which had not been proposed at the time of the
2018 Proposal, and which provides an alternative that could lead to
a reduced number of exemption applications. See Registration with
Alternative Compliance for Non-U.S. Derivatives Clearing
Organizations, 85 FR 67160 (Oct. 21, 2020). In addition, burden
estimates for reporting by exempt DCOs have been updated based on
recent observations of filing frequency by existing exempt DCOs.
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Estimated number of respondents: 1
Estimated number of reports per respondent: 1
Average number of hours per report: 40
Estimated gross annual reporting burden: 40
Termination of exemption
Estimated number of respondents: 1
Estimated number of reports per respondent: 0.33
Average number of hours per report: 2
Estimated gross annual reporting burden: 0.66
Notice to clearing members of termination of exemption
Estimated number of respondents: 1
Estimated number of reports per respondent: 8
Average number of hours per report: 0.1
Estimated gross annual reporting burden: 0.8
2. Reporting by Exempt DCOs
The number of respondents for the daily and quarterly reporting and
annual certification requirements is conservatively estimated at a
maximum of seven, based on the number of existing exempt DCOs (4) and
one application for exemption each year. Reporting of specific events
is expected to occur infrequently, and the estimated number of
respondents reflects that not all exempt DCOs will experience events
subject to the notification requirement:
Daily reporting
Estimated number of respondents: 7
Estimated number of reports per respondent: 250
Average number of hours per report: 0.1
Estimated gross annual reporting burden: 175
Quarterly reporting
Estimated number of respondents: 7
Estimated number of reports per respondent: 4
Average number of hours per report: 1
Estimated gross annual reporting burden: 28
Event-specific reporting
Estimated number of respondents: 4
Estimated number of reports per respondent: 1
Average number of hours per report: 0.5
Estimated gross annual reporting burden: 2
Annual certification
Estimated number of respondents: 7
Estimated number of reports per respondent: 1
Average number of hours per report: 1.5
Estimated gross annual reporting burden: 10.5
3. Reporting by Exempt DCOs in Accordance With Part 45
Regulation 39.6(d) requires an exempt DCO to report data regarding
the two swaps resulting from the novation of an original swap to an
SDR, if the original swap had been reported to an SDR pursuant to part
45 of the Commission's regulations. The Commission is revising the
information collection for part 45 to include a separate information
collection under OMB Control No. 3038-0096. The burden for exempt DCOs
reporting in accordance with part 45 is estimated to be approximately
one-fifth of the burden for registered DCOs because exempt DCOs will
not be required to report all swaps, only those that result from the
novation of original swaps that have been reported to an SDR.
Consequently, the burden hours for the collection of information in
this rulemaking have been estimated as follows:
Reporting in accordance with part 45
Estimated number of respondents: 7.
Estimated number of reports per respondent: 8,074 \50\
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\50\ While updating the number of reports based on recent data,
the Commission discovered that the estimated number in the NPRM--
1987--inadvertently reflected a quarterly, rather than annual,
number of reports. The estimate of 8074 reports per respondent
represents the median number of swaps reported to SDRs by existing
exempt DCOs during calendar year 2019.
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Average number of hours per report: 0.1
Estimated gross annual reporting burden: 5649
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.\51\ 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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\51\ 7 U.S.C. 19(a).
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The baseline for the Commission's consideration of the costs and
benefits of this rulemaking are: (1) The DCO Core Principles; (3) the
general provisions applicable to registered DCOs under subparts A and B
of part 39; (4) Form DCO in Appendix A to part 39; and (5) part 40 of
the Commission's regulations.
This rulemaking codifies certain conditions and procedures that the
[[Page 961]]
Commission has been using to grant exemptions from DCO registration,
with some modifications. To the extent that exemptions from DCO
registration were already available to non-U.S. clearing organizations
pursuant to these conditions and procedures, the actual costs and
benefits of this rulemaking will likely be lower than the costs and
benefits relative to the baseline.
The Commission notes that this consideration is based on its
understanding that the swaps market functions internationally with (1)
transactions that involve U.S. firms occurring across different
international jurisdictions; (2) some entities organized outside of the
United States that are prospective Commission registrants; and (3) 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 final rule on all relevant swaps activity,
whether based on their actual occurrence in the United States or on
their connection with activities in, or effect on, U.S. commerce
pursuant to section 2(i) of the CEA.\52\
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\52\ Pursuant to section 2(i) of the CEA, activities outside of
the United States are not subject to the swap provisions of the CEA,
including any rules prescribed or regulations promulgated
thereunder, unless those activities either have a direct and
significant connection with activities in, or effect on, commerce of
the United States; or contravene any rule or regulation established
to prevent evasion of a CEA provision enacted under the Dodd-Frank
Act, Public Law 111-203, 124 Stat. 1376. 7 U.S.C. 2(i).
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The Commission recognizes that the final rule may impose costs. The
Commission has endeavored to assess the expected costs and benefits of
the final rule in quantitative terms, including PRA-related costs,
where possible. In situations where the Commission is unable to
quantify the costs and benefits, the Commission identifies and
considers the costs and benefits of the applicable regulations in
qualitative terms. The lack of data and information to estimate those
costs is attributable in part to the nature of these final regulations.
Additionally, the initial and recurring compliance costs for any
particular exempt DCO will depend on the size, existing infrastructure,
level of clearing activity, practices, and cost structure of the DCO.
Finally, the costs and benefits of this final rule may be affected
by the Alternative Compliance framework \53\ under which a non-U.S.
clearing organization or an already registered non-U.S. DCO would have
the option of applying for registration with alternative compliance,
which would allow the DCO to comply with the DCO Core Principles
through its home country regulatory regime. The Commission has compared
these costs and benefits below.
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\53\ Registration with Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, 85 FR 67160 (Oct. 21, 2020).
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2. Amendments to Part 39
a. Summary
Section 5b(h) of the CEA permits the Commission to exempt a non-
U.S. clearing organization from DCO registration for the clearing of
swaps to the extent that the Commission determines that such clearing
organization is subject to comparable, comprehensive supervision by
appropriate government authorities in the clearing organization's home
country. Pursuant to this authority, the Commission has exempted four
non-U.S. clearing organizations from DCO registration. The final rule
generally codifies the policies and procedures that the Commission has
followed with respect to granting exemptions from DCO registration.
Specifically, these regulations set forth the process by which a non-
U.S. clearing organization may obtain an exemption from DCO
registration for the clearing of proprietary swaps for U.S. persons
provided that it meets the specified eligibility standards and can meet
the conditions of an exemption.
b. Benefits and Costs
With the Commission's adoption of this final rule, non-U.S.
clearing organizations seeking to clear swaps for U.S. persons on a
proprietary basis will have a choice between seeking an exemption from
DCO registration and registering as a DCO, either under the
Commission's original framework or the recently adopted Alternative
Compliance framework. The Commission expects exemption from
registration to be the least costly of the three options. The
Commission estimates that it would take about 421 hours to prepare a
traditional application for DCO registration \54\ and 100 hours to
prepare an application under the alternative procedures, as compared to
40 hours to prepare an application for an exemption.\55\ The daily,
quarterly, and event-specific reporting requirements are estimated to
impose the same hourly burden for both registered and exempt DCOs with
the exception of swap data reporting under part 45. Registered DCOs
subject to Alternative Compliance will be subject to the same part 45
reporting requirements as other registered DCOs, while exempt DCOs will
only have to report data regarding the two swaps resulting from the
novation of an original swap previously reported to an SDR. In the PRA
section for this release, the Commission estimates that the part 45
reporting burden for an exempt DCO would be about one fifth as much as
the burden on a registered DCO. Both exempt DCOs and registered DCOs
subject to Alternative Compliance are primarily subject to their home
country regulatory regimes, but registered DCOs subject to Alternative
Compliance will also be held to certain requirements set forth in the
CEA and Commission regulations, including, for example, subpart A of
part 39 and Sec. 39.15. The extent to which these additional
requirements will increase costs on registered DCOs subject to
Alternative Compliance relative to the costs to exempt DCOs will depend
on the extent to which these requirements exceed the legal requirements
of their home countries and whether registered DCOs subject to
Alternative Compliance have to change their practices more than they
would if they had sought an exemption instead.
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\54\ See Derivatives Clearing Organization General Provisions
and Core Principles, 85 FR 4800, 4829 (Jan. 27, 2020).
\55\ To the extent that current procedures for seeking an
exemption from DCO registration are similar to the procedures
adopted in this release, these costs are currently being incurred.
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Given the lower costs of an exemption as compared to registration,
and the greater clarity and regulatory certainty resulting from
codification of the CFTC's existing procedures, the final regulation
may promote competition among registered and exempt DCOs by encouraging
more clearing organizations to seek an exemption. Lower costs and
competition may, in turn, result in clearing members incurring lower
costs to clear through exempt DCOs. In addition, access to more
clearing organizations may also encourage voluntary clearing of swaps
that are not required to be cleared, as certain swaps may not be
cleared by any registered DCOs. This may, in turn, serve to diversify
the potential risk of cleared swaps, because any such risk would become
less concentrated if a larger number of registered and exempt DCOs were
clearing swaps for U.S. persons, and the volume of those swaps could
become more evenly distributed among those registered and exempt DCOs.
While an exemption from DCO registration would be less costly to
obtain than any form of DCO registration, registration provides
benefits that are not available to exempt
[[Page 962]]
DCOs or persons that clear through an exempt DCO. For example, a
registered DCO is permitted to clear for U.S. customers. An eligible
clearing organization may choose to register, particularly under the
Alternative Compliance framework, over seeking an exemption if it
determines that the benefits of customer clearing (including an
enhanced ability to attract U.S. business) would justify the extra
costs of registration relative to an exemption. Based on data submitted
by registered DCOs to the Commission pursuant to Sec. 39.19(c),
customer clearing typically accounts for a majority of the initial
margin at a DCO (about 70 percent on average), and this is likely true
for other clearing organizations as well. Thus, the inability of exempt
DCOs to clear for U.S. customers may create a significant disincentive
to seeking exemption in lieu of registration.
Registered DCOs may face a competitive disadvantage as a result of
the final rule. A registered DCO may have to compete with an exempt DCO
for U.S. proprietary swap business, yet may have higher ongoing
compliance costs than an exempt DCO. This competitive disadvantage is
mitigated by the fact that exempt DCOs are, as a precondition of such
exemption, required to be subject to comparable, comprehensive
supervision and regulation by a home country regulator that is likely
to impose costs similar to those associated with Commission regulation.
The Commission is codifying in Sec. 39.6(a)(1) the statutory
authority in section 5b(h) of the CEA that the Commission may exempt a
clearing organization from DCO registration for the clearing of swaps
provided that the Commission determines that the clearing organization
is subject to comparable, comprehensive supervision and regulation by a
home country regulator. To satisfy this standard, the clearing
organization will need to demonstrate, among other things, that: (i) It
is organized in a jurisdiction in which a home country regulator
applies to the clearing organization, on an ongoing basis, statutes,
rules, regulations, and/or policies that, taken together, are
consistent with the PFMIs; and (ii) it observes the PFMIs in all
material respects. New Sec. 39.6(b)(6) requires an annual
certification that an exempt DCO continues to observe the PFMIs in all
material respects.
The Commission believes that the PFMIs provide numerous regulatory
benefits and promote the protection of market participants and the
public, the financial integrity of derivatives markets, and sound risk
management practices. In this regard, the PFMIs include provisions that
address DCOs establishing requirements and/or procedures designed to
ensure that clearing members meet their obligations to DCOs and
safeguard customer funds. For example, the PFMIs provide that DCOs
should establish risk-related participation requirements adequate to
ensure that participants meet operational, financial, and legal
requirements to allow them to fulfill their obligations to DCOs.
Financial requirements may include reasonable risk-related capital
requirements for participants and appropriate indicators of participant
creditworthiness.\56\ In addition, the PFMIs provide that a DCO should
monitor compliance with its participation requirements on an ongoing
basis through the receipt of timely and accurate information.\57\ The
PFMIs further provide that collateral belonging to customers of
clearing members should be segregated from the assets of the clearing
member through which the customers clear.\58\ Moreover, using the PFMIs
may promote regulatory comity, since the PFMIs represent standards that
have been agreed to by the G20 and are widely used in the regulation of
clearing organizations. Although the PFMIs are already used to
determine eligibility for receiving an exemption from DCO registration,
the Commission believes that codifying the use of the PFMIs is
beneficial from the perspectives of transparency and consistency.
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\56\ PFMIs at Principle 18, Explanatory Note 3.18.5.
\57\ Id. at Principle 18, Explanatory Note 3.18.8.
\58\ Id. at Principle 14, Explanatory Note 3.14.1.
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The Commission acknowledges, as discussed in the preamble above,
that the PFMIs are not identical to, nor as detailed as, part 39. Thus,
market participants choosing to clear swaps through exempt DCOs may
incur costs associated with forgoing certain regulatory protections
that are not included in the PFMIs. However, these costs are mitigated
by some of the conditions of exemption set out in Sec. 39.6(b), as
discussed below, as well as other Commission regulations applicable to
exempt DCOs. These conditions (including, for example, the open access
provision of Sec. 39.6(b)(2)), provide additional regulatory
protections beyond those required by the PFMIs. Additionally, the costs
of using the PFMIs (as compared to some other means of determining that
a clearing organization is subject to comparable, comprehensive
supervision and regulation by a home country regulator) will vary
depending on the home country regulatory regime. Finally, since the
PFMIs are already used to determine eligibility for receiving an
exemption from DCO registration, these costs are currently being
realized by exempt DCOs and U.S. persons who currently clear
proprietary swaps on exempt DCOs.
New Sec. 39.6(b) contain various conditions that the Commission is
imposing for the granting of exemptions from DCO registration. These
conditions are consistent with those that the Commission has been
imposing on exempt DCOs prior to the adoption of this rule. Therefore,
the costs and benefits of these conditions are currently being incurred
by exempt DCOs and U.S. persons who currently clear proprietary swaps
on such DCOs.
New Sec. 39.6(b)(2) codifies the ``open access'' requirements of
section 2(h)(1)(B) of the CEA with respect to swaps cleared by an
exempt DCO to which one or more of the counterparties is a U.S.
person.\59\ Under Sec. 39.6(b)(2), an exempt DCO is required to
maintain rules providing that all such swaps with the same terms and
conditions submitted to the exempt DCO for clearing are economically
equivalent and may be offset with each other, to the extent that
offsetting is permitted by the exempt DCO's rules. An exempt DCO is
also required to maintain rules providing for non-discriminatory
clearing whether a swap is executed bilaterally or is executed on or
subject to the rules of an unaffiliated electronic matching platform or
trade execution facility, e.g., a swap execution facility. This should
benefit market participants by ensuring that they are able to offset
their positions to the extent that it is feasible and consistent with
DCO rules and that they are not subject to discrimination based on
whether or not they execute on a trading platform. The Commission
believes that most or all non-U.S. clearing organizations have open
access rules that comply with Sec. 39.6(b)(2) and has received no
comments suggesting otherwise. However, to the extent that a clearing
organization seeking an exemption from DCO registration needs to change
its rules to comply with this requirement, that clearing organization
could incur costs.
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\59\ 7 U.S.C. 2(h)(1)(B).
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New Sec. 39.6(b)(3) requires an exempt DCO to consent to
jurisdiction in the United States and designate an agent in the United
States to receive notice or service of various documents issued by or
on behalf of the Commission or the U.S. Department of Justice in
connection with investigations or for certain other purposes. This will
assist
[[Page 963]]
the Commission and the Department of Justice in protecting market
participants and the public and will impose on exempt DCOs the minor
costs associated with retaining a U.S. agent.
New Sec. Sec. 39.6(b)(4) and 39.6(b)(8) are general provisions
that require an exempt DCO to comply, and demonstrate compliance as
requested by the Commission, with any condition of the exempt DCO's
order of exemption and to provide that the Commission may condition an
exemption from DCO registration on any other facts and circumstances it
deems relevant. These provisions do not provide any costs and benefits
in and of themselves. The costs and benefits of any additional
conditions that may be imposed pursuant to Sec. 39.6(b)(8) can only be
considered when such additional conditions are imposed.
New Sec. 39.6(b)(5) requires an exempt DCO to promptly make all
books and records related to its operation as an exempt DCO available
to any Commission representative upon request. This provision will
facilitate the Commission's mission, including the protection of market
participants and the public. While the Commission does not anticipate
making routine requests for books and records, providing or making
available books and records pursuant to any such request will impose
modest costs on exempt DCOs.
New Sec. 39.6(b)(7) requires an exempt DCO's home country
regulator to provide an annual certification that the exempt DCO is in
good regulatory standing. That rule, along with Sec. 39.6(a)(2) which
requires an MOU or similar arrangement to be in effect between the
Commission and the home country regulator, will assist the Commission
in protecting market participants and the public, but will not impose
any direct costs on exempt DCOs or market participants. Where no MOU
between the Commission and a home country regulator is in effect, a
clearing organization in that country wanting an exemption may incur
costs associated with facilitating such an MOU, or it could incur the
costs of either registering with the Commission or forgoing U.S.
participation. The requirements regarding an MOU also exist in current
procedures, so the costs and benefits of those requirements are
currently being realized by exempt DCOs and U.S. persons who currently
clear proprietary swaps on exempt DCOs.
Finally, new Sec. 39.6(d) requires an exempt DCO to report swap
data for the two cleared swaps that result from the novation of an
original swap cleared through the exempt DCO. An exempt DCO would also
need to report the termination of the original swap to the SDR that
received the swap data for the original swap. To avoid duplicative
reporting, the exempt DCO is also required to have rules that prohibit
the part 45 reporting of the two new swaps by the counterparties to the
original swap. CCP12 commented that transparency in the swaps markets,
which is supported by SDR reporting, provides a number of benefits.
However, CCP12 argued that the SDR reporting requirements would post
significant operational challenges, such as onboarding with an SDR that
has a different reporting format than that of the exempt DCO's home
country. CCP12 also commented that SDR reporting fees would be a burden
based on the number of reported transactions. The Commission agrees
that SDR reporting enhances market transparency and thus provides
benefits to the market. The Commission notes that SDR reporting costs
would otherwise be borne by the counterparties to the swap, and because
there are far more swap counterparties than exempt DCOs, it would be
more efficient to require the relatively few exempt DCOs to bear the
operational burdens of setting up and following reporting processes and
procedures with the various SDRs. The costs and benefits of the
reporting requirements are currently being realized to the extent that
similar requirements are contained in existing orders of exemption for
DCOs.
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
For the most part, the final rule does not materially reduce the
protections available to market participants and the public because,
among other things, it: (i) Only permits exempt DCOs to clear swaps for
U.S. persons for their proprietary accounts, and not for customers;
(ii) requires that an exempt DCO be subject to comparable,
comprehensive supervision and regulation by a home country regulator as
provided by the PFMIs; (iii) requires an MOU or similar arrangement
with the home country regulator that would enable the Commission to
obtain 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; (iv) provides additional protections with the conditions of
exemption set out in Sec. 39.6(b), including open access and data
reporting requirements; and (v) explicitly authorizes the Commission to
modify or terminate an order of exemption on its own initiative if it
determines that there are changes to or omissions in material facts or
circumstances pursuant to which the order of exemption was issued, or
that any of the terms and conditions of the order of exemption have not
been met. Collectively, these provisions protect market participants
and the public by ensuring that exempt DCOs are subject to the
internationally recognized PFMIs. Although the Commission acknowledges
the possibility that some foreign regulatory regimes may ultimately
prove to be less effective than that of the United States, the
Commission believes that this risk is mitigated for the reasons
discussed above.
b. Efficiency, Competitiveness, and Financial Integrity
The final rule promotes operational efficiency by permitting exempt
DCOs to clear swaps for U.S. persons without having to apply for DCO
registration, which involves the submission of extensive documentation
to the Commission. The final rule also mitigates duplicative compliance
requirements by not requiring exempt DCOs to comply with the
Commission's part 39 regulations (with the exception of Sec. 39.6) in
addition to the requirements of their home country regulator. In
addition, adopting these regulations might prompt other regulators to
adopt similar rules that would defer to the Commission in the
regulation of U.S. registered DCOs operating outside the United States,
which could increase competitiveness by reducing the regulatory burdens
on such DCOs.
The exempt DCO framework may also promote competition for U.S.
proprietary business among non-U.S. clearing organizations because it
holds exempt DCOs to the internationally recognized standards set forth
in the PFMIs. This will allow such clearing organizations to compete
with each other for the proprietary business of U.S. clearing members
under their own comparable regulatory regimes, which may potentially
increase the number of DCOs available to clear for U.S. persons. The
final rule is expected to maintain the financial integrity of swap
transactions cleared by exempt DCOs because such DCOs are subject to
supervision and regulation by their home country regulator within a
legal framework that is comparable to that applicable to registered
DCOs under the CEA and Commission regulations and as
[[Page 964]]
comprehensive. In addition, the final rule may contribute to the
financial integrity of the broader financial system by spreading the
potential risk of particular swaps among a greater number of registered
and exempt 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 of the final rule 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 final rule does not impact
requirements under the CEA or Commission regulations regarding price
discovery.
d. Sound Risk Management Practices
The exempt DCO framework encourages sound risk management practices
because exempt DCOs are subject to the risk management standards set
forth in the PFMIs, which are comparable to standards imposed on
registered DCOs.
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 final rule codifies
the exemption process for non-U.S. clearing organizations that will
permit them to clear swap transactions for U.S. persons on a
proprietary basis when such clearing organizations meet the eligibility
requirements and conditions included therein, thus promoting
transparency and consistency. Furthermore, the final rule might
encourage international comity by deferring, under certain conditions,
to regulators in other jurisdictions in the oversight of non-U.S.
clearing organizations. The Commission expects that such regulators
will defer to the Commission in the supervision and regulation of
registered DCOs organized in the United States, thereby reducing the
regulatory and compliance burdens to which such DCOs are subject.
4. Consideration of Alternatives
The final rule does not permit U.S. customers to clear through
exempt DCOs. As the Commission noted in the 2018 Proposal, there is
uncertainty as to how swaps customer funds would be treated under the
U.S. Bankruptcy Code if the customer's swaps are cleared at an exempt
DCO.\60\ However, the Commission did request comment as to whether the
Commission should consider permitting an exempt DCO to clear swaps for
U.S. customers.\61\
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\60\ 2018 Proposal, 83 FR at 39926.
\61\ 2018 Proposal, 83 FR at 39930.
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In response, three commenters expressed support. ISDA stated that
it ``strongly believes'' that the Commission should permit exempt DCOs
to clear swaps for customers. ASX argued that it would be beneficial to
allow U.S. customers to access the broadest possible range of clearing
organizations, which would provide them with flexibility and choice in
accessing the best commercial solutions for the products that they use.
JSCC recommended that the Commission consider allowing U.S. customers
to access exempt DCOs through non-U.S. clearing members that are not
required to register as an FCM, as long as those non-U.S. clearing
members can demonstrate that they are properly supervised, regulated,
and licensed to provide customer clearing services in their home
countries, and if the home regulatory authority maintains appropriate
cooperative arrangements with the Commission.
Similarly, in response to the 2019 Proposal, several commenters,
including ASX, FIA, SIFMA, JSCC, and CCP12, proposed a regime for swaps
similar to that for futures, including a clearing structure in which a
U.S. customer clears through an FCM that maintains the U.S. customer's
positions and margin in a customer omnibus account held by a non-U.S.
clearing member that is not registered as an FCM. The commenters argued
that such a regime could potentially provide new business opportunities
to FCMs while allowing customers to save money and improve efficiency
by using the same FCMs to clear at both registered and exempt DCOs.
This would permit customers to avoid the time and expense of executing
documentation with multiple intermediaries, for example, and to realize
operational efficiencies such as netting and offsetting within a single
intermediary, receiving fewer position statements, and managing fewer
cash transfers. The commenters noted that customers would also benefit
from the various customer protections required of FCMs, such as those
pertaining to disclosure, net capital, and reporting.
The Commission notes that, based on data submitted pursuant to
Sec. 39.19(c), as of October 2020, approximately 70 percent of initial
margin at registered DCOs was in customer accounts, with the remainder
in house (proprietary) accounts. It is likely that the majority of
initial margin at exempt DCOs or clearing organizations that may seek
an exemption is also in customer accounts. Thus, limiting clearing by
U.S. persons at exempt DCOs to proprietary swaps will likely
significantly reduce the number of U.S. persons who can benefit from
clearing at exempt DCOs and may reduce the incentive for eligible
clearing organizations to seek exemption.\62\ However, there is
uncertainty as to the extent to which U.S. customers would be protected
under the Bankruptcy Code in the event of an FCM bankruptcy proceeding.
The Commission is not adopting these alternatives at this time, but
continues to weigh these risks against the potential benefits to U.S.
customers and FCMs.
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\62\ Clearing organizations could be incentivized to seek DCO
registration instead, either under the Commission's original
framework or the recently adopted Alternative Compliance framework.
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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.\63\
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\63\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is the promotion of competition. The Commission
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
proposed rulemaking to determine whether it is anticompetitive. The
Commission believes that the final rule may promote greater competition
in swap clearing because it might encourage more non-U.S. clearing
organizations to seek an exemption from registration to clear the same
types of swaps for U.S. persons that are currently cleared by
registered DCOs.
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 relevant purposes of the CEA that would
otherwise be served by adopting the final rule.
[[Page 965]]
List of Subjects
17 CFR Part 39
Clearing, Derivatives clearing organization, Exemption, 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 continues 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. Revise Sec. 39.1 to read as follows:
Sec. 39.1 Scope.
The provisions of this subpart A 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 or is required to register with the
Commission as a derivatives clearing organization pursuant to section
5b(a) of the Act, or that is applying for an exemption from
registration pursuant to section 5b(h) of the Act.
0
3. In Sec. 39.2, add definitions of the terms ``Exempt derivatives
clearing organization,'' ``Home country,'' ``Home country regulator,''
and ``Principles for Financial Market Infrastructures,'' in
alphabetical order, and amend the definition of ``Good regulatory
standing,'' to read as follows:
Sec. 39.2 Definitions.
* * * * *
Exempt derivatives clearing organization means a derivatives
clearing organization that the Commission has exempted from
registration under section 5b(a) of the Act, pursuant to section 5b(h)
of the Act and Sec. 39.6.
* * * * *
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:
(1) In the case of an exempt derivatives clearing organization,
either there has been no finding by the home country regulator of
material non-observance of the Principles for Financial Market
Infrastructures or other relevant home country legal requirements, or
there has been a finding by the home country regulator of material non-
observance of the Principles for Financial Market Infrastructures or
other relevant home country legal requirements but any such finding has
been or is being resolved to the satisfaction of the home country
regulator by means of corrective action taken by the derivatives
clearing organization; or
(2) In the case of a derivatives clearing organization registered
subject to compliance with subpart D of this part, 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.
Home country means, with respect to a derivatives clearing
organization that is organized outside of the United States, the
jurisdiction in which the derivatives clearing organization is
organized.
Home country regulator means, with respect to a derivatives
clearing organization that is organized outside of the United States,
an appropriate government authority which licenses, regulates,
supervises, or oversees the derivatives clearing organization's
clearing activities in the home country.
* * * * *
Principles for Financial Market Infrastructures means the
Principles for Financial Market Infrastructures jointly published by
the Committee on Payment and Settlement Systems and the Technical
Committee of the International Organization of Securities Commissions
in April 2012.
* * * * *
0
4. Add Sec. 39.6 to read as follows:
Sec. 39.6 Exemption from derivatives clearing organization
registration.
(a) Eligibility for exemption. A derivatives clearing organization
that is organized outside of the United States shall be eligible for an
exemption from registration as a derivatives clearing organization for
the clearing of swaps for U.S. persons, and thereby exempt from
compliance with provisions of the Act and Commission regulations
applicable to derivatives clearing organizations, if:
(1) The derivatives clearing organization is subject to comparable,
comprehensive supervision and regulation by a home country regulator as
demonstrated by the following:
(i) The derivatives clearing organization is organized in a
jurisdiction in which a home country regulator applies to the
derivatives clearing organization, on an ongoing basis, statutes,
rules, regulations, policies, or a combination thereof that, taken
together, are consistent with the Principles for Financial Market
Infrastructures;
(ii) The derivatives clearing organization observes the Principles
for Financial Market Infrastructures in all material respects; and
(iii) The derivatives clearing organization is in good regulatory
standing in its home country; and
(2) 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 necessary to evaluate the initial and continued eligibility of
the derivatives clearing organization for exemption from registration
or to review its compliance with any conditions of such exemption.
(b) Conditions of exemption. An exemption from registration as a
derivatives clearing organization shall be subject to any conditions
the Commission may prescribe including, but not limited to:
(1) Clearing by or for U.S. persons and futures commission
merchants. The exempt derivatives clearing organization shall have
rules that limit swaps clearing services for U.S. persons and futures
commission merchants to the following circumstances:
(i) A U.S. person that is a clearing member of the exempt
derivatives clearing organization may clear swaps for itself and those
persons identified in the definition of ``proprietary account'' set
forth in Sec. 1.3 of this chapter;
(ii) A non-U.S. person that is a clearing member of the exempt
derivatives clearing organization may clear swaps for any affiliated
U.S. person identified in the definition of ``proprietary'' account set
forth in Sec. 1.3 of this chapter; and
(iii) An entity that is registered with the Commission as a futures
commission merchant may be a clearing member of the exempt derivatives
[[Page 966]]
clearing organization, or otherwise maintain an account with an
affiliated broker that is a clearing member, for the purpose of
clearing swaps only for itself and those persons identified in the
definition of ``proprietary account'' set forth in Sec. 1.3 of this
chapter; and
(2) Open access. The exempt derivatives clearing organization shall
have rules with respect to swaps to which one or more of the
counterparties is a U.S. person that shall:
(i) Provide that all swaps with the same terms and conditions, as
defined by product specifications established under the exempt
derivatives clearing organization's rules, submitted to the exempt
derivatives clearing organization for clearing are economically
equivalent within the exempt derivatives clearing organization and may
be offset with each other within the exempt derivatives clearing
organization, to the extent offsetting is permitted by the exempt
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 exempt 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 exempt
derivatives clearing organization, in connection with any actions or
proceedings brought against, or investigations relating to, the exempt
derivatives clearing organization or any U.S. person or futures
commission merchant that is a clearing member, or that clears swaps
through a clearing member, of the exempt derivatives clearing
organization; and
(iii) Promptly inform the Commission of any change in its
designated and authorized agent.
(4) Compliance. The exempt derivatives clearing organization shall
comply, and shall demonstrate compliance as requested by the
Commission, with any condition of its exemption.
(5) Inspection of books and records. The exempt derivatives
clearing organization shall make all documents, books, records,
reports, and other information related to its operation as an exempt
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 exempt 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) Observance of the Principles for Financial Market
Infrastructures. On an annual basis, within 60 days following the end
of its fiscal year, the exempt derivatives clearing organization shall
provide to the Commission a certification that it continues to observe
the Principles for Financial Market Infrastructures in all material
respects. To the extent the exempt derivatives clearing organization is
unable to provide to the Commission an unconditional certification, it
must identify the underlying material non-observance of the Principles
for Financial Market Infrastructures and identify whether and how such
non-observance has been or is being resolved by means of corrective
action taken by the exempt derivatives clearing organization.
(7) Representation of good regulatory standing. On an annual basis,
within 60 days following the end of its fiscal year, an exempt
derivatives clearing organization shall request and the Commission must
receive from a home country regulator a written representation that the
exempt derivatives clearing organization is in good regulatory
standing.
(8) Other conditions. The Commission may condition an exemption on
any other facts and circumstances it deems relevant.
(c) General reporting requirements. (1) An exempt 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 exempt derivatives clearing organization for exemption from
registration, reviewing compliance by the exempt derivatives clearing
organization with any conditions of the exemption, or conducting
oversight of U.S. persons and their affiliates, and the swaps that are
cleared by such persons through the exempt derivatives clearing
organization. Information provided to the Commission under this
paragraph shall be submitted in accordance with Sec. 39.19(b).
(2) Each exempt derivatives clearing organization shall provide to
the Commission the following information:
(i) A report compiled as of the end of each trading day and
submitted to the Commission by 10:00 a.m. U.S. Central time on the
following business day, containing:
(A) Initial margin requirements and initial margin on deposit for
each U.S. person, with respect to swaps, provided however if a clearing
member margins on a portfolio basis its own positions and the positions
of its affiliates, and either the clearing member or any of its
affiliates is a U.S. person, the exempt derivatives clearing
organization shall report initial margin on deposit for all such
positions on a combined basis for each such clearing member; and
(B) Daily variation margin, separately listing the mark-to-market
amount collected from or paid to each U.S. person, with respect to
swaps; provided, however, if a clearing member margins on a portfolio
basis its own positions and the positions of its affiliates, and either
the clearing member or any of its affiliates is a U.S. person, the
exempt derivatives clearing organization shall separately list the
mark-to-market amount collected from or paid to each such clearing
member, on a combined basis.
(ii) A report compiled as of the last day of each fiscal quarter of
the exempt derivatives clearing organization and submitted to the
Commission no later than 17 business days after the end of the exempt
derivatives clearing organization's fiscal quarter, containing:
(A) The aggregate clearing volume of U.S. persons during the fiscal
quarter, with respect to swaps. If a clearing member is a U.S. person,
the volume figure shall include the transactions of the clearing member
and all affiliates. If a clearing member is not a U.S. person, the
volume figure shall include only transactions of affiliates that are
U.S. persons.
(B) The average open interest of U.S. persons during the fiscal
quarter, with respect to swaps. If a clearing member is a U.S. person,
the open interest figure shall include the positions of the clearing
member and all affiliates. If a clearing member is not a U.S. person,
the open interest figure shall include only positions of affiliates
that are U.S. persons.
(C) A list of U.S. persons and futures commission merchants that
are either clearing members or affiliates of any clearing member, with
respect to the
[[Page 967]]
clearing of swaps, as of the last day of the fiscal quarter.
(iii) Prompt notice regarding any change in the home country
regulatory regime that is material to the exempt derivatives clearing
organization's continuing observance of the Principles for Financial
Market Infrastructures or compliance with any of the requirements set
forth in this section or in the order of exemption issued by the
Commission;
(iv) As available to the exempt derivatives clearing organization,
any assessment of the exempt derivatives clearing organization's or the
home country regulator's observance of the Principles for Financial
Market Infrastructures, or any portion thereof, by a home country
regulator or other national authority, or an international financial
institution or international organization;
(v) As available to the exempt derivatives clearing organization,
any examination report, examination findings, or notification of the
commencement of any enforcement or disciplinary action by a home
country regulator;
(vi) Immediate notice of any change with respect to the exempt
derivatives clearing organization's licensure, registration, or other
authorization to act as a derivatives clearing organization in its home
country;
(vii) In the event of a default by a U.S. person or futures
commission merchant clearing swaps, with such event of default
determined in accordance with the rules of the exempt derivatives
clearing organization, immediate notice of the default including the
name of the U.S. person or futures commission merchant clearing swaps,
a list of the positions held by the U.S. person or futures commission
merchant, and the amount of the U.S. person's or futures commission
merchant's financial obligation; and
(viii) Notice of action taken against a U.S. person or futures
commission merchant clearing swaps by an exempt derivatives clearing
organization, no later than two business days after the exempt
derivatives clearing organization takes such action against a U.S.
person or futures commission merchant.
(d) Swap data reporting requirements. If an exempt derivatives
clearing organization accepts for clearing a swap that has been
reported to a swap data repository pursuant to part 45 of this chapter,
the exempt derivatives clearing organization shall report to a swap
data repository data regarding the two swaps resulting from the
novation of the original swap. The exempt derivatives clearing
organization shall also report the termination of the original swap to
the swap data repository to which the original swap was reported. In
order to avoid duplicative reporting for such transactions, the exempt
derivatives clearing organization shall have rules that prohibit the
reporting, pursuant to part 45 of this chapter, of the two new swaps by
the counterparties to the original swap.
(e) Application procedures. (1) An entity seeking to be exempt from
registration as a derivatives clearing organization shall file an
application for exemption with the Secretary of the Commission in the
format and manner specified by the Commission. The Commission will
review the application for exemption and may approve or deny the
application or, if deemed appropriate, exempt the applicant from
registration as a derivatives clearing organization subject to
conditions in addition to those set forth in paragraph (b) of this
section.
(2) Application. An applicant for exemption from registration as a
derivatives clearing organization shall submit to the Commission the
information and documentation described in this section. Such
information and documentation shall be clearly labeled as outlined in
this section. The Commission will not commence processing an
application unless the applicant has filed a complete application. Upon
its own initiative, an applicant may file with its completed
application for exemption additional information that may be necessary
or helpful to the Commission in processing the application. The
application shall include:
(i) A cover letter containing the following information:
(A) Exact name of applicant as specified in its charter, and the
name under which business will be conducted (including acronyms);
(B) Address of applicant's principal office;
(C) List of principal office(s) and address(es) where clearing
activities are/will be conducted;
(D) A list of all regulatory licenses or registrations of the
applicant (or exemptions from any licensing requirement) and the
regulator granting such license or registration;
(E) Date of the applicant's fiscal year end;
(F) Contact information for the person or persons to whom the
Commission should address questions and correspondence regarding the
application; and
(G) A signature and date by a duly authorized representative of the
applicant.
(ii) A description of the applicant's business plan for providing
clearing services as an exempt derivatives clearing organization,
including information as to the classes of swaps that will be cleared
and whether the swaps are subject to a clearing requirement issued by
the Commission or the applicant's home country regulator;
(iii) Documents that demonstrate that the applicant is organized in
a jurisdiction in which its home country regulator applies to the
applicant, on an ongoing basis, statutes, rules, regulations, policies,
or a combination thereof that, taken together, are consistent with the
Principles for Financial Market Infrastructures;
(iv) A written representation from the applicant's home country
regulator that the applicant is in good regulatory standing;
(v) Copies of the applicant's most recent disclosures that are
necessary to observe the Principles for Financial Market
Infrastructures, including the financial market infrastructure
disclosure template set forth in Annex A to the Disclosure Framework
and Assessment Methodology for the Principles for Financial Market
Infrastructures, any other such disclosure framework issued under the
authority of the International Organization of Securities Commissions
that is required for observance of the Principles for Financial Market
Infrastructures, and the URL to the specific page(s) on the applicant's
website where such disclosures may be found;
(vi) A representation that the applicant will comply with each of
the requirements and conditions of exemption set forth in paragraphs
(b), (c), and (d) of this section, and the terms and conditions of its
order of exemption as issued by the Commission;
(vii) A copy of the applicant's rules that meet the requirements of
paragraphs (b)(2) and (d) of this section, as applicable; and
(viii) The applicant's consent to jurisdiction in the United
States, and the name and address of the applicant's designated agent in
the United States, pursuant to paragraph (b)(3) of this section.
(3) Submission of supplemental information. At any time during its
review of the application for exemption from registration as a
derivatives clearing organization, the Commission may request that the
applicant submit supplemental information in order for the Commission
to process the application, and the applicant shall file such
supplemental information in the
[[Page 968]]
format and manner specified by the Commission.
(4) Amendments to pending application. An applicant for exemption
from registration as a derivatives clearing organization 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.
(5) Public information. The following sections of an application
for exemption from registration as a derivatives clearing organization
will be public: The cover letter set forth in paragraph (e)(2)(i) of
this section; the documentation required in paragraphs (e)(2)(iii) and
(e)(2)(v) of this section; rules that meet the requirements of
paragraphs (b)(2) and (d) of this section, as applicable; and any other
part of the application not covered by a request for confidential
treatment, subject to Sec. 145.9 of this chapter.
(f) Modification or termination of exemption upon Commission
initiative. (1) The Commission may, in its discretion and upon its own
initiative, terminate or modify the terms and conditions of an order of
exemption from derivatives clearing organization registration if the
Commission determines that there are changes to or omissions in
material facts or circumstances pursuant to which the order of
exemption was issued, or that any of the terms and conditions of its
order of exemption have not been met, including, but not limited to,
the requirement that:
(i) The exempt derivatives clearing organization observes the
Principles for Financial Market Infrastructures in all material
respects; or
(ii) The exempt derivatives clearing organization is subject to
comparable, comprehensive supervision and regulation by its home
country regulator.
(2) The Commission shall provide written notification to an exempt
derivatives clearing organization that it is considering whether to
terminate or modify an exemption pursuant to this paragraph and the
basis for that consideration.
(3) The exempt 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 exempt derivatives
clearing organization, or after expiration of the time permitted for a
response, the Commission may:
(i) Issue an order of termination, effective as of a date to be
specified therein. Such specified date shall be intended to provide the
exempt derivatives clearing organization with a reasonable amount of
time to wind down its swap clearing services for U.S. persons;
(ii) Issue an amended order of exemption that modifies the terms
and conditions of the exemption; or
(iii) Provide written notification to the exempt derivatives
clearing organization that the exemption will remain in effect without
modification to the terms and conditions of the exemption.
(g) Termination of exemption upon request by an exempt derivatives
clearing organization. (1) An exempt derivatives clearing organization
may petition the Commission to terminate its exemption if:
(i) Changed circumstances result in the exempt derivatives clearing
organization no longer qualifying for an exemption;
(ii) The exempt derivatives clearing organization intends to cease
clearing swaps for U.S. persons; or
(iii) In conjunction with the petition, the exempt derivatives
clearing organization submits an application for registration in
accordance with Sec. 39.3(a)(2) or Sec. 39.3(a)(3), as applicable, to
become a registered derivatives clearing organization pursuant to
section 5b(a) of the Act.
(2) The petition for termination of exemption shall include a
detailed explanation of the facts and circumstances supporting the
request and the exempt derivatives clearing organization's plans for,
as may be applicable, the liquidation or transfer of the swaps
positions and related collateral of U.S. persons.
(3) The Commission shall issue an order of termination within a
reasonable time appropriate to the circumstances or, as applicable, in
conjunction with the issuance of an order of registration.
(h) Notice to clearing members of termination of exemption.
Following the Commission's issuance of an order of termination (unless
issued in conjunction with the issuance of an order of registration),
the exempt derivatives clearing organization shall provide immediate
notice of such termination to its clearing members. Such notice shall
include:
(1) A copy of the Commission's order of termination;
(2) A description of the procedures for orderly disposition of any
open swaps positions that were cleared for U.S. persons; and
(3) An instruction to clearing members, requiring that they provide
the exempt derivatives clearing organization's notice of such
termination to all U.S. persons clearing swaps through such clearing
members.
0
5. Revise Sec. 39.9 to read as follows:
Sec. 39.9 Scope.
Except as otherwise provided by Commission order, the provisions of
this subpart B apply to any derivatives clearing organization, as
defined under section 1a(15) of the Act and Sec. 1.3 of this chapter,
that is registered with the Commission as a derivatives clearing
organization pursuant to section 5b of the Act. The provisions of this
subpart B do not apply to any exempt derivatives clearing organization,
as defined under Sec. 39.2.
PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
0
6. 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
7. Amend Sec. 140.94 by:
0
a. Redesignating paragraphs (c)(4) through (13) as paragraphs (c)(5)
through (14); and
0
b. Adding new paragraph (c)(4).
The addition reads 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) * * *
(4) All functions reserved to the Commission in Sec. 39.6 of this
chapter, except for the authority to:
(i) Grant an exemption under Sec. 39.6(a) of this chapter;
(ii) Prescribe conditions to an exemption under Sec. 39.6(b) of
this chapter;
(iii) Modify or terminate an exemption under Sec. 39.6(f)(4) of
this chapter; and
(iv) Terminate an exemption under Sec. 39.6(g)(3) of this chapter.
* * * * *
Issued in Washington, DC, on November 25, 2020, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
[[Page 969]]
Appendices to Exemption From Derivatives Clearing Organization
Registration--Commission Voting Summary, Chairman's Statement, and
Commissioners' Statements
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
We are voting to approve a rule proposed in 2018 that codifies
existing staff guidance by which the CFTC exempts derivatives
clearing organizations (DCOs) from registration for the clearing of
swaps.\1\ Pursuant to that guidance, we have exempted four
clearinghouses that we determined are subject to ``comparable,
comprehensive supervision and regulation'' by the clearing
organization's home country regulator.\2\ Codifying this framework
through a notice-and-comment rulemaking is, frankly, good
government. And doing so is in keeping with my recent directive on
the use of staff letters and guidance, in which I noted that staff
guidance and letters should supplement rulemakings, rather than
themselves function as rules.\3\ This approach has many benefits,
including providing increased transparency. It also furthers our
strategic objective of enhancing the regulatory experience for
market participants at home and abroad.
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\1\ See Exemption From Derivatives Clearing Organization
Registration, 83 FR 39923 (Aug. 13, 2018). The Dodd-Frank Wall
Street Reform and Consumer Protection Act, Public Law 111-203, 124
Stat. 1376, amended the Commodity Exchange Act (``CEA'') to permit
the Commission to exempt conditionally or unconditionally a DCO from
registration for the clearing of swaps if the Commission determines
that the clearing organization is subject to ``comparable,
comprehensive supervision and regulation'' by appropriate government
authorities in the clearing organization's home country. See Section
5b(a) of the CEA, 7 U.S.C. 7a-1(a).
\2\ See Amended Order of Exemption from Registration (Jan. 28,
2016) (ASX Clear (Futures) Pty Limited), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexemption.pdf; Amended Order of
Exemption from DCO Registration (May 15, 2017) (Japan Securities
Clearing Corporation), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf; Order of Exemption from DCO
Registration (Oct. 26, 2015) (Korea Exchange, Inc.), available at:
https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-15.pdf; and Order of
Exemption from DCO Registration (Dec. 21, 2015) (OTC Clearing Hong
Kong Limited), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf.
\3\ See Directive of Chairman Heath P. Tarbert on the Use of
Staff Letters and Guidance (Oct. 27, 2020), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbetstatement102720.
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This rulemaking is a modest first step. As is the case in the
existing staff guidance, the rule does not permit exempt DCOs to
clear for U.S. customers, but rather only for proprietary swap
transactions for U.S. clearing members and futures commission
merchants (FCMs). It reflects the CFTC's continued efforts to foster
cross-border cooperation and show deference to home country
regulation that is deemed comparable to our own regulations.
In 2019, the Commission issued a supplemental proposal that
would have gone further and permitted exempt DCOs to clear swaps for
U.S. eligible contract participants (ECPs) through foreign
intermediaries.\4\ I would have supported finalizing that proposal
for two reasons. First, the proposal would have provided greater
flexibility and choice to our most sophisticated U.S. customers--
ECPs--to access swaps cleared at non-U.S. clearinghouses. This would
have given these sophisticated counterparties access to foreign-
currency denominated instruments traded overseas that would enable
them to hedge their various risks on a global basis. Second,
exempting clearinghouses that do not pose a substantial risk to the
U.S. financial system is consistent with principles of international
comity.
---------------------------------------------------------------------------
\4\ See Exemption From Derivatives Clearing Organization
Registration, 84 FR 35456 (July 23, 2019).
---------------------------------------------------------------------------
Because we have not worked through all the issues raised by the
2019 supplemental proposal to the satisfaction of our Commission,
today we are adopting only the 2018 proposal. Nonetheless, I support
continued discussion on whether to permit Exempt DCOs additionally
to clear certain non-U.S.-dollar denominated swaps for U.S.
customers who are ECPs, either directly through foreign
intermediaries or through U.S. FCMs. Although registration as a
DCO--under either our traditional or recently-established
alternative framework \5\--should be the preferred route for most
non-U.S. clearinghouses, there are likely circumstances where U.S.
customers would benefit from access to additional risk-mitigating
instruments offered overseas.
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\5\ See Registration With Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, 85 FR 67160 (Oct. 21, 2020).
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Appendix 3--Supporting Statement of Commissioner Brian D. Quintenz
I support today's final rule to codify the CFTC's existing
practice of exempting non-U.S. derivatives clearing organizations
(DCOs) from registration, pursuant to a provision of the Commodity
Exchange Act that allows for U.S. swap market participants to access
comparably regulated foreign DCOs.\1\ That provision authorizes the
Commission to defer to its counterparts abroad, which I believe
properly conserves the Commission's resources and enables firms to
avoid duplicative regulation, while providing U.S. market
participants with greater choice. I am proud that today's final rule
provides yet another example of the CFTC deferring to foreign
regulators that provide comparable regulation and supervision.
During my tenure as a Commissioner, the CFTC has properly provided
such deference in many areas, including swap dealer (SD)
registration,\2\ uncleared swap margin requirements,\3\ swap
execution facilities (SEFs),\4\ registered DCOs,\5\ and foreign
futures.\6\ Like these other actions, today's final rule holds
exempt DCO to a high regulatory standard. Under the final rule, a
DCO is only eligible for an exemption if its home country regulator
ensures the clearinghouse complies with rules consistent with the
internationally accepted ``Principles for Financial Market
Infrastructures'' (PFMIs) issued by CPMI-IOSCO.\7\ Moreover, the
exempt DCO must regularly provide the CFTC with margin information
concerning U.S. clearing members, among other key information.\8\
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\1\ Sec. 5b(h) of the Commodity Exchange Act.
\2\ Cross-Border Application of the Registration Thresholds and
Certain Requirements Applicable to SDs and Major Swap Participants
(MSPs), 85 FR 56924 (Sept. 14, 2020).
\3\ Comparability Determination for Australia: Margin
Requirements for Uncleared Swaps for SDs and MSPs, 84 FR 12908 (Apr.
3, 2019); Amendment to Comparability Determination for Japan: Margin
Requirements for Uncleared Swaps for SDs and MSPs, 84 FR 12074 (Apr.
1, 2019).
\4\ Amendment to Order of Exemption from SEF registration for
Recognized Market Operators authorized in Singapore, Nov. 2, 2020,
available at: https://www.cftc.gov/PressRoom/PressReleases/8301-20;
Amendment to Order of Exemption from SEF registration for E.U.
multilateral trading facilities and organized trading facilities,
July 23, 2020, available at: https://www.cftc.gov/PressRoom/PressReleases/8211-20; Order of Exemption from SEF registration for
Japanese derivatives trading facilities, July 11, 2019, available
at: https://www.cftc.gov/PressRoom/PressReleases/7968-19.
\5\ Registration with Alternative Compliance for Non-U.S. DCOs,
85 FR 67160 (Oct. 21, 2020).
\6\ Regulation 30.10 orders issued to the Bombay Stock Exchange,
National Stock Exchange Int'l Financial Service Centre Ltd. [India],
Montreal Exchange, NZX Ltd. [New Zealand], and UBS AG [Switzerland],
Nov. 2, 2020, available at: https://www.cftc.gov/PressRoom/PressReleases/8300-20.
\7\ Reg. 39.6(a)(1)(i).
\8\ Reg. 39.6(c).
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I note that under the final rule, an exempt DCO will only be
authorized to clear the proprietary positions of its U.S. clearing
members. I had supported and still support the Commission's 2019
proposal that would have expanded the exempt DCO framework to allow
for U.S. customers, like asset managers and insurance companies, to
clear at exempt DCOs directly to better manage and hedge their
risk.\9\ I continue to believe that all participants meeting the
Commodity Exchange Act's definition of ``eligible contract
participant'' \10\ have the resources, sophistication, and
incentives to adequately assess how customer protections provided by
an exempt DCO may differ from protections established by CFTC
regulations for registered DCOs. The CFTC should provide these
market participants with the choice befitting their status, not only
as sophisticated market participants, but as complex international
organizations who
[[Page 970]]
need access to foreign markets, products, and a choice of liquidity
pools. I hope the Commission will continue to consider the best way
to expand the exempt DCO framework to allow for U.S. customer
clearing.
---------------------------------------------------------------------------
\9\ Exemption from DCO Registration, 84 FR 35456 (July 23,
2019); Opening Statement of Commissioner Brian Quintenz before the
Open Commission Meeting on July 11, 2019, available at:
https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement071119.
\10\ Sec. 1a(18) of the Commodity Exchange Act.
---------------------------------------------------------------------------
Appendix 4--Concurring Statement of Commissioner Rostin Behnam
I respectfully concur with the Commodity Futures Trading
Commission's final rule regarding policies and procedures that it
will follow with respect to granting exemptions from derivatives
clearing organization (DCO) registration pursuant to authority under
section 5b(h) of the Commodity Exchange Act (CEA) \1\ (the ``Final
Rule''). The Final Rule, with limited exceptions, codifies the
policies and procedures followed by the Commission in issuing the
four exempt DCO orders which currently limit clearing organizations
organized outside of the United States to clearing only proprietary
swap positions of U.S. persons and futures commission merchants, and
not customer positions (``exempt DCOs''). Critical to my vote today,
the Final Rule prohibits the clearing of U.S. customer positions at
an exempt DCO.\2\
---------------------------------------------------------------------------
\1\ 7 U.S.C. 7a-1(a).
\2\ See Final Rule at II.B.2.a. and Sec. 39.6(b)(1).
---------------------------------------------------------------------------
I supported the Commission's 2018 notice of proposed rulemaking
\3\ as a means to promote transparency and accountability as well as
a positive step towards increased cross-border cooperation and
deference to our foreign regulatory counterparts. However, I was
unable to support the Commission's 2019 supplement to the 2018
Proposal,\4\ which proposed permitting exempt DCOs to clear swaps
for U.S. customers through foreign intermediaries that would be
wholly outside the Commission's direct regulation and oversight. As
articulated more fully in my dissent,\5\ the 2019 Supplemental
Proposal was not the product of internal consensus and its brief
history and questionable timeline signaled a lack of appropriate
scrutiny and evaluation of the critical financial, market, consumer
protection, and systemic risk issues raised by diverging from the
customer protection model provided by the CEA and U.S. Bankruptcy
Code. It was and remains my view that if the Commission believes it
is appropriate to provide U.S. customers with greater access to non-
U.S. swap markets, then we can and should engage in a more careful
analysis of options, assessment of alternatives, and evaluation of
consequences consistent with the Administrative Procedure Act.\6\ As
the Commission is declining to adopt the 2019 Supplemental Proposal
at this time, I am comfortable with supporting the Final Rule.
---------------------------------------------------------------------------
\3\ Exemption from Derivatives Clearing Organization
Registration, 83 FR 39923 (proposed Aug. 13, 2018) (the ``2018
Proposal'').
\4\ Exemption from Derivatives Clearing Organization
Registration, 84 FR 35456 (proposed July 23, 2019) (the ``2019
Supplemental Proposal'').
\5\ See Appendix 4--Dissenting Statement of Commissioner Rostin
Behnam, Supplemental Proposal, 84 FR at 35476-35478.
\6\ Id. at 35476.
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One area in which I will remain vigilant is with regard to the
Commission's reliance on the Principles for Financial Market
Infrastructures (PFMI) framework as the benchmark for making the
comparability determination with respect to a foreign jurisdiction's
supervisory and regulatory scheme required by CEA section 5b(h). I
believe that the Commission's reliance on the PFMIs as providing a
comprehensive framework for DCO supervision that is comparable to
the statutory and regulatory requirements applicable to registered
DCOs, with a particular focus on the DCO Core Principles,\7\ is
within its discretion under CEA section 5b(h). However, I am
concerned that the Commission's decision to limit its reference to
the PFMIs as they existed in 2012 may lead to untenable divergence
in the future should the Commission determine to incorporate
subsequent amendments or revisions to the PFMIs or related
interpretations and guidance into its own regulatory and supervisory
DCO oversight. Alternatively, I am concerned that maintaining a
static definition of the PFMIs to provide exempt DCOs with greater
regulatory certainty with regard to their ongoing eligibility for
the exemption could negatively impact the Commission's consideration
regarding whether to adopt or incorporate future changes to the
PFMIs or related interpretations and guidance into its regulatory
regime. However, I am reassured that the Commission explicitly
reserves the ability to incorporate future amendments to the PFMIs
into the Final Rule's PFMI definition in Sec. 39.2. As well,
because the Commission also maintains broad discretion to condition
an exemption on any facts and circumstances it deems relevant under
new Sec. 39.6(b)(8), I believe the Commission has clear discretion
and authority to make appropriate changes with regard to its
consideration of exempt DCO eligibility criteria and ongoing
compliance to maintain comprehensive application of and adherence to
comparable regulatory and supervisory standards.
---------------------------------------------------------------------------
\7\ See CEA section 5b(c)(2), 7 U.S.C. 7a-1(c)(2).
---------------------------------------------------------------------------
My decision to support the Final Rule is largely based on the
Commission's determination to move forward with the 2018 Proposal
without adopting the 2019 Supplemental Proposal. However, I remain
supportive of the Commission's endeavor to explore ways to adapt
and--if appropriate--seek to adjust the current intermediary
structure established under the CEA and Commission regulations to
better accommodate both U.S. customer demand for increased access to
clearing in foreign jurisdictions and evolving global swaps market
structures. I remain open and look forward to the possibility of
further discussing the regulatory and policy issues raised during
this rulemaking.
Appendix 5--Statement of Commissioner Dan M. Berkovitz
I am voting for the final rule establishing procedures for
granting registration exemptions to foreign derivatives clearing
organizations (``Exempt DCOs'') to clear swaps for certain U.S.
persons (``Final Rule''). The Final Rule exercises the exemptive
authority provided by Congress in the Commodity Exchange Act
(``CEA'') \1\ in a limited, pragmatic manner that will provide U.S.
financial services firms that operate globally with access to
foreign clearinghouses and cleared swaps in order to more
effectively manage the risks arising from their global operations.
---------------------------------------------------------------------------
\1\ Commodity Exchange Act section 5b(h).
---------------------------------------------------------------------------
In July of last year, I dissented from the proposed exempt DCO
rule, because it also would have permitted Exempt DCOs to clear for
U.S. customers, but only through foreign intermediaries. In doing
so, the proposed rule would have subjected U.S. customer accounts to
foreign bankruptcy and other regulations, promoted the use of
foreign intermediaries at the expense of U.S. firms, and exceeded
this agency's limited exemptive authority.\2\ Enabling U.S.
customers to clear swaps and amass large positions in non-U.S.
markets in this manner would not only pose risks to those customers,
but also could have presented systemic risks to the U.S. financial
system.
---------------------------------------------------------------------------
\2\ See Dissenting Statement of Commissioner Berkovitz, 84 FR
35456 at 35479 (July 23, 2019). As discussed in my prior statement,
in addition to my substantive concerns, the proposed rule would have
relied on CEA Section 4(c) exemptive authority to exempt non-U.S.
intermediaries that provide customer clearing at Exempt DCOs from
the FCM registration requirement and the regulations applicable to
registered FCMs. This reliance would have exceeded the clearly
limited authority granted under Section 4(c). With the elimination
of customer clearing in the Final Rule, the Commission no longer
needs to resort to an overly expansive reading of Section 4(c)
authority to adopt the Final Rule.
---------------------------------------------------------------------------
In response to commenters who expressed similar objections, the
Final Rule does not contain the concerning provisions. Neither
registered FCMs nor their foreign intermediary counterparts can
clear for U.S. person customers. With respect to clearing for U.S.
persons, the Final Rule restricts clearing by an Exempt DCO to only
U.S. firms that become clearing members of the Exempt DCO along with
certain of their affiliates and persons associated with those firms
in the manner identified in the definition of ``proprietary
account'' in section 1.3 of our regulations. In addition, registered
FCMs, including U.S. firms, can also clear at exempt DCOs, but only
for themselves and persons associated with the FCMs in the manner
provided in the definition of ``proprietary account.'' These
sophisticated market participants are well equipped to assess the
risks of clearing swaps under the foreign regime. Furthermore, by
requiring that they be members of the Exempt DCO (or clear through
an affiliate that is a member), the Commission assures that such
entities have taken affirmative actions to assess and accept those
risks. The margin funds and related obligations of these persons
must also be segregated from customer funds held by registered FCMs
thereby minimizing any impact on U.S. customers of the cleared
positions at Exempt DCOs. These limitations are a reasonable,
practical approach to implementing the authority provided to the
Commission to exempt certain foreign DCOs without adding uncertain
risk into our system of fully registered DCOs and FCMs.
[[Page 971]]
Furthermore, the Commission has, on an ad hoc basis, previously
granted registration exemptions to four foreign clearinghouses
limited to proprietary swap positions with effectively the same
conditions and limitations as provided in the Final Rule. The Final
Rule will therefore maintain consistency with the existing
exemptions.
The Final Rule also contains fairly detailed daily, quarterly,
and annual reporting requirements, as well as special event notice
requirements. These requirements allow the Commission to monitor
U.S. person clearing activity at the Exempt DCO on a daily basis and
keep the Commission informed of any material changes to the
regulatory and financial status of the Exempt DCO in its home
jurisdiction. While the Exempt DCOs will be able to operate under
the compliance regime and oversight of its home country regulator,
the CFTC can maintain limited, but up-to-date oversight of the
activities that are relevant for U.S. market participants and that
could have an impact on our financial system.
As noted above, the Final Rule does not permit registered FCMs
to clear U.S. customer swaps at Exempt DCOs. In the Commission's
initial 2018 proposal to establish a framework for Exempt DCOs, the
Commission proposed this prohibition. The Commission explained:
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. Any swaps customer funds held by a DCO are
also subject to the segregation requirements of section 4d(f)(2) of
the CEA, and in order for a customer to receive protection under
this regime, particularly in an insolvency context, its funds must
be carried by an FCM, and deposited with a registered DCO. Absent
that chain of registration, the swaps customer's funds may not be
treated as customer property under the U.S. Bankruptcy Code and the
Commission's regulations. Because of this, it has been the
Commission's policy to allow exempt DCOs to clear only proprietary
positions of U.S. persons and FCMs.\3\
---------------------------------------------------------------------------
\3\ Exemption from Derivatives Clearing Organization
Registration, 83 FR 39923, 39926 (proposed Aug. 13, 2018).
---------------------------------------------------------------------------
The Final Rule notes that the Commission may revisit the
prohibition on U.S. customer clearing in the future. While I agree
with the outcome in the Final Rule as to customer clearing given the
Commission's interpretation of CEA Section 4d(f), if the above
interpretation changes, whether by a change to the statute or by
other appropriate means, I could support a further amendment of the
Final Rule. Any such change should place U.S. FCMs on an equal
footing with their foreign counterparts when competing for U.S.
customer clearing at Exempt DCOs. In addition, such a change should
not create an advantage for unregistered Exempt DCOs over registered
DCOs who comply with all of our regulations.
Finally, I note that CEA Section 5b(h) provides for the
registration exemption if the foreign DCO is subject to
``comparable, comprehensive supervision and home country
regulation.'' Under the Final Rule, to demonstrate comparability,
the DCO must be subject to home country regulations that are
consistent with, and the DCO must ``observe in all material
respects,'' the ``Principles for Financial Market Infrastructures''
\4\ (``PFMIs'') applicable to central counterparties.
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\4\ See Committee on Payment and Settlement Systems and the
Technical Committee of the International Organization of Securities
Commissions, Principles for financial market infrastructures (Apr.
2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf.
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Several commenters objected to this approach to comparability
determinations on a number of grounds. These commenters stated that
the Commission should not substitute a commitment to adhere to the
PFMIs for its own examination and assessment as to the comparability
and comprehensiveness of the actual foreign regulations. As the
PFMIs are only general principles, even when the PFMIs are
implemented, material differences may exist between the PFMI-
compliant regime and the Commission's DCO core principles and
regulations. Commenters further argued that Congress intended for
the Commission to analyze comparability only by direct comparison to
the CTFC's laws and regulations.
Over the past two years, I have expressed concerns over the
erosion of the Commission's standards and role in finding
comparability for various CFTC regulations. The Commission's
approach has been increasingly deferential to other regulators,
which has the potential to permit the importation of increased risks
into the U.S. financial system.
In this regard, I too have some concerns about the use of the
PFMIs as a standard for comparability. However, for the purpose of
granting DCO registration exemptions, I believe the approach taken
in the Final Rule is reasonable. I have consistently said that
comparability determinations should involve a detailed examination
of the other jurisdiction's standards, but also should be outcomes
based. Regulators around the world take substantively different
approaches to regulating DCOs, but that does not mean any one
approach is necessarily better or worse than another as to its
expected outcome. The PFMIs tend to be more general in nature than
the DCO core principles and regulations in the CEA and CFTC
regulations. However, regarding the general outcome of DCO
regulation, the PFMIs--which the CFTC has contributed to and
incorporated in regulation \5\--are consistent with our DCO core
principles. Furthermore, given the limited scope of the Final Rule
in that it applies only to clearing of proprietary positions, using
the PFMIs to find comparability is not unwarranted. Finally, the
Final Rule allows for the Commission to assess the extent to which
the home country regulations are consistent with the PFMIs and the
extent to which the applying DCO is observing the PFMIs. As such, I
believe the approach taken in the Final Rule is reasonable.
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\5\ See 17 CFR 39.30, 39.40.
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In conclusion, the Final Rule creates a limited, practical set
of policies and procedures for granting exemptions from registration
for foreign DCOs. The Exempt DCOs can only clear swaps for U.S.
persons who are proprietary traders and who are able to assess the
specific risks of clearing at the Exempt DCO. The U.S. customer
accounts at registered FCMs will not be commingled with accounts
used for Exempt DCO clearing. Finally, U.S. FCMs are not put at a
competitive disadvantage to their foreign counterparts. For these
reasons, I support the changes made to the proposed rule that result
in an appropriate, codified approach to exempting foreign DCOs who
meet appropriate standards.
[FR Doc. 2020-26527 Filed 1-6-21; 8:45 am]
BILLING CODE 6351-01-P