Comparability Determination for the European Union: Dually-Registered Derivatives Clearing Organizations and Central Counterparties, 15260-15272 [2016-06261]
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Federal Register / Vol. 81, No. 55 / Tuesday, March 22, 2016 / Notices
a. Record the date, time, and location
(or closest point of ingress) of each visit
to the research site.
b. Collect the following information
for each visit: Composition of the
marine mammals sighted, such as
species, gender and life history.
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7. Reporting
The holder of this Authorization is
required to:
a. Report observations of unusual
behaviors of pinnipeds to West Coast
Region fishery biologist so that the
appropriate personnel in the Regional
Office may conduct any potential
follow-up observations.
b. Draft Report: Submit a draft final
report to the Chief, Permits and
Conservation Division, Office of
Protected Resources, Headquarters,
NMFS within 60 days after the
expiration of the Authorization. The
report will include the information
gathered pursuant to the monitoring
requirements listed in item 6, along
with an executive summary.
c. The Draft Report shall be subject to
review and comment by NMFS. Any
recommendations made by NMFS must
be addressed in the Final Report prior
to submission to NMFS. If we decide
that the draft final report needs no
comments, the draft final report will be
considered to be the final report.
d. Final Report: Submit a final report
to the Chief, Permits and Conservation
Division, Office of Protected Resources,
Headquarters, NMFS within 30 days
after receiving comments from us on the
draft final report.
8. Reporting Prohibited Take
In the unanticipated event that Point
Blue’s activities cause any taking of a
marine mammal in a manner prohibited
by the Authorization, such as an injury
(Level A harassment), serious injury or
mortality (e.g., vessel-strike), Point Blue
shall immediately cease the specified
activities and immediately report the
incident to the Chief, Permits and
Conservation Division, Office of
Protected Resources, and the Assistant
West Coast Regional Stranding
Coordinator. The report must include
the following information:
Time, date, and location (latitude/
longitude) of the incident; the name and
type of vessel involved; the vessel’s
speed during and leading up to the
incident; description of the incident;
water depth; environmental conditions
(e.g., wind speed and direction, Beaufort
sea state, cloud cover, and visibility);
description of marine mammal
observations in the 24 hours preceding
the incident; species identification or
description of the animal(s) involved;
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the fate of the animal(s); and
photographs or video footage of the
animal (if equipment is available).
Point Blue shall not resume its
activities until NMFS is able to review
the circumstances of the prohibited
take. NMFS will work with Point Blue
to determine what is necessary to
minimize the likelihood of further
prohibited take and ensure MMPA
compliance. Point Blue may not resume
their activities until notified by NMFS
in writing via a letter or email or via the
telephone.
9. Reporting an Injured or Dead Marine
Mammal With an Unknown Cause of
Death
In the event that Point Blue discovers
an injured or dead marine mammal, and
the lead researcher determines that the
cause of the injury or death is unknown
and the death is relatively recent (i.e., in
less than a moderate state of
decomposition as described in the next
paragraph), Point Blue will immediately
report the incident to the Chief, Permits
and Conservation Division, Office of
Protected Resources and the Assistant
West Coast Regional Stranding
Coordinator. The report must include
the same information identified in the
paragraph above this section. Activities
may continue while we review the
circumstances of the incident. NMFS
will work with Point Blue to determine
whether modifications to the activities
are appropriate.
10. Reporting an Injured or Dead Marine
Mammal Not Related to Point Blue’s
Activities
In the event that Point Blue discovers
an injured or dead marine mammal, and
the lead researcher determines that the
injury or death is not associated with or
related to the activities authorized in the
Authorization (e.g., previously wounded
animal, carcass with moderate to
advanced decomposition, or scavenger
damage), Point Blue will report the
incident to the Chief, Permits and
Conservation Division, Office of
Protected Resources and the Assistant
West Coast Regional Stranding
Coordinator within 24 hours of the
discovery. Point Blue will provide
photographs or video footage (if
available) or other documentation of the
stranded animal sighting to us and the
Marine Mammal Stranding Network.
Point Blue can continue their research
activities.
11. A copy of this Authorization must
be in the possession of Point Blue and
its designees (including contractors and
marine mammal monitors) operating
under the authority of this Incidental
Harassment Authorization at all times.
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Request for Public Comments
NMFS requests comment on the
analyses, the draft Authorization, and
any other aspect of the Notice of
Proposed Incidental Harassment
Authorization for Point Blue’s seabird
research activities. Please include any
supporting data or literature citations
with your comments to help inform our
final decision on Point Blue’s request
for an Authorization.
Dated: March 16, 2016.
Perry F. Gayaldo,
Deputy Director, Office of Protected
Resources, National Marine Fisheries Service.
[FR Doc. 2016–06317 Filed 3–21–16; 8:45 am]
BILLING CODE 3510–22–P
COMMODITY FUTURES TRADING
COMMISSION
Comparability Determination for the
European Union: Dually-Registered
Derivatives Clearing Organizations and
Central Counterparties
Commodity Futures Trading
Commission.
ACTION: Notice of Comparability
Determination for Certain Requirements
Under the European Market
Infrastructure Regulation.
AGENCY:
The Commodity Futures
Trading Commission (the
‘‘Commission’’ or ‘‘CFTC’’) has
determined that certain laws and
regulations applicable in the European
Union (‘‘EU’’) provide a sufficient basis
for an affirmative finding of
comparability with respect to certain
regulatory obligations applicable to
derivatives clearing organizations
(‘‘DCOs’’) that are registered with the
Commission and are authorized to
operate as central counterparties
(‘‘CCPs’’) in the EU. The Commission’s
determination provides for substituted
compliance with respect to
requirements for financial resources,
risk management, settlement
procedures, and default rules and
procedures.
DATES: This determination will become
effective upon publication in the
Federal Register.
FOR FURTHER INFORMATION CONTACT:
Jeffrey M. Bandman, Acting Director,
202–418–5044, jbandman@cftc.gov;
Robert B. Wasserman, Chief Counsel,
202–418–5092, rwasserman@cftc.gov;
Tracey Wingate, Special Counsel, 202–
418–5319, twingate@cftc.gov, in each
case at the Division of Clearing and
Risk, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW., Washington, DC
SUMMARY:
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20581; or Michael H. Margolis, Special
Counsel, 312–596–0576, mmargolis@
cftc.gov, Division of Clearing and Risk,
Commodity Futures Trading
Commission, 525 W. Monroe Street,
Suite 1100, Chicago, IL 60661.
SUPPLEMENTARY INFORMATION:
I. Introduction
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On February 10, 2016 Commission
Chairman Timothy Massad issued a
joint statement with Commissioner
Jonathan Hill of the European
Commission setting forth a common
approach regarding the regulation of
CCPs. Under the common approach, the
European Commission (‘‘EC’’) will
propose a third-country equivalence
decision (‘‘Equivalence Decision’’)
regarding the Commission’s regulatory
regime for DCOs, which is a prerequisite
for the European Securities and Markets
Authority (‘‘ESMA’’) to recognize U.S.
DCOs as equivalent third-country CCPs.
Once recognized by ESMA, U.S. DCOs
may continue to operate and provide
clearing services in the EU.
This Notice is being issued in
connection with the resolution of
equivalence for U.S. DCOs. For an
Equivalence Decision under Article 25
of the European Market Infrastructure
Regulation (‘‘EMIR’’), one of the
conditions requires that the legal and
supervisory regime of the United States
must include an ‘‘effective equivalent
system’’ for the recognition of CCPs
authorized in the EU under EMIR.1 As
described below, U.S. law and CFTC
regulations require that foreign-based
CCPs register with the CFTC in certain
circumstances. If registered, they must
comply with the relevant U.S.
requirements, including the
Commission regulations applicable to
registered DCOs.
Under this Notice, EU-based CCPs
that register with or are currently
registered with the Commission as
DCOs and that are authorized to operate
in the EU may comply with certain
Commission requirements for financial
resources, risk management, settlement
procedures, and default rules and
procedures (as set forth in this Notice)
by complying with the terms of
corresponding requirements under the
EMIR Framework, as defined below.
II. Statutory and Regulatory
Framework for Registration of non-U.S.
CCPs
The Commodity Exchange Act
(‘‘CEA’’) does not impose geographic
1 See Regulation (EU) No 648/2012 of the
European Parliament and the Council on OTC
derivatives, central counterparties and trade
repositories of 4 July 2012 (‘EMIR’), Art. 25(6).
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limitations on the registration of DCOs.
Nor does it mandate that clearing of
futures traded on U.S. exchanges must
take place in the United States.2 To the
contrary, it permits futures traded on
exchanges in the United States to be
cleared outside the United States.
However, the CEA and CFTC
regulations require that foreign-based
CCPs that wish to clear such futures be
registered with the Commission and
comply with CFTC regulations.3 In
addition, consistent with Section 2(i) of
the CEA, foreign-based CCPs that clear
swaps with a sufficient nexus to U.S.
commerce must register with the
Commission.4
Thus, under this regulatory
framework, a number of foreign-based
CCPs have been registered with the
Commission for some time.
LCH.Clearnet Ltd., which is based in
London, for example, has been
registered with the Commission since
2001, and thus has been subject to dual
supervision by UK authorities and the
Commission since long before the EU
adopted its current regulatory scheme—
EMIR.5 This dual registration system
has been a foundation on which the
cleared swaps market grew to be a
global market. In addition to
LCH.Clearnet Ltd., there are currently
five other foreign-based DCOs that are
registered both with the Commission
and their home country regulators:
Singapore Exchange Derivatives
Clearing Limited (home country
regulator is the Monetary Authority of
Singapore), LCH.Clearnet SA (home
´
country regulators are the Autorite de
ˆ
´
controle prudentiel et resolution, the
´
´
Autorite des marches financiers, and the
Banque de France), ICE Clear Europe
Ltd. (home country regulator is Bank of
England), Natural Gas Exchange (home
country regulator is the Alberta
Securities Commission), and Eurex
Clearing AG (home country regulators
¨
are Bundesanstalt fur
Finanzdienstleistungsaufsicht (BaFin)
and Deutsche Bundesbank). Two
additional foreign-based CCPs have
applications pending before the
27
U.S.C. 7a–1(a).
generally 7 U.S.C. 7(d)(9)(iii) and (11); 17
CFR 38.601.
4 7 U.S.C. 7a–1(a); 17 CFR 39.3; see also 7 U.S.C.
2(i) (providing that the CEA’s swap-related
provisions shall not apply to activities outside the
United States unless those activities have a direct
and significant connection with activities in, or
effect on, commerce of the United States or
contravene such rules or regulations as the
Commission may prescribe or promulgate as are
necessary or appropriate to prevent the evasion of
any provision of the CEA).
5 Regulation (EU) No 648/2012 on OTC
derivatives, central counterparties and trade
repositories.
3 See
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15261
Commission for registration as DCOs
(CME Clearing Europe Ltd. and Japan
Securities Clearing Corporation).
Additionally, the Commission has
provided exemptions from registration
for foreign-based CCPs that clear
proprietary swaps positions for their
U.S. members and affiliates but not for
U.S. customers generally. (These
foreign-based DCOs also do not clear
futures traded on U.S. designated
contract markets (‘‘DCMs’’).) These
exemptions have been issued pursuant
to Section 5b(h) of the CEA, which
permits the Commission to exempt a
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.6
For purposes of the granting of
exemptions to foreign-based CCPs that
are not clearing futures traded on U.S.
DCMs nor clearing swaps for U.S.
customers, the Commission has
determined that a supervisory and
regulatory framework that is consistent
with the Principles for Financial Market
Infrastructures (‘‘PFMIs’’) can be
considered to be comparable to and as
comprehensive as the supervisory and
regulatory framework established by the
CEA and part 39 of the Commission’s
regulations.7 Pursuant to this authority,
the Commission has granted exemptions
to clearing organizations in Australia,
Japan, South Korea, and Hong Kong,
provided that each exempt CCP not offer
customer clearing services for U.S.
persons and limit direct clearing by U.S.
persons and futures commission
merchants (‘‘FCMs’’) to the following
circumstances: (1) ‘‘A U.S. person that
is a clearing member of [the exempt
CCP] may clear swaps for itself and
those persons identified in the
Commission’s definition of ‘proprietary
account’ set forth in Regulation 1.3(y)’’;
(2) ‘‘A non-U.S. person that is a clearing
member of [the exempt CCP] may clear
swaps for any affiliated U.S. person
identified in the definition of
‘proprietary account’ set forth in
Regulation 1.3(y)’’; and (3) ‘‘An entity
that is registered with the Commission
67
U.S.C. 7a–1(h).
PFMIs were jointly issued by the Committee
on Payment and Settlement Systems (now, the
Committee on Payments and Market Infrastructures
(‘‘CPMI’’)) of the Bank for International Settlements
and the Technical Committee of the International
Organization of Securities Commissions (‘‘IOSCO’’)
in April 2012. The PFMIs are available at https://
www.iosco.org/library/pubdocs/pdf/
IOSCOPD377.pdf.
7 The
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as an FCM may be a clearing member of
[the exempt CCP], or otherwise maintain
an account with an affiliated broker that
is a clearing member, for the purpose of
clearing swaps for itself and those
persons identified in the definition of
‘proprietary account’ set forth in
Regulation 1.3(y).’’ 8
To clear U.S. customer transactions,
the Commission requires that a CCP
register with the Commission as a DCO
and such a DCO becomes subject to
Section 4d of the CEA, which
establishes a customer protection regime
for futures, options, and swaps
customers.9 For example, with respect
to swaps customers, Section 4d(f)(1)
states that it shall be unlawful for any
person to accept money, securities, or
property (funds) from a swaps customer
to margin a swap cleared through a DCO
unless the person is registered as an
FCM.10 Additionally, Section 4d(f)(2)
requires segregation of cleared swaps
customer funds from the funds of the
FCM, and Section 4d(f)(6) extends these
segregation requirements to DCOs.11
These provisions of the CEA interlock
with the commodity broker provisions
of the Bankruptcy Code, Subchapter IV
of Chapter 7.12 No EU-based CCP has
sought an exemption from registration.
This is because EU-based CCPs offer, or
are seeking to offer, clearing for U.S.
customers and thus have obtained or are
seeking to obtain, registration as DCOs.
Nevertheless, EU-based CCPs that do
not clear swaps for U.S. customers may
petition the Commission for exempt
DCO status.
Additionally, in all instances in
which the Commission has granted
registration to a foreign-based CCP, it
also has entered into a memorandum of
8 See In re Petition of ASX Clear (Futures) Pty
Limited for Exemption from Registration as a
Derivatives Clearing Organization (Aug. 18, 2015);
In re Petition of Japan Securities Clearing Corp. for
Exemption from Registration as a Derivatives
Clearing Organization (Oct. 26, 2015); In re Petition
of Korea Exchange, Inc. for Exemption from
Registration as a Derivatives Clearing Organization
(Oct. 26, 2015); In re Petition of OTC Clearing Hong
Kong Ltd. for Exemption from Registration as a
Derivatives Clearing Organization (Dec. 21, 2015).
9 7 U.S.C. 6d(a), (b), and (f).
10 Section 4d(f)(l) of the CEA, 7 U.S.C 6d(f)(l),
states, in relevant part, that it shall be unlawful for
any person to accept any money, securities, or
property (or to extend any credit in lieu of money,
securities, or property) from, for, or on behalf of a
swaps customer to margin, guarantee, or secure a
swap cleared by or through a derivatives clearing
organization (including money, securities, or
property accruing to the customer as the result of
such a swap), unless the person shall have
registered under the CEA with the Commission as
a futures commission merchant, and the registration
shall not have expired nor been suspended nor
revoked.
11 7 U.S.C 6d(f)(2) and (6).
12 See 11 U.S.C. 761–767; see also Section 101(6)
of the Bankruptcy Code, 11 U.S.C. 101(6).
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understanding or similar arrangement
(‘‘MOU’’) with the CCP’s home country
regulator(s). Such MOUs establish a
framework pursuant to which the
Commission and the CCP’s home
country regulator(s) intend to cooperate
with each other in fulfilling their
respective regulatory responsibilities
with respect to covered cross-border
entities, including CCPs licensed by the
home country regulator(s) and registered
with the Commission. Specifically, such
an MOU sets forth procedures for,
among other things, information sharing
between the CFTC and the home
country regulator(s), notification of
certain material information, conduct of
on-site visits, and the use and treatment
of non-public information.
III. Regulation of CCPs in the EU
EU-based CCPs are subject to the
regulations laid down in EMIR and the
Regulatory Technical Standards (‘‘RTS’’)
(collectively, the ‘‘EMIR Framework’’).13
EMIR and the RTS establish uniform
legal requirements for EU CCPs that, as
EU-level legislation, have an immediate,
binding, and direct effect in all EU
member states without the need for
additional action by national
authorities.14 Moreover, where the
European Parliament and the European
Council have passed EU-level
legislation, EU member states cannot
legislate laws that duplicate or conflict
with EMIR.15
The European Parliament and the
European Council passed EMIR on July
4, 2012, which entered into force on
August 16, 2012. The relevant technical
standards for CCPs, including the RTS
for capital requirements (‘‘RTS–CR’’)
and the RTS for central counterparties
(‘‘RTS–CCP’’), generally entered into
force on March 15, 2013.
Pursuant to EMIR, each EU member
state is responsible for implementing
the EMIR Framework by designating a
national competent authority(s)
(‘‘NCA’’) to authorize and supervise the
day-to-day operations of CCPs
established in its territory. The NCAs
are required to regularly review how the
CCP complies with EMIR by examining
the CCP’s rules, arrangements,
13 For
the purposes of this Notice the Commission
only considered those EMIR Framework provisions
published as of the date of this Notice. The relevant
RTS include: Commission Delegated Regulation No.
152/2013 with regard to regulatory technical
standards on capital requirements for central
counterparties (‘‘RTS–CR’’); and Commission
Delegated Regulation No. 153/2013 with regard to
regulatory technical standards on requirements for
central counterparties (‘‘RTS–CCP’’).
14 See EMIR (stating that ‘‘[t]his Regulation shall
be binding in its entirety and directly applicable in
all Member States.’’).
15 EMIR Article 13(1).
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procedures, and mechanisms, and to
evaluate the risks to which such CCPs
are, or might be, exposed. At a
minimum, these reviews and
examinations must occur at least
annually. As part of such reviews and
evaluations, the CCP is subject to on-site
inspections.16
Additionally, for each authorized
CCP, a college of supervisors is
established that comprises members of
the NCA, ESMA, other EU national
authorities that may supervise entities
on which the operations of that CCP
might have an impact (i.e., selected
clearing members, trading venues,
interoperable CCPs and central
securities depositories), as well as
members of the European System of
Central Banks (ESCB), as relevant.17 The
NCAs regularly, and at least annually,
inform the college of the results of the
review and evaluation of the CCP,
including any remedial action taken or
penalty imposed.18 The CCP college is
responsible for reaching an opinion on
(1) the authorization of a CCP; (2)
extensions of authorization; and (3) any
changes to a CCP’s risk model.
While NCAs remain in charge of
supervising CCPs, ESMA, as an
independent European supervisory
authority, validates changes to the risk
models of authorized CCPs and is
responsible for harmonizing and
coordinating the implementation of
EMIR across the EU member states.
ESMA is managed by a Board of
Supervisors, which is composed of the
heads of 28 national authorities (where
there is more than one national
authority in a Member State those
authorities agree which of their heads
will represent them), with observers
from Norway, Iceland, and
Liechtenstein. The Board makes
decisions on the compliance by NCAs
with community legislation,
interpretation of community legislation,
decisions in crisis situations, the
approval of draft technical standards,
guidelines, peer reviews, and any
reports that are developed.19
IV. Comparable and Comprehensive
Standard
Consistent with CEA Section 2(i) and
principles of international comity, in
the case of foreign-based DCOs, the
Commission will make a comparability
determination on a requirement-byrequirement basis, rather than on the
16 See
EMIR Articles 21 and 22.
at Article 18.
18 Id. at Articles 12 and 21.
19 See ESMA: Board of Supervisors and NCAs,
https://www.esma.europa.eu/about-esma/
governance/board-supervisors-and-ncas.
17 Id.
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basis of the foreign regime as a whole.20
In making its comparability
determinations, the Commission may
include conditions that address, among
other things, timing and other issues
related to coordinating the
implementation of reform efforts across
jurisdictions.
In evaluating whether a particular
category of foreign regulatory
requirement(s) is comparable and
comprehensive to the corollary
requirement(s) under the CEA and
Commission regulations, the
Commission will take into consideration
all relevant factors, including, but not
limited to: The comprehensiveness of
the requirement(s); the scope and
objectives of the relevant
requirement(s); the comprehensiveness
of the foreign regulator’s supervisory
compliance program; and the foreign
jurisdiction’s authority to support and
enforce its oversight of the registrant.
In making this comparability
determination, the Commission is
relying on the provisions of the EMIR
Framework. The Commission assumes
that the provisions of the EMIR
Framework discussed herein are in full
force and effect and that the description
of the EMIR Framework that is
contained within this Notice is accurate
and complete.21 The Commission also
assumes that the provisions of the EMIR
Framework discussed herein have been
implemented in accordance with their
terms and there are no Member State or
EU laws, regulations, or actions of the
NCAs or any other authorities that are
contrary to the provisions of the EMIR
Framework. Further, the Commission’s
determination is based on the EMIR
Framework as it exists at this time; any
changes to the EMIR Framework
(including, but not limited to, changes
in the relevant supervisory or regulatory
regime) could, depending on the nature
of the change, invalidate the
Commission’s comparability
determination.
20 The Commission has taken analogous action
with respect to foreign-based swap dealers and
major swap participants. Cf 78 FR 78864 (Dec. 27,
2013) (Australia); 78 FR 78852 (Dec. 27, 2013)
(Hong Kong); 78 FR 78910 (Dec. 27, 2013) (Japan—
Entity Level Requirements); 78 FR 78890 (Dec. 27,
2013) (Japan—Transaction Level Requirements);78
FR 78899 (Dec. 27, 2013) (Switzerland); 78 FR
78839 (Dec. 27, 2013) (Canada); 78 FR 78923 (Dec.
27, 2013) (EU—Entity Level Requirements); 78 FR
78878 (Dec. 27, 2013) (EU—Transaction Level
Requirements); see also 78 FR 45292 (July 26,
2013).
21 The Commission additionally provided the EC
and ESMA the opportunity to consult regarding the
relevant provisions of the EMIR Framework
described in this Notice; however, in reaching its
conclusions the Commission ultimately relied upon
the English-language published text of the
provisions of the EMIR Framework.
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V. Comparability Determination
The following section presents the
requirements imposed by specific
sections of the CEA and Commission
regulations applicable to DCOs that are
the subject of this comparability
determination. Following the discussion
of each Commission requirement, the
Commission provides the corresponding
provision of the EMIR Framework.
The Commission’s determinations in
this regard are intended to inform the
public of the Commission’s views
regarding whether the specific
provisions of the EMIR Framework may
be comparable to, and as comprehensive
as, specific requirements in the CEA and
CFTC regulations and, therefore, may
form the basis for substituted
compliance. The descriptions provided
herein of CEA and CFTC requirements,
as well as the provisions of the EMIR
Framework, are summaries of the actual
provisions and are qualified by
reference to them. Statements of
regulatory objectives are general in
nature and provided only for the
purpose of this Notice. Likewise, the
Commission’s summary of what is
comparable as between specific CEA
and CFTC requirements on the one hand
and corresponding provisions of the
EMIR Framework on the other is only a
summary. In particular, there may be
aspects that are not cited, including
particular features that may not be
comparable, but that do not affect the
overall determination with respect to
that provision or set of provisions.
A. Financial Resources (Regulation
39.11)
CEA Section 7a–1(c)(2)(B) (‘‘Core
Principle B’’) establishes general
requirements for DCOs to have adequate
financial resources. To implement Core
Principle B the Commission adopted
regulation 39.11, which requires a DCO
to maintain financial resources
sufficient to cover its exposures with a
high degree of confidence and to enable
it to perform its functions in compliance
with the core principles set out in
Section 5b of the CEA.
Commission Requirement: Regulation
39.11 sets forth requirements by which
a DCO must identify and adequately
manage its general business risks and
hold sufficient liquid resources to cover
potential losses that are not related to
clearing members’ defaults so that the
DCO can continue to provide services as
a going concern.
Regulation 39.11 provides that a
DCO’s financial resources will be
considered sufficient if their value, at a
minimum, exceeds the total amount that
would enable the DCO to meet its
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15263
financial obligations to its clearing
members notwithstanding a default by
the clearing member creating the largest
financial exposure for the DCO in
extreme but plausible market conditions
(‘‘Cover 1’’).22 A DCO may use the
following types of financial resources to
satisfy this requirement, including: the
DCO’s own capital; guaranty fund
deposits; default insurance; potential
assessments for additional guaranty
fund contributions, if permitted by the
DCO’s rules; and any other financial
resource deemed acceptable.23
On a monthly basis, a DCO must
perform stress testing that will allow it
to make a reasonable calculation of the
financial resources needed to meet its
Cover 1 requirement. A DCO has
reasonable discretion to determine the
methodology it uses to compute its
Cover 1 requirement; however, the
Commission may review the
methodology and require changes as
appropriate.24 A DCO may allocate a
financial resource to satisfy its Cover 1
credit risk or its operating costs, but it
may not allocate a financial resource to
satisfy both its Cover 1 credit risk and
its operating costs.25
If a DCO’s rules provide for
assessments for additional guaranty
fund contributions, then the DCO must:
Have rules requiring that its clearing
members have the ability to meet an
assessment within the time frame of a
normal end-of-day variation settlement
cycle; monitor the financial and
operational capacity of its clearing
members to meet potential
assessment(s); apply a 30% haircut to
the value of potential assessments; and
only count the value of assessments
after the haircut, to meet up to 20% of
those obligations.26
In addition, CFTC regulation 39.11
provides that a DCO must effectively
measure, monitor, and manage its
liquidity risks, maintaining sufficient
liquid resources such that it can, at a
minimum, fulfill its cash obligations
when due.27 A DCO also must hold its
assets in a manner that minimizes the
risk of loss or delay in accessing them.28
The financial resources the DCO
allocates to meet this liquidity
requirement must be sufficiently liquid
to enable the DCO to fulfill its
obligations as a CCP during a one-day
settlement cycle.29 A DCO must
22 17
CFR 39.11(a)(1).
CFR 39.11(b)(1).
24 17 CFR 39.11(c)(1).
25 17 CFR 39.11(b)(3).
26 17 CFR 39.11(d)(2).
27 17 CFR 39.11(e)(1)(i).
28 Id.
29 17 CFR 39.11(e)(1)(ii).
23 17
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maintain cash, U.S. Treasury
obligations, or high quality, liquid,
general obligations of a sovereign
nation, in an amount equal or greater
than an amount calculated as follows:
• Calculate the average daily
settlement pay for each clearing member
over the last fiscal quarter;
• Calculate the sum of those average
daily settlement pays; and
• Using that sum, calculate the
average of its clearing members’ average
pays.30
A DCO may take into account a
committed line of credit or similar
facility for the purposes of meeting the
remainder of this liquidity requirement.
CFTC regulation 39.11 further
provides that the assets a DCO holds in
a guaranty fund must have minimal
credit, market, and liquidity risks and
must be readily accessible on a sameday basis.31 Additionally, letters of
credit are not permissible assets for a
guaranty fund.32
Finally, CFTC regulation 39.11
provides that a DCO’s cash balances
must be invested or placed in
safekeeping in a manner that bears little
or no principal risk.33
Regulatory Objective: Core Principle B
and the Commission’s implementing
regulations are designed to establish
uniform standards that further the goals
of avoiding market disruptions and
financial losses to market participants
and the general public, and avoiding
systemic problems that could arise from
a DCO’s failure to maintain adequate
resources. The regulations promote
financial strength and stability, thereby
fostering efficiency and a greater ability
to compete in the broader financial
market.
As highlighted by the events of 2007–
2008 in global financial markets,
maintaining sufficient financial
resources is a critical aspect of any
financial entity’s risk management
system, and ultimately contributes to
the goal of stability in the broader
financial markets. By setting specific
standards with respect to how DCOs
must access and monitor the adequacy
of their financial resources, Core
Principle B and the Commission’s
implementing regulations contribute to
a DCO’s maintenance of sound risk
management practices and further the
goal of minimizing systemic risk.
Comparable EU Law and Regulations:
The following provisions of the EMIR
Framework address financial resources.
EMIR, Art. 43: At all times, a CCP
shall maintain sufficient prefunded
30 17
CFR 39.11(e)(1)(ii).
CFR 39.11(e)(3)(i).
32 17 CFR 39.11(e)(3)(iii).
33 17 CFR 39.11(e)(3)(ii).
31 17
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available financial resources to enable
the CCP to withstand the default of at
least the two clearing members to which
it has the largest exposure under
extreme but plausible market
conditions. Such prefunded financial
resources shall include dedicated
resources of the CCP, shall be freely
available to the CCP, and shall not be
used to meet the CCP’s capital
requirements.
RTS–CCP, Art. 51(2) and 53(1): On a
regular basis, a CCP shall conduct stress
tests designed to ensure that its
combination of margin, default fund
contributions, and other financial
resources are sufficient to cover the
default of at least the two clearing
members to which the CCP has the
largest exposures under extreme but
plausible market conditions. As part of
its stress testing, the CCP also shall
examine potential losses resulting from
the default of entities in the same
corporate group as the two clearing
members to which it has the largest
exposure under extreme but plausible
market conditions.
RTS–CCP, Art. 30(2) and 59(5): A CCP
shall develop a framework for defining
the types of extreme but plausible
market conditions based on a range of
(1) historical scenarios that could
expose it to the greatest risk; and (2)
potential future scenarios founded on
consistent assumptions regarding
market volatility and price correlation
across markets and financial
instruments, drawing on both
quantitative and qualitative assessments
of potential market conditions. If a CCP
decides that recurrence of a historical
instance of large price movements is not
plausible, the CCP shall justify to the
competent authority its omission from
the framework. A CCP shall analyze and
monitor its financial resources coverage
in the event of defaults by conducting
at least daily stress testing using
standard and predetermined parameters
and assumptions.
EMIR, Art. 44 and 47(3)–(5): At all
times, a CCP shall have access to
adequate liquidity to perform its
services and activities and, on a daily
basis, shall measure its potential
liquidity needs. Financial instruments
posted as margin or as default fund
contributions shall be deposited in a
manner that ensures the full protection
of those financial instruments. Cash
deposits of a CCP, other than with a
central bank, shall be executed through
highly secure arrangements with
authorized financial institutions. Where
a CCP deposits assets with a third party,
it shall ensure that the assets are
identifiable separately by means of
differently titled accounts.
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RTS–CCP, Chapter VIII (Art. 32–34): A
CCP shall establish a robust liquidity
risk management framework, which
shall include, among other things,
effective operational and analytical tools
to identify, measure, and monitor its
settlement and funding flows on an
ongoing and timely basis and assess its
potential future liquidity needs under a
wide range of potential stress scenarios.
A CCP shall maintain, in each relevant
currency, liquid resources
commensurate with its liquidity
requirements. These liquid resources
shall be limited to the following: cash
deposited at a central bank of issue;
cash deposited at authorized credit
institutions; committed lines of credit;
committed repurchase agreements; and/
or highly marketable financial
instruments that are readily available
and convertible into cash on a same-day
basis using prearranged and highly
reliable funding arrangements.
EMIR, Art. 46 and 47: A CCP shall
accept highly liquid collateral with
minimal credit and market risk to cover
its initial and ongoing exposure to its
clearing members and it shall invest its
financial resources only in cash or
highly liquid financial instruments with
minimal market and credit risk.
EMIR, Art. 16 and 47(2): A CCP’s
capital, including retained earnings and
reserves, shall be proportionate to the
risk stemming from the activities of the
CCP. Capital not invested in cash or
highly liquid financial instruments with
minimal credit risk, however, shall not
count for purposes of calculating a
CCP’s regulatory capital.
RTS–CR, Art. 2(2): A CCP shall
calculate and retain the amount of
capital it requires to wind down or
restructure. This estimated time span
shall be sufficient to ensure an orderly
winding down or restructuring of its
activities, reorganizing its operations,
liquidating its clearing portfolio, or
transferring its clearing activities to
another CCP, including in stressed
market conditions. For the purposes of
this RTS, the prescribed time span for
purposes of determining sufficient
capital to wind down or restructure a
CCP’s activities is subject to a minimum
of six months.
RTS–CCP, Art. 43–46 and Annex II: A
debt instrument can be considered
highly liquid, bearing minimal credit
and market risk if it is issued by or
explicitly guaranteed by a government,
central bank, multilateral development
bank, or the European Financial
Stability Facility or the European
Stability Mechanism; the CCP can
demonstrate that the debt instrument
has low credit and market risk based
upon an internal assessment; the
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average time-to-maturity of the CCP’s
portfolio does not exceed two years; the
debt instrument is denominated in a
currency the risks of which the CCP can
demonstrate it is able to manage or in
a currency in which the CCP clears
transactions; the debt instrument is
freely transferrable and without any
regulatory constraint or third party
claims that impair liquidation; the debt
instrument has an active outright sale or
repurchase market with a diverse group
of buyers and sellers, including during
stress conditions; and reliable price data
on the debt instrument is published on
a regular basis.
Commission Determination: The
Commission finds that the provisions of
the EMIR Framework with respect to
financial resources are generally similar
to the applicable provisions of CFTC
Regulation 39.11, and set specific and
uniform standards with respect to how
CCPs should access and monitor the
adequacy of their financial resources.
These standards seek to ensure that
CCPs can meet their financial
obligations to market participants, thus
contributing to the financial integrity of
the derivatives market as a whole. Both
regimes require prefunding of financial
resources sufficient to at least cover a
default caused by a clearing member
creating the largest financial exposure
for the EU-based CCP that is dually
registered with the CFTC as a DCO
(‘‘DCO/CCP’’) in extreme but plausible
market conditions. Both regimes also
require that a DCO/CCP’s financial
resources include dedicated resources
(e.g., prefunded mutualized resources)
and require frequent and regular stress
testing of financial resources. Likewise,
both regimes require that assets in the
default fund have minimal credit,
market, and liquidity risks, and be
readily accessible on a same-day basis.
Additionally, both regimes prohibit a
DCO/CCP from allocating the same
financial resources to different
categories of financial exposure and
both regimes require that cash balances
must be either invested or appropriately
15265
safeguarded in a manner which bears
little to no principal risk.
Accordingly, the Commission finds
that the provisions of the EMIR
Framework with respect to financial
resources discussed above and
identified below in Table 1(a) are
comparable to and as comprehensive as
the financial resource requirements of
CFTC regulation 39.11, with the
exception of 39.11(f), which requires
DCOs to submit to the Commission
quarterly financial resource reports that
include a quarterly financial statement.
The Commission recognizes that
European CCPs would not have
financial statements prepared in
accordance with U.S. Generally
Accepted Accounting Principles
(‘‘GAAP’’) absent Commission
registration. Thus, the Commission will
permit CCPs to submit financial
statements prepared in accordance with
International Financial Reporting
Standards (‘‘IFRS’’), with periodic
reconciliation to assist staff in reviewing
the financial statements.
TABLE 1(A)—FINANCIAL RESOURCES
Subject area
CFTC regulations
Default financial resources (Credit risk: Cover
1).
Monthly stress-testing of default financial resources.
Liquidity of default financial resources ...............
17 CFR 39.11(a)(1), 17 CFR 39.11(b)(1), 17
CFR 39.11(d)(2).
17 CFR 39.11(c)(1) ..........................................
Default fund collateral ........................................
General business risks, (Allocation of financial
resources).
Cash management .............................................
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B. Risk Management (Regulation 39.13)
CEA Section 7a–1(c)(2)(D) (‘‘Core
Principle D’’) establishes general
requirements for DCOs to have the
ability to manage the risks associated
with discharging the responsibilities of
the DCO through the appropriate tools
and procedures. To implement Core
Principle D, the Commission adopted
regulation 39.13, which requires a DCO
to maintain appropriate tools and
procedures to manage the risks
associated with discharging the
responsibilities of a DCO in compliance
with the core principles set out in
Section 5b of the CEA.
Commission Requirement: CFTC
regulation 39.13 generally requires a
DCO to measure its credit exposure to
each clearing member not less than once
during each business day and to
monitor such exposure periodically
during the business day. CFTC
regulation 39.13 also requires a DCO to
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EMIR framework
17 CFR 39.11(e)(1) ..........................................
17 CFR 39.11(e)(3)(i), 17 CFR 39.11(e)(3)(iii)
17 CFR 39.11(b)(3) ..........................................
17 CFR 39.11(e)(3)(ii) ......................................
limit its exposure to potential losses
from defaults by clearing members,
through margin requirements and other
risk control mechanisms, to ensure that
its operations would not be disrupted
and that non-defaulting clearing
members would not be exposed to
losses that non-defaulting clearing
members cannot anticipate or control.
Finally, CFTC regulation 39.13 also
requires that a DCO collect margin from
each clearing member sufficient to cover
potential exposures in normal market
conditions and that each model and
parameter used in setting such margin
requirements be risk-based and
reviewed on a regular basis.
CFTC regulation 39.13 requires a DCO
to establish, maintain, and regularly
update a written risk management
framework (approved by its board of
directors) that, at a minimum, clearly
identifies and documents the range of
risks to which the DCO is exposed,
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EMIR, Art 43; RTS–CCP, Art 53(1)
RTS–CCP, Art. 51(2) and 53(1); RTS–CCP,
Art 30(2) and 59(5)
EMIR, Art 44 and 47(3)–(5); RTS–CCP,
Chapter VIII (Art 32–34)
EMIR, Art 46 and 47
EMIR Art 16 and 47(2); RTS-Capital Requirements for CCP, Art 2(2)
EMIR, Art 47; RTS–CCP, Art 43–46 and
Annex II
addresses monitoring and managing
those risks, and provides a mechanism
for internal audit.34
CFTC regulation 39.13 also requires a
DCO to appoint a chief risk officer
(‘‘CRO’’), who must be responsible for
implementing the DCO’s written risk
management framework and for making
appropriate recommendations to the
DCO’s risk management committee or
board of directors.35 Given the
importance of the risk management
function and the comprehensive nature
of the responsibilities of a DCO’s chief
compliance officer (‘‘CCO’’), the
Commission previously has stated that
it expects that a DCO’s CRO and CCO
would be two different individuals.36
Pursuant to CFTC regulation 39.13,
through margin requirements and other
risk control mechanisms, a DCO must
34 17
CFR 39.13(b).
CFR 39.13(c).
36 76 FR 69363.
35 17
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limit its exposure to potential losses
from defaults by its clearing members to
ensure that its operations would not be
disrupted and non-defaulting clearing
members would not be exposed to
losses that they cannot anticipate or
control.37
CFTC regulation 39.13 also provides
that a DCO must establish initial margin
requirements that are commensurate
with the risk of each product and
portfolio, including any unusual
characteristics of, or risks associated
with, particular products or portfolios,
including but not limited to jump-todefault risk or other similar risk.38 Each
model and parameter used in setting
initial margin requirements must be
risk-based and reviewed on a regular
basis.39 On a daily basis, a DCO must
determine the adequacy of its initial
margin requirements.40
The actual coverage of a DCO’s initial
margin requirements must meet an
established confidence level of at least
99%, based on data from an appropriate
historical time period, for each product
for which the DCO uses a product-based
margin methodology; for each spread
within or between products for which
there is a defined spread margin rate; for
each account held by a clearing member
at the DCO, by house origin and by each
customer origin; and for each swap
portfolio, including any portfolio
containing futures and/or options and
held in a commingled account pursuant
to CFTC regulation 39.15(b)(2), by
beneficial owner.41 A DCO must
determine the appropriate historic time
period based on the characteristics,
including volatility patterns, of each
product, spread, account, or portfolio.42
In addition, CFTC regulation 39.13
provides that on a regular basis, a
qualified and independent party must
review and validate a DCO’s systems for
generating initial margin requirements,
including its theoretical models, and
that this party must not be the person
responsible for development or
operation of the systems and models
being tested.43
A DCO may reduce initial margin
requirements for related positions if the
price risks with respect to such
positions are significantly and reliably
correlated—i.e., there is a theoretical
basis for the correlation in addition to
an exhibited statistical correlation.44
37 17
CFR 39.13(f).
CFR 39.13(g)(2)(i).
39 17 CFR 39.13(g)(1).
40 17 CFR 39.13(g)(6).
41 17 CFR 39.13(g)(2)(iii).
42 17 CFR 39.13(g)(2)(iv).
43 17 CFR 39.13(g)(3).
44 17 CFR 39.13(g)(4).
38 17
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Additionally, CFTC regulation 39.13
provides that a DCO must back test its
initial margin requirements by
comparing its initial margin
requirements with historical price
changes to determine the extent of
actual margin coverage using an
appropriate time period but not less
than the previous 30 days, as follows:
On a daily basis, the DCO must back test
products or swaps portfolios that are
experiencing significant market
volatility; and on at least a monthly
basis, the DCO must back test the
adequacy of all of its initial margin
requirements.45
On a daily basis, a DCO must use
prudent valuation practices to value
assets posted as initial margin.46 In
particular, a DCO must appropriately
reduce its valuation of the assets that it
accepts in satisfaction of its initial
margin requirements, to reflect credit,
market, and liquidity risks, taking into
account stressed market conditions, and
must evaluate the appropriateness of
such haircuts on at least a quarterly
basis.47
Regulatory Objective: Core Principle D
and the Commission’s implementing
regulations are designed to ensure that
each DCO possesses the ability and
necessary tools to manage the risks
associated with discharging the
responsibilities of being a DCO. The
Commission’s regulation requiring a
DCO to maintain and update a written
risk management framework seeks to
ensure that a DCO carefully has
considered its risk management
framework, and it will provide guidance
to DCO management, staff, and market
participants. By requiring a 99%
confidence level for initial margin, the
Commission’s regulations seek to
prevent DCOs from competing with
respect to how much risk they are
willing to take on or from misjudging
the amount of risk they would take on
if they operated under lower standards.
Through requiring independent
validation of the DCO’s margin models,
the Commission’s regulations seek to
prevent bias in validating the DCO’s
models. By requiring daily review and
back testing, the regulations seek to
ensure that DCOs monitor the adequacy
of their initial margin requirements.
Comparable EU Law and Regulations:
The following provisions of the EMIR
Framework address risk management.
RTS–CCP Art. 4: A CCP shall have a
sound, written framework for the
comprehensive management of all
material risks to which it is or may be
45 17
CFR 39.13(g)(7).
CFR 39.13(g)(11).
47 17 CFR 39.13(g)(12).
46 17
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exposed. In developing its risk
management framework, a CCP shall
take an integrated and comprehensive
view of all relevant risks.
RTS–CCP, Art. 3(3) and 4(6): A CCP
shall have a CRO, who shall implement
the risk management framework. The
CCP shall ensure that the functions of
the CRO, CCO, and chief technology
officer are carried out by different
individuals, who shall be employees of
the CCP entrusted with the exclusive
responsibility of performing these
functions.
EMIR, Art. 48(2): A CCP shall take
prompt action to contain losses and
liquidity pressures resulting from
defaults and shall ensure that the
closing out of any clearing member’s
positions does not disrupt its operations
or expose non-defaulting clearing
members to losses that they cannot
anticipate or control.
EMIR, Art. 41(2), 49(1): A CCP shall
adopt models and parameters for setting
margin requirements that capture the
risk characteristics of the products and
swaps cleared and take into account the
interval between margin collections,
market liquidity, and the possibility of
changes over the duration of the
transaction. The models shall be
validated by the competent authority. A
CCP regularly shall review its models
and parameters for setting margin
requirements and shall subject the
models to rigorous and frequent stress
tests. A CCP also shall obtain
independent validations of its models
and parameters.
RTS–CCP, Art. 24(2)(b): In
determining the adequate confidence
interval for each class of product that it
clears, a CCP shall consider, among
other factors, the risk characteristics of
the class of product, which can include,
but are not limited to, volatility,
duration, liquidity, non-linear price
characteristics, jump-to-default risk and
wrong-way risk.
RTS–CCP, Art. 24(1): A CCP shall
calculate the initial margins to cover the
exposures arising from market
movements for each financial
instrument that is collateralized on a
product basis, over an appropriate time
horizon for the liquidation of the
position, with a confidence level of
99.5% for over-the-counter derivatives
and 99% for all other products.
RTS–CCP, Art. CCP 25: A CCP shall
ensure that its model methodology and
its validation process for determining
initial margin covers at least the latest
12 months and captures a full range of
market conditions, including periods of
stress.
RTS–CCP, Art 47 and 59(1): At least
annually, a CCP shall conduct a
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comprehensive and well-documented
validation of its models, their
methodologies, and the liquidity risk
management framework used to
quantify, aggregate, and manage the
CCP’s risks.
RTS–CCP, Art. 27 and 59(9): A CCP
may allow offsets or reductions in the
required margin across the products and
swaps that it clears if the price risk of
one financial instrument or a set of
products or swaps is significantly and
reliably correlated, or based on an
equivalent statistical parameter of
dependence, with the price risk of other
products or swaps. The CCP shall
demonstrate the existence of an
economic rationale for the price
correlation. At least annually, a CCP
shall test offsets among products and
swaps and how correlations perform
during periods of actual and
hypothetical severe market conditions.
RTS–CCP, Art. 49 and 60(2): On a
daily basis, a CCP shall assess its margin
coverage by back testing its margin
coverage against expected outcomes
derived from the use of margin models
to evaluate whether there are any testing
exceptions to margin coverage. In
conducting such back testing, the CCP
shall evaluate its current positions and
clearing members, and take into account
possible effects from portfolio margining
and, where appropriate, interoperable
CCPs. The historical time horizons used
for back tests shall include data from at
minimum the most recent year or as
long as a CCP has been clearing the
relevant product or swap if that is less
than a year.
RTS–CCP, Art. 40(2): A CCP shall
mark-to-market its collateral on a near to
real-time basis, and where not possible,
a CCP shall be able to demonstrate to
the competent authorities that it is able
to manage the risks.
EMIR, Art. 46(1); RTS–CCP, Art. 41(2)
and 59(10): A CCP shall accept highly
liquid collateral with minimal credit
and market risk to cover its initial and
ongoing exposure to its clearing
members. It shall apply adequate
haircuts to collateral asset values that
take into account the liquidity risk
following the default of a market
participant and concentration risk, and
that reflect the potential for the value of
such assets to decline over the interval
between their last reevaluation and the
time by which they reasonably can be
assumed to be liquidated. Such haircuts
shall consider, for each among other
factors, the type of asset and the credit
risk associated with the financial
instrument, the maturity of the asset; the
historical and hypothetical future price
volatility of the asset in stressed market
conditions; the liquidity of the
underlying market, including bid/ask
spread; the foreign exchange risks; and
any wrong-way risk. The CCP shall test
its haircuts at least monthly.
Commission Determination: The
Commission finds that the provisions of
the EMIR Framework with respect to
risk management are generally similar to
Core Principle D and CFTC regulation
39.13, and prescribe how CCPs should
monitor, evaluate, and manage the risks
to which they are exposed. These
standards seek to ensure that CCPs can
meet their financial obligations to
market participants, thus contributing to
the financial integrity of the derivatives
market as a whole.
Both regimes include a broad, general
requirement for a DCO/CCP to manage
the risk to which it is exposed and both
regimes require the appointment of a
CRO to perform similar functions. Both
regimes require a DCO/CCP to use risk
control mechanisms, such as margin
requirements, to limit exposure to
potential clearing member defaults.
Similarly, both regimes require that
margin models and parameters be risk-
15267
based and regularly reviewed and both
regimes require that the calculation of
initial margin include factoring the risk
characteristics of each cleared product.
Both regimes require at least a 99%
confidence level in determining the
adequacy of initial margin and both
regimes have similar proscriptions for
back testing initial margin models.
Finally, both regimes require that cash
balances must be either invested or
appropriately safeguarded in a manner
that bears little or no principal risk.
Accordingly, the Commission finds
that the provisions of the EMIR
Framework with respect to risk
management standards discussed above
and identified below in Table 1(b) are
comparable to and as comprehensive as
the risk management requirements of
CFTC regulation 39.13, with the
exception of 39.13(g)(8)(i) and (ii),
which respectively require FCMs to
calculate initial margin for cleared
customer accounts on a gross (as
opposed to net) basis and require DCOs
to collect additional initial margin for
non-hedge positions of FCM customers.
Despite the importance of gross
margining of customer accounts and the
collection of this additional initial
margin, in an effort to promote comity,
the Commission would not require
DCO/CCPs to apply either of these
regulations to non-FCM clearing
member intermediaries or to the
customers of non-FCM clearing member
intermediaries. Additionally, the
Commission makes this finding
notwithstanding that the EMIR
Framework’s treatment of affiliates does
not shield customers from potential
losses by affiliates of the clearing
member in the same manner as the
CFTC’s approach and in fact potentially
exposes customers to proprietary
trading losses.
TABLE 1(B)—RISK MANAGEMENT
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Subject area
CFTC regulations
General/documentation requirement ..................
Chief risk officer .................................................
Limitation of exposure to potential losses from
defaults.
Margin models/parameters .................................
Risk factors for margin .......................................
Minimum confidence level ..................................
Lookback period .................................................
Regular independent validation ..........................
Portfolio margining .............................................
Margin Back tests ...............................................
Daily valuation of collateral posted as initial
margin.
Haircuts ..............................................................
17 CFR 39.13(a)–(b) ........................................
17 CFR 39.13(c) ..............................................
17 CFR 39.13(f) ...............................................
RTS–CCP, Art 4
RTS–CCP, Art 3(3) and 4(6)
EMIR, Art 48(2)
17
17
17
17
17
17
17
17
EMIR, Art 41(2), 49(1)
RTS–CCP, Art 24(2)(b)
RTS–CCP, Art 24(1)
RTS–CCP, Art 25
RTS–CCP, Art 47 and 59(1)
RTS–CCP, Art 27; RTS–CCP, Art 59(9)
RTS–CCP, Art 49 and 60(2)
RTS–CCP, Art 40(2)
Daily determination of initial margin adequacy ..
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CFR
CFR
CFR
CFR
CFR
CFR
CFR
EMIR framework
39.13(g)(1) ..........................................
39.13(g)(2)(i) ......................................
39.13(g)(2)(iii) .....................................
39.13(g)(2)(iv) .....................................
39.13(g)(3) ..........................................
39.13(g)(4) ..........................................
39.13(g)(7) ..........................................
39.13(g)(11) ........................................
17 CFR 39.13(g)(12) ........................................
17 CFR 39.13(g)(6) ..........................................
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EMIR, Art 46(1); RTS–CCP, Art 41(2) and
59(10)
EMIR, Art 49(1)
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C. Settlement Procedures (Regulation
39.14)
CEA Section 7a–1(c)(2)(E) (‘‘Core
Principle E’’) establishes general
requirements for DCOs to have
sufficient settlement procedures. To
implement Core Principle E the
Commission adopted regulation 39.14,
which requires a DCO to complete
money settlements on a timely basis, but
not less frequently than once each
business day; employ money settlement
arrangements to eliminate or strictly
limit exposure to settlement bank risks;
maintain an accurate record of the flow
of funds associated with money
settlements; possess the ability to
comply with the terms and conditions
of any permitted netting or offset
arrangement with another DCO;
establish rules that clearly state the
obligation of a DCO with respect to
physical deliveries; and ensure that a
DCO identifies and manages each risk
arising from any of its obligation with
respect to physical deliveries.
Commission Requirement: Regulation
39.14 requires that a DCO collect margin
from its clearing members on a daily
basis. Specifically, a DCO must effect
settlement with each clearing member at
least once each business day, and must
have the authority and operational
capacity to effect a settlement with each
clearing member on an intraday basis,
either routinely, when thresholds
specified by the DCO are breached, or in
times of extreme market volatility.48
CFTC regulation 39.14 provides that a
DCO must employ settlement
arrangements that eliminate or strictly
limit its exposure to settlement bank
risk, by among other things, having
documented criteria with respect to
those banks that are acceptable
settlement banks for the DCO and its
clearing members, including criteria
addressing the capitalization,
creditworthiness, access to liquidity,
operational reliability, and regulation or
supervision of such banks.49 A DCO
further must monitor each approved
settlement bank on an ongoing basis to
ensure that such bank continues to meet
the DCO’s established criteria.50
A DCO must monitor the full range of
and concentration of its exposure to its
own and its clearing members’
settlement bank(s) and assess its own
and its clearing members’ potential
losses and liquidity in the event that the
settlement bank with the largest share of
settlement activity were to fail. A DCO
must take any one or more of the
following actions, as needed, to
eliminate or strictly limit such
exposures: maintain accounts at one or
more additional settlement banks;
approve one or more additional
settlement banks that its clearing
members could choose to use; impose
concentration limits with respect to one
or more of its own or its clearing
members’ settlement banks; and/or take
any other appropriate actions.51
A DCO must maintain an accurate
record of the flow of funds associated
with each settlement.52
A DCO must possess the ability to
comply with each term and condition of
any permitted netting or offset
arrangement with any other clearing
organization.53
For products that are settled by
physical transfer of the underlying
instruments or commodities, a DCO
must establish rules that clearly state
each obligation that the DCO has
assumed with respect to such physical
deliveries, including whether it has an
obligation to make or receive delivery of
a physical instrument or commodity, or
whether it indemnifies clearing
members for losses incurred in the
delivery process, and ensure that the
risks of each such obligation are
identified and properly managed.54
Regulatory Objective: On a daily basis,
DCOs are exposed to significant inflows
and outflows of cash and other liquid
financial instruments. Core Principle E
and the Commission’s implementing
regulations are designed to ensure that
a DCO has the authority and operational
capacity to effect settlement with each
clearing member, on an intraday basis
and to also monitor, eliminate, or
strictly limit the settlement risks to
which a DCO is exposed.
Comparable EU Law and Regulations:
The following provisions of the EMIR
Framework address settlement
procedures.
EMIR, Art. 41(1) and (3): A CCP shall
impose, call, and collect margins to
limit its exposures from its clearing
members, and where relevant, from
CCPs with which it has interoperability
arrangements. Such margins shall be
sufficient to cover potential exposures
that the CCP estimates will occur until
the liquidation of the relevant positions.
Such margins also shall be sufficient to
cover losses that result from at least
99% of the exposures’ movements over
an appropriate time horizon and they
shall ensure that a CCP fully
collateralizes its exposures with all its
clearing members, and, where relevant,
51 17
CFR 39.14(c)(3).
CFR 39.14(e).
53 17 CFR 39.14(f).
54 17 CFR 39.14(g).
52 17
48 17
CFR 39.14(b).
49 17 CFR 39.14(c)(1).
50 17 CFR 39.14(c)(2).
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with CCPs with which it has
interoperability arrangements, at least
on a daily basis. A CCP shall regularly
monitor and, if necessary, revise its
margins to reflect current market
conditions, taking into account any
potential procyclical effects of such
revisions. A CCP shall call and collect
margins on an intraday basis, at a
minimum when predefined thresholds
are exceeded.
EMIR, Art. 50(1): Where practical and
available, a CCP shall use central bank
money to settle its transactions. Where
a CCP cannot use central bank money,
it shall take steps to strictly limit cash
settlement risk.
RTS–CCP, Art. 4(2), 32(4)(a), and
51(3): A CCP shall take an integrated
and comprehensive view of all relevant
risk, including the risks it bears from
and poses to, among other things,
settlement banks. A CCP also shall
assess the liquidity risk it faces,
including situations in which the CCP
or its clearing members cannot settle
their payment obligations when due as
part of the clearing or settlement
process. Such assessment shall address
the liquidity needs arising from the
CCP’s relationship with, among others,
settlement banks. As part of its stress
testing procedures, a CCP should
consider stress testing scenarios
involving the technical or financial
failure of, among others, its settlement
banks.
RTS–CCP, Art. 13 and Art. 14(3): A
CCP shall maintain records of all
transactions in all contracts it clears and
shall ensure that its records include all
information necessary to conduct a
comprehensive and accurate
reconstruction of the clearing process. A
CCP shall make, and keep updated, a
record of the amounts of margin, default
fund contributions, and other financial
resources, with respect to each single
clearing member and client account, if
known to the CCP.
EMIR, Art. 50(2)–(3): A CCP shall
clearly state its obligations with respect
to deliveries of financial instruments,
including whether it has any obligation
to make or receive delivery of a
financial instrument or whether it
indemnifies participants for losses
incurred in the delivery process. Where
a CCP has an obligation to make or
receive deliveries of financial
instruments, it shall eliminate principal
risk by using delivery-versus-payment
mechanisms, to the extent possible.
Commission Determination: The
Commission finds that the provisions of
the EMIR Framework with respect to
settlement procedures are generally
similar to Core Principle E and CFTC
regulation 39.14, and eliminate or
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strictly limit a CCP’s exposure to
settlement risk. Both regimes require the
daily collection of margin and both
require a DCO/CCP to employ
settlement arrangements that limit
exposure to various risks, including
exposure to settlement banks,
concentration risk, and physical
delivery of instruments. Both regimes
have similar recordkeeping
requirements. Finally, both regimes
require a DCO/CCP to have rules with
respect to the physical delivery of an
instrument or commodity, and to
identify and manage the risks associated
with the physical delivery of such
instruments.
Accordingly, the Commission finds
that the provisions of the EMIR
Framework with respect to settlement
procedures discussed above and
identified below in Table 1(c) are
comparable to and as comprehensive as
the default rules and procedures of
CFTC regulation 39.14.
For the avoidance of doubt, the
Commission notes that the foregoing
15269
comparability determination only
applies with regard to certain provisions
of regulation 39.14 (i.e., § 39.14(b),
§ 39.14(c), § 39.14(e), § 39.14(f), and
§ 39.14(g)). No comparability finding is
made regarding § 39.14(d), which
requires a DCO to ensure that
settlements are final when effected by
ensuring that it has entered into legal
agreements that state that settlement
fund transfers are irrevocable and
unconditional no later than when the
DCO’s accounts are debited or credited.
TABLE 1(C)—SETTLEMENT PROCEDURES
CFTC regulations
EMIR framework
Settlement procedures .......................................
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Subject area
17 CFR 39.14(b), (c), (e)–(g) ...........................
EMIR, Art. 41(1) and (3); EMIR, Art 50(1);
RTS–CCP, Art 4(2), 32(4)(a) and 51(3);
RTS–CCP, Art 13 and 14(3); EMIR, Art
50(2)-(3).
other clearing members; any obligations
that the DCO imposes on its clearing
members to participate in auctions or to
accept allocations, of the customer or
house positions of a defaulting clearing
member, subject to certain limitations;
the default waterfall—i.e., the sequence
in which the funds and assets of the
defaulting clearing member and its
customers and the financial resources
maintained by the DCO would be
applied in the event of a default; and a
provision that the funds and assets of a
defaulting clearing member must be
applied to cover losses with respect to
a customer default, if the relevant
customer funds and assets are
insufficient to cover the shortfall.57 The
DCO must make its default rules
publicly available.58
Regulatory Objective: Core Principle G
and the Commission’s implementing
regulations are designed to ensure that
each DCO clearly states its default
procedures, makes its default rules
publicly available, and has rules and
procedures that allow it to take timely
action to contain losses and liquidity
pressures and to continue meeting its
obligations.
Comparable EU Law and Regulations:
The following provisions of the EMIR
Framework address default rules and
procedures.
EMIR, Art. 48: A CCP shall have
written procedures to be followed in the
event of the default of a clearing
member. The CCP shall take prompt
action to contain losses and liquidity
pressures resulting from defaults and
shall ensure that the closing out of any
clearing member’s positions does not
disrupt its operations or expose the nondefaulting clearing members to losses
that they cannot anticipate or control.
EMIR, Art. 37(6): A CCP may impose
specific additional obligations on
clearing members, including the
participation in auctions of a defaulting
member’s positions. Such obligations
shall be proportional to the risk brought
by the clearing member and shall not
restrict participation to certain
categories of clearing members.
EMIR, Art. 45: A CCP shall use a
defaulting clearing member’s margins
before using other financial resources to
cover losses. Where the margins posted
by the defaulting clearing member are
insufficient to cover the losses covered
by the CCP, the CCP shall use the
default fund contribution of the
defaulting member to cover the loss. A
CCP shall use contributions to the
default fund of the non-defaulting
clearing members and any other
financial resources only after having
exhausted the defaulting clearing
member’s contributions. A CCP further
shall use its own dedicated financial
resources before using the default fund
contributions of non-defaulting clearing
members. A CCP shall not use the
margins posted by non-defaulting
clearing members to cover losses
resulting from the default of another
clearing member.
RTS–CCP, Art. 58 and 59(12): At least
on a quarterly basis, a CCP shall test and
review its default procedures to ensure
they are both practical and effective. At
least annually, a CCP shall perform
simulation exercises as part of the
testing of its default procedures. It also
shall perform simulation exercises
D. Default Rules and Procedures
(Regulation 39.16)
CEA Section 7a-1(c)(2)(G) (‘‘Core
Principle G’’) establishes general
requirements for DCOs to have adequate
default rules and procedures. To
implement Core Principle G the
Commission adopted regulation 39.16,
which requires a DCO to have rules and
procedures designed to allow for the
efficient, fair, and safe management of
events during which members or
participants become insolvent or
otherwise default on the obligations of
the members or participants to the DCO.
Commission Requirement: CFTC
regulation 39.16 provides requirements
by which a DCO must adopt rules and
procedures designed to allow DCOs to
effectively manage events during which
clearing members become insolvent or
default on the obligations of such
clearing members to the DCO.55
Pursuant to CFTC regulation 39.16, a
DCO must adopt procedures that would
permit the DCO to timely take action to
contain losses and liquidity pressures
and to continue meeting its obligations
in the event of a default on the
obligations of a clearing member to the
DCO.56 Further, a DCO must adopt rules
setting forth its default procedures;
including the DCO’s definition of
default, the actions that the DCO may
take upon default, which must include
the prompt transfer, liquidation, or
hedging of the customer or house
positions of the defaulting clearing
member, as applicable, and which may
include, in the DCO’s discretion, the
auctioning or allocation of positions to
55 17
56 17
CFR 39.16(a).
CFR 39.16(c)(1).
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58 17
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CFR 39.16(c)(3).
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following any material change to its
default procedures.
ESMA Q&A CCP Question 8(f)(1): A
CCP shall use the margins posted by a
defaulting clearing member prior to
other financial resources when covering
losses and may have rules which allow
it to use surplus margin on a defaulted
clearing member’s house account to
meet any obligation of the clearing
member with respect to losses on a
client account of that clearing member.
For the avoidance of doubt, surplus
margin on a client account of a default
clearing member cannot be used to meet
any losses on the defaulted clearing
member’s house account(s).59
RTS–CCP, Art. 61(2): A CCP shall
make publicly available key aspects of
its default procedures, including the
circumstances in which action may be
taken, who may take action, the scope
of the actions that may be taken
(including the treatment of both
proprietary and client positions, funds
and assets), and the mechanisms for
addressing a CCP’s obligations to nondefaulting clearing members.
Commission Determination: The
Commission finds that the provisions of
the EMIR Framework with respect to
default rules and procedures are
generally similar to CFTC regulation
39.16, and prescribe how CCPs should
clearly state their default procedures.
Both regimes require a DCO/CCP to
have detailed procedures to follow in
the event of a default, including
requirements for the orderly transfer
and/or liquidation of customer or
proprietary positions, participation in
auctions, the sequence of the default
waterfall, and public disclosure of the
default procedures. These standards
seek to ensure that CCPs may take
timely action to contain losses and
liquidity pressures and to continue
meeting their obligations.
Accordingly, the Commission finds
that the EMIR Framework with respect
to default rules and procedures
discussed above and identified below in
Table 1(d) are comparable to and as
comprehensive as the default rules and
procedures of CFTC regulation 39.16.
For the avoidance of doubt, the
Commission notes that the foregoing
comparability determination only
applies with regard to the above
mentioned provisions of CFTC
regulation 39.16 (i.e., § 39.16(a),
§ 39.16(c)(1), § 39.16(c)(2)(i)-(v), and
§ 39.16(c)(3)). No comparability finding
is made regarding the other provisions
of § 39.16, namely § 39.16(b), which
requires a DCO to maintain a written
default management plan, and
§ 39.16(d), which requires a DCO to
have certain rules in place regarding the
insolvency of clearing members.
TABLE 1(D)—DEFAULT RULES AND PROCEDURES
Subject area
CFTC regulations
EMIR framework
Default rules & procedures ................................
17 CFR 39.16(a), .............................................
17 CFR 39.16(c)(1), 17 CFR 39.16(c)(2)(i)–
(v), 17 CFR 39.16(c)(3).
EMIR, Art 48, 37(6) and 45; RTS–CCP, Art
58, 59(12) and 61(2); ESMA Q&A CCP
Question 8(f)1.
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VI. DCO/CCP Registration
Section 5b(a) of the CEA and
Commission Regulations 39.1 and 39.3
require a DCO to register with the
Commission in the format and manner
specified by the Commission. In
particular, Regulation 39.3 specifies that
a DCO seeking registration from the
Commission must file a Form DCO and
various supporting exhibits.
In the interest of comity, the
Commission generally will tailor its
registration process both in terms of
administration and substantive review
to reflect the availability of substituted
compliance for EU CCPs. Accordingly,
consistent with Regulation 39.3, EU
CCPs seeking registration must complete
Form DCO. However, with respect to
questions and information requirements
in areas where compliance with the
EMIR Framework is substituted for
compliance with part 39, the EU CCP
may evidence its compliance with the
EMIR Framework in lieu of its
compliance with part 39. DCO/CCPs
that are already dually registered need
not take any further action to take
advantage of the substituted compliance
determinations made under this Notice.
These determinations will be applied
59 Questions and Answers: Implementation of the
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automatically to all current DCO/CCPs
registrants.
Moreover, to streamline the
registration process, an EU CCP
applicant may, instead of submitting the
exhibits required under the CFTC Form
DCO regulation, use existing materials
that it has submitted to its NCA for its
EMIR authorization or other relevant
documents produced by its NCA that
demonstrate compliance with EMIR
provisions for which substituted
compliance is available (e.g.,
supervisory examination reports or
reports from its NCA). The positive
opinion of the CCP supervisory college
should also be submitted to the
Commission by way of supporting
evidence. The Commission will not
require an EU CCP to obtain
certification from its NCA, certifying
that it has complied with the EMIR
Framework.
In addition, for the Form DCO
documents listed below, the
Commission will accept a copy of the
original document filed by the EU CCP
with its NCA with an attestation by that
authority that they are acceptable to that
authority:
• Exhibit A–8: articles of
incorporation or similar corporate
documents;
• Exhibit A–10: outside service
provider agreements;
• Exhibit E–1(4): settlement bank
agreements;
• Exhibit F(a)(2): depository
agreements; and
• Exhibit M(a): information-sharing
agreements.
If these documents are not in English,
and an English translation is available,
the EU CCP applying for registration
should provide the English translation.
If an English translation is not available,
the EU CCP applying for registration
should inform the Commission in
writing but need not provide a
translated version unless requested by
the CFTC.
The Commission will review the
documentation received to determine if
it is complete and comprehensive. In
the case that information evidencing
compliance with the EMIR Framework
is incomplete, the Commission will seek
to obtain further evidence from the
relevant NCA evidencing its assessment
of compliance. If the documentation is
still not sufficient for the Commission to
review compliance with the terms of the
central counterparties and trade repositories (EMIR)
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library/2016–293_qa_xvi_on_emir_
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EMIR Framework, the Commission will
request additional evidence from the
CCP and notify the NCA of the request
made.
The Commission will seek to obtain
any other missing information from the
relevant EU CCP. The Commission also
will provide the relevant NCA with the
opportunity to be consulted with
respect to any questions if so requested
at the outset by that authority.
VII. Limited Application of Certain
CFTC Regulations
As a general matter, the Commission
acknowledges that CCPs registered in
foreign jurisdictions operate under
different regulatory regimes, and that
the differences between these various
regimes may lead to regulatory arbitrage.
The Commission also understands that
the CFTC staff intends to provide
limited no-action relief for DCO/CCPs
from the application of Commission
regulations to discrete aspects of a DCO/
CCP’s non-U.S. clearing activities as set
forth below when this Notice becomes
effective.
(1) CFTC Regulation 39.12(b)(6)’s
requirement that, upon a DCO’s
acceptance of a swap for clearing, the
original swap is extinguished and it is
replaced by an equal and opposite swap
between the DCO and each clearing
member acting as a principal for a house
trade or an agent for a customer trade
will not apply where neither party is a
U.S. clearing member or an FCM
clearing member;
(2) Part 22 of CFTC Regulations and
its ‘‘legally segregated but operationally
commingled’’ (‘‘LSOC’’) account model
for cleared swaps customer accounts
will not apply to clearing members that
are not FCMs;
(3) CFTC Regulation 39.13(g)(8)(i)’s
requirement that initial margin for
customer accounts cleared by an FCM
be calculated and collected on a gross
basis would not apply to non-FCM
clearing member intermediaries;
(4) CFTC Regulation 39.13(g)(8)(ii)’s
requirement that a DCO collect initial
margin at a level that is greater than
100% of the DCO’s initial margin
requirements for the non-hedge
positions of FCM customers will not
apply to non-FCM clearing member
intermediaries;
(5) CFTC Regulation 39.12(a)(2)(iii)’s
prohibition that a DCO not set a
minimum capital requirement of more
than $50 million for any person that
seeks to become a clearing member to
clear swaps will not apply to non-U.S.
clearing members or non-FCM clearing
members;
(6) CFTC Regulation 39.12(b)(7)’s
requirement that DCOs utilize ‘‘straight-
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through-processing’’ of swaps submitted
for clearing will not apply to trades that
are not executed on or subject to the
rules of a DCM or a swap execution
facility and for which neither clearing
member is an FCM, a swap dealer, or a
major swap participant;
(7) Regulation 39.13(h)(5)’s
requirement that DCOs must require
their clearing members to maintain
written risk management policies and
procedures and that DCOs must have
the authority to obtain information and
documents from clearing members
regarding their risk will still apply;
however, DCO/CCPs may implement
different oversight programs for U.S./
FCM clearing members and non-U.S.
clearing members; and
(8) Regulation 39.11(f)’s and
Regulation 39.19(c)(3)(ii)’s implicit
requirements that DCOs submit to the
CFTC quarterly financial resource
reports and an audited year-end
financial statement that are prepared in
accordance with GAAP will not apply;
rather, the DCO/CCPs may submit
financial statements prepared in
accordance with IFRS, with periodic
reconciliation to assist staff in reviewing
the financial statements.
VIII. Supervisory Arrangement
As noted above, with respect to
dually-registered DCO/CCPs, the
Commission retains its examination
authority with respect to DCO/CCPs and
requires that home country regulator(s)
enter into an MOU that addresses how
the regulator(s) will cooperate and share
information with respect to supervision
of the DCO/CCP. Thus, the Commission
has entered into a supervisory MOU
with the home country regulator(s) of a
DCO/CCP.60 For dual registrants in the
future, the Commission similarly
expects that an MOU will establish
procedures for ongoing cooperation,
address direct access to information,
provide for notification upon the
occurrence of specified events,
memorialize understandings related to
on-site visits, and include protections
related to the use and confidentiality of
non-public information shared pursuant
to the MOU.
While certain principles of
supervision are universal, based on its
experience supervising DCO/CCPs, the
Commission recognizes the benefits of
tailoring a joint supervisory regime to
(1) the unique legal and regulatory
framework in which each regulator
operates and (2) the unique financial,
operational, and organizational
characteristics of each DCO/CCP. With
60 The Commission also requires an MOU with
respect to exempt DCOs.
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respect to CFTC regulations for which
there would be substituted compliance,
the Commission generally believes that
there should be joint examinations. By
way of example, Commission staff
already has participated in joint
examinations with the Bank of England,
and the Commission believes that joint
examinations can be an efficient means
for effective, in-depth review of a DCO/
CCP’s regulatory compliance.
However, depending on the
individual circumstances, it may be
appropriate for the home country
regulator(s) to assume greater
responsibility for conducting the
examinations. The Commission expects
that its staff would be flexible in
determining their approach to a given
examination based on the nature and
scope of the examination. Therefore,
with the overall goal of applying
uniform principles in a consistent yet
flexible way, the Commission intends to
address supervisory matters, including
examinations, on a case-by-case basis
for each individual DCO/CCP in close
consultation with the relevant home
country regulator(s).
IX. Conclusion
As noted above, the Commission finds
that each provision of the EMIR
Framework discussed above, is
comparable to and comprehensive as
the Commission requirements identified
above and thus a CCP’s compliance with
the identified provisions of the EMIR
Framework will satisfy compliance with
the corresponding Commission
requirements.
Issued in Washington, DC, on March 16,
2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Appendices to Comparability
Determination for the European Union:
Dually-Registered Derivatives Clearing
Organizations and Central
Counterparties—Commission Voting
Summary, Chairman’s Statement, and
Commissioner’s Statement
Appendix 1—Commission Voting
Summary
On this matter, Chairman Massad and
Commissioners Bowen and Giancarlo voted
in the affirmative. No Commissioner voted in
the negative.
Appendix 2—Statement of Chairman
Timothy G. Massad
Today, the CFTC has taken action to
implement our agreement with the European
Commission regarding requirements for
central clearing counterparties (CCPs). Our
unanimous action today means that
European CCPs registered with the CFTC can
comply with many of our rules by meeting
E:\FR\FM\22MRN1.SGM
22MRN1
15272
Federal Register / Vol. 81, No. 55 / Tuesday, March 22, 2016 / Notices
the corresponding European Market
Infrastructure Regulation (EMIR)
requirements.
The equivalence agreement announced by
European Commissioner Jonathan Hill and
myself is an important step in achieving
cross-border harmonization of derivatives
regulation. It provides a foundation for
cooperation among regulators in the
oversight of the global clearinghouses that are
so important in our financial system today.
It resolves the issues that were standing in
the way of Europe recognizing U.S. CCPs.
And it helps make sure that the U.S. and
European derivatives markets can continue to
be dynamic, with robust competition and
liquidity across borders.
The action we have taken today is an
important component of that agreement. The
notice identifies the rules for which the
CFTC will grant substituted compliance.
These include rules related to CCP financial
resources, risk management, settlement
procedures, and default management. We
have also streamlined the process for
registration, which will further harmonize
our regimes.
Finally, CFTC staff today are also
providing no-action relief from the
application of Commission regulations to
discrete aspects of a clearinghouse’s non-U.S.
clearing activities.
The Commission is working with U.S.
clearinghouses seeking recognition by the
European Securities and Market Authority
(ESMA) to ensure ESMA has all necessary
information to review their applications in a
timely manner. I look forward to ESMA
completing the recognition process in a
manner that ensures the global derivatives
markets can continue to function efficiently
and without disruption.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Appendix 3—Statement of
Commissioner J. Christopher Giancarlo
I support the comparability determinations
issued by the Commodity Futures Trading
Commission (‘‘CFTC’’).
Today’s action furthers the commitment to
a common approach for transatlantic central
clearing counterparties (CCPs) announced on
February 10, 2016 by my colleague, CFTC
Chairman Timothy Massad, and
Commissioner Jonathan Hill of the European
Commission (EC). Under the comparability
determinations, CCPs that are authorized in
the European Union (EU) under the European
Market Infrastructure Regulation (EMIR) and
registered with the CFTC may comply with
certain CFTC requirements for financial
resources, risk management, settlement
procedures, and default rules and procedures
by complying with corresponding
requirements under the EMIR framework.
Today’s notice also provides for a
streamlined approach for EU CCPs that may
wish to register with the CFTC in the future.
As I said when it was announced, the
agreement reached between the EC and the
CFTC avoids unacceptable changes to four
decades of U.S. clearinghouse margin policy
and higher costs of hedging risk for
America’s farmers, ranchers, financial
institutions, energy firms and manufacturers.
Yet, as I have observed, the protracted
process for reaching this compromise was
VerDate Sep<11>2014
17:34 Mar 21, 2016
Jkt 238001
made needlessly complex because both the
EC and the CFTC insisted on a line-by-line
rule analysis contrary to the flexible,
outcomes-based approach advocated by the
OTC Derivatives Regulators Group. While the
end result is a good one, the approach taken
to get here was needlessly circuitous and
uncertain.
The CFTC and its global counterparts must
now recommit themselves to work together to
implement an equivalence and substituted
compliance process, particularly for swaps
execution and the cross-border activities of
swap dealers and major swaps participants,
based on common principles in order to
increase regulatory harmonization and
reduce market balkanization.1 The future of
the global swaps marketplace depends on it.
[FR Doc. 2016–06261 Filed 3–21–16; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF DEFENSE
Office of the Secretary
[Docket ID: DOD–2015–OS–0099]
Manual for Courts-Martial; Proposed
Amendments
Joint Service Committee on
Military Justice (JSC), Department of
Defense.
ACTION: Notice of response to public
comments on proposed amendments to
the Manual for Courts-Martial, United
States (2012 ed.) (MCM).
AGENCY:
The JSC is publishing final
proposed amendments to the MCM. The
proposed changes concern the Rules for
Courts-Martial, the Military Rules of
Evidence, and the punitive articles
applicable in trials by courts-martial.
These proposed changes have not been
coordinated within the Department of
Defense under DoD Directive 5500.1,
‘‘Preparation, Processing and
Coordinating Legislation, Executive
Orders, Proclamations, Views Letters
and Testimony,’’ June 15, 2007, and do
not constitute the official position of the
Department of Defense, the Military
Departments, or any other Government
agency.
FOR FURTHER INFORMATION CONTACT:
Major Harlye Carlton, USMC, JSC
Executive Secretary, at harlye.carlton@
usmc.mil. The JSC public Web site is
located at https://jsc.defense.gov.
SUPPLEMENTARY INFORMATION:
Public Comments: Comments and
materials received from the public are
available under Docket ID Number
DOD–2015–OS–0099, Federal Register
Number 2015–26485, and at the
SUMMARY:
1 See, e.g., IOSCO Task Force on Cross-Border
Regulation, Final Report (Sept. 2015) (advocating
for an outcomes-based approach as opposed to a
line-by-line comparison of rules).
PO 00000
Frm 00053
Fmt 4703
Sfmt 4703
following link: https://www.regulations.
gov/#!docketDetail;D=DOD-2015-OS0099.
Background
On October 19, 2015 (80 FR 63204–
63212), the JSC published a Notice of
Proposed Amendments concerning the
rules of procedure and evidence and the
punitive articles applicable in trials by
courts-martial and a Notice of Public
Meeting to receive comments on these
proposals. The public meeting was held
on November 5, 2015. No comments
were received at the public meeting.
The 60-day public comment period for
the notice closed on December 18, 2015.
One public comment was received.
The JSC considered the public
comments and after conducting
deliberations, made no modifications to
the proposed amendments to the MCM
as a result of the public comments. The
JSC conducted additional internal
deliberations and made some
modifications to the proposed
amendments to the MCM accordingly.
Comments that were submitted that are
outside the scope of the originallyproposed changes will be considered as
part of the JSC 2016 annual review of
the MCM.
Proposed Amendments After Period for
Public Comment
The proposed recommended
amendments to the MCM that have been
forwarded through the DoD for action by
Executive Order of the President of the
United States are as follows:
Section 1. Part II of the Manual for
Courts-Martial, United States, is
amended as follows:
(a) The title of R.C.M. 104(b)(1) is
amended to read as follows:
‘‘(1) Evaluation of member, defense
counsel, or special victims’ counsel.’’
(b) R.C.M. 104(b)(1)(B) is amended to
read as follows:
‘‘(B) Give a less favorable rating or
evaluation of any defense counsel or
special victims’ counsel because of the
zeal with which such counsel
represented any client. As used in this
rule, ‘‘special victims’ counsel’’ are
judge advocates who, in accordance
with 10 U.S.C. 1044e, are designated as
Special Victims’ Counsel by the Judge
Advocate General of the armed force in
which the judge advocates are members,
and within the Marine Corps, by the
Staff Judge Advocate to the
Commandant of the Marine Corps.’’
(c) R.C.M. 305(h)(2)(B)(iii)(a) is
amended to read as follows:
‘‘(a) The prisoner will not appear at
trial, pretrial hearing, preliminary
hearing, or investigation, or’’
E:\FR\FM\22MRN1.SGM
22MRN1
]]>Agencies
[Federal Register Volume 81, Number 55 (Tuesday, March 22, 2016)]
[Notices]
[Pages 15260-15272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06261]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central
Counterparties
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Comparability Determination for Certain Requirements
Under the European Market Infrastructure Regulation.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or ``CFTC'') has determined that certain laws and regulations
applicable in the European Union (``EU'') provide a sufficient basis
for an affirmative finding of comparability with respect to certain
regulatory obligations applicable to derivatives clearing organizations
(``DCOs'') that are registered with the Commission and are authorized
to operate as central counterparties (``CCPs'') in the EU. The
Commission's determination provides for substituted compliance with
respect to requirements for financial resources, risk management,
settlement procedures, and default rules and procedures.
DATES: This determination will become effective upon publication in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Jeffrey M. Bandman, Acting Director,
202-418-5044, jbandman@cftc.gov; Robert B. Wasserman, Chief Counsel,
202-418-5092, rwasserman@cftc.gov; Tracey Wingate, Special Counsel,
202-418-5319, twingate@cftc.gov, in each case at the Division of
Clearing and Risk, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC
[[Page 15261]]
20581; or Michael H. Margolis, Special Counsel, 312-596-0576,
mmargolis@cftc.gov, Division of Clearing and Risk, Commodity Futures
Trading Commission, 525 W. Monroe Street, Suite 1100, Chicago, IL
60661.
SUPPLEMENTARY INFORMATION:
I. Introduction
On February 10, 2016 Commission Chairman Timothy Massad issued a
joint statement with Commissioner Jonathan Hill of the European
Commission setting forth a common approach regarding the regulation of
CCPs. Under the common approach, the European Commission (``EC'') will
propose a third-country equivalence decision (``Equivalence Decision'')
regarding the Commission's regulatory regime for DCOs, which is a
prerequisite for the European Securities and Markets Authority
(``ESMA'') to recognize U.S. DCOs as equivalent third-country CCPs.
Once recognized by ESMA, U.S. DCOs may continue to operate and provide
clearing services in the EU.
This Notice is being issued in connection with the resolution of
equivalence for U.S. DCOs. For an Equivalence Decision under Article 25
of the European Market Infrastructure Regulation (``EMIR''), one of the
conditions requires that the legal and supervisory regime of the United
States must include an ``effective equivalent system'' for the
recognition of CCPs authorized in the EU under EMIR.\1\ As described
below, U.S. law and CFTC regulations require that foreign-based CCPs
register with the CFTC in certain circumstances. If registered, they
must comply with the relevant U.S. requirements, including the
Commission regulations applicable to registered DCOs.
---------------------------------------------------------------------------
\1\ See Regulation (EU) No 648/2012 of the European Parliament
and the Council on OTC derivatives, central counterparties and trade
repositories of 4 July 2012 (`EMIR'), Art. 25(6).
---------------------------------------------------------------------------
Under this Notice, EU-based CCPs that register with or are
currently registered with the Commission as DCOs and that are
authorized to operate in the EU may comply with certain Commission
requirements for financial resources, risk management, settlement
procedures, and default rules and procedures (as set forth in this
Notice) by complying with the terms of corresponding requirements under
the EMIR Framework, as defined below.
II. Statutory and Regulatory Framework for Registration of non-U.S.
CCPs
The Commodity Exchange Act (``CEA'') does not impose geographic
limitations on the registration of DCOs. Nor does it mandate that
clearing of futures traded on U.S. exchanges must take place in the
United States.\2\ To the contrary, it permits futures traded on
exchanges in the United States to be cleared outside the United States.
However, the CEA and CFTC regulations require that foreign-based CCPs
that wish to clear such futures be registered with the Commission and
comply with CFTC regulations.\3\ In addition, consistent with Section
2(i) of the CEA, foreign-based CCPs that clear swaps with a sufficient
nexus to U.S. commerce must register with the Commission.\4\
---------------------------------------------------------------------------
\2\ 7 U.S.C. 7a-1(a).
\3\ See generally 7 U.S.C. 7(d)(9)(iii) and (11); 17 CFR 38.601.
\4\ 7 U.S.C. 7a-1(a); 17 CFR 39.3; see also 7 U.S.C. 2(i)
(providing that the CEA's swap-related provisions shall not apply to
activities outside the United States unless those activities have a
direct and significant connection with activities in, or effect on,
commerce of the United States or contravene such rules or
regulations as the Commission may prescribe or promulgate as are
necessary or appropriate to prevent the evasion of any provision of
the CEA).
---------------------------------------------------------------------------
Thus, under this regulatory framework, a number of foreign-based
CCPs have been registered with the Commission for some time.
LCH.Clearnet Ltd., which is based in London, for example, has been
registered with the Commission since 2001, and thus has been subject to
dual supervision by UK authorities and the Commission since long before
the EU adopted its current regulatory scheme--EMIR.\5\ This dual
registration system has been a foundation on which the cleared swaps
market grew to be a global market. In addition to LCH.Clearnet Ltd.,
there are currently five other foreign-based DCOs that are registered
both with the Commission and their home country regulators: Singapore
Exchange Derivatives Clearing Limited (home country regulator is the
Monetary Authority of Singapore), LCH.Clearnet SA (home country
regulators are the Autorit[eacute] de contr[ocirc]le prudentiel et
r[eacute]solution, the Autorit[eacute] des march[eacute]s financiers,
and the Banque de France), ICE Clear Europe Ltd. (home country
regulator is Bank of England), Natural Gas Exchange (home country
regulator is the Alberta Securities Commission), and Eurex Clearing AG
(home country regulators are Bundesanstalt f[uuml]r
Finanzdienstleistungsaufsicht (BaFin) and Deutsche Bundesbank). Two
additional foreign-based CCPs have applications pending before the
Commission for registration as DCOs (CME Clearing Europe Ltd. and Japan
Securities Clearing Corporation). Additionally, the Commission has
provided exemptions from registration for foreign-based CCPs that clear
proprietary swaps positions for their U.S. members and affiliates but
not for U.S. customers generally. (These foreign-based DCOs also do not
clear futures traded on U.S. designated contract markets (``DCMs'').)
These exemptions have been issued pursuant to Section 5b(h) of the CEA,
which permits the Commission to exempt a 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.\6\
---------------------------------------------------------------------------
\5\ Regulation (EU) No 648/2012 on OTC derivatives, central
counterparties and trade repositories.
\6\ 7 U.S.C. 7a-1(h).
---------------------------------------------------------------------------
For purposes of the granting of exemptions to foreign-based CCPs
that are not clearing futures traded on U.S. DCMs nor clearing swaps
for U.S. customers, the Commission has determined that a supervisory
and regulatory framework that is consistent with the Principles for
Financial Market Infrastructures (``PFMIs'') can be considered to be
comparable to and as comprehensive as the supervisory and regulatory
framework established by the CEA and part 39 of the Commission's
regulations.\7\ Pursuant to this authority, the Commission has granted
exemptions to clearing organizations in Australia, Japan, South Korea,
and Hong Kong, provided that each exempt CCP not offer customer
clearing services for U.S. persons and limit direct clearing by U.S.
persons and futures commission merchants (``FCMs'') to the following
circumstances: (1) ``A U.S. person that is a clearing member of [the
exempt CCP] may clear swaps for itself and those persons identified in
the Commission's definition of `proprietary account' set forth in
Regulation 1.3(y)''; (2) ``A non-U.S. person that is a clearing member
of [the exempt CCP] may clear swaps for any affiliated U.S. person
identified in the definition of `proprietary account' set forth in
Regulation 1.3(y)''; and (3) ``An entity that is registered with the
Commission
[[Page 15262]]
as an FCM may be a clearing member of [the exempt CCP], or otherwise
maintain an account with an affiliated broker that is a clearing
member, for the purpose of clearing swaps for itself and those persons
identified in the definition of `proprietary account' set forth in
Regulation 1.3(y).'' \8\
---------------------------------------------------------------------------
\7\ The PFMIs were jointly issued by the Committee on Payment
and Settlement Systems (now, the Committee on Payments and Market
Infrastructures (``CPMI'')) of the Bank for International
Settlements and the Technical Committee of the International
Organization of Securities Commissions (``IOSCO'') in April 2012.
The PFMIs are available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
\8\ See In re Petition of ASX Clear (Futures) Pty Limited for
Exemption from Registration as a Derivatives Clearing Organization
(Aug. 18, 2015); In re Petition of Japan Securities Clearing Corp.
for Exemption from Registration as a Derivatives Clearing
Organization (Oct. 26, 2015); In re Petition of Korea Exchange, Inc.
for Exemption from Registration as a Derivatives Clearing
Organization (Oct. 26, 2015); In re Petition of OTC Clearing Hong
Kong Ltd. for Exemption from Registration as a Derivatives Clearing
Organization (Dec. 21, 2015).
---------------------------------------------------------------------------
To clear U.S. customer transactions, the Commission requires that a
CCP register with the Commission as a DCO and such a DCO becomes
subject to Section 4d of the CEA, which establishes a customer
protection regime for futures, options, and swaps customers.\9\ For
example, with respect to swaps customers, Section 4d(f)(1) states that
it shall be unlawful for any person to accept money, securities, or
property (funds) from a swaps customer to margin a swap cleared through
a DCO unless the person is registered as an FCM.\10\ Additionally,
Section 4d(f)(2) requires segregation of cleared swaps customer funds
from the funds of the FCM, and Section 4d(f)(6) extends these
segregation requirements to DCOs.\11\ These provisions of the CEA
interlock with the commodity broker provisions of the Bankruptcy Code,
Subchapter IV of Chapter 7.\12\ No EU-based CCP has sought an exemption
from registration. This is because EU-based CCPs offer, or are seeking
to offer, clearing for U.S. customers and thus have obtained or are
seeking to obtain, registration as DCOs. Nevertheless, EU-based CCPs
that do not clear swaps for U.S. customers may petition the Commission
for exempt DCO status.
---------------------------------------------------------------------------
\9\ 7 U.S.C. 6d(a), (b), and (f).
\10\ Section 4d(f)(l) of the CEA, 7 U.S.C 6d(f)(l), states, in
relevant part, that it shall be unlawful for any person to accept
any money, securities, or property (or to extend any credit in lieu
of money, securities, or property) from, for, or on behalf of a
swaps customer to margin, guarantee, or secure a swap cleared by or
through a derivatives clearing organization (including money,
securities, or property accruing to the customer as the result of
such a swap), unless the person shall have registered under the CEA
with the Commission as a futures commission merchant, and the
registration shall not have expired nor been suspended nor revoked.
\11\ 7 U.S.C 6d(f)(2) and (6).
\12\ See 11 U.S.C. 761-767; see also Section 101(6) of the
Bankruptcy Code, 11 U.S.C. 101(6).
---------------------------------------------------------------------------
Additionally, in all instances in which the Commission has granted
registration to a foreign-based CCP, it also has entered into a
memorandum of understanding or similar arrangement (``MOU'') with the
CCP's home country regulator(s). Such MOUs establish a framework
pursuant to which the Commission and the CCP's home country
regulator(s) intend to cooperate with each other in fulfilling their
respective regulatory responsibilities with respect to covered cross-
border entities, including CCPs licensed by the home country
regulator(s) and registered with the Commission. Specifically, such an
MOU sets forth procedures for, among other things, information sharing
between the CFTC and the home country regulator(s), notification of
certain material information, conduct of on-site visits, and the use
and treatment of non-public information.
III. Regulation of CCPs in the EU
EU-based CCPs are subject to the regulations laid down in EMIR and
the Regulatory Technical Standards (``RTS'') (collectively, the ``EMIR
Framework'').\13\ EMIR and the RTS establish uniform legal requirements
for EU CCPs that, as EU-level legislation, have an immediate, binding,
and direct effect in all EU member states without the need for
additional action by national authorities.\14\ Moreover, where the
European Parliament and the European Council have passed EU-level
legislation, EU member states cannot legislate laws that duplicate or
conflict with EMIR.\15\
---------------------------------------------------------------------------
\13\ For the purposes of this Notice the Commission only
considered those EMIR Framework provisions published as of the date
of this Notice. The relevant RTS include: Commission Delegated
Regulation No. 152/2013 with regard to regulatory technical
standards on capital requirements for central counterparties (``RTS-
CR''); and Commission Delegated Regulation No. 153/2013 with regard
to regulatory technical standards on requirements for central
counterparties (``RTS-CCP'').
\14\ See EMIR (stating that ``[t]his Regulation shall be binding
in its entirety and directly applicable in all Member States.'').
\15\ EMIR Article 13(1).
---------------------------------------------------------------------------
The European Parliament and the European Council passed EMIR on
July 4, 2012, which entered into force on August 16, 2012. The relevant
technical standards for CCPs, including the RTS for capital
requirements (``RTS-CR'') and the RTS for central counterparties
(``RTS-CCP''), generally entered into force on March 15, 2013.
Pursuant to EMIR, each EU member state is responsible for
implementing the EMIR Framework by designating a national competent
authority(s) (``NCA'') to authorize and supervise the day-to-day
operations of CCPs established in its territory. The NCAs are required
to regularly review how the CCP complies with EMIR by examining the
CCP's rules, arrangements, procedures, and mechanisms, and to evaluate
the risks to which such CCPs are, or might be, exposed. At a minimum,
these reviews and examinations must occur at least annually. As part of
such reviews and evaluations, the CCP is subject to on-site
inspections.\16\
---------------------------------------------------------------------------
\16\ See EMIR Articles 21 and 22.
---------------------------------------------------------------------------
Additionally, for each authorized CCP, a college of supervisors is
established that comprises members of the NCA, ESMA, other EU national
authorities that may supervise entities on which the operations of that
CCP might have an impact (i.e., selected clearing members, trading
venues, interoperable CCPs and central securities depositories), as
well as members of the European System of Central Banks (ESCB), as
relevant.\17\ The NCAs regularly, and at least annually, inform the
college of the results of the review and evaluation of the CCP,
including any remedial action taken or penalty imposed.\18\ The CCP
college is responsible for reaching an opinion on (1) the authorization
of a CCP; (2) extensions of authorization; and (3) any changes to a
CCP's risk model.
---------------------------------------------------------------------------
\17\ Id. at Article 18.
\18\ Id. at Articles 12 and 21.
---------------------------------------------------------------------------
While NCAs remain in charge of supervising CCPs, ESMA, as an
independent European supervisory authority, validates changes to the
risk models of authorized CCPs and is responsible for harmonizing and
coordinating the implementation of EMIR across the EU member states.
ESMA is managed by a Board of Supervisors, which is composed of the
heads of 28 national authorities (where there is more than one national
authority in a Member State those authorities agree which of their
heads will represent them), with observers from Norway, Iceland, and
Liechtenstein. The Board makes decisions on the compliance by NCAs with
community legislation, interpretation of community legislation,
decisions in crisis situations, the approval of draft technical
standards, guidelines, peer reviews, and any reports that are
developed.\19\
---------------------------------------------------------------------------
\19\ See ESMA: Board of Supervisors and NCAs, https://www.esma.europa.eu/about-esma/governance/board-supervisors-and-ncas.
---------------------------------------------------------------------------
IV. Comparable and Comprehensive Standard
Consistent with CEA Section 2(i) and principles of international
comity, in the case of foreign-based DCOs, the Commission will make a
comparability determination on a requirement-by-requirement basis,
rather than on the
[[Page 15263]]
basis of the foreign regime as a whole.\20\ In making its comparability
determinations, the Commission may include conditions that address,
among other things, timing and other issues related to coordinating the
implementation of reform efforts across jurisdictions.
---------------------------------------------------------------------------
\20\ The Commission has taken analogous action with respect to
foreign-based swap dealers and major swap participants. Cf 78 FR
78864 (Dec. 27, 2013) (Australia); 78 FR 78852 (Dec. 27, 2013) (Hong
Kong); 78 FR 78910 (Dec. 27, 2013) (Japan--Entity Level
Requirements); 78 FR 78890 (Dec. 27, 2013) (Japan--Transaction Level
Requirements);78 FR 78899 (Dec. 27, 2013) (Switzerland); 78 FR 78839
(Dec. 27, 2013) (Canada); 78 FR 78923 (Dec. 27, 2013) (EU--Entity
Level Requirements); 78 FR 78878 (Dec. 27, 2013) (EU--Transaction
Level Requirements); see also 78 FR 45292 (July 26, 2013).
---------------------------------------------------------------------------
In evaluating whether a particular category of foreign regulatory
requirement(s) is comparable and comprehensive to the corollary
requirement(s) under the CEA and Commission regulations, the Commission
will take into consideration all relevant factors, including, but not
limited to: The comprehensiveness of the requirement(s); the scope and
objectives of the relevant requirement(s); the comprehensiveness of the
foreign regulator's supervisory compliance program; and the foreign
jurisdiction's authority to support and enforce its oversight of the
registrant.
In making this comparability determination, the Commission is
relying on the provisions of the EMIR Framework. The Commission assumes
that the provisions of the EMIR Framework discussed herein are in full
force and effect and that the description of the EMIR Framework that is
contained within this Notice is accurate and complete.\21\ The
Commission also assumes that the provisions of the EMIR Framework
discussed herein have been implemented in accordance with their terms
and there are no Member State or EU laws, regulations, or actions of
the NCAs or any other authorities that are contrary to the provisions
of the EMIR Framework. Further, the Commission's determination is based
on the EMIR Framework as it exists at this time; any changes to the
EMIR Framework (including, but not limited to, changes in the relevant
supervisory or regulatory regime) could, depending on the nature of the
change, invalidate the Commission's comparability determination.
---------------------------------------------------------------------------
\21\ The Commission additionally provided the EC and ESMA the
opportunity to consult regarding the relevant provisions of the EMIR
Framework described in this Notice; however, in reaching its
conclusions the Commission ultimately relied upon the English-
language published text of the provisions of the EMIR Framework.
---------------------------------------------------------------------------
V. Comparability Determination
The following section presents the requirements imposed by specific
sections of the CEA and Commission regulations applicable to DCOs that
are the subject of this comparability determination. Following the
discussion of each Commission requirement, the Commission provides the
corresponding provision of the EMIR Framework.
The Commission's determinations in this regard are intended to
inform the public of the Commission's views regarding whether the
specific provisions of the EMIR Framework may be comparable to, and as
comprehensive as, specific requirements in the CEA and CFTC regulations
and, therefore, may form the basis for substituted compliance. The
descriptions provided herein of CEA and CFTC requirements, as well as
the provisions of the EMIR Framework, are summaries of the actual
provisions and are qualified by reference to them. Statements of
regulatory objectives are general in nature and provided only for the
purpose of this Notice. Likewise, the Commission's summary of what is
comparable as between specific CEA and CFTC requirements on the one
hand and corresponding provisions of the EMIR Framework on the other is
only a summary. In particular, there may be aspects that are not cited,
including particular features that may not be comparable, but that do
not affect the overall determination with respect to that provision or
set of provisions.
A. Financial Resources (Regulation 39.11)
CEA Section 7a-1(c)(2)(B) (``Core Principle B'') establishes
general requirements for DCOs to have adequate financial resources. To
implement Core Principle B the Commission adopted regulation 39.11,
which requires a DCO to maintain financial resources sufficient to
cover its exposures with a high degree of confidence and to enable it
to perform its functions in compliance with the core principles set out
in Section 5b of the CEA.
Commission Requirement: Regulation 39.11 sets forth requirements by
which a DCO must identify and adequately manage its general business
risks and hold sufficient liquid resources to cover potential losses
that are not related to clearing members' defaults so that the DCO can
continue to provide services as a going concern.
Regulation 39.11 provides that a DCO's financial resources will be
considered sufficient if their value, at a minimum, exceeds the total
amount that would enable the DCO to meet its financial obligations to
its clearing members notwithstanding a default by the clearing member
creating the largest financial exposure for the DCO in extreme but
plausible market conditions (``Cover 1'').\22\ A DCO may use the
following types of financial resources to satisfy this requirement,
including: the DCO's own capital; guaranty fund deposits; default
insurance; potential assessments for additional guaranty fund
contributions, if permitted by the DCO's rules; and any other financial
resource deemed acceptable.\23\
---------------------------------------------------------------------------
\22\ 17 CFR 39.11(a)(1).
\23\ 17 CFR 39.11(b)(1).
---------------------------------------------------------------------------
On a monthly basis, a DCO must perform stress testing that will
allow it to make a reasonable calculation of the financial resources
needed to meet its Cover 1 requirement. A DCO has reasonable discretion
to determine the methodology it uses to compute its Cover 1
requirement; however, the Commission may review the methodology and
require changes as appropriate.\24\ A DCO may allocate a financial
resource to satisfy its Cover 1 credit risk or its operating costs, but
it may not allocate a financial resource to satisfy both its Cover 1
credit risk and its operating costs.\25\
---------------------------------------------------------------------------
\24\ 17 CFR 39.11(c)(1).
\25\ 17 CFR 39.11(b)(3).
---------------------------------------------------------------------------
If a DCO's rules provide for assessments for additional guaranty
fund contributions, then the DCO must: Have rules requiring that its
clearing members have the ability to meet an assessment within the time
frame of a normal end-of-day variation settlement cycle; monitor the
financial and operational capacity of its clearing members to meet
potential assessment(s); apply a 30% haircut to the value of potential
assessments; and only count the value of assessments after the haircut,
to meet up to 20% of those obligations.\26\
---------------------------------------------------------------------------
\26\ 17 CFR 39.11(d)(2).
---------------------------------------------------------------------------
In addition, CFTC regulation 39.11 provides that a DCO must
effectively measure, monitor, and manage its liquidity risks,
maintaining sufficient liquid resources such that it can, at a minimum,
fulfill its cash obligations when due.\27\ A DCO also must hold its
assets in a manner that minimizes the risk of loss or delay in
accessing them.\28\ The financial resources the DCO allocates to meet
this liquidity requirement must be sufficiently liquid to enable the
DCO to fulfill its obligations as a CCP during a one-day settlement
cycle.\29\ A DCO must
[[Page 15264]]
maintain cash, U.S. Treasury obligations, or high quality, liquid,
general obligations of a sovereign nation, in an amount equal or
greater than an amount calculated as follows:
---------------------------------------------------------------------------
\27\ 17 CFR 39.11(e)(1)(i).
\28\ Id.
\29\ 17 CFR 39.11(e)(1)(ii).
---------------------------------------------------------------------------
Calculate the average daily settlement pay for each
clearing member over the last fiscal quarter;
Calculate the sum of those average daily settlement pays;
and
Using that sum, calculate the average of its clearing
members' average pays.\30\
---------------------------------------------------------------------------
\30\ 17 CFR 39.11(e)(1)(ii).
---------------------------------------------------------------------------
A DCO may take into account a committed line of credit or similar
facility for the purposes of meeting the remainder of this liquidity
requirement.
CFTC regulation 39.11 further provides that the assets a DCO holds
in a guaranty fund must have minimal credit, market, and liquidity
risks and must be readily accessible on a same-day basis.\31\
Additionally, letters of credit are not permissible assets for a
guaranty fund.\32\
---------------------------------------------------------------------------
\31\ 17 CFR 39.11(e)(3)(i).
\32\ 17 CFR 39.11(e)(3)(iii).
---------------------------------------------------------------------------
Finally, CFTC regulation 39.11 provides that a DCO's cash balances
must be invested or placed in safekeeping in a manner that bears little
or no principal risk.\33\
---------------------------------------------------------------------------
\33\ 17 CFR 39.11(e)(3)(ii).
---------------------------------------------------------------------------
Regulatory Objective: Core Principle B and the Commission's
implementing regulations are designed to establish uniform standards
that further the goals of avoiding market disruptions and financial
losses to market participants and the general public, and avoiding
systemic problems that could arise from a DCO's failure to maintain
adequate resources. The regulations promote financial strength and
stability, thereby fostering efficiency and a greater ability to
compete in the broader financial market.
As highlighted by the events of 2007-2008 in global financial
markets, maintaining sufficient financial resources is a critical
aspect of any financial entity's risk management system, and ultimately
contributes to the goal of stability in the broader financial markets.
By setting specific standards with respect to how DCOs must access and
monitor the adequacy of their financial resources, Core Principle B and
the Commission's implementing regulations contribute to a DCO's
maintenance of sound risk management practices and further the goal of
minimizing systemic risk.
Comparable EU Law and Regulations: The following provisions of the
EMIR Framework address financial resources.
EMIR, Art. 43: At all times, a CCP shall maintain sufficient
prefunded available financial resources to enable the CCP to withstand
the default of at least the two clearing members to which it has the
largest exposure under extreme but plausible market conditions. Such
prefunded financial resources shall include dedicated resources of the
CCP, shall be freely available to the CCP, and shall not be used to
meet the CCP's capital requirements.
RTS-CCP, Art. 51(2) and 53(1): On a regular basis, a CCP shall
conduct stress tests designed to ensure that its combination of margin,
default fund contributions, and other financial resources are
sufficient to cover the default of at least the two clearing members to
which the CCP has the largest exposures under extreme but plausible
market conditions. As part of its stress testing, the CCP also shall
examine potential losses resulting from the default of entities in the
same corporate group as the two clearing members to which it has the
largest exposure under extreme but plausible market conditions.
RTS-CCP, Art. 30(2) and 59(5): A CCP shall develop a framework for
defining the types of extreme but plausible market conditions based on
a range of (1) historical scenarios that could expose it to the
greatest risk; and (2) potential future scenarios founded on consistent
assumptions regarding market volatility and price correlation across
markets and financial instruments, drawing on both quantitative and
qualitative assessments of potential market conditions. If a CCP
decides that recurrence of a historical instance of large price
movements is not plausible, the CCP shall justify to the competent
authority its omission from the framework. A CCP shall analyze and
monitor its financial resources coverage in the event of defaults by
conducting at least daily stress testing using standard and
predetermined parameters and assumptions.
EMIR, Art. 44 and 47(3)-(5): At all times, a CCP shall have access
to adequate liquidity to perform its services and activities and, on a
daily basis, shall measure its potential liquidity needs. Financial
instruments posted as margin or as default fund contributions shall be
deposited in a manner that ensures the full protection of those
financial instruments. Cash deposits of a CCP, other than with a
central bank, shall be executed through highly secure arrangements with
authorized financial institutions. Where a CCP deposits assets with a
third party, it shall ensure that the assets are identifiable
separately by means of differently titled accounts.
RTS-CCP, Chapter VIII (Art. 32-34): A CCP shall establish a robust
liquidity risk management framework, which shall include, among other
things, effective operational and analytical tools to identify,
measure, and monitor its settlement and funding flows on an ongoing and
timely basis and assess its potential future liquidity needs under a
wide range of potential stress scenarios. A CCP shall maintain, in each
relevant currency, liquid resources commensurate with its liquidity
requirements. These liquid resources shall be limited to the following:
cash deposited at a central bank of issue; cash deposited at authorized
credit institutions; committed lines of credit; committed repurchase
agreements; and/or highly marketable financial instruments that are
readily available and convertible into cash on a same-day basis using
prearranged and highly reliable funding arrangements.
EMIR, Art. 46 and 47: A CCP shall accept highly liquid collateral
with minimal credit and market risk to cover its initial and ongoing
exposure to its clearing members and it shall invest its financial
resources only in cash or highly liquid financial instruments with
minimal market and credit risk.
EMIR, Art. 16 and 47(2): A CCP's capital, including retained
earnings and reserves, shall be proportionate to the risk stemming from
the activities of the CCP. Capital not invested in cash or highly
liquid financial instruments with minimal credit risk, however, shall
not count for purposes of calculating a CCP's regulatory capital.
RTS-CR, Art. 2(2): A CCP shall calculate and retain the amount of
capital it requires to wind down or restructure. This estimated time
span shall be sufficient to ensure an orderly winding down or
restructuring of its activities, reorganizing its operations,
liquidating its clearing portfolio, or transferring its clearing
activities to another CCP, including in stressed market conditions. For
the purposes of this RTS, the prescribed time span for purposes of
determining sufficient capital to wind down or restructure a CCP's
activities is subject to a minimum of six months.
RTS-CCP, Art. 43-46 and Annex II: A debt instrument can be
considered highly liquid, bearing minimal credit and market risk if it
is issued by or explicitly guaranteed by a government, central bank,
multilateral development bank, or the European Financial Stability
Facility or the European Stability Mechanism; the CCP can demonstrate
that the debt instrument has low credit and market risk based upon an
internal assessment; the
[[Page 15265]]
average time-to-maturity of the CCP's portfolio does not exceed two
years; the debt instrument is denominated in a currency the risks of
which the CCP can demonstrate it is able to manage or in a currency in
which the CCP clears transactions; the debt instrument is freely
transferrable and without any regulatory constraint or third party
claims that impair liquidation; the debt instrument has an active
outright sale or repurchase market with a diverse group of buyers and
sellers, including during stress conditions; and reliable price data on
the debt instrument is published on a regular basis.
Commission Determination: The Commission finds that the provisions
of the EMIR Framework with respect to financial resources are generally
similar to the applicable provisions of CFTC Regulation 39.11, and set
specific and uniform standards with respect to how CCPs should access
and monitor the adequacy of their financial resources. These standards
seek to ensure that CCPs can meet their financial obligations to market
participants, thus contributing to the financial integrity of the
derivatives market as a whole. Both regimes require prefunding of
financial resources sufficient to at least cover a default caused by a
clearing member creating the largest financial exposure for the EU-
based CCP that is dually registered with the CFTC as a DCO (``DCO/
CCP'') in extreme but plausible market conditions. Both regimes also
require that a DCO/CCP's financial resources include dedicated
resources (e.g., prefunded mutualized resources) and require frequent
and regular stress testing of financial resources. Likewise, both
regimes require that assets in the default fund have minimal credit,
market, and liquidity risks, and be readily accessible on a same-day
basis. Additionally, both regimes prohibit a DCO/CCP from allocating
the same financial resources to different categories of financial
exposure and both regimes require that cash balances must be either
invested or appropriately safeguarded in a manner which bears little to
no principal risk.
Accordingly, the Commission finds that the provisions of the EMIR
Framework with respect to financial resources discussed above and
identified below in Table 1(a) are comparable to and as comprehensive
as the financial resource requirements of CFTC regulation 39.11, with
the exception of 39.11(f), which requires DCOs to submit to the
Commission quarterly financial resource reports that include a
quarterly financial statement. The Commission recognizes that European
CCPs would not have financial statements prepared in accordance with
U.S. Generally Accepted Accounting Principles (``GAAP'') absent
Commission registration. Thus, the Commission will permit CCPs to
submit financial statements prepared in accordance with International
Financial Reporting Standards (``IFRS''), with periodic reconciliation
to assist staff in reviewing the financial statements.
Table 1(a)--Financial Resources
------------------------------------------------------------------------
Subject area CFTC regulations EMIR framework
------------------------------------------------------------------------
Default financial resources 17 CFR 39.11(a)(1), EMIR, Art 43; RTS-
(Credit risk: Cover 1). 17 CFR 39.11(b)(1), CCP, Art 53(1)
17 CFR 39.11(d)(2).
Monthly stress-testing of 17 CFR 39.11(c)(1).. RTS-CCP, Art. 51(2)
default financial resources. and 53(1); RTS-CCP,
Art 30(2) and 59(5)
Liquidity of default 17 CFR 39.11(e)(1).. EMIR, Art 44 and
financial resources. 47(3)-(5); RTS-CCP,
Chapter VIII (Art
32-34)
Default fund collateral..... 17 CFR EMIR, Art 46 and 47
39.11(e)(3)(i), 17
CFR
39.11(e)(3)(iii).
General business risks, 17 CFR 39.11(b)(3).. EMIR Art 16 and
(Allocation of financial 47(2); RTS-Capital
resources). Requirements for
CCP, Art 2(2)
Cash management............. 17 CFR EMIR, Art 47; RTS-
39.11(e)(3)(ii). CCP, Art 43-46 and
Annex II
------------------------------------------------------------------------
B. Risk Management (Regulation 39.13)
CEA Section 7a-1(c)(2)(D) (``Core Principle D'') establishes
general requirements for DCOs to have the ability to manage the risks
associated with discharging the responsibilities of the DCO through the
appropriate tools and procedures. To implement Core Principle D, the
Commission adopted regulation 39.13, which requires a DCO to maintain
appropriate tools and procedures to manage the risks associated with
discharging the responsibilities of a DCO in compliance with the core
principles set out in Section 5b of the CEA.
Commission Requirement: CFTC regulation 39.13 generally requires a
DCO to measure its credit exposure to each clearing member not less
than once during each business day and to monitor such exposure
periodically during the business day. CFTC regulation 39.13 also
requires a DCO to limit its exposure to potential losses from defaults
by clearing members, through margin requirements and other risk control
mechanisms, to ensure that its operations would not be disrupted and
that non-defaulting clearing members would not be exposed to losses
that non-defaulting clearing members cannot anticipate or control.
Finally, CFTC regulation 39.13 also requires that a DCO collect margin
from each clearing member sufficient to cover potential exposures in
normal market conditions and that each model and parameter used in
setting such margin requirements be risk-based and reviewed on a
regular basis.
CFTC regulation 39.13 requires a DCO to establish, maintain, and
regularly update a written risk management framework (approved by its
board of directors) that, at a minimum, clearly identifies and
documents the range of risks to which the DCO is exposed, addresses
monitoring and managing those risks, and provides a mechanism for
internal audit.\34\
---------------------------------------------------------------------------
\34\ 17 CFR 39.13(b).
---------------------------------------------------------------------------
CFTC regulation 39.13 also requires a DCO to appoint a chief risk
officer (``CRO''), who must be responsible for implementing the DCO's
written risk management framework and for making appropriate
recommendations to the DCO's risk management committee or board of
directors.\35\ Given the importance of the risk management function and
the comprehensive nature of the responsibilities of a DCO's chief
compliance officer (``CCO''), the Commission previously has stated that
it expects that a DCO's CRO and CCO would be two different
individuals.\36\
---------------------------------------------------------------------------
\35\ 17 CFR 39.13(c).
\36\ 76 FR 69363.
---------------------------------------------------------------------------
Pursuant to CFTC regulation 39.13, through margin requirements and
other risk control mechanisms, a DCO must
[[Page 15266]]
limit its exposure to potential losses from defaults by its clearing
members to ensure that its operations would not be disrupted and non-
defaulting clearing members would not be exposed to losses that they
cannot anticipate or control.\37\
---------------------------------------------------------------------------
\37\ 17 CFR 39.13(f).
---------------------------------------------------------------------------
CFTC regulation 39.13 also provides that a DCO must establish
initial margin requirements that are commensurate with the risk of each
product and portfolio, including any unusual characteristics of, or
risks associated with, particular products or portfolios, including but
not limited to jump-to-default risk or other similar risk.\38\ Each
model and parameter used in setting initial margin requirements must be
risk-based and reviewed on a regular basis.\39\ On a daily basis, a DCO
must determine the adequacy of its initial margin requirements.\40\
---------------------------------------------------------------------------
\38\ 17 CFR 39.13(g)(2)(i).
\39\ 17 CFR 39.13(g)(1).
\40\ 17 CFR 39.13(g)(6).
---------------------------------------------------------------------------
The actual coverage of a DCO's initial margin requirements must
meet an established confidence level of at least 99%, based on data
from an appropriate historical time period, for each product for which
the DCO uses a product-based margin methodology; for each spread within
or between products for which there is a defined spread margin rate;
for each account held by a clearing member at the DCO, by house origin
and by each customer origin; and for each swap portfolio, including any
portfolio containing futures and/or options and held in a commingled
account pursuant to CFTC regulation 39.15(b)(2), by beneficial
owner.\41\ A DCO must determine the appropriate historic time period
based on the characteristics, including volatility patterns, of each
product, spread, account, or portfolio.\42\
---------------------------------------------------------------------------
\41\ 17 CFR 39.13(g)(2)(iii).
\42\ 17 CFR 39.13(g)(2)(iv).
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In addition, CFTC regulation 39.13 provides that on a regular
basis, a qualified and independent party must review and validate a
DCO's systems for generating initial margin requirements, including its
theoretical models, and that this party must not be the person
responsible for development or operation of the systems and models
being tested.\43\
---------------------------------------------------------------------------
\43\ 17 CFR 39.13(g)(3).
---------------------------------------------------------------------------
A DCO may reduce initial margin requirements for related positions
if the price risks with respect to such positions are significantly and
reliably correlated--i.e., there is a theoretical basis for the
correlation in addition to an exhibited statistical correlation.\44\
---------------------------------------------------------------------------
\44\ 17 CFR 39.13(g)(4).
---------------------------------------------------------------------------
Additionally, CFTC regulation 39.13 provides that a DCO must back
test its initial margin requirements by comparing its initial margin
requirements with historical price changes to determine the extent of
actual margin coverage using an appropriate time period but not less
than the previous 30 days, as follows: On a daily basis, the DCO must
back test products or swaps portfolios that are experiencing
significant market volatility; and on at least a monthly basis, the DCO
must back test the adequacy of all of its initial margin
requirements.\45\
---------------------------------------------------------------------------
\45\ 17 CFR 39.13(g)(7).
---------------------------------------------------------------------------
On a daily basis, a DCO must use prudent valuation practices to
value assets posted as initial margin.\46\ In particular, a DCO must
appropriately reduce its valuation of the assets that it accepts in
satisfaction of its initial margin requirements, to reflect credit,
market, and liquidity risks, taking into account stressed market
conditions, and must evaluate the appropriateness of such haircuts on
at least a quarterly basis.\47\
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\46\ 17 CFR 39.13(g)(11).
\47\ 17 CFR 39.13(g)(12).
---------------------------------------------------------------------------
Regulatory Objective: Core Principle D and the Commission's
implementing regulations are designed to ensure that each DCO possesses
the ability and necessary tools to manage the risks associated with
discharging the responsibilities of being a DCO. The Commission's
regulation requiring a DCO to maintain and update a written risk
management framework seeks to ensure that a DCO carefully has
considered its risk management framework, and it will provide guidance
to DCO management, staff, and market participants. By requiring a 99%
confidence level for initial margin, the Commission's regulations seek
to prevent DCOs from competing with respect to how much risk they are
willing to take on or from misjudging the amount of risk they would
take on if they operated under lower standards. Through requiring
independent validation of the DCO's margin models, the Commission's
regulations seek to prevent bias in validating the DCO's models. By
requiring daily review and back testing, the regulations seek to ensure
that DCOs monitor the adequacy of their initial margin requirements.
Comparable EU Law and Regulations: The following provisions of the
EMIR Framework address risk management.
RTS-CCP Art. 4: A CCP shall have a sound, written framework for the
comprehensive management of all material risks to which it is or may be
exposed. In developing its risk management framework, a CCP shall take
an integrated and comprehensive view of all relevant risks.
RTS-CCP, Art. 3(3) and 4(6): A CCP shall have a CRO, who shall
implement the risk management framework. The CCP shall ensure that the
functions of the CRO, CCO, and chief technology officer are carried out
by different individuals, who shall be employees of the CCP entrusted
with the exclusive responsibility of performing these functions.
EMIR, Art. 48(2): A CCP shall take prompt action to contain losses
and liquidity pressures resulting from defaults and shall ensure that
the closing out of any clearing member's positions does not disrupt its
operations or expose non-defaulting clearing members to losses that
they cannot anticipate or control.
EMIR, Art. 41(2), 49(1): A CCP shall adopt models and parameters
for setting margin requirements that capture the risk characteristics
of the products and swaps cleared and take into account the interval
between margin collections, market liquidity, and the possibility of
changes over the duration of the transaction. The models shall be
validated by the competent authority. A CCP regularly shall review its
models and parameters for setting margin requirements and shall subject
the models to rigorous and frequent stress tests. A CCP also shall
obtain independent validations of its models and parameters.
RTS-CCP, Art. 24(2)(b): In determining the adequate confidence
interval for each class of product that it clears, a CCP shall
consider, among other factors, the risk characteristics of the class of
product, which can include, but are not limited to, volatility,
duration, liquidity, non-linear price characteristics, jump-to-default
risk and wrong-way risk.
RTS-CCP, Art. 24(1): A CCP shall calculate the initial margins to
cover the exposures arising from market movements for each financial
instrument that is collateralized on a product basis, over an
appropriate time horizon for the liquidation of the position, with a
confidence level of 99.5% for over-the-counter derivatives and 99% for
all other products.
RTS-CCP, Art. CCP 25: A CCP shall ensure that its model methodology
and its validation process for determining initial margin covers at
least the latest 12 months and captures a full range of market
conditions, including periods of stress.
RTS-CCP, Art 47 and 59(1): At least annually, a CCP shall conduct a
[[Page 15267]]
comprehensive and well-documented validation of its models, their
methodologies, and the liquidity risk management framework used to
quantify, aggregate, and manage the CCP's risks.
RTS-CCP, Art. 27 and 59(9): A CCP may allow offsets or reductions
in the required margin across the products and swaps that it clears if
the price risk of one financial instrument or a set of products or
swaps is significantly and reliably correlated, or based on an
equivalent statistical parameter of dependence, with the price risk of
other products or swaps. The CCP shall demonstrate the existence of an
economic rationale for the price correlation. At least annually, a CCP
shall test offsets among products and swaps and how correlations
perform during periods of actual and hypothetical severe market
conditions.
RTS-CCP, Art. 49 and 60(2): On a daily basis, a CCP shall assess
its margin coverage by back testing its margin coverage against
expected outcomes derived from the use of margin models to evaluate
whether there are any testing exceptions to margin coverage. In
conducting such back testing, the CCP shall evaluate its current
positions and clearing members, and take into account possible effects
from portfolio margining and, where appropriate, interoperable CCPs.
The historical time horizons used for back tests shall include data
from at minimum the most recent year or as long as a CCP has been
clearing the relevant product or swap if that is less than a year.
RTS-CCP, Art. 40(2): A CCP shall mark-to-market its collateral on a
near to real-time basis, and where not possible, a CCP shall be able to
demonstrate to the competent authorities that it is able to manage the
risks.
EMIR, Art. 46(1); RTS-CCP, Art. 41(2) and 59(10): A CCP shall
accept highly liquid collateral with minimal credit and market risk to
cover its initial and ongoing exposure to its clearing members. It
shall apply adequate haircuts to collateral asset values that take into
account the liquidity risk following the default of a market
participant and concentration risk, and that reflect the potential for
the value of such assets to decline over the interval between their
last reevaluation and the time by which they reasonably can be assumed
to be liquidated. Such haircuts shall consider, for each among other
factors, the type of asset and the credit risk associated with the
financial instrument, the maturity of the asset; the historical and
hypothetical future price volatility of the asset in stressed market
conditions; the liquidity of the underlying market, including bid/ask
spread; the foreign exchange risks; and any wrong-way risk. The CCP
shall test its haircuts at least monthly.
Commission Determination: The Commission finds that the provisions
of the EMIR Framework with respect to risk management are generally
similar to Core Principle D and CFTC regulation 39.13, and prescribe
how CCPs should monitor, evaluate, and manage the risks to which they
are exposed. These standards seek to ensure that CCPs can meet their
financial obligations to market participants, thus contributing to the
financial integrity of the derivatives market as a whole.
Both regimes include a broad, general requirement for a DCO/CCP to
manage the risk to which it is exposed and both regimes require the
appointment of a CRO to perform similar functions. Both regimes require
a DCO/CCP to use risk control mechanisms, such as margin requirements,
to limit exposure to potential clearing member defaults. Similarly,
both regimes require that margin models and parameters be risk-based
and regularly reviewed and both regimes require that the calculation of
initial margin include factoring the risk characteristics of each
cleared product. Both regimes require at least a 99% confidence level
in determining the adequacy of initial margin and both regimes have
similar proscriptions for back testing initial margin models. Finally,
both regimes require that cash balances must be either invested or
appropriately safeguarded in a manner that bears little or no principal
risk.
Accordingly, the Commission finds that the provisions of the EMIR
Framework with respect to risk management standards discussed above and
identified below in Table 1(b) are comparable to and as comprehensive
as the risk management requirements of CFTC regulation 39.13, with the
exception of 39.13(g)(8)(i) and (ii), which respectively require FCMs
to calculate initial margin for cleared customer accounts on a gross
(as opposed to net) basis and require DCOs to collect additional
initial margin for non-hedge positions of FCM customers. Despite the
importance of gross margining of customer accounts and the collection
of this additional initial margin, in an effort to promote comity, the
Commission would not require DCO/CCPs to apply either of these
regulations to non-FCM clearing member intermediaries or to the
customers of non-FCM clearing member intermediaries. Additionally, the
Commission makes this finding notwithstanding that the EMIR Framework's
treatment of affiliates does not shield customers from potential losses
by affiliates of the clearing member in the same manner as the CFTC's
approach and in fact potentially exposes customers to proprietary
trading losses.
Table 1(b)--Risk Management
------------------------------------------------------------------------
Subject area CFTC regulations EMIR framework
------------------------------------------------------------------------
General/documentation 17 CFR 39.13(a)-(b). RTS-CCP, Art 4
requirement.
Chief risk officer.......... 17 CFR 39.13(c)..... RTS-CCP, Art 3(3)
and 4(6)
Limitation of exposure to 17 CFR 39.13(f)..... EMIR, Art 48(2)
potential losses from
defaults.
Margin models/parameters.... 17 CFR 39.13(g)(1).. EMIR, Art 41(2),
49(1)
Risk factors for margin..... 17 CFR RTS-CCP, Art
39.13(g)(2)(i). 24(2)(b)
Minimum confidence level.... 17 CFR RTS-CCP, Art 24(1)
39.13(g)(2)(iii).
Lookback period............. 17 CFR RTS-CCP, Art 25
39.13(g)(2)(iv).
Regular independent 17 CFR 39.13(g)(3).. RTS-CCP, Art 47 and
validation. 59(1)
Portfolio margining......... 17 CFR 39.13(g)(4).. RTS-CCP, Art 27; RTS-
CCP, Art 59(9)
Margin Back tests........... 17 CFR 39.13(g)(7).. RTS-CCP, Art 49 and
60(2)
Daily valuation of 17 CFR 39.13(g)(11). RTS-CCP, Art 40(2)
collateral posted as
initial margin.
Haircuts.................... 17 CFR 39.13(g)(12). EMIR, Art 46(1); RTS-
CCP, Art 41(2) and
59(10)
Daily determination of 17 CFR 39.13(g)(6).. EMIR, Art 49(1)
initial margin adequacy.
------------------------------------------------------------------------
[[Page 15268]]
C. Settlement Procedures (Regulation 39.14)
CEA Section 7a-1(c)(2)(E) (``Core Principle E'') establishes
general requirements for DCOs to have sufficient settlement procedures.
To implement Core Principle E the Commission adopted regulation 39.14,
which requires a DCO to complete money settlements on a timely basis,
but not less frequently than once each business day; employ money
settlement arrangements to eliminate or strictly limit exposure to
settlement bank risks; maintain an accurate record of the flow of funds
associated with money settlements; possess the ability to comply with
the terms and conditions of any permitted netting or offset arrangement
with another DCO; establish rules that clearly state the obligation of
a DCO with respect to physical deliveries; and ensure that a DCO
identifies and manages each risk arising from any of its obligation
with respect to physical deliveries.
Commission Requirement: Regulation 39.14 requires that a DCO
collect margin from its clearing members on a daily basis.
Specifically, a DCO must effect settlement with each clearing member at
least once each business day, and must have the authority and
operational capacity to effect a settlement with each clearing member
on an intraday basis, either routinely, when thresholds specified by
the DCO are breached, or in times of extreme market volatility.\48\
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\48\ 17 CFR 39.14(b).
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CFTC regulation 39.14 provides that a DCO must employ settlement
arrangements that eliminate or strictly limit its exposure to
settlement bank risk, by among other things, having documented criteria
with respect to those banks that are acceptable settlement banks for
the DCO and its clearing members, including criteria addressing the
capitalization, creditworthiness, access to liquidity, operational
reliability, and regulation or supervision of such banks.\49\ A DCO
further must monitor each approved settlement bank on an ongoing basis
to ensure that such bank continues to meet the DCO's established
criteria.\50\
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\49\ 17 CFR 39.14(c)(1).
\50\ 17 CFR 39.14(c)(2).
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A DCO must monitor the full range of and concentration of its
exposure to its own and its clearing members' settlement bank(s) and
assess its own and its clearing members' potential losses and liquidity
in the event that the settlement bank with the largest share of
settlement activity were to fail. A DCO must take any one or more of
the following actions, as needed, to eliminate or strictly limit such
exposures: maintain accounts at one or more additional settlement
banks; approve one or more additional settlement banks that its
clearing members could choose to use; impose concentration limits with
respect to one or more of its own or its clearing members' settlement
banks; and/or take any other appropriate actions.\51\
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\51\ 17 CFR 39.14(c)(3).
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A DCO must maintain an accurate record of the flow of funds
associated with each settlement.\52\
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\52\ 17 CFR 39.14(e).
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A DCO must possess the ability to comply with each term and
condition of any permitted netting or offset arrangement with any other
clearing organization.\53\
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\53\ 17 CFR 39.14(f).
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For products that are settled by physical transfer of the
underlying instruments or commodities, a DCO must establish rules that
clearly state each obligation that the DCO has assumed with respect to
such physical deliveries, including whether it has an obligation to
make or receive delivery of a physical instrument or commodity, or
whether it indemnifies clearing members for losses incurred in the
delivery process, and ensure that the risks of each such obligation are
identified and properly managed.\54\
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\54\ 17 CFR 39.14(g).
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Regulatory Objective: On a daily basis, DCOs are exposed to
significant inflows and outflows of cash and other liquid financial
instruments. Core Principle E and the Commission's implementing
regulations are designed to ensure that a DCO has the authority and
operational capacity to effect settlement with each clearing member, on
an intraday basis and to also monitor, eliminate, or strictly limit the
settlement risks to which a DCO is exposed.
Comparable EU Law and Regulations: The following provisions of the
EMIR Framework address settlement procedures.
EMIR, Art. 41(1) and (3): A CCP shall impose, call, and collect
margins to limit its exposures from its clearing members, and where
relevant, from CCPs with which it has interoperability arrangements.
Such margins shall be sufficient to cover potential exposures that the
CCP estimates will occur until the liquidation of the relevant
positions. Such margins also shall be sufficient to cover losses that
result from at least 99% of the exposures' movements over an
appropriate time horizon and they shall ensure that a CCP fully
collateralizes its exposures with all its clearing members, and, where
relevant, with CCPs with which it has interoperability arrangements, at
least on a daily basis. A CCP shall regularly monitor and, if
necessary, revise its margins to reflect current market conditions,
taking into account any potential procyclical effects of such
revisions. A CCP shall call and collect margins on an intraday basis,
at a minimum when predefined thresholds are exceeded.
EMIR, Art. 50(1): Where practical and available, a CCP shall use
central bank money to settle its transactions. Where a CCP cannot use
central bank money, it shall take steps to strictly limit cash
settlement risk.
RTS-CCP, Art. 4(2), 32(4)(a), and 51(3): A CCP shall take an
integrated and comprehensive view of all relevant risk, including the
risks it bears from and poses to, among other things, settlement banks.
A CCP also shall assess the liquidity risk it faces, including
situations in which the CCP or its clearing members cannot settle their
payment obligations when due as part of the clearing or settlement
process. Such assessment shall address the liquidity needs arising from
the CCP's relationship with, among others, settlement banks. As part of
its stress testing procedures, a CCP should consider stress testing
scenarios involving the technical or financial failure of, among
others, its settlement banks.
RTS-CCP, Art. 13 and Art. 14(3): A CCP shall maintain records of
all transactions in all contracts it clears and shall ensure that its
records include all information necessary to conduct a comprehensive
and accurate reconstruction of the clearing process. A CCP shall make,
and keep updated, a record of the amounts of margin, default fund
contributions, and other financial resources, with respect to each
single clearing member and client account, if known to the CCP.
EMIR, Art. 50(2)-(3): A CCP shall clearly state its obligations
with respect to deliveries of financial instruments, including whether
it has any obligation to make or receive delivery of a financial
instrument or whether it indemnifies participants for losses incurred
in the delivery process. Where a CCP has an obligation to make or
receive deliveries of financial instruments, it shall eliminate
principal risk by using delivery-versus-payment mechanisms, to the
extent possible.
Commission Determination: The Commission finds that the provisions
of the EMIR Framework with respect to settlement procedures are
generally similar to Core Principle E and CFTC regulation 39.14, and
eliminate or
[[Page 15269]]
strictly limit a CCP's exposure to settlement risk. Both regimes
require the daily collection of margin and both require a DCO/CCP to
employ settlement arrangements that limit exposure to various risks,
including exposure to settlement banks, concentration risk, and
physical delivery of instruments. Both regimes have similar
recordkeeping requirements. Finally, both regimes require a DCO/CCP to
have rules with respect to the physical delivery of an instrument or
commodity, and to identify and manage the risks associated with the
physical delivery of such instruments.
Accordingly, the Commission finds that the provisions of the EMIR
Framework with respect to settlement procedures discussed above and
identified below in Table 1(c) are comparable to and as comprehensive
as the default rules and procedures of CFTC regulation 39.14.
For the avoidance of doubt, the Commission notes that the foregoing
comparability determination only applies with regard to certain
provisions of regulation 39.14 (i.e., Sec. 39.14(b), Sec. 39.14(c),
Sec. 39.14(e), Sec. 39.14(f), and Sec. 39.14(g)). No comparability
finding is made regarding Sec. 39.14(d), which requires a DCO to
ensure that settlements are final when effected by ensuring that it has
entered into legal agreements that state that settlement fund transfers
are irrevocable and unconditional no later than when the DCO's accounts
are debited or credited.
Table 1(c)--Settlement Procedures
------------------------------------------------------------------------
Subject area CFTC regulations EMIR framework
------------------------------------------------------------------------
Settlement procedures....... 17 CFR 39.14(b), EMIR, Art. 41(1) and
(c), (e)-(g). (3); EMIR, Art
50(1); RTS-CCP, Art
4(2), 32(4)(a) and
51(3); RTS-CCP, Art
13 and 14(3); EMIR,
Art 50(2)-(3).
------------------------------------------------------------------------
D. Default Rules and Procedures (Regulation 39.16)
CEA Section 7a-1(c)(2)(G) (``Core Principle G'') establishes
general requirements for DCOs to have adequate default rules and
procedures. To implement Core Principle G the Commission adopted
regulation 39.16, which requires a DCO to have rules and procedures
designed to allow for the efficient, fair, and safe management of
events during which members or participants become insolvent or
otherwise default on the obligations of the members or participants to
the DCO.
Commission Requirement: CFTC regulation 39.16 provides requirements
by which a DCO must adopt rules and procedures designed to allow DCOs
to effectively manage events during which clearing members become
insolvent or default on the obligations of such clearing members to the
DCO.\55\
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\55\ 17 CFR 39.16(a).
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Pursuant to CFTC regulation 39.16, a DCO must adopt procedures that
would permit the DCO to timely take action to contain losses and
liquidity pressures and to continue meeting its obligations in the
event of a default on the obligations of a clearing member to the
DCO.\56\ Further, a DCO must adopt rules setting forth its default
procedures; including the DCO's definition of default, the actions that
the DCO may take upon default, which must include the prompt transfer,
liquidation, or hedging of the customer or house positions of the
defaulting clearing member, as applicable, and which may include, in
the DCO's discretion, the auctioning or allocation of positions to
other clearing members; any obligations that the DCO imposes on its
clearing members to participate in auctions or to accept allocations,
of the customer or house positions of a defaulting clearing member,
subject to certain limitations; the default waterfall--i.e., the
sequence in which the funds and assets of the defaulting clearing
member and its customers and the financial resources maintained by the
DCO would be applied in the event of a default; and a provision that
the funds and assets of a defaulting clearing member must be applied to
cover losses with respect to a customer default, if the relevant
customer funds and assets are insufficient to cover the shortfall.\57\
The DCO must make its default rules publicly available.\58\
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\56\ 17 CFR 39.16(c)(1).
\57\ 17 CFR 39.16(c)(2)(i)-(v).
\58\ 17 CFR 39.16(c)(3).
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Regulatory Objective: Core Principle G and the Commission's
implementing regulations are designed to ensure that each DCO clearly
states its default procedures, makes its default rules publicly
available, and has rules and procedures that allow it to take timely
action to contain losses and liquidity pressures and to continue
meeting its obligations.
Comparable EU Law and Regulations: The following provisions of the
EMIR Framework address default rules and procedures.
EMIR, Art. 48: A CCP shall have written procedures to be followed
in the event of the default of a clearing member. The CCP shall take
prompt action to contain losses and liquidity pressures resulting from
defaults and shall ensure that the closing out of any clearing member's
positions does not disrupt its operations or expose the non-defaulting
clearing members to losses that they cannot anticipate or control.
EMIR, Art. 37(6): A CCP may impose specific additional obligations
on clearing members, including the participation in auctions of a
defaulting member's positions. Such obligations shall be proportional
to the risk brought by the clearing member and shall not restrict
participation to certain categories of clearing members.
EMIR, Art. 45: A CCP shall use a defaulting clearing member's
margins before using other financial resources to cover losses. Where
the margins posted by the defaulting clearing member are insufficient
to cover the losses covered by the CCP, the CCP shall use the default
fund contribution of the defaulting member to cover the loss. A CCP
shall use contributions to the default fund of the non-defaulting
clearing members and any other financial resources only after having
exhausted the defaulting clearing member's contributions. A CCP further
shall use its own dedicated financial resources before using the
default fund contributions of non-defaulting clearing members. A CCP
shall not use the margins posted by non-defaulting clearing members to
cover losses resulting from the default of another clearing member.
RTS-CCP, Art. 58 and 59(12): At least on a quarterly basis, a CCP
shall test and review its default procedures to ensure they are both
practical and effective. At least annually, a CCP shall perform
simulation exercises as part of the testing of its default procedures.
It also shall perform simulation exercises
[[Page 15270]]
following any material change to its default procedures.
ESMA Q&A CCP Question 8(f)(1): A CCP shall use the margins posted
by a defaulting clearing member prior to other financial resources when
covering losses and may have rules which allow it to use surplus margin
on a defaulted clearing member's house account to meet any obligation
of the clearing member with respect to losses on a client account of
that clearing member. For the avoidance of doubt, surplus margin on a
client account of a default clearing member cannot be used to meet any
losses on the defaulted clearing member's house account(s).\59\
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\59\ Questions and Answers: Implementation of the Regulation
(EU) No 648/2012 on OTC derivatives, central counterparties and
trade repositories (EMIR) https://www.esma.europa.eu/system/files_force/library/2016-293_qa_xvi_on_emir_implementation.pdf?download=1.
---------------------------------------------------------------------------
RTS-CCP, Art. 61(2): A CCP shall make publicly available key
aspects of its default procedures, including the circumstances in which
action may be taken, who may take action, the scope of the actions that
may be taken (including the treatment of both proprietary and client
positions, funds and assets), and the mechanisms for addressing a CCP's
obligations to non-defaulting clearing members.
Commission Determination: The Commission finds that the provisions
of the EMIR Framework with respect to default rules and procedures are
generally similar to CFTC regulation 39.16, and prescribe how CCPs
should clearly state their default procedures. Both regimes require a
DCO/CCP to have detailed procedures to follow in the event of a
default, including requirements for the orderly transfer and/or
liquidation of customer or proprietary positions, participation in
auctions, the sequence of the default waterfall, and public disclosure
of the default procedures. These standards seek to ensure that CCPs may
take timely action to contain losses and liquidity pressures and to
continue meeting their obligations.
Accordingly, the Commission finds that the EMIR Framework with
respect to default rules and procedures discussed above and identified
below in Table 1(d) are comparable to and as comprehensive as the
default rules and procedures of CFTC regulation 39.16.
For the avoidance of doubt, the Commission notes that the foregoing
comparability determination only applies with regard to the above
mentioned provisions of CFTC regulation 39.16 (i.e., Sec. 39.16(a),
Sec. 39.16(c)(1), Sec. 39.16(c)(2)(i)-(v), and Sec. 39.16(c)(3)). No
comparability finding is made regarding the other provisions of Sec.
39.16, namely Sec. 39.16(b), which requires a DCO to maintain a
written default management plan, and Sec. 39.16(d), which requires a
DCO to have certain rules in place regarding the insolvency of clearing
members.
Table 1(d)--Default Rules and Procedures
------------------------------------------------------------------------
Subject area CFTC regulations EMIR framework
------------------------------------------------------------------------
Default rules & procedures.. 17 CFR 39.16(a),.... EMIR, Art 48, 37(6)
17 CFR 39.16(c)(1), and 45; RTS-CCP,
17 CFR Art 58, 59(12) and
39.16(c)(2)(i)-(v), 61(2); ESMA Q&A CCP
17 CFR 39.16(c)(3). Question 8(f)1.
------------------------------------------------------------------------
VI. DCO/CCP Registration
Section 5b(a) of the CEA and Commission Regulations 39.1 and 39.3
require a DCO to register with the Commission in the format and manner
specified by the Commission. In particular, Regulation 39.3 specifies
that a DCO seeking registration from the Commission must file a Form
DCO and various supporting exhibits.
In the interest of comity, the Commission generally will tailor its
registration process both in terms of administration and substantive
review to reflect the availability of substituted compliance for EU
CCPs. Accordingly, consistent with Regulation 39.3, EU CCPs seeking
registration must complete Form DCO. However, with respect to questions
and information requirements in areas where compliance with the EMIR
Framework is substituted for compliance with part 39, the EU CCP may
evidence its compliance with the EMIR Framework in lieu of its
compliance with part 39. DCO/CCPs that are already dually registered
need not take any further action to take advantage of the substituted
compliance determinations made under this Notice. These determinations
will be applied automatically to all current DCO/CCPs registrants.
Moreover, to streamline the registration process, an EU CCP
applicant may, instead of submitting the exhibits required under the
CFTC Form DCO regulation, use existing materials that it has submitted
to its NCA for its EMIR authorization or other relevant documents
produced by its NCA that demonstrate compliance with EMIR provisions
for which substituted compliance is available (e.g., supervisory
examination reports or reports from its NCA). The positive opinion of
the CCP supervisory college should also be submitted to the Commission
by way of supporting evidence. The Commission will not require an EU
CCP to obtain certification from its NCA, certifying that it has
complied with the EMIR Framework.
In addition, for the Form DCO documents listed below, the
Commission will accept a copy of the original document filed by the EU
CCP with its NCA with an attestation by that authority that they are
acceptable to that authority:
Exhibit A-8: articles of incorporation or similar
corporate documents;
Exhibit A-10: outside service provider agreements;
Exhibit E-1(4): settlement bank agreements;
Exhibit F(a)(2): depository agreements; and
Exhibit M(a): information-sharing agreements.
If these documents are not in English, and an English translation
is available, the EU CCP applying for registration should provide the
English translation. If an English translation is not available, the EU
CCP applying for registration should inform the Commission in writing
but need not provide a translated version unless requested by the CFTC.
The Commission will review the documentation received to determine
if it is complete and comprehensive. In the case that information
evidencing compliance with the EMIR Framework is incomplete, the
Commission will seek to obtain further evidence from the relevant NCA
evidencing its assessment of compliance. If the documentation is still
not sufficient for the Commission to review compliance with the terms
of the
[[Page 15271]]
EMIR Framework, the Commission will request additional evidence from
the CCP and notify the NCA of the request made.
The Commission will seek to obtain any other missing information
from the relevant EU CCP. The Commission also will provide the relevant
NCA with the opportunity to be consulted with respect to any questions
if so requested at the outset by that authority.
VII. Limited Application of Certain CFTC Regulations
As a general matter, the Commission acknowledges that CCPs
registered in foreign jurisdictions operate under different regulatory
regimes, and that the differences between these various regimes may
lead to regulatory arbitrage. The Commission also understands that the
CFTC staff intends to provide limited no-action relief for DCO/CCPs
from the application of Commission regulations to discrete aspects of a
DCO/CCP's non-U.S. clearing activities as set forth below when this
Notice becomes effective.
(1) CFTC Regulation 39.12(b)(6)'s requirement that, upon a DCO's
acceptance of a swap for clearing, the original swap is extinguished
and it is replaced by an equal and opposite swap between the DCO and
each clearing member acting as a principal for a house trade or an
agent for a customer trade will not apply where neither party is a U.S.
clearing member or an FCM clearing member;
(2) Part 22 of CFTC Regulations and its ``legally segregated but
operationally commingled'' (``LSOC'') account model for cleared swaps
customer accounts will not apply to clearing members that are not FCMs;
(3) CFTC Regulation 39.13(g)(8)(i)'s requirement that initial
margin for customer accounts cleared by an FCM be calculated and
collected on a gross basis would not apply to non-FCM clearing member
intermediaries;
(4) CFTC Regulation 39.13(g)(8)(ii)'s requirement that a DCO
collect initial margin at a level that is greater than 100% of the
DCO's initial margin requirements for the non-hedge positions of FCM
customers will not apply to non-FCM clearing member intermediaries;
(5) CFTC Regulation 39.12(a)(2)(iii)'s prohibition that a DCO not
set a minimum capital requirement of more than $50 million for any
person that seeks to become a clearing member to clear swaps will not
apply to non-U.S. clearing members or non-FCM clearing members;
(6) CFTC Regulation 39.12(b)(7)'s requirement that DCOs utilize
``straight-through-processing'' of swaps submitted for clearing will
not apply to trades that are not executed on or subject to the rules of
a DCM or a swap execution facility and for which neither clearing
member is an FCM, a swap dealer, or a major swap participant;
(7) Regulation 39.13(h)(5)'s requirement that DCOs must require
their clearing members to maintain written risk management policies and
procedures and that DCOs must have the authority to obtain information
and documents from clearing members regarding their risk will still
apply; however, DCO/CCPs may implement different oversight programs for
U.S./FCM clearing members and non-U.S. clearing members; and
(8) Regulation 39.11(f)'s and Regulation 39.19(c)(3)(ii)'s implicit
requirements that DCOs submit to the CFTC quarterly financial resource
reports and an audited year-end financial statement that are prepared
in accordance with GAAP will not apply; rather, the DCO/CCPs may submit
financial statements prepared in accordance with IFRS, with periodic
reconciliation to assist staff in reviewing the financial statements.
VIII. Supervisory Arrangement
As noted above, with respect to dually-registered DCO/CCPs, the
Commission retains its examination authority with respect to DCO/CCPs
and requires that home country regulator(s) enter into an MOU that
addresses how the regulator(s) will cooperate and share information
with respect to supervision of the DCO/CCP. Thus, the Commission has
entered into a supervisory MOU with the home country regulator(s) of a
DCO/CCP.\60\ For dual registrants in the future, the Commission
similarly expects that an MOU will establish procedures for ongoing
cooperation, address direct access to information, provide for
notification upon the occurrence of specified events, memorialize
understandings related to on-site visits, and include protections
related to the use and confidentiality of non-public information shared
pursuant to the MOU.
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\60\ The Commission also requires an MOU with respect to exempt
DCOs.
---------------------------------------------------------------------------
While certain principles of supervision are universal, based on its
experience supervising DCO/CCPs, the Commission recognizes the benefits
of tailoring a joint supervisory regime to (1) the unique legal and
regulatory framework in which each regulator operates and (2) the
unique financial, operational, and organizational characteristics of
each DCO/CCP. With respect to CFTC regulations for which there would be
substituted compliance, the Commission generally believes that there
should be joint examinations. By way of example, Commission staff
already has participated in joint examinations with the Bank of
England, and the Commission believes that joint examinations can be an
efficient means for effective, in-depth review of a DCO/CCP's
regulatory compliance.
However, depending on the individual circumstances, it may be
appropriate for the home country regulator(s) to assume greater
responsibility for conducting the examinations. The Commission expects
that its staff would be flexible in determining their approach to a
given examination based on the nature and scope of the examination.
Therefore, with the overall goal of applying uniform principles in a
consistent yet flexible way, the Commission intends to address
supervisory matters, including examinations, on a case-by-case basis
for each individual DCO/CCP in close consultation with the relevant
home country regulator(s).
IX. Conclusion
As noted above, the Commission finds that each provision of the
EMIR Framework discussed above, is comparable to and comprehensive as
the Commission requirements identified above and thus a CCP's
compliance with the identified provisions of the EMIR Framework will
satisfy compliance with the corresponding Commission requirements.
Issued in Washington, DC, on March 16, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Appendices to Comparability Determination for the European Union:
Dually-Registered Derivatives Clearing Organizations and Central
Counterparties--Commission Voting Summary, Chairman's Statement, and
Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2--Statement of Chairman Timothy G. Massad
Today, the CFTC has taken action to implement our agreement with
the European Commission regarding requirements for central clearing
counterparties (CCPs). Our unanimous action today means that
European CCPs registered with the CFTC can comply with many of our
rules by meeting
[[Page 15272]]
the corresponding European Market Infrastructure Regulation (EMIR)
requirements.
The equivalence agreement announced by European Commissioner
Jonathan Hill and myself is an important step in achieving cross-
border harmonization of derivatives regulation. It provides a
foundation for cooperation among regulators in the oversight of the
global clearinghouses that are so important in our financial system
today. It resolves the issues that were standing in the way of
Europe recognizing U.S. CCPs. And it helps make sure that the U.S.
and European derivatives markets can continue to be dynamic, with
robust competition and liquidity across borders.
The action we have taken today is an important component of that
agreement. The notice identifies the rules for which the CFTC will
grant substituted compliance. These include rules related to CCP
financial resources, risk management, settlement procedures, and
default management. We have also streamlined the process for
registration, which will further harmonize our regimes.
Finally, CFTC staff today are also providing no-action relief
from the application of Commission regulations to discrete aspects
of a clearinghouse's non-U.S. clearing activities.
The Commission is working with U.S. clearinghouses seeking
recognition by the European Securities and Market Authority (ESMA)
to ensure ESMA has all necessary information to review their
applications in a timely manner. I look forward to ESMA completing
the recognition process in a manner that ensures the global
derivatives markets can continue to function efficiently and without
disruption.
Appendix 3--Statement of Commissioner J. Christopher Giancarlo
I support the comparability determinations issued by the
Commodity Futures Trading Commission (``CFTC'').
Today's action furthers the commitment to a common approach for
transatlantic central clearing counterparties (CCPs) announced on
February 10, 2016 by my colleague, CFTC Chairman Timothy Massad, and
Commissioner Jonathan Hill of the European Commission (EC). Under
the comparability determinations, CCPs that are authorized in the
European Union (EU) under the European Market Infrastructure
Regulation (EMIR) and registered with the CFTC may comply with
certain CFTC requirements for financial resources, risk management,
settlement procedures, and default rules and procedures by complying
with corresponding requirements under the EMIR framework. Today's
notice also provides for a streamlined approach for EU CCPs that may
wish to register with the CFTC in the future.
As I said when it was announced, the agreement reached between
the EC and the CFTC avoids unacceptable changes to four decades of
U.S. clearinghouse margin policy and higher costs of hedging risk
for America's farmers, ranchers, financial institutions, energy
firms and manufacturers.
Yet, as I have observed, the protracted process for reaching
this compromise was made needlessly complex because both the EC and
the CFTC insisted on a line-by-line rule analysis contrary to the
flexible, outcomes-based approach advocated by the OTC Derivatives
Regulators Group. While the end result is a good one, the approach
taken to get here was needlessly circuitous and uncertain.
The CFTC and its global counterparts must now recommit
themselves to work together to implement an equivalence and
substituted compliance process, particularly for swaps execution and
the cross-border activities of swap dealers and major swaps
participants, based on common principles in order to increase
regulatory harmonization and reduce market balkanization.\1\ The
future of the global swaps marketplace depends on it.
---------------------------------------------------------------------------
\1\ See, e.g., IOSCO Task Force on Cross-Border Regulation,
Final Report (Sept. 2015) (advocating for an outcomes-based approach
as opposed to a line-by-line comparison of rules).
[FR Doc. 2016-06261 Filed 3-21-16; 8:45 am]
BILLING CODE 6351-01-P
