Exemption From Derivatives Clearing Organization Registration, 39923-39937 [2018-17335]
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Federal Register / Vol. 83, No. 156 / Monday, August 13, 2018 / Proposed Rules
these alternative controls on specific
types of spraying or fogging systems
(including ‘‘parts,’’ ‘‘components,’’
‘‘accessories,’’ and ‘‘attachments’’
therefor) that are currently being
manufactured and/or sold or that are
likely to be manufactured and/or sold in
the foreseeable future. Comments on
option #4 (where the ECCN 2B352.i
control text would include the term
‘‘specially designed’’) should not only
address this option with reference to the
four criteria described above, but also
identify any performance levels,
characteristics, or functions that clearly
distinguish commercial spraying or
fogging systems from those systems
having properties that are peculiarly
responsible for achieving the
dissemination or dispersion of
chemicals controlled by ECCN 1C350 or
1C355 or biological agents controlled by
ECCN 1C351 in a manner likely to cause
significant harm to humans or livestock
or serious damage to crops.
Dated: August 6, 2018.
Richard E. Ashooh,
Assistant Secretary for Export
Administration.
[FR Doc. 2018–17249 Filed 8–10–18; 8:45 am]
BILLING CODE 3510–33–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 39 and 140
RIN 3038–AE65
Exemption From Derivatives Clearing
Organization Registration
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (Commission) is
proposing amendments to its
regulations to establish a regulatory
framework within which the
Commission may exempt a clearing
organization that is organized outside of
the United States (hereinafter referred to
as ‘‘non-U.S. clearing organization’’)
from registration as a derivatives
clearing organization (DCO) in
connection with the clearing
organization’s clearing of swaps. In
addition, the Commission is proposing
certain amendments to its delegation
provisions in its regulations.
DATES: Comments must be received on
or before October 12, 2018.
ADDRESSES: You may submit comments,
identified by ‘‘Exemption from
Derivatives Clearing Organization
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SUMMARY:
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Registration’’ and RIN number 3038–
AE65, by any of the following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this rulemaking and
follow the instructions on the Public
Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
Please submit your comments using
only one of these methods. To avoid
possible delays with mail or in-person
deliveries, submissions through the
CFTC Comments Portal are encouraged.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
comments.cftc.gov. You should submit
only information that you wish to make
available publicly. If you wish the
Commission to consider information
that you believe is exempt from
disclosure under the Freedom of
Information Act (FOIA), a petition for
confidential treatment of the exempt
information may be submitted according
to the procedures established in § 145.9
of the Commission’s regulations.1
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from https://comments.cftc.gov that it
may deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the FOIA.
FOR FURTHER INFORMATION CONTACT:
Eileen A. Donovan, Deputy Director,
202–418–5096, edonovan@cftc.gov;
Parisa Abadi, Associate Director, 202–
418–6620, pabadi@cftc.gov; Eileen R.
Chotiner, Senior Compliance Analyst,
202–418–5467, echotiner@cftc.gov;
Abigail S. Knauff, Special Counsel, 202–
418–5123, aknauff@cftc.gov; Division of
Clearing and Risk, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
1 17 CFR 145.9. Commission regulations referred
to herein are found at 17 CFR chapter I (2018), and
are accessible on the Commission’s website at
https://www.cftc.gov/LawRegulation/Commodity
ExchangeAct/index.htm.
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SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Project KISS
B. Statutory and Regulatory Framework for
Swaps Execution and Clearing
C. Statutory and Regulatory Requirements
for Registration and Operation of DCOs
II. Proposed Amendments to Part 39
A. Regulation 39.1—Scope
B. Regulation 39.2—Definitions
C. Regulation 39.6—Exemption Provisions
D. Regulation 39.9—Scope
III. Proposed Amendments to Part 140—
Delegations of Authority
IV. Request for Comments
V. Consideration of Costs and Benefits
A. Introduction
B. Proposed Regulation 39.6
C. Section 15(a) Factors
VI. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
I. Background
A. Project KISS
The Commission is engaging in an
agency-wide review of its rules,
regulations, and practices to make them
simpler, less burdensome, and less
costly, and to make progress on G–20
regulatory reforms. This initiative is
called Project KISS, which stands for
‘‘Keep It Simple, Stupid.’’ 2 The
Commission is proposing to adopt
regulations that would codify the
policies and procedures that the
Commission is currently following with
respect to granting exemptions from
DCO registration in order to make such
policies and procedures transparent to
all potential applicants.
B. Statutory and Regulatory Framework
for Swaps Execution and Clearing
The Commodity Exchange Act (CEA) 3
provides that a clearing organization
may not ‘‘perform the functions of a
[DCO]’’ 4 with respect to swaps unless
2 See Remarks of Acting Chairman J. Christopher
Giancarlo before the 42nd Annual International
Futures Industry Conference in Boca Raton, FL,
Mar. 15, 2017, available at https://www.cftc.gov/
PressRoom/SpeechesTestimony/opagiancarlo-20.
On February 24, 2017, President Donald J. Trump
issued Executive Order 13777: Enforcing the
Regulatory Reform Agenda (E.O. 13777). E.O. 13777
directs federal agencies, among other things, to
designate a Regulatory Reform Officer and establish
a Regulatory Reform Task Force. Although the
CFTC, as an independent federal agency, is not
bound by E.O. 13777, the Commission is
nevertheless engaging in an agency-wide review of
its rules, regulations, and practices to make them
simpler, less burdensome, and less costly. See
Request for Information, 82 FR 23756 (May 24,
2017).
3 7 U.S.C. 1 et seq.
4 The term ‘‘derivatives clearing organization’’ is
statutorily defined to mean a clearing organization
in general. However, for purposes of the discussion
herein, the term ‘‘DCO’’ refers to a Commission-
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Federal Register / Vol. 83, No. 156 / Monday, August 13, 2018 / Proposed Rules
the clearing organization is registered
with the Commission.5 However, the
CEA also permits the Commission to
conditionally or unconditionally
exempt a clearing organization from
registration for the clearing of swaps if
the Commission determines that the
clearing organization is subject to
‘‘comparable, comprehensive
supervision and regulation’’ by
appropriate government authorities in
the clearing organization’s home
country.6
To date, the Commission has
exempted four non-U.S. clearing
organizations from DCO registration.
The Commission is proposing to adopt
regulations that would codify the
policies and procedures that the
Commission is currently following with
respect to granting exemptions from
DCO registration and would make such
policies and procedures transparent to
all potential applicants.
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C. Statutory and Regulatory
Requirements for Registration and
Operation of DCOs
As previously noted, the CEA requires
a clearing organization that clears swaps
to be registered with the Commission as
a DCO. However, in order to be
registered and maintain registration as a
DCO, a clearing organization must
comply with the core principles for
DCOs set forth in the CEA (DCO Core
Principles) 7 and all applicable
Commission regulations.8
The Commission may conditionally or
unconditionally exempt a clearing
organization from registration for the
clearing of swaps if the Commission
determines that the clearing
organization is subject to ‘‘comparable,
comprehensive supervision and
regulation’’ by the clearing
organization’s home country
regulator(s). The Commission has
construed ‘‘comparable, comprehensive
supervision and regulation’’ to mean
registered DCO, the term ‘‘exempt DCO’’ refers to
a derivatives clearing organization that is exempt
from registration, and the term ‘‘clearing
organization’’ refers to a clearing organization that:
(a) Is neither registered nor exempt from registration
with the Commission as a DCO; and (b) falls within
the definition of ‘‘derivatives clearing organization’’
under section 1a(15) of the CEA, 7 U.S.C. 1a(15),
and ‘‘clearing organization or derivatives clearing
organization’’ under Regulation 1.3, 17 CFR 1.3.
5 Section 5b(a) of the CEA, 7 U.S.C. 7a–1(a).
6 Section 5b(h) of the CEA, 7 U.S.C. 7a–1(h).
Section 5b(h) also permits the Commission to
exempt from DCO registration a securities clearing
agency registered with the Securities and Exchange
Commission; however, the Commission is not
proposing to exempt securities clearing agencies at
this time.
7 7 U.S.C. 7a–1(c)(2)(A).
8 See 17 CFR parts 1—190 including, in
particular, part 39, which implements the DCO Core
Principles.
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that the home country’s supervisory and
regulatory framework should be
consistent with, and achieve the same
outcome as, the statutory and regulatory
requirements applicable to registered
DCOs. This outcomes-based approach
reflects the Commission’s recognition
that a foreign jurisdiction’s supervisory
and regulatory scheme applicable to its
clearing organizations may differ from
the Commission’s in certain respects,
but nevertheless may achieve the same
underlying goals. This approach also
supports the Commission’s effort to
strike an appropriate balance by
focusing on the risk implications to the
United States, while promoting global
harmonization.
Further, the Commission has deemed
a supervisory and regulatory framework
that conforms to the Principles for
Financial Market Infrastructures
(PFMIs) 9 to be comparable to, and as
comprehensive as, the supervisory and
regulatory requirements applicable to
registered DCOs.10 Notably, the
Commission was a key contributor to
the joint efforts of the Committee on
Payments and Market Infrastructures
(CPMI) 11 and the Technical Committee
of the International Organization of
Securities Commissions (IOSCO) to
develop the PFMIs, which apply to
clearing organizations.12 In addition to
contributing to the development of the
PFMIs, the Commission serves as a
9 See CPMI–IOSCO, Principles for financial
market infrastructures (Apr. 2012), available at
https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD377-PFMI.pdf. The PFMIs define a
‘‘financial market infrastructure’’ as a ‘‘multilateral
system among participating institutions, including
the operator of the system, used for the purposes
of clearing, settling, or recording payments,
securities, derivatives, or other financial
transactions.’’ See PFMIs, paragraph 1.8.
Additionally, the PFMIs are ‘‘broadly designed to
apply to all systemically important [financial
market infrastructures].’’ See PFMIs, paragraph
1.20.
10 This conclusion is consistent with previous
Commission determinations. See, e.g., Regulation
50.52(b)(4)(i)(E), 17 CFR 50.52(b)(4)(i)(E)
(permitting eligible affiliate counterparties that are
located in certain jurisdictions to satisfy a condition
to electing the exemption by clearing the swap
through a DCO or a clearing organization that is
subject to supervision by appropriate government
authorities in the clearing organization’s home
country and that has been assessed to be in
compliance with the PFMIs).
11 CPMI was formerly the Committee on Payment
and Settlement Systems; it was renamed effective
September 1, 2014. See https://www.bis.org/press/
p140901.htm.
12 In order to promote effective and consistent
global regulation of swaps, section 752 of the DoddFrank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act) directs the Commission to
consult and coordinate with foreign regulatory
authorities on the establishment of consistent
international standards with respect to the
regulation of swaps, among other things. Section
752 of the Dodd-Frank Act, Public Law 111–203,
124 Stat. 1376 (2010), codified at 15 U.S.C. 8325.
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member of the CPMI–IOSCO task force
that monitors implementation of the
PFMIs. The PFMIs are comparable to the
DCO Core Principles and applicable
Commission regulations in purpose and
scope. Both address major elements
critical to the safe and efficient
operations of clearing organizations,
such as risk management, adequacy of
financial resources, default
management, margin, settlement, and
participation requirements.13 In light of
the foregoing, the Commission believes
that a supervisory and regulatory
framework that adheres to the
framework under the PFMIs achieves
outcomes that are comparable to that of
the supervisory and regulatory
requirements applicable to registered
DCOs. Accordingly, the Commission
proposes to continue to use the PFMI
framework as the benchmark for making
a comparability determination with
respect to a foreign jurisdiction’s
supervisory and regulatory scheme.
II. Proposed Amendments to Part 39
A. Regulation 39.1—Scope
The Commission is proposing to
amend Regulation 39.1 to state that the
provisions of subpart A of part 39 apply
to any registered DCO or, as applicable,
any entity applying to be registered as
a DCO or applying to be exempt from
DCO registration. Regulation 39.3,
which is contained in subpart A and is
not proposed to be amended, sets forth
procedures for DCO registration.
Proposed Regulation 39.6, which also
would be contained in subpart A, would
set forth the requirements for an
exemption from DCO registration, as
discussed below.
B. Regulation 39.2—Definitions
In connection with the proposed
exemption regulations, the Commission
is proposing to add five definitions to
Regulation 39.2, for purposes of part 39
only.
The Commission proposes to define
the term ‘‘exempt derivatives clearing
organization’’ to mean a derivatives
clearing organization that the
Commission has exempted from
registration under section 5b(a) of the
CEA, pursuant to section 5b(h) of the
CEA and Regulation 39.6.
The Commission proposes to define
the term ‘‘good regulatory standing’’ to
mean, with respect to a non-U.S.
clearing organization that is authorized
to act as a clearing organization in its
home country, that either there has been
no finding by the home country
13 See, e.g., Derivatives Clearing Organizations
and International Standards, 78 FR 72476 (Dec. 2,
2013) (adopting final rules).
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regulator of material non-observance of
the PFMIs or other relevant home
country legal requirements, or there has
been such a finding by the home
country regulator, but it has been or is
being resolved to the satisfaction of the
home country regulator by means of
corrective action taken by the clearing
organization. The Commission believes
that this is a workable definition from
the standpoint of both the Commission
and the home country regulator in that
it establishes a basis for providing the
Commission with a high degree of
assurance as to the clearing
organization’s observance of the PFMIs,
while only seeking from the home
country regulator a representation that it
can reasonably make.
The Commission proposes to define
the term ‘‘home country’’ to mean, with
respect to a non-U.S. clearing
organization, the jurisdiction in which
the clearing organization is organized.
The Commission proposes to define
the term ‘‘home country regulator,’’ with
respect to a non-U.S. clearing
organization, as an appropriate
government authority which licenses,
regulates, supervises, or oversees the
clearing organization’s clearing
activities in the home country. The
proposed definition is consistent with
section 5b(h) of the CEA, which
provides, in relevant part, that the
Commission may exempt a clearing
organization from registration for the
clearing of swaps if the Commission
determines that the clearing
organization is subject to comparable,
comprehensive supervision and
regulation by the appropriate
government authorities in the home
country of the clearing organization. Use
of the term ‘‘an appropriate government
authority’’ rather than ‘‘the appropriate
government authority’’ is intended to
recognize that in some foreign
jurisdictions there may be more than
one government authority that
supervises and regulates a clearing
organization.
The Commission proposes to define
the term ‘‘Principles for Financial
Market Infrastructures’’ as the PFMIs
published by CPMI–IOSCO in April
2012, as updated, revised, or otherwise
amended.14
14 The Commission proposes to include this
language to recognize that CPMI–IOSCO could offer
further interpretation of or guidance on the PFMIs.
See, e.g., CPMI–IOSCO, Resilience of central
counterparties: Further guidance on the PFMI (July
2017), available at https://www.bis.org/cpmi/publ/
d163.pdf.
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C. Regulation 39.6—Exemption
Provisions
Proposed Regulation 39.6 would
implement section 5b(h) of the CEA by
setting forth the regulatory framework
within which the Commission may
exempt a clearing organization from
DCO registration in connection with the
clearing of swaps. After section 5b(h)
was enacted in 2010, clearing
organizations outside the United States
began inquiring as to how they could go
about obtaining an exemption. Because
the Commission had not yet developed
a framework for granting exemptions,
the Commission’s Division of Clearing
and Risk (DCR) began granting timelimited no-action relief to these clearing
organizations which permit them to
engage in swap clearing activity that
would otherwise require registration as
a DCO.15 After careful consideration of
the issues involved, DCR staff presented
initial thoughts on granting exemptions
at a May 2014 meeting of the
Commission’s Global Markets Advisory
Committee. Finally, in November 2014,
DCR sent a letter to those clearing
organizations that had received noaction relief, advising them on how to
petition the Commission for an
exemption. In response to petitions
submitted in accordance with the terms
of the letter, the Commission issued
orders of exemption from DCO
registration to ASX Clear (Futures) Pty
Limited (ASX), Korea Exchange, Inc.
(KRX), Japan Securities Clearing
Corporation (JSCC), and OTC Clearing
Hong Kong Limited (OTC Clear).16
Proposed Regulation 39.6 would codify
the policies and procedures that the
Commission is currently following with
15 See, e.g., CFTC Letter No. 16–56 (May 31, 2016)
(granting no-action relief to Shanghai Clearing
House); CFTC Letter No. 14–107 (Aug. 18, 2014)
(granting no-action relief to Clearing Corporation of
India Ltd.); CFTC Letter No. 14–87 (June 26, 2014)
(granting no-action relief to Korea Exchange, Inc.);
CFTC Letter No. 14–68 (May 7, 2014) (granting noaction relief to OTC Clearing Hong Kong Limited
and certain of its clearing members); CFTC Letter
No. 14–07 (Feb. 6, 2014) (granting no-action relief
to ASX Clear (Futures) Pty Limited); and CFTC
Letter No. 12–56 (Dec. 17, 2012) (granting no-action
relief to Japan Securities Clearing Corporation and
certain of its clearing participants).
16 See ASX Amended Order of Exemption from
Registration (Jan. 28, 2016), available at https://
www.cftc.gov/idc/groups/public/@otherif/
documents/ifdocs/
asxclearamdorderdcoexemption.pdf; KRX Order of
Exemption from Registration (Oct. 26, 2015),
available at https://www.cftc.gov/idc/groups/public/
@otherif/documents/ifdocs/krxdcoexemptorder1026-15.pdf; JSCC Order of Exemption from
Registration (Oct. 26, 2015), available at https://
www.cftc.gov/idc/groups/public/@otherif/
documents/ifdocs/jsccdcoexemptorder10-26-15.pdf;
OTC Clear Order of Exemption from Registration
(Dec. 21, 2015), available at https://www.cftc.gov/
idc/groups/public/@otherif/documents/ifdocs/
otccleardcoexemptorder12-21-15.pdf.
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respect to granting exemptions from
DCO registration and would make such
policies and procedures transparent to
all potential applicants for an
exemption.
1. Eligibility for Exemption
Proposed Regulation 39.6(a) would
provide that the Commission may
exempt, conditionally or
unconditionally, a non-U.S. clearing
organization from registration as a DCO
for the clearing of swaps for certain U.S.
persons,17 and thereby exempt such
clearing organization from compliance
with the provisions of the CEA and
Commission regulations applicable to
DCOs, if the Commission determines
that all of the eligibility requirements
listed in proposed Regulation 39.6(a)(1)
and (a)(2) are met, and the clearing
organization satisfies the conditions set
forth in Regulation 39.6(b).18 Each of
these requirements is described below.
Proposed Regulation 39.6(a)(1) would
codify the statutory requirement that the
Commission may only exempt a clearing
organization from DCO registration for
the clearing of swaps if the Commission
determines that the clearing
organization is subject to comparable,
comprehensive supervision and
regulation. Proposed Regulation
39.6(a)(1)(i) would require that, in order
to be eligible for an exemption from
DCO registration, a clearing organization
must be organized in a jurisdiction in
which a home country regulator applies
to the clearing organization, on an
ongoing basis, statutes, rules,
regulations, policies, or a combination
thereof that, taken together, are
consistent with the PFMIs.19 Under
proposed Regulation 39.6(a)(1)(ii) and
17 The Commission proposes to use the definition
of ‘‘U.S. person’’ as set forth in the Commission’s
Interpretive Guidance and Policy Statement
Regarding Compliance With Certain Swap
Regulations, 78 FR 45292, 45316–45317 (July 26,
2013), as such definition may be amended or
superseded by a definition of the term ‘‘U.S.
person’’ that is adopted by the Commission and
applicable to this proposed regulation.
18 The eligibility requirements listed in proposed
Regulation 39.6(a)(1) and (a)(2) and the conditions
set forth in proposed Regulation 39.6(b) would be
pre-conditions to the Commission’s issuance of any
order exempting a clearing organization from the
DCO registration requirements of the CEA and
Commission regulations. Additional conditions that
are unique to the facts and circumstances specific
to a particular clearing organization could be
imposed upon that clearing organization in the
Commission’s order of exemption, as permitted by
section 5b(h) of the CEA.
19 The Commission notes that the regulatory
framework of a particular jurisdiction may consist
of one or multiple sources of authority. In
particular, the inclusion of ‘‘policies’’ is intended
to accommodate a jurisdiction in which a policy
has the force of law, and a set of policies may, on
its own, represent the jurisdiction’s regulatory
framework that is consistent with the PFMIs.
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(iii), a clearing organization would be
required to observe the PFMIs in all
material respects and be in good
regulatory standing in its home country.
As previously noted, the Commission
believes that operating within a
regulatory framework consistent with
the PFMIs would meet the CEA’s
requirement in section 5b(h) that, in
order to qualify for an exemption, a
clearing organization must be subject to
comparable, comprehensive supervision
and regulation by the appropriate
government authorities in its home
country.20
Proposed Regulation 39.6(a)(2) would
provide that, in order for a clearing
organization to be eligible for an
exemption from DCO registration, a
memorandum of understanding (MOU)
or similar arrangement satisfactory to
the Commission must be in effect
between the Commission and the
clearing organization’s home country
regulator,21 pursuant to which, among
other things, the home country regulator
agrees to provide to the Commission any
information that the Commission deems
necessary to evaluate the clearing
organization’s initial and continued
eligibility for exemption or to review
compliance with any conditions of such
exemption. The Commission has
customarily entered into MOUs or
similar arrangements in connection with
the supervision of non-U.S. clearing
organizations that are registered as
DCOs. In the context of exempt DCOs,
satisfactory MOUs or similar
arrangements with the home country
regulator would include provisions for
information sharing and cooperation, as
well as for notification upon the
20 In addition to the principles applicable to
central counterparties and other FMIs, the PFMIs
provide that central banks, market regulators, and
other relevant authorities should observe five
responsibilities. Consistent with this, the
Commission expects that, in order to meet the
standard of being subject to comparable,
comprehensive supervision and regulation, a
clearing organization’s home country regulator will
observe these responsibilities. In particular,
Responsibility D Explanatory Note 4.4.1 provides
that the home country regulator should adopt the
PFMIs, and, ‘‘[w]hile the precise means through
which the principles are applied may vary from
jurisdiction to jurisdiction, all [CPMI] and IOSCO
members are expected to apply the principles to the
relevant FMIs in their jurisdictions to the fullest
extent allowed by the legal framework in their
jurisdiction.’’ PFMIs, paragraph 4.4.1. Therefore,
the Commission would not find a home country
regulator’s statement that it requires a clearing
organization to observe the PFMIs to be sufficient
to meet the above standard for exemption, if the
home country regulator has not itself adopted a
regulatory framework that is consistent with the
PFMIs.
21 In foreign jurisdictions where more than one
regulator supervises and regulates a clearing
organization, the Commission would expect to enter
into an MOU or similar arrangement with more
than one regulator.
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occurrence of certain events, but the
Commission would not expect to
conduct routine site visits to exempt
DCOs.
2. Conditions of Exemption
Proposed Regulation 39.6(b) sets forth
conditions to which an exempt DCO
would be subject. These conditions are
consistent with the conditions that the
Commission has imposed on each of the
clearing organizations to which it has
previously issued orders of exemption.
Under proposed Regulation
39.6(b)(1)(i), a U.S. person that is a
clearing member of an exempt DCO
would be permitted to clear swaps for
itself and those persons identified in the
definition of ‘‘proprietary account’’ set
forth in Regulation 1.3. This provision
is intended to permit a U.S. clearing
member to clear for affiliates (including
a parent or subsidiary) that are either
U.S. or non-U.S. persons. The
Commission recognizes that in some
foreign jurisdictions, affiliates are
considered to be ‘‘customers’’ and their
positions are held in customer accounts.
Clearing for affiliates under these
circumstances would be permissible
even if the affiliate positions are not
held in an account that is an analogue
to a proprietary account under the
Commission’s regulations.
Similarly, proposed Regulation
39.6(b)(1)(ii) would provide that a nonU.S. person that is a clearing member of
an exempt DCO may clear swaps for any
affiliated U.S. person identified in the
definition of ‘‘proprietary account’’ in
Regulation 1.3. This complements the
standard in paragraph (b)(1)(i) by
clarifying that an exempt DCO may clear
for affiliated entities when one or more
of those entities is a U.S. person, even
if the clearing member itself is not a
U.S. person.
Proposed Regulation 39.6(b)(1)(iii)
would provide that a futures
commission merchant (FCM) may be a
clearing member of an exempt DCO, or
maintain an account with an affiliated
broker that is a clearing member, for the
purpose of clearing swaps for the FCM
itself and those persons identified in the
definition of ‘‘proprietary account’’ in
Regulation 1.3. Again, this provision is
intended to permit what would be
considered clearing of ‘‘proprietary’’
positions under the Commission’s
regulations, even if the positions would
qualify as ‘‘customer’’ positions under
the laws and regulations of an exempt
DCO’s home country. This provision
would clarify that an exempt DCO may
clear positions for FCMs if the positions
are not ‘‘customer’’ positions under the
Commission’s regulations.
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The effect of proposed Regulation
39.6(b)(1) is to prohibit the clearing of
FCM customer positions at an exempt
DCO. Section 4d(f)(1) of the CEA makes
it unlawful for any person to accept
money, securities, or property (i.e.,
funds) from a swaps customer to margin
a swap cleared through a DCO unless
the person is registered as an FCM.22
Any swaps customer funds held by a
DCO are also subject to the segregation
requirements of section 4d(f)(2) of the
CEA, and in order for a swaps customer
to receive protection under this regime,
particularly in an insolvency context, its
funds must be carried by an FCM and
deposited with a registered DCO.23
Absent that chain of registration, the
swaps customer’s funds may not be
treated as customer property under the
U.S. Bankruptcy Code 24 and the
Commission’s regulations. Because of
this, it has been the Commission’s
policy to allow exempt DCOs to clear
only proprietary positions of U.S.
persons and FCMs. The proposed
regulations would codify this approach.
Proposed Regulation 39.6(b)(2) would
codify the ‘‘open access’’ requirements
of section 2(h)(1)(B) of the CEA with
respect to swaps cleared by an exempt
DCO to which one or more of the
counterparties is a U.S. person.25
Paragraph (b)(2)(i) would require an
exempt DCO to maintain rules
providing that all such swaps with the
same terms and conditions (as defined
by product specifications established
under the exempt DCO’s rules)
submitted to the exempt DCO for
clearing are economically equivalent
and may be offset with each other, to the
extent that offsetting is permitted by the
exempt DCO’s rules. Paragraph (b)(2)(ii)
would require an exempt DCO to
maintain rules providing for nondiscriminatory clearing of such a swap
executed either bilaterally or on or
subject to the rules of an unaffiliated
electronic matching platform or trade
execution facility, e.g., a swap execution
facility.
Proposed Regulation 39.6(b)(3) would
provide that an exempt DCO must
22 7 U.S.C. 6d(f)(1). This provision establishes a
customer protection regime for swaps customers
that is broadly similar to the regime for futures
customers and options on futures customers under
sections 4d(a) and (b) of the CEA. 7 U.S.C. 6d(a) and
(b).
23 See Section 761(2) of the Bankruptcy Code, 11
U.S.C. 761(2) (defining a ‘‘clearing organization’’ as
a derivatives clearing organization registered under
the CEA), and Regulation 190.01(f), 17 CFR
190.01(f) (stating that for purposes of the part 190
bankruptcy rules, ‘‘clearing organization’’ has the
same meaning as that set forth in section 761(2) of
the Bankruptcy Code).
24 11 U.S.C. 761–767.
25 7 U.S.C. 2(h)(1)(B).
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consent to jurisdiction in the United
States and designate an agent in the
United States, for notice or service of
process, pleadings, or other documents
issued by or on behalf of the
Commission or the U.S. Department of
Justice in connection with any actions
or proceedings against, or any
investigations relating to, the exempt
DCO or any U.S. person or FCM that is
a clearing member or that clears swaps
through an affiliated clearing member.
The name of the designated agent would
be submitted as part of the clearing
organization’s application for
exemption. If an exempt DCO appoints
another agent to accept such notice or
service of process, the exempt DCO
would be required to promptly inform
the Commission of this change. This is
consistent with requirements currently
imposed in the registration orders of
DCOs that are organized outside of the
United States as well as in each of the
orders of exemption that the
Commission has issued.
Proposed Regulation 39.6(b)(4) is a
general provision that would require an
exempt DCO to comply, and
demonstrate compliance as requested by
the Commission, with any condition of
the exempt DCO’s order of exemption.
Proposed Regulation 39.6(b)(5) would
require an exempt DCO to make all
documents, books, records, reports, and
other information related to its
operation as an exempt DCO (books and
records) open to inspection and copying
by any Commission representative, and
to promptly make its books and records
available and provide them directly to
Commission representatives, upon the
request of a Commission representative.
This condition of exemption is
consistent with section 5b(h) of the
CEA, which provides that the
Commission may exempt a DCO from
registration with conditions that may
include requiring that the DCO be
available for inspection by the
Commission and make available all
information requested by the
Commission.26 The Commission notes
that it does not anticipate conducting
routine site visits to exempt DCOs.
However, the Commission may request
an exempt DCO to provide books and
records related to its operation as an
exempt DCO in order for the
Commission to ensure that, among other
things, the exempt DCO continues to
meet the eligibility requirements for an
26 See also Regulation 1.31, 17 CFR 1.31
(requiring, among other things, that books and
records of DCOs and other registered entities be
made available for inspection by Commission
representatives).
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exemption as well as the conditions of
its exemption.27
Proposed Regulation 39.6(b)(6) would
require that the exempt DCO provide an
annual certification that it continues to
observe the PFMIs in all material
respects, within 60 days following the
end of its fiscal year. Proposed
Regulation 39.6(b)(7) would require that
the Commission receive an annual
written representation from a home
country regulator that the exempt DCO
is in good regulatory standing, within 60
days following the end of the exempt
DCO’s fiscal year. These requirements
would help the Commission to assess an
exempt DCO’s continued eligibility for
an exemption.
3. Reporting Requirements
Proposed Regulation 39.6(c) and (d)
would require an exempt DCO to meet
certain reporting requirements, which
are consistent with the reporting
requirements exempt DCOs currently
meet.
a. General Reporting Requirements
Proposed Regulation 39.6(c)(1) sets
forth general reporting requirements
pursuant to which an exempt DCO must
provide certain information directly to
the Commission: (1) On a periodic basis
(daily or quarterly); and (2) after the
occurrence of a specified event, each in
accordance with the submission
requirements of Regulation 39.19(b).28
Such information may be used by the
Commission, among other things, for the
purposes of the Commission evaluating
the continued eligibility of the exempt
DCO for exemption, reviewing the
exempt DCO’s compliance with any
conditions of its exemption, or
conducting oversight of U.S. persons
and their affiliates, and the swaps that
they clear through the exempt DCO.
Proposed Regulation 39.6(c)(2)(i)
would require an exempt DCO to
compile a report as of the end of each
trading day, and submit it to the
Commission by 10:00 a.m. U.S. Central
27 Although an MOU or similar arrangement
would provide for information sharing whereby the
home country regulator agrees to provide to the
Commission any information that the Commission
deems necessary to evaluate the clearing
organization’s initial and continued eligibility for
exemption or to review compliance with any
conditions of such exemption, the Commission
would retain the authority to access books and
records directly from an exempt DCO.
28 Regulation 39.19(b), 17 CFR 39.19(b), requires
that a DCO submit reports electronically and in a
format and manner specified by the Commission,
defines the term ‘‘business day,’’ and establishes the
relevant time zone for any stated time, unless
otherwise specified by the Commission. The
Commission has specified that U.S. Central time
will apply with respect to the daily reports that
must be filed by exempt DCOs pursuant to
proposed Regulation 39.6(c)(2)(i).
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time on the following business day,
containing with respect to swaps: (A)
Initial margin requirements and initial
margin on deposit for each U.S. person;
and (B) daily variation margin,
separately listing the mark-to-market
amount collected from or paid to each
U.S. person. However, if a clearing
member margins on a portfolio basis its
own positions and the positions of its
affiliates, and either the clearing
member or any of its affiliates is a U.S.
person, the exempt DCO would be
required to report initial margin
requirements and initial margin on
deposit for all such positions on a
combined basis for each such clearing
member and to separately list the markto-market amount collected from or paid
to each such clearing member, on a
combined basis. These requirements are
similar to certain reporting requirements
in Regulation 39.19(c)(1) that apply to
registered DCOs.29 These reports would
provide the Commission with
information regarding the cash flows
associated with U.S. persons clearing
swaps through exempt DCOs in order to
analyze the risks presented by such U.S.
persons and to assess the extent to
which U.S. business is being cleared by
each exempt DCO.
Proposed Regulation 39.6(c)(2)(ii)
would require an exempt DCO to
compile a report as of the last day of
each fiscal quarter, and submit the
report to the Commission no later than
17 business days after the end of the
fiscal quarter, containing: (A) The
aggregate clearing volume of U.S.
persons during the fiscal quarter, and
(B) the average open interest of U.S.
persons during the fiscal quarter. If a
clearing member is a U.S. person, this
data would include the transactions and
positions of the clearing member and all
affiliates for which the clearing member
clears; if a clearing member is not a U.S.
person, the data would only have to
include the transactions and positions
of affiliates that are U.S. persons.
Paragraph (C) of proposed Regulation
39.6(c)(2)(ii) would require that an
exempt DCO’s quarterly report to the
Commission contain a list of U.S.
29 Specifically, Regulation 39.19(c)(1) requires
registered DCOs to submit daily reports to the
Commission, by 10:00 a.m. on the following
business day, which contain, among other things,
initial margin requirements, initial margin on
deposit, and daily variation margin for each
clearing member. See Regulation 39.19(c)(1)(i)(A)
and (c)(1)(i)(B), 17 CFR 39.19(c)(1)(i)(A) and
(c)(1)(i)(B). These provisions require such
information to be provided for each clearing
member by house origin and by each customer
origin. This distinction would not apply to an
exempt DCO, which will only be permitted to clear
transactions that the Commission would treat as
‘‘proprietary.’’ See discussion of proprietary and
customer clearing supra section II.C.2.
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persons and FCMs 30 that are either
clearing members or affiliates of any
clearing member, with respect to the
clearing of swaps, as of the last day of
the fiscal quarter. This information
would enable the Commission, in
conducting risk surveillance of U.S.
persons and swaps markets more
broadly, to better understand and
evaluate the nature and extent of the
cleared swaps activity of U.S. persons.
Paragraphs (c)(2)(iii) through
(c)(2)(viii) of proposed Regulation 39.6
each would require an exempt DCO to
provide information to the Commission
upon the occurrence of certain specified
events. Several of the proposed required
notifications are intended to provide the
Commission with information relevant
to the exempt DCO’s continued
eligibility for an exemption or its
compliance with the conditions of its
exemption. Proposed Regulation
39.6(c)(2)(iii) would require an exempt
DCO to provide prompt notice to the
Commission regarding any change in its
home country regulatory regime that is
material to the exempt DCO’s
continuing observance of the PFMIs,
any requirements set forth in proposed
Regulation 39.6, or the order of
exemption issued by the Commission.
In this regard, the Commission requests
comment on whether an exempt DCO
should make the determination of
whether a change to the home country
regulatory regime constitutes a
‘‘material’’ change to the exempt DCO’s
continuing observance of the PFMIs,
any requirements set forth in proposed
Regulation 39.6, or the Commission’s
order of exemption. Alternatively, the
Commission requests comment on
whether the Commission should require
an exempt DCO to provide prompt
notice of any change in its home
country regulatory regime thereby
allowing the Commission to determine
whether a change is ‘‘material’’ to the
exempt DCO’s continuing observance of
the PFMIs, any requirements set forth in
proposed Regulation 39.6, or the
Commission’s order of exemption.
Proposed Regulation 39.6(c)(2)(iv)
would require an exempt DCO to
provide to the Commission, to the
30 Such FCMs may or may not be U.S. persons.
The Commission is not proposing to require that
exempt DCOs provide daily information regarding
initial margin requirements, initial margin on
deposit, and daily variation margin, or quarterly
aggregate clearing volume or average open interest,
with respect to swaps, for FCMs that are not U.S.
persons (unless reporting would otherwise be
required because such FCMs are affiliates of U.S.
persons). However, the Commission has a
supervisory interest in receiving information
regarding which of its registered FCMs are clearing
members or affiliates of clearing members, with
respect to the clearing of swaps on an exempt DCO.
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extent that it is available to the exempt
DCO, any assessment of the exempt
DCO’s observance (or the home country
regulator’s observance) of any of the
PFMIs by a home country regulator or
other national authority, or an
international financial institution or
international organization.31 Proposed
Regulation 39.6(c)(2)(v) would require
an exempt DCO to provide to the
Commission, to the extent that it is
available to the exempt DCO, any
examination report, examination
findings, or notification of the
commencement of any enforcement or
disciplinary action by a home country
regulator. Proposed Regulation
39.6(c)(2)(vi) would require an exempt
DCO to provide immediate notice to the
Commission of any change with respect
to its licensure, registration, or other
authorization to act as a clearing
organization in its home country.
Two of the event-specific required
notifications would assist the
Commission in its oversight of U.S.
persons and FCMs clearing swaps.
Proposed Regulation 39.6(c)(2)(vii)
would require an exempt DCO to
provide immediate notice to the
Commission in the event of a default (as
defined by the exempt DCO in its rules)
by a U.S. person or FCM clearing swaps,
including the name of the U.S. person
or FCM, a list of the positions held by
the U.S. person or FCM, and the amount
of the U.S. person’s or FCM’s financial
obligation. Proposed Regulation
39.6(c)(2)(viii) would require an exempt
DCO to provide notice of any action that
it has taken against a U.S. person or
FCM, no later than two business days
after the exempt DCO takes such action
against a U.S. person or FCM. In
particular, these provisions would
require such reporting with respect to a
default of, or an action taken against, an
FCM, which may or may not be a U.S.
person, in furtherance of the
Commission’s supervisory
responsibilities with respect to
registered FCMs. Proposed paragraphs
(c)(2)(vii) and (c)(2)(viii) of Regulation
39.6 are similar to paragraphs (c)(4)(vii)
and (c)(4)(xi) of Regulation 39.19, which
apply to registered DCOs, respectively.
b. Swap Data Reporting Requirements
Proposed Regulation 39.6(d) would
require that if a clearing member clears
through an exempt DCO a swap that has
been reported to a registered swap data
repository (SDR) pursuant to part 45 of
the Commission’s regulations, the
exempt DCO must report to an SDR data
31 Such an international organization may include
the International Monetary Fund or World Bank.
See PFMIs, paragraph 1.33.
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regarding the two swaps resulting from
the novation of the original swap that
had been submitted to the exempt DCO
for clearing. In addition, an exempt DCO
would be required to report the
termination of the original swap
accepted for clearing by the exempt
DCO to the SDR to which the original
swap was reported. Further, in order to
avoid duplicative reporting for such
transactions, an exempt DCO would be
required to have rules that prohibit the
part 45 reporting of the two new swaps
by the counterparties to the original
swap.32
4. Application Procedures
Proposed Regulation 39.6(e) would
describe the relevant application
procedures for a clearing organization
that seeks to be exempt from DCO
registration, which are consistent with
the application procedures the
Commission has been using to evaluate
petitions for exemption. Specifically,
under proposed Regulation 39.6(e)(1), a
clearing organization would be required
to file an application for exemption with
the Secretary of the Commission in the
format and manner specified by the
Commission. After reviewing the
application, the Commission could: (1)
Grant the exemption without
conditions; (2) grant the exemption with
conditions; or (3) deny the application
for exemption.33 This provision mirrors
language in Regulation 39.3(a)(1), which
addresses the application procedures for
registration as a DCO.
Proposed Regulation 39.6(e)(2) would
require an applicant to submit a
complete application, including all
applicable information and
documentation as detailed in proposed
Regulation 39.6(e)(2) and discussed
below. It would provide that the
Commission will not commence
processing an application unless the
application is complete. Proposed
Regulation 39.6(e)(2) would further
provide that an applicant may file with
its completed application additional
information that may be necessary or
helpful to the Commission in processing
the application. This provision is
similar to certain provisions of
Regulation 39.3(a)(2), which sets forth
requirements with respect to
applications for registration as a DCO.
32 While the Commission recognizes that the
counterparties to the original swap would otherwise
be required to report the two new swaps under part
45 of the Commission’s regulations, because an
exempt DCO would be required to implement rules
to the contrary at the direction of the Commission,
such counterparties would be expected to comply
with the rules of the exempt DCO in this case.
33 As noted above, proposed Regulation 39.6(b)
sets forth the pre-conditions that would apply to
any exemption from registration as a DCO.
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Under proposed Regulation
39.6(e)(2)(i), an applicant would be
required to submit a cover letter
providing general information
identifying the applicant, its regulatory
licenses or registrations, and relevant
contact information. Proposed
Regulation 39.6(e)(2)(ii)–(viii) would
require an applicant for exemption to
submit documents that would establish
the applicant’s eligibility for exemption
under proposed Regulation 39.6(a), and
would contain representations that the
applicant would comply with the
conditions of exemption, the general
reporting requirements, and the swap
data reporting requirements set forth in
proposed Regulation 39.6(b), (c), and
(d), respectively, and the terms and
conditions of its order of exemption as
issued by the Commission.
Additionally, proposed Regulation
39.6(e)(2)(v) would require an applicant
to submit to the Commission copies of
its most recent disclosures necessary to
observe the PFMIs, including the
financial market infrastructure (FMI)
disclosure template set forth in Annex
A to the Disclosure Framework and
Assessment Methodology (Disclosure
Framework) for the PFMIs.34 The FMI
disclosure template requires a clearing
organization to provide a general
description of itself and the markets it
serves, a description of its general
organization, an overview of the
relevant legal and regulatory framework,
a description of how it processes a
transaction, and a summary narrative
detailing its approach to observing each
of the PFMIs. The Commission expects
that the FMI disclosure template
provided to the Commission would
have been reviewed and updated within
the previous two years.35 The FMI
disclosure template is generally
required by home country regulators
that enforce the PFMIs and is necessary
to achieve status as a qualified central
counterparty (QCCP).36
34 See CPMI–IOSCO, Principles for financial
market infrastructures: Disclosure framework and
Assessment methodology (Dec. 2012), at 82 et seq.,
available at https://www.iosco.org/library/pubdocs/
pdf/IOSCOPD396.pdf.
35 PFMI Explanatory Note 3.23.7 provides that the
Principle 23, Key Consideration 5 standard that
responses to the Disclosure Framework should be
completed ‘‘regularly’’ means that an FMI should
review its responses ‘‘[a]t a minimum . . . every
two years to ensure continued accuracy and
usefulness.’’ PFMIs, paragraph 3.23.7.
36 A QCCP is defined as an entity that (i) is
licensed to operate as a central counterparty (CCP)
and is permitted by the appropriate regulator to
operate as such, and (ii) is prudentially supervised
in a jurisdiction where the relevant regulator has
established and publicly indicated that it applies to
the CCP, on an ongoing basis, domestic rules and
regulations that are consistent with the PFMIs. The
failure of a CCP to achieve QCCP status could result
in significant costs to its bank customers due to
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Proposed Regulation 39.6(e)(3) would
provide that, at any time during the
Commission’s review of an application
for exemption from registration as a
DCO, the Commission may request that
the applicant submit supplemental
information in order for the Commission
to process the application, and would
require that the applicant file such
supplemental information in the format
and manner specified by the
Commission. A similar provision is
contained in Regulation 39.3(a)(3),
which applies to applications for DCO
registration.
Proposed Regulation 39.6(e)(4) would
state that an applicant for exemption
from registration as a DCO must
promptly amend its application if it
discovers a material omission or error,
or if there is a material change in the
information provided to the
Commission in the application or other
information provided in connection
with the application. This provision is
virtually identical to Regulation
39.3(a)(4), which addresses amendments
to applications for DCO registration.
Proposed Regulation 39.6(e)(5) would
identify those sections of an application
for exemption from registration that will
be made public, including the cover
letter required in proposed Regulation
39.6(e)(2)(i); documents demonstrating
that the applicant is organized in a
jurisdiction in which its home country
regulator applies to the applicant
statutes, rules, regulations, and/or
policies that are consistent with the
PFMIs; disclosures necessary to observe
the PFMIs; 37 rules that meet the
requirements of proposed Regulation
39.6(b)(2) and (d), as applicable; and
any other part of the application not
covered by a request for confidential
treatment, subject to Regulation 145.9.
This provision is similar to Regulation
39.3(a)(5), which identifies those
portions of an application for
registration as a DCO that are made
public.
5. Modification of an Exemption
Proposed Regulation 39.6(f) would
provide that the Commission may
modify the terms and conditions of an
certain financial incentives for banks, including
their subsidiaries and affiliates, to clear financial
derivatives through QCCPs. See Basel Committee on
Banking Supervision, Capital Requirements for
Bank Exposures to Central Counterparties (Apr. 10,
2014), available at https://www.bis.org/publ/
bcbs282.htm.
37 The Disclosure Framework contemplates that
central counterparties will make public disclosures
pursuant to the Disclosure Framework. See CPMI–
IOSCO, Principles for financial market
infrastructures: Disclosure framework and
Assessment methodology (Dec. 2012), at 1, available
at https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD396.pdf.
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order of exemption, either at the request
of the exempt DCO or on the
Commission’s own initiative, based on
changes to or omissions in material facts
or circumstances pursuant to which the
order of exemption was issued, or for
any reason in the Commission’s
discretion. This is a further expression
of the Commission’s discretionary
authority under section 5b(h) of the CEA
to exempt a clearing organization from
registration ‘‘conditionally or
unconditionally,’’ and it reflects the
Commission’s authority to act with
flexibility in responding to changed
circumstances affecting an exempt DCO.
6. Termination of Exemption Upon
Request by an Exempt DCO
Proposed Regulation 39.6(g) would set
forth the framework under which an
exempt DCO may petition the
Commission to terminate its exemption
and the applicable procedures.
Specifically, pursuant to proposed
Regulation 39.6(g)(1), an exempt DCO
may request that the Commission
terminate its exemption if the exempt
DCO: (i) No longer qualifies for an
exemption as a result of changed
circumstances; (ii) intends to cease
clearing swaps for U.S. persons; or (iii)
submits a completed Form DCO in order
to become a registered DCO in
conjunction with its petition. Proposed
Regulation 39.6(g)(2) would provide that
the petition for termination must
include an explanation for the request
and describe the exempt DCO’s plans
for liquidation or transfer of the
positions and related collateral of U.S.
persons, if applicable. Pursuant to
proposed Regulation 39.6(g)(3), the
Commission would issue an order of
termination within a reasonable time
appropriate to the circumstances or in
conjunction with the issuance of an
order of registration, if applicable.
D. Regulation 39.9—Scope
The Commission is proposing to
revise Regulation 39.9 to make it clear
that the provisions of subpart B apply to
any DCO, as defined under section
1a(15) of the CEA and Regulation 1.3,
that is registered with the Commission
as a DCO pursuant to section 5b of the
CEA, but do not apply to any exempt
DCO. This revision would clarify that
the subpart B regulations that address
compliance with the DCO Core
Principles applicable to registered DCOs
do not impose any obligations upon
exempt DCOs.
III. Proposed Amendments to Part
140—Delegations of Authority
The proposed amendments to
Regulation 140.94(c)(4) would delegate
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to the Director of DCR all functions
reserved to the Commission under
proposed Regulation 39.6 except for the
following: (i) Granting an exemption
under paragraph (a); (ii) prescribing any
conditions to an exemption under
paragraph (b); (iii) modifying an
exemption under paragraph (f); and (iv)
terminating an exemption under
paragraph (g)(3). Such delegation would
expedite consideration of exemption
requests by permitting DCR to more
efficiently carry out tasks associated
with the processing of an exemption
application. Certain technical
amendments have also been proposed to
Regulation 140.94 in order to adjust the
paragraph numbering to accommodate
the proposed amendments to Regulation
140.94(c)(4).
IV. Request for Comments
The Commission generally requests
comments on all aspects of the proposed
rules. Additionally, the Commission
requests comments on the following
specific issues:
• Exempt DCOs are permitted to clear
only proprietary positions of U.S.
persons and FCMs. The proposed
regulations would codify this approach.
Should the Commission consider
permitting an exempt DCO to clear
swaps for FCM customers?
• Should the Commission impose any
additional conditions on an exempt
DCO or modify any of the existing
conditions?
• Should any of the conditions
imposed on an exempt DCO lead to an
automatic termination of the exemption
if the condition is not met?
V. Consideration of Costs and Benefits
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A. Introduction
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders.38 Section
15(a) further specifies that the costs and
benefits shall be evaluated in light of
five broad areas of market and public
concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission considers the costs and
benefits resulting from its discretionary
determinations with respect to the
Section 15(a) factors.
38 7
U.S.C. 19(a).
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B. Proposed Regulation 39.6
1. Summary
Section 5b(a) of the CEA requires a
clearing organization that clears swaps
to be registered with the Commission as
a DCO. Section 5b(h) of the CEA,
however, 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. Pursuant to this authority, the
Commission has exempted four nonU.S. clearing organizations from DCO
registration to clear proprietary swap
positions of U.S. persons and FCMs.
The proposed regulation would codify
the policies and procedures that the
Commission is currently following with
respect to granting exemptions from
DCO registration. Accordingly, the
baseline for this consideration of costs
and benefits is the current status, where
the Commission has implemented a set
of conditions and procedures for
granting exemptions from DCO
registration, but has not codified those
conditions and procedures under
Commission regulations.
Specifically, the proposed regulation
would set forth the process by which a
non-U.S. clearing organization could
obtain an exemption from DCO
registration for the clearing of swaps
provided that it meets the specified
eligibility standards and can meet the
conditions of an exemption. The
eligibility standards require, among
other things, that a clearing organization
applying for exemption must be
organized in a jurisdiction in which a
home country regulator applies to the
clearing organization, on an ongoing
basis, statutes, rules, regulations,
policies, or a combination thereof that,
taken together, are consistent with the
PFMIs, and the clearing organization
must observe the PFMIs in all material
respects. The conditions of exemption
describe, among other things, the
circumstances in which an exempt DCO
would be permitted to clear swaps for
U.S. persons. An exempt DCO is and
would be permitted to clear only
‘‘proprietary’’ positions as defined in
Regulation 1.3, and it is not and would
not be permitted to clear ‘‘customer’’
positions subject to section 4d(f) of the
CEA.
2. Benefits
Proposed Regulation 39.6 would
provide several benefits. First, an
exempt DCO may clear proprietary swap
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positions for U.S. persons without
having to prepare and submit an
application for DCO registration, which
involves the submission of extensive
documentation to the Commission.
Similarly, an exempt DCO is not
required to comply with Commission
regulations applicable to registered
DCOs, except as required under
Regulation 39.6 or the exempt DCO’s
order of exemption. Thus, the
significantly reduced application and
ongoing compliance requirements for
exempt DCOs may encourage clearing
organizations to seek an exemption from
registration. This mitigation of
registration-related requirements may
also benefit market participants and the
public more generally. That is, non-U.S.
clearing organizations that are exempt
from registration may incur lower
compliance costs, which may, in turn,
result in lower costs to their clearing
members. In addition, U.S. persons (as
clearing members or affiliates of clearing
members) would likely have access to
more clearing organizations in order to
clear their proprietary swaps. Access to
more clearing organizations may also
encourage voluntary clearing of swaps
that are not required to be cleared, as
certain swaps may not be cleared by any
registered DCOs. This may, in turn,
serve to diversify the potential risk of
cleared swaps, because any such risk
would become less concentrated if a
larger number of registered and exempt
DCOs were clearing swaps for U.S.
persons, and the volume of those swaps
could become more evenly distributed
among those registered and exempt
DCOs.
Finally, the proposed regulation may
also promote competition among
registered and exempt DCOs by
encouraging more clearing organizations
to seek an exemption, and it would
permit exempt DCOs to clear the same
types of swap transactions for the
proprietary accounts of U.S. persons
that may be cleared by registered DCOs.
The Commission requests comment
on the potential benefits of proposed
Regulation 39.6, including, where
possible, quantitative data. More
specifically, the Commission requests
comment on the potential benefits to
clearing organizations that are eligible to
become exempt DCOs and thereby clear
swaps for U.S. persons and their
affiliates, and the potential benefits to
other market participants or the
financial system as a whole. The
Commission further requests comment
on any alternative proposals that might
achieve the objectives of the proposed
regulation, and the benefits associated
with any such alternatives.
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3. Costs
A clearing organization seeking an
exemption incurs some costs in
preparing an application for exemption.
If a clearing organization were not able
to seek an exemption, however, it would
be required to register with the
Commission and to submit a Form
DCO.39 While the Form DCO and the
FMI disclosure template set forth in
Annex A to the Disclosure Framework
require certain similar types of
information to be provided to the
Commission, the Form DCO would
require the clearing organization to
provide additional documentation that
is not required pursuant to the
Disclosure Framework. Moreover, a
clearing organization is likely to have
already prepared the FMI disclosure
template in order to comply with the
requirements of its home country
regulator, which must be consistent
with the PFMIs, and to achieve QCCP
status.40 Therefore, the costs involved in
applying for an exemption are less than
the costs involved in applying for
registration, and the proposed
regulation would not change this. Based
on the Commission’s Paperwork
Reduction Act estimates, the cost
burden to submit Form DCO is
approximately $100,000 per entity,41
while that for submitting an application
for exemption is approximately $10,500
per entity.42 Thus, there is an estimated
cost savings associated with submitting
an application for exemption rather than
Form DCO of approximately $89,500 per
entity, and the proposed regulation
would codify the procedures for
submitting an application for
exemption. The Commission seeks
comment about whether these cost
estimates are reasonable.
Other potential administrative costs
associated with maintaining an
exemption from DCO registration are
minimal. For example, an exempt DCO
would be required to make its books and
records relating to its operation as an
exempt DCO available for inspection by
Commission staff upon request. This
condition of exemption is consistent
with section 5b(h) of the CEA, which
provides that the Commission may
39 For purposes of this analysis, it is assumed that
any clearing organization that is not granted an
exemption will be required to register as a DCO if
it clears swaps for any U.S. person. This
assumption, however, is not intended to be a legal
conclusion that, with respect to the particular facts
and circumstances of any particular clearing
organization, the CEA would require registration
with the Commission as a DCO.
40 See supra section II.C.4 for more detail.
41 See Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR 69334, 69410
(Nov. 8, 2011).
42 See infra section VI.B for more detail.
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exempt a DCO from registration with
conditions that may include requiring
that the DCO be available for inspection
by the Commission and make available
all information requested by the
Commission. In addition, this
requirement is imposed on registered
DCOs; as a result, an exempt DCO
would be held to this requirement even
if it were to choose to register as a DCO.
The Commission notes that there would
be no costs imposed on an exempt DCO
in connection with this condition unless
and until the Commission requests to
inspect its books and records.
Furthermore, an exempt DCO’s home
country regulator is and would be
required to provide to the Commission
an annual written representation that
the exempt DCO is in good regulatory
standing. The Commission believes that
the costs associated with this
requirement are minimal, as home
country regulators typically provide a
standard letter and are required to
provide it only once a year.
Lastly, exempt DCOs would be held to
certain reporting requirements, the costs
of which are limited to providing them
to the Commission on either a regular or
event-specific basis. The Commission
has previously considered the costs of
regular and event-specific reporting
requirements when adopting Regulation
39.19(c) for registered DCOs.43 The
reporting requirements for exempt DCOs
are substantially less extensive than
those specified in Regulation 39.19(c).
The Commission believes the costs of
the exempt DCO reporting requirements
are not significant but welcomes
comment on such costs, particularly
from existing exempt DCOs.
An exempt DCO may incur costs
related to establishing and maintaining
connections to an SDR in order to report
the swap data that would be required by
proposed Regulation 39.6(d). In
connection with the analysis required
by the Paperwork Reduction Act, the
Commission has estimated an initial
cost of $85,478 per exempt DCO to
establish an SDR connection, and an
annual cost of $93,750 to maintain this
connection.
As discussed in section VI.B below,
an exempt DCO would likely realize
some administrative cost savings with
respect to its ongoing compliance
obligations with the Commission. The
Commission acknowledges that it is
difficult to differentiate the ongoing
costs of complying with a home
country’s regulatory requirements from
those of complying with the CEA and
Commission regulations given that there
43 Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR at 69426.
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39931
may be costs common to both.
Furthermore, the Commission lacks
reliable data upon which to base many
of these cost estimates, which it
acknowledges could vary greatly among
clearing organizations. Thus, the
Commission seeks comment about such
costs.
C. Section 15(a) Factors
1. Protection of Market Participants and
the Public
The proposed amendments to Part 39
would protect market participants and
the public by requiring, among other
things, that an exempt DCO: (i) May
only clear swaps for U.S. persons for
their proprietary accounts, and not for
‘‘swaps customers’’ within the meaning
of the CEA and Commission regulations;
(ii) must be organized in a jurisdiction
in which it is subject to supervision and
regulation by a government authority
that applies to the clearing organization
statutes, rules, regulations, policies, or a
combination thereof that, taken together,
are consistent with the PFMIs; (iii) must
submit to the Commission the FMI
disclosure template set forth in Annex
A to the Disclosure Framework required
to observe the PFMIs establishing that it
does observe the PFMIs, and must
provide information to the Commission,
upon request, that the Commission
deems necessary to evaluate its
continued eligibility for exemption or to
review its compliance with any
conditions of exemption; and (iv) must
be licensed, registered, or otherwise
authorized to act as a clearing
organization in its home country, and its
home country regulator must not have
made any findings of material nonobservance of the PFMIs or other
relevant home country legal
requirements that have not resulted in
corrective action. Furthermore, the
proposed amendments to part 39 would
provide additional market safeguards
through requiring an MOU or other
similar arrangement with the home
country regulator that would enable the
Commission to obtain any information
that the Commission deems necessary to
evaluate the initial and continued
eligibility of the DCO for exemption
from registration or to review its
compliance with any conditions of such
exemption.
These requirements would protect
market participants and the public by
ensuring that U.S. ‘‘swaps customers’’
would remain subject to the customer
protection regime established in the
CEA and Commission regulations, and
that exempt DCOs would be subject to
the internationally recognized PFMI
standards.
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2. Efficiency, Competitiveness, and
Financial Integrity
Proposed Regulation 39.6 would
promote efficiency in the design of an
exempt DCO’s settlement and clearing
arrangements, operating structure and
procedures, scope of products cleared,
and use of technology because it would
permit an exempt DCO to clear
proprietary transactions for U.S. persons
through observance of the PFMIs,
subject to supervision and regulation by
a home country regulator. Moreover, the
use of a single set of standards to
determine eligibility, namely the
internationally recognized PFMIs,
would promote operational efficiency
because it would (i) permit a non-U.S.
clearing organization to obtain an
exemption from registration that would
mitigate duplicative compliance
requirements and (ii) facilitate
uniformity in supervision and
regulation of both registered and exempt
DCOs.
Proposed Regulation 39.6 may also
promote competition among registered
and exempt DCOs because it would
permit exempt DCOs to clear the same
types of swap transactions for the
proprietary accounts of U.S. persons
that may be cleared by registered DCOs.
Unlike their foreign counterparts, U.S.based DCOs would still be required to
register with the Commission in order to
clear proprietary swap positions for U.S.
persons and would not be eligible for an
exemption under the proposed
regulation (or under section 5b(h) of the
CEA). Potentially, this different
treatment may create a competitive
disadvantage for U.S.-based DCOs,
which would be subject to the
requirements of the CEA and
Commission regulations. However,
exempt DCOs would be subject to a
foreign supervisory and regulatory
framework that is consistent with the
internationally recognized standards set
forth in the PFMIs.
Proposed Regulation 39.6 would be
expected to maintain the financial
integrity of clearing organizations that
clear proprietary transactions for U.S.
persons because exempt clearing
organizations would be subject to
supervision and regulation by a home
country regulator within a legal
framework that is consistent with the
PFMIs. Such supervision and regulation
is comparable to that applicable to
DCOs under the CEA and Commission
regulations, and is sufficiently
comprehensive. In addition, the
proposed regulation may contribute to
the financial integrity of the broader
financial system by spreading the
potential risk of particular cleared
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swaps among a greater number of
registered and exempt DCOs.
3. Price Discovery
Price discovery is the process by
which prices for underlying instruments
may be determined by, or inferred from,
prices of derivative contracts. The
Commission has not identified any
impact that proposed Regulation 39.6
would have on price discovery.
4. Sound Risk Management Practices
Proposed Regulation 39.6 would
contribute to the sound risk
management practices of clearing
organizations that provide clearing
services to U.S. persons for their
proprietary transactions because exempt
DCOs would be subject to the risk
management standards that are included
in the PFMIs. Although the risk
management requirements of the CEA
and the Commission regulations
applicable to registered DCOs would not
be binding upon exempt DCOs, the risk
management standards in the PFMIs are
substantially similar.
5. Other Public Interest Considerations
The Commission notes the public
interest in access to clearing
organizations outside the United States
in light of the international nature of
many swap transactions. The proposed
amendments to part 39 would codify the
exemption process for non-U.S. clearing
organizations that would permit them to
clear proprietary swap transactions for
certain U.S. persons, when such
clearing organizations meet the
eligibility requirements and conditions
of the proposed rule. Having a more
open and transparent process for
obtaining an exemption from
registration may encourage more nonU.S. clearing organizations to seek an
exemption, providing greater
harmonization of the U.S. and global
financial markets.
VI. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires that agencies consider whether
the regulations they propose will have
a significant economic impact on a
substantial number of small entities
and, if so, provide a regulatory
flexibility analysis on the impact.44 The
regulations proposed by the
Commission will affect only clearing
organizations. The Commission has
previously established certain
definitions of ‘‘small entities’’ to be used
by the Commission in evaluating the
impact of its regulations on small
44 5
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entities in accordance with the RFA.45
The Commission has previously
determined that clearing organizations
are not small entities for the purpose of
the RFA.46 Accordingly, the Chairman,
on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that
the proposed regulations will not have
a significant economic impact on a
substantial number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act
(PRA) 47 provides that Federal agencies,
including the Commission, may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a valid
control number from the Office of
Management and Budget (OMB). This
proposed rulemaking contains reporting
requirements that are collections of
information within the meaning of the
PRA. Although the Commission
anticipates that fewer than ten persons
will be subject to these requirements,
which is below the ‘‘ten or more
persons’’ threshold for PRA compliance,
the PRA applies to any recordkeeping,
reporting, or disclosure requirement
contained in a rule of general
applicability.48 The Commission is
proposing to revise Information
Collection 3038–0076, which contains
the requirements for applications for
registration as a DCO, and Information
Collection 3038–0096, which contains
swap data reporting requirements, to
include the collection of information in
proposed Regulation 39.6. The
responses to the collection of
information would be necessary to
obtain the requested exemption from
DCO registration.
1. Application for Exemption and
Ongoing Reporting Obligations Under
Proposed Regulation 39.6
The number of potential respondents
was estimated based on the number of
non-U.S. clearing organizations that
have already applied for, or been
granted, an exemption from DCO
registration by the Commission. Based
on its experience in addressing petitions
for exemption, the Commission
anticipates receiving one or two
applications for exemption per year.
Burden hours and costs were estimated
based on existing information
collections for DCO registration and
reporting, adjusted to reflect the
significantly lower burden of the
proposed regulations. The number of
45 47
FR 18618 (Apr. 30, 1982).
66 FR 45604, 45609 (Aug. 29, 2001).
47 44 U.S.C. 3501 et seq.
48 5 CFR 1320.3(c)(4)(i).
46 See
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respondents for the daily and quarterly
reporting and annual certification
requirements is conservatively
estimated at a maximum of seven, based
on the number of existing exempt DCOs
and the number of pending petitions.
Reporting of specific events and
termination of an exemption are
expected to occur infrequently. The
burden is estimated conservatively at
two per year for event-specific reporting
and at one per year for reporting of an
exemption termination. The
Commission has estimated the burden
hours for this proposed collection of
information as follows:
Application for exemption
Estimated number of respondents: 2
Estimated number of reports per
respondent: 1
Average number of hours per report:
32
Estimated gross annual reporting
burden: 64
Information requested by the
Commission
Estimated number of respondents: 2
Estimated number of reports per
respondent: 1
Average number of hours per report:
3
Estimated gross annual reporting
burden: 6
Daily reporting
Estimated number of respondents: 7
Estimated number of reports per
respondent: 250
Average number of hours per report:
0.1
Estimated gross annual reporting
burden: 175
Quarterly reporting
Estimated number of respondents: 7
Estimated number of reports per
respondent: 4
Average number of hours per report:
2
Estimated gross annual reporting
burden: 56
Event-specific reporting
Estimated number of respondents: 2
Estimated number of reports per
respondent: 1
Average number of hours per report:
0.5
Estimated gross annual reporting
burden: 1
Annual certification
Estimated number of respondents: 7
Estimated number of reports per
respondent: 1
Average number of hours per report:
1.5
Estimated gross annual reporting
burden: 21
Termination of exemption by request of
clearing organization
Estimated number of respondents: 1
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Estimated number of reports per
respondent: 1
Average number of hours per report:
2
Estimated gross annual reporting
burden: 2
Notice to clearing members of
termination of exemption
Estimated number of respondents: 1
Estimated number of reports per
respondent: 22
Average number of hours per report:
0.1
Estimated gross annual reporting
burden: 2.2
2. Reporting by Exempt DCOs in
Accordance With Part 45
Proposed Regulation 39.6(d) would
require an exempt DCO to report data
regarding the two swaps resulting from
the novation of an original swap to a
registered SDR, if the original swap had
been reported to a registered SDR
pursuant to part 45 of the Commission’s
regulations. The Commission is
proposing to revise the information
collection for part 45 to add exempt
DCOs as an additional category of
reporting entity. The burden for exempt
DCOs reporting in accordance with part
45 is estimated to be approximately onequarter of the burden for registered
DCOs with respect to both non-recurring
and recurring costs because exempt
DCOs will not be required to report all
swaps, only those that result from the
novation of original swaps that have
been reported to an SDR.49
Consequently, the burden hours for the
proposed collection of information in
this rulemaking have been estimated as
follows:
Reporting in accordance with part 45
Estimated number of respondents: 7
Estimated number of reports per
respondent: 1,987
Average number of hours per report:
0.1
Estimated gross annual reporting
burden: 1,393
List of Subjects
17 CFR Part 39
Commodity futures, Default rules and
procedures, Exemption, Risk
management, Settlement procedures,
System safeguards.
17 CFR Part 140
Authority delegations (Government
agencies), Organization and functions
(Government agencies).
49 Details of the estimated burden related to nonrecurring and recurring costs under part 45 are
discussed in the part 45 adopting release. See Swap
Data Recordkeeping and Reporting Requirements,
77 FR at 2171–2176.
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39933
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission proposes to amend
17 CFR chapter I as follows:
PART 39—DERIVATIVES CLEARING
ORGANIZATIONS
1. The authority citation for part 39
continues to read as follows:
■
Authority: 7 U.S.C. 2, 7a–1, and 12a; 12
U.S.C. 5464; 15 U.S.C. 8325.
■
2. Revise § 39.1 to read as follows:
§ 39.1
Scope.
The provisions of this subpart A
apply to any derivatives clearing
organization, as defined under section
1a(15) of the Act and § 1.3 of this
chapter, that is registered or is required
to register with the Commission as a
derivatives clearing organization
pursuant to section 5b(a) of the Act, or
that is applying for an exemption from
registration pursuant to section 5b(h) of
the Act.
■ 3. In § 39.2, add the following
definitions in alphabetical order to read
as follows:
§ 39.2
Definitions.
*
*
*
*
*
Exempt derivatives clearing
organization means a derivatives
clearing organization that the
Commission has exempted from
registration under section 5b(a) of the
Act, pursuant to section 5b(h) of the Act
and § 39.6.
Good regulatory standing means, with
respect to a derivatives clearing
organization that is organized outside of
the United States, and is licensed,
registered, or otherwise authorized to
act as a clearing organization in its
home country, that either:
(1) There has been no finding by the
home country regulator of material nonobservance of the Principles for
Financial Market Infrastructures or
other relevant home country legal
requirements, or
(2) There has been a finding by the
home country regulator of material nonobservance of the Principles for
Financial Market Infrastructures or
other relevant home country legal
requirements but any such finding has
been or is being resolved to the
satisfaction of the home country
regulator by means of corrective action
taken by the derivatives clearing
organization.
Home country means, with respect to
a derivatives clearing organization that
is organized outside of the United
States, the jurisdiction in which the
derivatives clearing organization is
organized.
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Home country regulator means, with
respect to a derivatives clearing
organization that is organized outside of
the United States, an appropriate
government authority which licenses,
regulates, supervises, or oversees the
derivatives clearing organization’s
clearing activities in the home country.
*
*
*
*
*
Principles for Financial Market
Infrastructures means the Principles for
Financial Market Infrastructures jointly
published by the Committee on
Payments and Market Infrastructures
and the Technical Committee of the
International Organization of Securities
Commissions in April 2012, as updated,
revised, or otherwise amended.
*
*
*
*
*
■ 4. Add § 39.6 to read as follows:
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§ 39.6 Exemption from derivatives clearing
organization registration.
(a) Eligibility for exemption. The
Commission may exempt, conditionally
or unconditionally, a derivatives
clearing organization that is organized
outside of the United States, from
registration as a derivatives clearing
organization for the clearing of swaps
for U.S. persons, and thereby exempt
such derivatives clearing organization
from compliance with provisions of the
Act and Commission regulations
applicable to derivatives clearing
organizations, if:
(1) The derivatives clearing
organization is subject to comparable,
comprehensive supervision and
regulation by a home country regulator
as demonstrated by the following:
(i) The derivatives clearing
organization is organized in a
jurisdiction in which a home country
regulator applies to the derivatives
clearing organization, on an ongoing
basis, statutes, rules, regulations,
policies, or a combination thereof that,
taken together, are consistent with the
Principles for Financial Market
Infrastructures;
(ii) The derivatives clearing
organization observes the Principles for
Financial Market Infrastructures in all
material respects; and
(iii) The derivatives clearing
organization is in good regulatory
standing in its home country; and
(2) A memorandum of understanding
or similar arrangement satisfactory to
the Commission is in effect between the
Commission and the derivatives
clearing organization’s home country
regulator, pursuant to which, among
other things, the home country regulator
agrees to provide to the Commission any
information that the Commission deems
necessary to evaluate the initial and
continued eligibility of the derivatives
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clearing organization for exemption
from registration or to review its
compliance with any conditions of such
exemption.
(b) Conditions of exemption. An
exemption from registration as a
derivatives clearing organization shall
be subject to any conditions the
Commission may prescribe including,
but not limited to:
(1) Clearing by or for U.S. persons and
futures commission merchants. The
exempt derivatives clearing organization
shall maintain rules that limit swaps
clearing services for U.S. persons and
futures commission merchants to the
following circumstances:
(i) A U.S. person that is a clearing
member of the exempt derivatives
clearing organization may clear swaps
for itself and those persons identified in
the definition of ‘‘proprietary account’’
set forth in § 1.3 of this chapter;
(ii) A non-U.S. person that is a
clearing member of the exempt
derivatives clearing organization may
clear swaps for any affiliated U.S.
person identified in the definition of
‘‘proprietary account’’ set forth in § 1.3
of this chapter; and
(iii) An entity that is registered with
the Commission as a futures
commission merchant may be a clearing
member of the exempt derivatives
clearing organization, 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 § 1.3 of this chapter.
(2) Open access. The exempt
derivatives clearing organization shall
maintain rules with respect to swaps to
which one or more of the counterparties
is a U.S. person. Such rules shall:
(i) Provide that all swaps with the
same terms and conditions, as defined
by product specifications established
under the exempt derivatives clearing
organization’s rules, submitted to the
exempt derivatives clearing organization
for clearing are economically equivalent
within the exempt derivatives clearing
organization and may be offset with
each other within the exempt
derivatives clearing organization, to the
extent offsetting is permitted by the
exempt derivatives clearing
organization’s rules; and
(ii) Provide that there shall be nondiscriminatory clearing of a swap
executed bilaterally or on or subject to
the rules of an unaffiliated electronic
matching platform or trade execution
facility.
(3) Consent to jurisdiction;
designation of agent for service of
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process. The exempt derivatives
clearing organization shall:
(i) Consent to jurisdiction in the
United States;
(ii) Designate, authorize, and identify
to the Commission, an agent in the
United States who shall accept any
notice or service of process, pleadings,
or other documents, including any
summons, complaint, order, subpoena,
request for information, or any other
written or electronic documentation or
correspondence issued by or on behalf
of the Commission or the United States
Department of Justice to the exempt
derivatives clearing organization, in
connection with any actions or
proceedings brought against, or
investigations relating to, the exempt
derivatives clearing organization or any
U.S. person or futures commission
merchant that is a clearing member, or
that clears swaps through an affiliated
clearing member, of the exempt
derivatives clearing organization; and
(iii) Promptly inform the Commission
of any change in its designated and
authorized agent.
(4) Compliance. The exempt
derivatives clearing organization shall
comply, and shall demonstrate
compliance as requested by the
Commission, with any condition of its
exemption.
(5) Inspection of books and records.
The exempt derivatives clearing
organization shall make all documents,
books, records, reports, and other
information related to its operation as
an exempt derivatives clearing
organization open to inspection and
copying by any representative of the
Commission; and in response to a
request by any representative of the
Commission, the exempt derivatives
clearing organization shall, promptly
and in the form specified, make the
requested books and records available
and provide them directly to
Commission representatives.
(6) Observance of the Principles for
Financial Market Infrastructures. On an
annual basis, within 60 days following
the end of its fiscal year, the exempt
derivatives clearing organization shall
provide to the Commission a
certification that it continues to observe
the Principles for Financial Market
Infrastructures in all material respects.
(7) Representation of good regulatory
standing. On an annual basis, within 60
days following the end of its fiscal year,
the Commission shall receive from a
home country regulator, at the request of
the exempt derivatives clearing
organization, a written representation
that the exempt derivatives clearing
organization is in good regulatory
standing.
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(c) General reporting requirements. (1)
An exempt derivatives clearing
organization shall provide to the
Commission the information specified
in this paragraph and any other
information that the Commission deems
necessary, including, but not limited to,
information for the purpose of the
Commission evaluating the continued
eligibility of the exempt derivatives
clearing organization for exemption
from registration, reviewing compliance
by the exempt derivatives clearing
organization with any conditions of the
exemption, or conducting oversight of
U.S. persons and their affiliates, and the
swaps that are cleared by such persons
through the exempt derivatives clearing
organization. Information provided to
the Commission under this paragraph
shall be submitted in accordance with
§ 39.19(b).
(2) Each exempt derivatives clearing
organization shall provide to the
Commission the following information:
(i) A report compiled as of the end of
each trading day and submitted to the
Commission by 10:00 a.m. U.S. Central
time on the following business day,
containing:
(A) Initial margin requirements and
initial margin on deposit for each U.S.
person, with respect to swaps; provided,
however, if a clearing member margins
on a portfolio basis its own positions
and the positions of its affiliates, and
either the clearing member or any of its
affiliates is a U.S. person, the exempt
derivatives clearing organization shall
report initial margin requirements and
initial margin on deposit for all such
positions on a combined basis for each
such clearing member; and
(B) Daily variation margin, separately
listing the mark-to-market amount
collected from or paid to each U.S.
person, with respect to swaps; provided,
however, if a clearing member margins
on a portfolio basis its own positions
and the positions of its affiliates, and
either the clearing member or any of its
affiliates is a U.S. person, the exempt
derivatives clearing organization shall
separately list the mark-to-market
amount collected from or paid to each
such clearing member, on a combined
basis.
(ii) A report compiled as of the last
day of each fiscal quarter of the exempt
derivatives clearing organization and
submitted to the Commission no later
than 17 business days after the end of
the exempt derivatives clearing
organization’s fiscal quarter, containing
the following information:
(A) The aggregate clearing volume of
U.S. persons during the fiscal quarter,
with respect to swaps. If a clearing
member is a U.S. person, the volume
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figure shall include the transactions of
the clearing member and all affiliates. If
a clearing member is not a U.S. person,
the volume figure shall include only
transactions of affiliates that are U.S.
persons.
(B) The average open interest of U.S.
persons during the fiscal quarter, with
respect to swaps. If a clearing member
is a U.S. person, the open interest figure
shall include the positions of the
clearing member and all affiliates. If a
clearing member is not a U.S. person,
the open interest figure shall include
only positions of affiliates that are U.S.
persons.
(C) A list of U.S. persons and futures
commission merchants that are either
clearing members or affiliates of any
clearing member, with respect to the
clearing of swaps, as of the last day of
the fiscal quarter.
(iii) Prompt notice regarding any
change in the home country regulatory
regime that is material to the exempt
derivatives clearing organization’s
continuing observance of the Principles
for Financial Market Infrastructures or
with any of the requirements set forth in
this section or in the order of exemption
issued by the Commission;
(iv) As available to the exempt
derivatives clearing organization, any
assessment of the exempt derivatives
clearing organization’s or the home
country regulator’s observance of the
Principles for Financial Market
Infrastructures, or any portion thereof,
by a home country regulator or other
national authority, or an international
financial institution or international
organization;
(v) As available to the exempt
derivatives clearing organization, any
examination report, examination
findings, or notification of the
commencement of any enforcement or
disciplinary action by a home country
regulator;
(vi) Immediate notice of any change
with respect to the exempt derivatives
clearing organization’s licensure,
registration, or other authorization to act
as a derivatives clearing organization in
its home country;
(vii) In the event of a default by a U.S.
person or futures commission merchant
clearing swaps, with such event of
default determined in accordance with
the rules of the exempt derivatives
clearing organization, immediate notice
of the default including the name of the
U.S. person or futures commission
merchant, a list of the positions held by
the U.S. person or futures commission
merchant, and the amount of the U.S.
person’s or futures commission
merchant’s financial obligation; and
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39935
(viii) Notice of action taken against a
U.S. person or futures commission
merchant by an exempt derivatives
clearing organization, no later than two
business days after the exempt
derivatives clearing organization takes
such action against a U.S. person or
futures commission merchant.
(d) Swap data reporting requirements.
If a clearing member clears through an
exempt derivatives clearing organization
a swap that has been reported to a
registered swap data repository
pursuant to part 45 of this chapter, the
exempt derivatives clearing organization
shall report to a registered swap data
repository data regarding the two swaps
resulting from the novation of the
original swap that had been submitted
to the exempt derivatives clearing
organization for clearing. The exempt
derivatives clearing organization shall
also report the termination of the
original swap accepted for clearing by
the exempt derivatives clearing
organization, to the swap data
repository to which the original swap
was reported. In order to avoid
duplicative reporting for such
transactions, the exempt derivatives
clearing organization shall have rules
that prohibit the reporting, pursuant to
part 45 of this chapter, of the two new
swaps by the original counterparties to
the original swap.
(e) Application procedures. (1) An
entity seeking to be exempt from
registration as a derivatives clearing
organization shall file an application for
exemption with the Secretary of the
Commission in the format and manner
specified by the Commission. The
Commission will review the application
for exemption and may approve or deny
the application or, if deemed
appropriate, exempt the applicant from
registration as a derivatives clearing
organization subject to conditions in
addition to those set forth in paragraph
(b) of this section.
(2) Application. An applicant for
exemption from registration as a
derivatives clearing organization shall
submit to the Commission the
information and documentation
described in this section. Such
information and documentation shall be
clearly labeled as outlined in this
section. The Commission will not
commence processing an application
unless the applicant has filed a
complete application. Upon its own
initiative, an applicant may file with its
completed application for exemption
additional information that may be
necessary or helpful to the Commission
in processing the application. The
application shall include:
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(i) A cover letter containing the
following information:
(A) Exact name of applicant as
specified in its charter, and the name
under which business will be conducted
(including acronyms);
(B) Address of applicant’s principal
office;
(C) List of principal office(s) and
address(es) where clearing activities are/
will be conducted;
(D) A list of all regulatory licenses or
registrations of the applicant (or
exemptions from any licensing
requirement) and the regulator granting
such license or registration;
(E) Date of the applicant’s fiscal year
end;
(F) Contact information for the person
or persons to whom the Commission
should address questions and
correspondence regarding the
application; and
(G) A signature and date by a duly
authorized representative of the
applicant.
(ii) A description of the applicant’s
business plan for providing clearing
services as an exempt derivatives
clearing organization, including
information as to the classes of swaps
that will be cleared and whether the
swaps are subject to a clearing
requirement issued by the Commission
or the applicant’s home country
regulator;
(iii) Documents that demonstrate that
applicant is organized in a jurisdiction
in which its home country regulator
applies to the applicant, on an ongoing
basis, statutes, rules, regulations,
policies, or a combination thereof that,
taken together, are consistent with the
Principles for Financial Market
Infrastructures;
(iv) A written representation from the
applicant’s home country regulator that
the applicant is in good regulatory
standing;
(v) Copies of the applicant’s most
recent disclosures that are necessary to
observe the Principles for Financial
Market Infrastructures, including the
financial market infrastructure
disclosure template set forth in Annex
A to the Disclosure Framework and
Assessment Methodology for the
Principles for Financial Market
Infrastructures, any other such
disclosure framework issued under the
authority of the International
Organization of Securities Commissions
that is required for observance of the
Principles for Financial Market
Infrastructures, and the URL to the
specific page(s) on the applicant’s
website where such disclosures may be
found;
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(vi) A representation that the
applicant will comply with each of the
requirements and conditions of
exemption set forth in paragraphs (b),
(c), and (d) of this section, and the terms
and conditions of its order of exemption
as issued by the Commission;
(vii) A copy of the applicant’s rules
that meet the requirements of
paragraphs (b)(2) and (d) of this section,
as applicable; and
(viii) The applicant’s consent to
jurisdiction in the United States, and
the name and address of the applicant’s
designated agent in the United States,
pursuant to paragraph (b)(3) of this
section.
(3) Submission of supplemental
information. At any time during its
review of the application for exemption
from registration as a derivatives
clearing organization, the Commission
may request that the applicant submit
supplemental information in order for
the Commission to process the
application, and the applicant shall file
such supplemental information in the
format and manner specified by the
Commission.
(4) Amendments to pending
application. An applicant for exemption
from registration as a derivatives
clearing organization shall promptly
amend its application if it discovers a
material omission or error, or if there is
a material change in the information
provided to the Commission in the
application or other information
provided in connection with the
application.
(5) Public information. The following
sections of an application for exemption
from registration as a derivatives
clearing organization will be public: The
cover letter set forth in paragraph
(e)(2)(i) of this section; the
documentation required in paragraphs
(e)(2)(iii) and (e)(2)(v) of this section;
rules that meet the requirements of
paragraphs (b)(2) and (d) of this section,
as applicable; and any other part of the
application not covered by a request for
confidential treatment, subject to § 145.9
of this chapter.
(f) Modification of an exemption. The
Commission may, either at the request
of the exempt derivatives clearing
organization or on its own initiative,
modify the terms and conditions of an
order of exemption, based on changes to
or omissions in material facts or
circumstances pursuant to which the
order of exemption was issued, or for
any reason in its discretion.
(g) Termination of exemption upon
request by an exempt derivatives
clearing organization. (1) An exempt
derivatives clearing organization may
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petition the Commission to terminate its
exemption if:
(i) Changed circumstances result in
the exempt derivatives clearing
organization no longer qualifying for an
exemption;
(ii) The exempt derivatives clearing
organization intends to cease clearing
swaps for U.S. persons; or
(iii) In conjunction with the petition,
the exempt derivatives clearing
organization submits a completed Form
DCO to become a registered derivatives
clearing organization pursuant to
section 5b(a) of the Act.
(2) The petition for termination of
exemption shall include a detailed
explanation of the facts and
circumstances supporting the request
and the exempt derivatives clearing
organization’s plans for, as may be
applicable, the liquidation or transfer of
the swaps positions and related
collateral of U.S. persons.
(3) The Commission shall issue an
order of termination within a reasonable
time appropriate to the circumstances
or, as applicable, in conjunction with
the issuance of an order of registration.
(h) Notice to clearing members of
termination of exemption. Following the
Commission’s issuance of an order of
termination (unless issued in
conjunction with the issuance of an
order of registration), the exempt
derivatives clearing organization shall
provide immediate notice of such
termination to its clearing members.
Such notice shall include:
(1) A copy of the Commission’s order
of termination;
(2) A description of the procedures for
orderly disposition of any open swaps
positions that were cleared for U.S.
persons; and
(3) An instruction to clearing
members, requiring that they provide
the exempt derivatives clearing
organization’s notice of such
termination to all U.S. persons clearing
swaps through such clearing members.
■ 5. Revise § 39.9 to read as follows:
§ 39.9
Scope.
The provisions of this subpart B apply
to any derivatives clearing organization,
as defined under section 1a(15) of the
Act and § 1.3 of this chapter, that is
registered with the Commission as a
derivatives clearing organization
pursuant to section 5b of the Act. The
provisions of this subpart B do not
apply to any exempt derivatives clearing
organization, as defined under § 39.2.
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Federal Register / Vol. 83, No. 156 / Monday, August 13, 2018 / Proposed Rules
PART 140—ORGANIZATION,
FUNCTIONS, AND PROCEDURES OF
THE COMMISSION
6. The authority citation for part 140
continues to read as follows:
■
Authority: 7 U.S.C. 2(a)(12), 12a, 13(c),
13(d), 13(e), and 16(b).
7. Amend § 140.94 as follows:
a. Revise the introductory text of
paragraph (c);
■ b. Redesignate paragraphs (c)(4)
through (c)(13) as paragraphs (c)(5)
through (c)(14); and
■ c. Add new paragraph (c)(4).
The revisions and additions read as
follows:
■
■
§ 140.94 Delegation of authority to the
Director of the Division of Swap Dealer and
Intermediary Oversight and the Director of
the Division of Clearing and Risk.
*
*
*
*
*
(c) The Commission hereby delegates,
until such time as the Commission
orders otherwise, the following
functions to the Director of the Division
of Clearing and Risk and to such
members of the Commission’s staff
acting under his or her direction as he
or she may designate from time to time:
*
*
*
*
*
(4) All functions reserved to the
Commission in § 39.6 of this chapter,
except for the authority to:
(i) Grant an exemption under § 39.6(a)
of this chapter;
(ii) Prescribe conditions to an
exemption under § 39.6(b) of this
chapter;
(iii) Modify an exemption under
§ 39.6(f) of this chapter; and
(iv) Terminate an exemption under
§ 39.6(g)(3) of this chapter.
*
*
*
*
*
Issued in Washington, DC, on August 8,
2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Exemption From
Derivatives Clearing Organization
Registration—Commission Voting
Summary and Chairman’s Statement
sradovich on DSK3GMQ082PROD with PROPOSALS
Appendix 1—Commission Voting
Summary
On this matter, Chairman Giancarlo and
Commissioners Quintenz and Behnam voted
in the affirmative. No Commissioner voted in
the negative.
what has been an internal process public and
transparent. Under the Commodity Exchange
Act (CEA), the Commission may
conditionally or unconditionally exempt a
derivatives clearing organization (DCO) from
registration for the clearing of swaps if the
Commission determines that the clearing
organization is subject to ‘‘comparable,
comprehensive supervision and regulation’’
by appropriate government authorities in the
clearing organization’s home country.
Pursuant to this authority, the Commission
has exempted four non-U.S. clearing
organizations from DCO registration.
The Commission is proposing to adopt
regulations that would codify the policies
and procedures that the Commission is
currently following with respect to granting
exemptions from DCO registration. The
proposed regulations are consistent with the
policies and procedures that the Commission
is currently following, and with the terms
and conditions that the Commission has
imposed on each of the clearing
organizations to which it has previously
issued orders of exemption.
The exempt DCO process applies a
comparable, outcomes-based approach to
reflect the Commission’s recognition that a
foreign jurisdiction may have different
regulations for its central counterparties
(CCP) but share the same regulatory goals.
Under the proposal, for CCPs in foreign
jurisdictions, a framework that conforms to
the Committee on Payments and Market
Infrastructures (CPMI) and the International
Organization of Securities Commissions
(IOSCO) Principles for Financial Market
Infrastructures (PFMI) would be deemed
comparable to the CFTC’s requirements for
domestic CCPs.
The proposal is part of the Commission’s
continued efforts to foster cross-border
cooperation and show deference to home
country regulation that is deemed
comparable to the Commission’s regulations.
As our regulatory counterparts continue to
implement swaps reforms in their markets, it
is critical that the Commission endeavor to
ensure that its rules do not unnecessarily
conflict and fragment the global marketplace.
For this reason, the Commission should
operate on the basis of comity, not
uniformity, with non-U.S. regulators. This
avoids the untenable state of overlapping and
duplicative regulations. The current proposal
reflects this vision.
I support this proposed rule from the
Division of Clearing and Risk (DCR). I look
forward to hearing comments on the
proposal.
[FR Doc. 2018–17335 Filed 8–10–18; 8:45 am]
BILLING CODE 6351–01–P
This proposal is part of Project KISS’s
simple and straightforward efforts to make
17:58 Aug 10, 2018
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DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket Number USCG–2018–0723]
RIN 1625–AA00
Safety Zone; Delaware River; Penn’s
Landing; Philadelphia, PA; Fireworks
Display
Coast Guard, DHS.
Notice of proposed rulemaking.
AGENCY:
ACTION:
The Coast Guard proposes to
establish a temporary safety zone on a
portion of the Delaware River in
Philadelphia, PA. This action is
necessary to protect the surrounding
public and vessels on these navigable
waters adjacent to Penn’s Landing,
Philadelphia, PA, during a fireworks
display on September 16, 2018. This
proposed rulemaking would prohibit
persons and vessels from entering,
transiting, or remaining within the
safety zone unless authorized by the
Captain of the Port Delaware Bay or a
designated representative. We invite
your comments on this proposed
rulemaking.
DATES: Comments and related material
must be received by the Coast Guard on
or before August 28, 2018.
ADDRESSES: You may submit comments
identified by docket number USCG–
2018–0723 using the Federal
eRulemaking Portal at https://
www.regulations.gov. See the ‘‘Public
Participation and Request for
Comments’’ portion of the
SUPPLEMENTARY INFORMATION section for
further instructions on submitting
comments.
FOR FURTHER INFORMATION CONTACT: If
you have questions about this proposed
rulemaking, call or email Petty Officer
Thomas Welker, U.S. Coast Guard,
Sector Delaware Bay, Waterways
Management Division; telephone 215–
271–4814, email Thomas.j.welker@
uscg.mil.
SUPPLEMENTARY INFORMATION:
SUMMARY:
I. Table of Abbreviations
CFR Code of Federal Regulations
DHS Department of Homeland Security
FR Federal Register
NPRM Notice of proposed rulemaking
§ Section
U.S.C. United States Code
II. Background, Purpose, and Legal
Basis
On July 18, 2018, the Mexican
Cultural Society notified the Coast
Appendix 2—Statement of Chairman J.
Christopher Giancarlo
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]]>Agencies
[Federal Register Volume 83, Number 156 (Monday, August 13, 2018)]
[Proposed Rules]
[Pages 39923-39937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17335]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 39 and 140
RIN 3038-AE65
Exemption From Derivatives Clearing Organization Registration
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission) is
proposing amendments to its regulations to establish a regulatory
framework within which the Commission may exempt a clearing
organization that is organized outside of the United States
(hereinafter referred to as ``non-U.S. clearing organization'') from
registration as a derivatives clearing organization (DCO) in connection
with the clearing organization's clearing of swaps. In addition, the
Commission is proposing certain amendments to its delegation provisions
in its regulations.
DATES: Comments must be received on or before October 12, 2018.
ADDRESSES: You may submit comments, identified by ``Exemption from
Derivatives Clearing Organization Registration'' and RIN number 3038-
AE65, by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (FOIA), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
---------------------------------------------------------------------------
\1\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I (2018), and are accessible on the
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
---------------------------------------------------------------------------
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected]; Parisa Abadi, Associate Director, 202-
418-6620, [email protected]; Eileen R. Chotiner, Senior Compliance
Analyst, 202-418-5467, [email protected]; Abigail S. Knauff, Special
Counsel, 202-418-5123, [email protected]; Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Project KISS
B. Statutory and Regulatory Framework for Swaps Execution and
Clearing
C. Statutory and Regulatory Requirements for Registration and
Operation of DCOs
II. Proposed Amendments to Part 39
A. Regulation 39.1--Scope
B. Regulation 39.2--Definitions
C. Regulation 39.6--Exemption Provisions
D. Regulation 39.9--Scope
III. Proposed Amendments to Part 140--Delegations of Authority
IV. Request for Comments
V. Consideration of Costs and Benefits
A. Introduction
B. Proposed Regulation 39.6
C. Section 15(a) Factors
VI. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
I. Background
A. Project KISS
The Commission is engaging in an agency-wide review of its rules,
regulations, and practices to make them simpler, less burdensome, and
less costly, and to make progress on G-20 regulatory reforms. This
initiative is called Project KISS, which stands for ``Keep It Simple,
Stupid.'' \2\ The Commission is proposing to adopt regulations that
would codify the policies and procedures that the Commission is
currently following with respect to granting exemptions from DCO
registration in order to make such policies and procedures transparent
to all potential applicants.
---------------------------------------------------------------------------
\2\ See Remarks of Acting Chairman J. Christopher Giancarlo
before the 42nd Annual International Futures Industry Conference in
Boca Raton, FL, Mar. 15, 2017, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20. On February 24, 2017,
President Donald J. Trump issued Executive Order 13777: Enforcing
the Regulatory Reform Agenda (E.O. 13777). E.O. 13777 directs
federal agencies, among other things, to designate a Regulatory
Reform Officer and establish a Regulatory Reform Task Force.
Although the CFTC, as an independent federal agency, is not bound by
E.O. 13777, the Commission is nevertheless engaging in an agency-
wide review of its rules, regulations, and practices to make them
simpler, less burdensome, and less costly. See Request for
Information, 82 FR 23756 (May 24, 2017).
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B. Statutory and Regulatory Framework for Swaps Execution and Clearing
The Commodity Exchange Act (CEA) \3\ provides that a clearing
organization may not ``perform the functions of a [DCO]'' \4\ with
respect to swaps unless
[[Page 39924]]
the clearing organization is registered with the Commission.\5\
However, the CEA also permits the Commission to conditionally or
unconditionally exempt a clearing organization from registration for
the clearing of swaps if the Commission determines that the clearing
organization is subject to ``comparable, comprehensive supervision and
regulation'' by appropriate government authorities in the clearing
organization's home country.\6\
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\3\ 7 U.S.C. 1 et seq.
\4\ The term ``derivatives clearing organization'' is
statutorily defined to mean a clearing organization in general.
However, for purposes of the discussion herein, the term ``DCO''
refers to a Commission-registered DCO, the term ``exempt DCO''
refers to a derivatives clearing organization that is exempt from
registration, and the term ``clearing organization'' refers to a
clearing organization that: (a) Is neither registered nor exempt
from registration with the Commission as a DCO; and (b) falls within
the definition of ``derivatives clearing organization'' under
section 1a(15) of the CEA, 7 U.S.C. 1a(15), and ``clearing
organization or derivatives clearing organization'' under Regulation
1.3, 17 CFR 1.3.
\5\ Section 5b(a) of the CEA, 7 U.S.C. 7a-1(a).
\6\ Section 5b(h) of the CEA, 7 U.S.C. 7a-1(h). Section 5b(h)
also permits the Commission to exempt from DCO registration a
securities clearing agency registered with the Securities and
Exchange Commission; however, the Commission is not proposing to
exempt securities clearing agencies at this time.
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To date, the Commission has exempted four non-U.S. clearing
organizations from DCO registration. The Commission is proposing to
adopt regulations that would codify the policies and procedures that
the Commission is currently following with respect to granting
exemptions from DCO registration and would make such policies and
procedures transparent to all potential applicants.
C. Statutory and Regulatory Requirements for Registration and Operation
of DCOs
As previously noted, the CEA requires a clearing organization that
clears swaps to be registered with the Commission as a DCO. However, in
order to be registered and maintain registration as a DCO, a clearing
organization must comply with the core principles for DCOs set forth in
the CEA (DCO Core Principles) \7\ and all applicable Commission
regulations.\8\
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\7\ 7 U.S.C. 7a-1(c)(2)(A).
\8\ See 17 CFR parts 1--190 including, in particular, part 39,
which implements the DCO Core Principles.
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The Commission may conditionally or unconditionally exempt a
clearing organization from registration for the clearing of swaps if
the Commission determines that the clearing organization is subject to
``comparable, comprehensive supervision and regulation'' by the
clearing organization's home country regulator(s). The Commission has
construed ``comparable, comprehensive supervision and regulation'' to
mean that the home country's supervisory and regulatory framework
should be consistent with, and achieve the same outcome as, the
statutory and regulatory requirements applicable to registered DCOs.
This outcomes-based approach reflects the Commission's recognition that
a foreign jurisdiction's supervisory and regulatory scheme applicable
to its clearing organizations may differ from the Commission's in
certain respects, but nevertheless may achieve the same underlying
goals. This approach also supports the Commission's effort to strike an
appropriate balance by focusing on the risk implications to the United
States, while promoting global harmonization.
Further, the Commission has deemed a supervisory and regulatory
framework that conforms to the Principles for Financial Market
Infrastructures (PFMIs) \9\ to be comparable to, and as comprehensive
as, the supervisory and regulatory requirements applicable to
registered DCOs.\10\ Notably, the Commission was a key contributor to
the joint efforts of the Committee on Payments and Market
Infrastructures (CPMI) \11\ and the Technical Committee of the
International Organization of Securities Commissions (IOSCO) to develop
the PFMIs, which apply to clearing organizations.\12\ In addition to
contributing to the development of the PFMIs, the Commission serves as
a member of the CPMI-IOSCO task force that monitors implementation of
the PFMIs. The PFMIs are comparable to the DCO Core Principles and
applicable Commission regulations in purpose and scope. Both address
major elements critical to the safe and efficient operations of
clearing organizations, such as risk management, adequacy of financial
resources, default management, margin, settlement, and participation
requirements.\13\ In light of the foregoing, the Commission believes
that a supervisory and regulatory framework that adheres to the
framework under the PFMIs achieves outcomes that are comparable to that
of the supervisory and regulatory requirements applicable to registered
DCOs. Accordingly, the Commission proposes to continue to use the PFMI
framework as the benchmark for making a comparability determination
with respect to a foreign jurisdiction's supervisory and regulatory
scheme.
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\9\ See CPMI-IOSCO, Principles for financial market
infrastructures (Apr. 2012), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf. The PFMIs define a
``financial market infrastructure'' as a ``multilateral system among
participating institutions, including the operator of the system,
used for the purposes of clearing, settling, or recording payments,
securities, derivatives, or other financial transactions.'' See
PFMIs, paragraph 1.8. Additionally, the PFMIs are ``broadly designed
to apply to all systemically important [financial market
infrastructures].'' See PFMIs, paragraph 1.20.
\10\ This conclusion is consistent with previous Commission
determinations. See, e.g., Regulation 50.52(b)(4)(i)(E), 17 CFR
50.52(b)(4)(i)(E) (permitting eligible affiliate counterparties that
are located in certain jurisdictions to satisfy a condition to
electing the exemption by clearing the swap through a DCO or a
clearing organization that is subject to supervision by appropriate
government authorities in the clearing organization's home country
and that has been assessed to be in compliance with the PFMIs).
\11\ CPMI was formerly the Committee on Payment and Settlement
Systems; it was renamed effective September 1, 2014. See https://www.bis.org/press/p140901.htm.
\12\ In order to promote effective and consistent global
regulation of swaps, section 752 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) directs the
Commission to consult and coordinate with foreign regulatory
authorities on the establishment of consistent international
standards with respect to the regulation of swaps, among other
things. Section 752 of the Dodd-Frank Act, Public Law 111-203, 124
Stat. 1376 (2010), codified at 15 U.S.C. 8325.
\13\ See, e.g., Derivatives Clearing Organizations and
International Standards, 78 FR 72476 (Dec. 2, 2013) (adopting final
rules).
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II. Proposed Amendments to Part 39
A. Regulation 39.1--Scope
The Commission is proposing to amend Regulation 39.1 to state that
the provisions of subpart A of part 39 apply to any registered DCO or,
as applicable, any entity applying to be registered as a DCO or
applying to be exempt from DCO registration. Regulation 39.3, which is
contained in subpart A and is not proposed to be amended, sets forth
procedures for DCO registration. Proposed Regulation 39.6, which also
would be contained in subpart A, would set forth the requirements for
an exemption from DCO registration, as discussed below.
B. Regulation 39.2--Definitions
In connection with the proposed exemption regulations, the
Commission is proposing to add five definitions to Regulation 39.2, for
purposes of part 39 only.
The Commission proposes to define the term ``exempt derivatives
clearing organization'' to mean a derivatives clearing organization
that the Commission has exempted from registration under section 5b(a)
of the CEA, pursuant to section 5b(h) of the CEA and Regulation 39.6.
The Commission proposes to define the term ``good regulatory
standing'' to mean, with respect to a non-U.S. clearing organization
that is authorized to act as a clearing organization in its home
country, that either there has been no finding by the home country
[[Page 39925]]
regulator of material non-observance of the PFMIs or other relevant
home country legal requirements, or there has been such a finding by
the home country regulator, but it has been or is being resolved to the
satisfaction of the home country regulator by means of corrective
action taken by the clearing organization. The Commission believes that
this is a workable definition from the standpoint of both the
Commission and the home country regulator in that it establishes a
basis for providing the Commission with a high degree of assurance as
to the clearing organization's observance of the PFMIs, while only
seeking from the home country regulator a representation that it can
reasonably make.
The Commission proposes to define the term ``home country'' to
mean, with respect to a non-U.S. clearing organization, the
jurisdiction in which the clearing organization is organized.
The Commission proposes to define the term ``home country
regulator,'' with respect to a non-U.S. clearing organization, as an
appropriate government authority which licenses, regulates, supervises,
or oversees the clearing organization's clearing activities in the home
country. The proposed definition is consistent with section 5b(h) of
the CEA, which provides, in relevant part, that the Commission may
exempt a clearing organization from registration for the clearing of
swaps if the Commission determines that the clearing organization is
subject to comparable, comprehensive supervision and regulation by the
appropriate government authorities in the home country of the clearing
organization. Use of the term ``an appropriate government authority''
rather than ``the appropriate government authority'' is intended to
recognize that in some foreign jurisdictions there may be more than one
government authority that supervises and regulates a clearing
organization.
The Commission proposes to define the term ``Principles for
Financial Market Infrastructures'' as the PFMIs published by CPMI-IOSCO
in April 2012, as updated, revised, or otherwise amended.\14\
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\14\ The Commission proposes to include this language to
recognize that CPMI-IOSCO could offer further interpretation of or
guidance on the PFMIs. See, e.g., CPMI-IOSCO, Resilience of central
counterparties: Further guidance on the PFMI (July 2017), available
at https://www.bis.org/cpmi/publ/d163.pdf.
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C. Regulation 39.6--Exemption Provisions
Proposed Regulation 39.6 would implement section 5b(h) of the CEA
by setting forth the regulatory framework within which the Commission
may exempt a clearing organization from DCO registration in connection
with the clearing of swaps. After section 5b(h) was enacted in 2010,
clearing organizations outside the United States began inquiring as to
how they could go about obtaining an exemption. Because the Commission
had not yet developed a framework for granting exemptions, the
Commission's Division of Clearing and Risk (DCR) began granting time-
limited no-action relief to these clearing organizations which permit
them to engage in swap clearing activity that would otherwise require
registration as a DCO.\15\ After careful consideration of the issues
involved, DCR staff presented initial thoughts on granting exemptions
at a May 2014 meeting of the Commission's Global Markets Advisory
Committee. Finally, in November 2014, DCR sent a letter to those
clearing organizations that had received no-action relief, advising
them on how to petition the Commission for an exemption. In response to
petitions submitted in accordance with the terms of the letter, the
Commission issued orders of exemption from DCO registration to ASX
Clear (Futures) Pty Limited (ASX), Korea Exchange, Inc. (KRX), Japan
Securities Clearing Corporation (JSCC), and OTC Clearing Hong Kong
Limited (OTC Clear).\16\ Proposed Regulation 39.6 would codify the
policies and procedures that the Commission is currently following with
respect to granting exemptions from DCO registration and would make
such policies and procedures transparent to all potential applicants
for an exemption.
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\15\ See, e.g., CFTC Letter No. 16-56 (May 31, 2016) (granting
no-action relief to Shanghai Clearing House); CFTC Letter No. 14-107
(Aug. 18, 2014) (granting no-action relief to Clearing Corporation
of India Ltd.); CFTC Letter No. 14-87 (June 26, 2014) (granting no-
action relief to Korea Exchange, Inc.); CFTC Letter No. 14-68 (May
7, 2014) (granting no-action relief to OTC Clearing Hong Kong
Limited and certain of its clearing members); CFTC Letter No. 14-07
(Feb. 6, 2014) (granting no-action relief to ASX Clear (Futures) Pty
Limited); and CFTC Letter No. 12-56 (Dec. 17, 2012) (granting no-
action relief to Japan Securities Clearing Corporation and certain
of its clearing participants).
\16\ See ASX Amended Order of Exemption from Registration (Jan.
28, 2016), available at https://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexemption.pdf; KRX
Order of Exemption from Registration (Oct. 26, 2015), available at
https://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-15.pdf; JSCC Order of Exemption from
Registration (Oct. 26, 2015), available at https://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf; OTC Clear Order of Exemption from Registration (Dec. 21,
2015), available at https://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf.
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1. Eligibility for Exemption
Proposed Regulation 39.6(a) would provide that the Commission may
exempt, conditionally or unconditionally, a non-U.S. clearing
organization from registration as a DCO for the clearing of swaps for
certain U.S. persons,\17\ and thereby exempt such clearing organization
from compliance with the provisions of the CEA and Commission
regulations applicable to DCOs, if the Commission determines that all
of the eligibility requirements listed in proposed Regulation
39.6(a)(1) and (a)(2) are met, and the clearing organization satisfies
the conditions set forth in Regulation 39.6(b).\18\ Each of these
requirements is described below.
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\17\ The Commission proposes to use the definition of ``U.S.
person'' as set forth in the Commission's Interpretive Guidance and
Policy Statement Regarding Compliance With Certain Swap Regulations,
78 FR 45292, 45316-45317 (July 26, 2013), as such definition may be
amended or superseded by a definition of the term ``U.S. person''
that is adopted by the Commission and applicable to this proposed
regulation.
\18\ The eligibility requirements listed in proposed Regulation
39.6(a)(1) and (a)(2) and the conditions set forth in proposed
Regulation 39.6(b) would be pre-conditions to the Commission's
issuance of any order exempting a clearing organization from the DCO
registration requirements of the CEA and Commission regulations.
Additional conditions that are unique to the facts and circumstances
specific to a particular clearing organization could be imposed upon
that clearing organization in the Commission's order of exemption,
as permitted by section 5b(h) of the CEA.
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Proposed Regulation 39.6(a)(1) would codify the statutory
requirement that the Commission may only exempt a clearing organization
from DCO registration for the clearing of swaps if the Commission
determines that the clearing organization is subject to comparable,
comprehensive supervision and regulation. Proposed Regulation
39.6(a)(1)(i) would require that, in order to be eligible for an
exemption from DCO registration, a clearing organization must be
organized in a jurisdiction in which a home country regulator applies
to the clearing organization, on an ongoing basis, statutes, rules,
regulations, policies, or a combination thereof that, taken together,
are consistent with the PFMIs.\19\ Under proposed Regulation
39.6(a)(1)(ii) and
[[Page 39926]]
(iii), a clearing organization would be required to observe the PFMIs
in all material respects and be in good regulatory standing in its home
country. As previously noted, the Commission believes that operating
within a regulatory framework consistent with the PFMIs would meet the
CEA's requirement in section 5b(h) that, in order to qualify for an
exemption, a clearing organization must be subject to comparable,
comprehensive supervision and regulation by the appropriate government
authorities in its home country.\20\
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\19\ The Commission notes that the regulatory framework of a
particular jurisdiction may consist of one or multiple sources of
authority. In particular, the inclusion of ``policies'' is intended
to accommodate a jurisdiction in which a policy has the force of
law, and a set of policies may, on its own, represent the
jurisdiction's regulatory framework that is consistent with the
PFMIs.
\20\ In addition to the principles applicable to central
counterparties and other FMIs, the PFMIs provide that central banks,
market regulators, and other relevant authorities should observe
five responsibilities. Consistent with this, the Commission expects
that, in order to meet the standard of being subject to comparable,
comprehensive supervision and regulation, a clearing organization's
home country regulator will observe these responsibilities. In
particular, Responsibility D Explanatory Note 4.4.1 provides that
the home country regulator should adopt the PFMIs, and, ``[w]hile
the precise means through which the principles are applied may vary
from jurisdiction to jurisdiction, all [CPMI] and IOSCO members are
expected to apply the principles to the relevant FMIs in their
jurisdictions to the fullest extent allowed by the legal framework
in their jurisdiction.'' PFMIs, paragraph 4.4.1. Therefore, the
Commission would not find a home country regulator's statement that
it requires a clearing organization to observe the PFMIs to be
sufficient to meet the above standard for exemption, if the home
country regulator has not itself adopted a regulatory framework that
is consistent with the PFMIs.
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Proposed Regulation 39.6(a)(2) would provide that, in order for a
clearing organization to be eligible for an exemption from DCO
registration, a memorandum of understanding (MOU) or similar
arrangement satisfactory to the Commission must be in effect between
the Commission and the clearing organization's home country
regulator,\21\ pursuant to which, among other things, the home country
regulator agrees to provide to the Commission any information that the
Commission deems necessary to evaluate the clearing organization's
initial and continued eligibility for exemption or to review compliance
with any conditions of such exemption. The Commission has customarily
entered into MOUs or similar arrangements in connection with the
supervision of non-U.S. clearing organizations that are registered as
DCOs. In the context of exempt DCOs, satisfactory MOUs or similar
arrangements with the home country regulator would include provisions
for information sharing and cooperation, as well as for notification
upon the occurrence of certain events, but the Commission would not
expect to conduct routine site visits to exempt DCOs.
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\21\ In foreign jurisdictions where more than one regulator
supervises and regulates a clearing organization, the Commission
would expect to enter into an MOU or similar arrangement with more
than one regulator.
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2. Conditions of Exemption
Proposed Regulation 39.6(b) sets forth conditions to which an
exempt DCO would be subject. These conditions are consistent with the
conditions that the Commission has imposed on each of the clearing
organizations to which it has previously issued orders of exemption.
Under proposed Regulation 39.6(b)(1)(i), a U.S. person that is a
clearing member of an exempt DCO would be permitted to clear swaps for
itself and those persons identified in the definition of ``proprietary
account'' set forth in Regulation 1.3. This provision is intended to
permit a U.S. clearing member to clear for affiliates (including a
parent or subsidiary) that are either U.S. or non-U.S. persons. The
Commission recognizes that in some foreign jurisdictions, affiliates
are considered to be ``customers'' and their positions are held in
customer accounts. Clearing for affiliates under these circumstances
would be permissible even if the affiliate positions are not held in an
account that is an analogue to a proprietary account under the
Commission's regulations.
Similarly, proposed Regulation 39.6(b)(1)(ii) would provide that a
non-U.S. person that is a clearing member of an exempt DCO may clear
swaps for any affiliated U.S. person identified in the definition of
``proprietary account'' in Regulation 1.3. This complements the
standard in paragraph (b)(1)(i) by clarifying that an exempt DCO may
clear for affiliated entities when one or more of those entities is a
U.S. person, even if the clearing member itself is not a U.S. person.
Proposed Regulation 39.6(b)(1)(iii) would provide that a futures
commission merchant (FCM) may be a clearing member of an exempt DCO, or
maintain an account with an affiliated broker that is a clearing
member, for the purpose of clearing swaps for the FCM itself and those
persons identified in the definition of ``proprietary account'' in
Regulation 1.3. Again, this provision is intended to permit what would
be considered clearing of ``proprietary'' positions under the
Commission's regulations, even if the positions would qualify as
``customer'' positions under the laws and regulations of an exempt
DCO's home country. This provision would clarify that an exempt DCO may
clear positions for FCMs if the positions are not ``customer''
positions under the Commission's regulations.
The effect of proposed Regulation 39.6(b)(1) is to prohibit the
clearing of FCM customer positions at an exempt DCO. Section 4d(f)(1)
of the CEA makes it unlawful for any person to accept money,
securities, or property (i.e., funds) from a swaps customer to margin a
swap cleared through a DCO unless the person is registered as an
FCM.\22\ Any swaps customer funds held by a DCO are also subject to the
segregation requirements of section 4d(f)(2) of the CEA, and in order
for a swaps customer to receive protection under this regime,
particularly in an insolvency context, its funds must be carried by an
FCM and deposited with a registered DCO.\23\ Absent that chain of
registration, the swaps customer's funds may not be treated as customer
property under the U.S. Bankruptcy Code \24\ and the Commission's
regulations. Because of this, it has been the Commission's policy to
allow exempt DCOs to clear only proprietary positions of U.S. persons
and FCMs. The proposed regulations would codify this approach.
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\22\ 7 U.S.C. 6d(f)(1). This provision establishes a customer
protection regime for swaps customers that is broadly similar to the
regime for futures customers and options on futures customers under
sections 4d(a) and (b) of the CEA. 7 U.S.C. 6d(a) and (b).
\23\ See Section 761(2) of the Bankruptcy Code, 11 U.S.C. 761(2)
(defining a ``clearing organization'' as a derivatives clearing
organization registered under the CEA), and Regulation 190.01(f), 17
CFR 190.01(f) (stating that for purposes of the part 190 bankruptcy
rules, ``clearing organization'' has the same meaning as that set
forth in section 761(2) of the Bankruptcy Code).
\24\ 11 U.S.C. 761-767.
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Proposed Regulation 39.6(b)(2) would codify the ``open access''
requirements of section 2(h)(1)(B) of the CEA with respect to swaps
cleared by an exempt DCO to which one or more of the counterparties is
a U.S. person.\25\ Paragraph (b)(2)(i) would require an exempt DCO to
maintain rules providing that all such swaps with the same terms and
conditions (as defined by product specifications established under the
exempt DCO's rules) submitted to the exempt DCO for clearing are
economically equivalent and may be offset with each other, to the
extent that offsetting is permitted by the exempt DCO's rules.
Paragraph (b)(2)(ii) would require an exempt DCO to maintain rules
providing for non-discriminatory clearing of such a swap executed
either bilaterally or on or subject to the rules of an unaffiliated
electronic matching platform or trade execution facility, e.g., a swap
execution facility.
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\25\ 7 U.S.C. 2(h)(1)(B).
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Proposed Regulation 39.6(b)(3) would provide that an exempt DCO
must
[[Page 39927]]
consent to jurisdiction in the United States and designate an agent in
the United States, for notice or service of process, pleadings, or
other documents issued by or on behalf of the Commission or the U.S.
Department of Justice in connection with any actions or proceedings
against, or any investigations relating to, the exempt DCO or any U.S.
person or FCM that is a clearing member or that clears swaps through an
affiliated clearing member. The name of the designated agent would be
submitted as part of the clearing organization's application for
exemption. If an exempt DCO appoints another agent to accept such
notice or service of process, the exempt DCO would be required to
promptly inform the Commission of this change. This is consistent with
requirements currently imposed in the registration orders of DCOs that
are organized outside of the United States as well as in each of the
orders of exemption that the Commission has issued.
Proposed Regulation 39.6(b)(4) is a general provision that would
require an exempt DCO to comply, and demonstrate compliance as
requested by the Commission, with any condition of the exempt DCO's
order of exemption.
Proposed Regulation 39.6(b)(5) would require an exempt DCO to make
all documents, books, records, reports, and other information related
to its operation as an exempt DCO (books and records) open to
inspection and copying by any Commission representative, and to
promptly make its books and records available and provide them directly
to Commission representatives, upon the request of a Commission
representative. This condition of exemption is consistent with section
5b(h) of the CEA, which provides that the Commission may exempt a DCO
from registration with conditions that may include requiring that the
DCO be available for inspection by the Commission and make available
all information requested by the Commission.\26\ The Commission notes
that it does not anticipate conducting routine site visits to exempt
DCOs. However, the Commission may request an exempt DCO to provide
books and records related to its operation as an exempt DCO in order
for the Commission to ensure that, among other things, the exempt DCO
continues to meet the eligibility requirements for an exemption as well
as the conditions of its exemption.\27\
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\26\ See also Regulation 1.31, 17 CFR 1.31 (requiring, among
other things, that books and records of DCOs and other registered
entities be made available for inspection by Commission
representatives).
\27\ Although an MOU or similar arrangement would provide for
information sharing whereby the home country regulator agrees to
provide to the Commission any information that the Commission deems
necessary to evaluate the clearing organization's initial and
continued eligibility for exemption or to review compliance with any
conditions of such exemption, the Commission would retain the
authority to access books and records directly from an exempt DCO.
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Proposed Regulation 39.6(b)(6) would require that the exempt DCO
provide an annual certification that it continues to observe the PFMIs
in all material respects, within 60 days following the end of its
fiscal year. Proposed Regulation 39.6(b)(7) would require that the
Commission receive an annual written representation from a home country
regulator that the exempt DCO is in good regulatory standing, within 60
days following the end of the exempt DCO's fiscal year. These
requirements would help the Commission to assess an exempt DCO's
continued eligibility for an exemption.
3. Reporting Requirements
Proposed Regulation 39.6(c) and (d) would require an exempt DCO to
meet certain reporting requirements, which are consistent with the
reporting requirements exempt DCOs currently meet.
a. General Reporting Requirements
Proposed Regulation 39.6(c)(1) sets forth general reporting
requirements pursuant to which an exempt DCO must provide certain
information directly to the Commission: (1) On a periodic basis (daily
or quarterly); and (2) after the occurrence of a specified event, each
in accordance with the submission requirements of Regulation
39.19(b).\28\ Such information may be used by the Commission, among
other things, for the purposes of the Commission evaluating the
continued eligibility of the exempt DCO for exemption, reviewing the
exempt DCO's compliance with any conditions of its exemption, or
conducting oversight of U.S. persons and their affiliates, and the
swaps that they clear through the exempt DCO.
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\28\ Regulation 39.19(b), 17 CFR 39.19(b), requires that a DCO
submit reports electronically and in a format and manner specified
by the Commission, defines the term ``business day,'' and
establishes the relevant time zone for any stated time, unless
otherwise specified by the Commission. The Commission has specified
that U.S. Central time will apply with respect to the daily reports
that must be filed by exempt DCOs pursuant to proposed Regulation
39.6(c)(2)(i).
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Proposed Regulation 39.6(c)(2)(i) would require an exempt DCO to
compile a report as of the end of each trading day, and submit it to
the Commission by 10:00 a.m. U.S. Central time on the following
business day, containing with respect to swaps: (A) Initial margin
requirements and initial margin on deposit for each U.S. person; and
(B) daily variation margin, separately listing the mark-to-market
amount collected from or paid to each U.S. person. However, if a
clearing member margins on a portfolio basis its own positions and the
positions of its affiliates, and either the clearing member or any of
its affiliates is a U.S. person, the exempt DCO would be required to
report initial margin requirements and initial margin on deposit for
all such positions on a combined basis for each such clearing member
and to separately list the mark-to-market amount collected from or paid
to each such clearing member, on a combined basis. These requirements
are similar to certain reporting requirements in Regulation 39.19(c)(1)
that apply to registered DCOs.\29\ These reports would provide the
Commission with information regarding the cash flows associated with
U.S. persons clearing swaps through exempt DCOs in order to analyze the
risks presented by such U.S. persons and to assess the extent to which
U.S. business is being cleared by each exempt DCO.
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\29\ Specifically, Regulation 39.19(c)(1) requires registered
DCOs to submit daily reports to the Commission, by 10:00 a.m. on the
following business day, which contain, among other things, initial
margin requirements, initial margin on deposit, and daily variation
margin for each clearing member. See Regulation 39.19(c)(1)(i)(A)
and (c)(1)(i)(B), 17 CFR 39.19(c)(1)(i)(A) and (c)(1)(i)(B). These
provisions require such information to be provided for each clearing
member by house origin and by each customer origin. This distinction
would not apply to an exempt DCO, which will only be permitted to
clear transactions that the Commission would treat as
``proprietary.'' See discussion of proprietary and customer clearing
supra section II.C.2.
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Proposed Regulation 39.6(c)(2)(ii) would require an exempt DCO to
compile a report as of the last day of each fiscal quarter, and submit
the report to the Commission no later than 17 business days after the
end of the fiscal quarter, containing: (A) The aggregate clearing
volume of U.S. persons during the fiscal quarter, and (B) the average
open interest of U.S. persons during the fiscal quarter. If a clearing
member is a U.S. person, this data would include the transactions and
positions of the clearing member and all affiliates for which the
clearing member clears; if a clearing member is not a U.S. person, the
data would only have to include the transactions and positions of
affiliates that are U.S. persons. Paragraph (C) of proposed Regulation
39.6(c)(2)(ii) would require that an exempt DCO's quarterly report to
the Commission contain a list of U.S.
[[Page 39928]]
persons and FCMs \30\ that are either clearing members or affiliates of
any clearing member, with respect to the clearing of swaps, as of the
last day of the fiscal quarter. This information would enable the
Commission, in conducting risk surveillance of U.S. persons and swaps
markets more broadly, to better understand and evaluate the nature and
extent of the cleared swaps activity of U.S. persons.
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\30\ Such FCMs may or may not be U.S. persons. The Commission is
not proposing to require that exempt DCOs provide daily information
regarding initial margin requirements, initial margin on deposit,
and daily variation margin, or quarterly aggregate clearing volume
or average open interest, with respect to swaps, for FCMs that are
not U.S. persons (unless reporting would otherwise be required
because such FCMs are affiliates of U.S. persons). However, the
Commission has a supervisory interest in receiving information
regarding which of its registered FCMs are clearing members or
affiliates of clearing members, with respect to the clearing of
swaps on an exempt DCO.
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Paragraphs (c)(2)(iii) through (c)(2)(viii) of proposed Regulation
39.6 each would require an exempt DCO to provide information to the
Commission upon the occurrence of certain specified events. Several of
the proposed required notifications are intended to provide the
Commission with information relevant to the exempt DCO's continued
eligibility for an exemption or its compliance with the conditions of
its exemption. Proposed Regulation 39.6(c)(2)(iii) would require an
exempt DCO to provide prompt notice to the Commission regarding any
change in its home country regulatory regime that is material to the
exempt DCO's continuing observance of the PFMIs, any requirements set
forth in proposed Regulation 39.6, or the order of exemption issued by
the Commission. In this regard, the Commission requests comment on
whether an exempt DCO should make the determination of whether a change
to the home country regulatory regime constitutes a ``material'' change
to the exempt DCO's continuing observance of the PFMIs, any
requirements set forth in proposed Regulation 39.6, or the Commission's
order of exemption. Alternatively, the Commission requests comment on
whether the Commission should require an exempt DCO to provide prompt
notice of any change in its home country regulatory regime thereby
allowing the Commission to determine whether a change is ``material''
to the exempt DCO's continuing observance of the PFMIs, any
requirements set forth in proposed Regulation 39.6, or the Commission's
order of exemption. Proposed Regulation 39.6(c)(2)(iv) would require an
exempt DCO to provide to the Commission, to the extent that it is
available to the exempt DCO, any assessment of the exempt DCO's
observance (or the home country regulator's observance) of any of the
PFMIs by a home country regulator or other national authority, or an
international financial institution or international organization.\31\
Proposed Regulation 39.6(c)(2)(v) would require an exempt DCO to
provide to the Commission, to the extent that it is available to the
exempt DCO, any examination report, examination findings, or
notification of the commencement of any enforcement or disciplinary
action by a home country regulator. Proposed Regulation 39.6(c)(2)(vi)
would require an exempt DCO to provide immediate notice to the
Commission of any change with respect to its licensure, registration,
or other authorization to act as a clearing organization in its home
country.
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\31\ Such an international organization may include the
International Monetary Fund or World Bank. See PFMIs, paragraph
1.33.
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Two of the event-specific required notifications would assist the
Commission in its oversight of U.S. persons and FCMs clearing swaps.
Proposed Regulation 39.6(c)(2)(vii) would require an exempt DCO to
provide immediate notice to the Commission in the event of a default
(as defined by the exempt DCO in its rules) by a U.S. person or FCM
clearing swaps, including the name of the U.S. person or FCM, a list of
the positions held by the U.S. person or FCM, and the amount of the
U.S. person's or FCM's financial obligation. Proposed Regulation
39.6(c)(2)(viii) would require an exempt DCO to provide notice of any
action that it has taken against a U.S. person or FCM, no later than
two business days after the exempt DCO takes such action against a U.S.
person or FCM. In particular, these provisions would require such
reporting with respect to a default of, or an action taken against, an
FCM, which may or may not be a U.S. person, in furtherance of the
Commission's supervisory responsibilities with respect to registered
FCMs. Proposed paragraphs (c)(2)(vii) and (c)(2)(viii) of Regulation
39.6 are similar to paragraphs (c)(4)(vii) and (c)(4)(xi) of Regulation
39.19, which apply to registered DCOs, respectively.
b. Swap Data Reporting Requirements
Proposed Regulation 39.6(d) would require that if a clearing member
clears through an exempt DCO a swap that has been reported to a
registered swap data repository (SDR) pursuant to part 45 of the
Commission's regulations, the exempt DCO must report to an SDR data
regarding the two swaps resulting from the novation of the original
swap that had been submitted to the exempt DCO for clearing. In
addition, an exempt DCO would be required to report the termination of
the original swap accepted for clearing by the exempt DCO to the SDR to
which the original swap was reported. Further, in order to avoid
duplicative reporting for such transactions, an exempt DCO would be
required to have rules that prohibit the part 45 reporting of the two
new swaps by the counterparties to the original swap.\32\
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\32\ While the Commission recognizes that the counterparties to
the original swap would otherwise be required to report the two new
swaps under part 45 of the Commission's regulations, because an
exempt DCO would be required to implement rules to the contrary at
the direction of the Commission, such counterparties would be
expected to comply with the rules of the exempt DCO in this case.
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4. Application Procedures
Proposed Regulation 39.6(e) would describe the relevant application
procedures for a clearing organization that seeks to be exempt from DCO
registration, which are consistent with the application procedures the
Commission has been using to evaluate petitions for exemption.
Specifically, under proposed Regulation 39.6(e)(1), a clearing
organization would be required to file an application for exemption
with the Secretary of the Commission in the format and manner specified
by the Commission. After reviewing the application, the Commission
could: (1) Grant the exemption without conditions; (2) grant the
exemption with conditions; or (3) deny the application for
exemption.\33\ This provision mirrors language in Regulation
39.3(a)(1), which addresses the application procedures for registration
as a DCO.
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\33\ As noted above, proposed Regulation 39.6(b) sets forth the
pre-conditions that would apply to any exemption from registration
as a DCO.
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Proposed Regulation 39.6(e)(2) would require an applicant to submit
a complete application, including all applicable information and
documentation as detailed in proposed Regulation 39.6(e)(2) and
discussed below. It would provide that the Commission will not commence
processing an application unless the application is complete. Proposed
Regulation 39.6(e)(2) would further provide that an applicant may file
with its completed application additional information that may be
necessary or helpful to the Commission in processing the application.
This provision is similar to certain provisions of Regulation
39.3(a)(2), which sets forth requirements with respect to applications
for registration as a DCO.
[[Page 39929]]
Under proposed Regulation 39.6(e)(2)(i), an applicant would be
required to submit a cover letter providing general information
identifying the applicant, its regulatory licenses or registrations,
and relevant contact information. Proposed Regulation 39.6(e)(2)(ii)-
(viii) would require an applicant for exemption to submit documents
that would establish the applicant's eligibility for exemption under
proposed Regulation 39.6(a), and would contain representations that the
applicant would comply with the conditions of exemption, the general
reporting requirements, and the swap data reporting requirements set
forth in proposed Regulation 39.6(b), (c), and (d), respectively, and
the terms and conditions of its order of exemption as issued by the
Commission.
Additionally, proposed Regulation 39.6(e)(2)(v) would require an
applicant to submit to the Commission copies of its most recent
disclosures necessary to observe the PFMIs, including the financial
market infrastructure (FMI) disclosure template set forth in Annex A to
the Disclosure Framework and Assessment Methodology (Disclosure
Framework) for the PFMIs.\34\ The FMI disclosure template requires a
clearing organization to provide a general description of itself and
the markets it serves, a description of its general organization, an
overview of the relevant legal and regulatory framework, a description
of how it processes a transaction, and a summary narrative detailing
its approach to observing each of the PFMIs. The Commission expects
that the FMI disclosure template provided to the Commission would have
been reviewed and updated within the previous two years.\35\ The FMI
disclosure template is generally required by home country regulators
that enforce the PFMIs and is necessary to achieve status as a
qualified central counterparty (QCCP).\36\
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\34\ See CPMI-IOSCO, Principles for financial market
infrastructures: Disclosure framework and Assessment methodology
(Dec. 2012), at 82 et seq., available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
\35\ PFMI Explanatory Note 3.23.7 provides that the Principle
23, Key Consideration 5 standard that responses to the Disclosure
Framework should be completed ``regularly'' means that an FMI should
review its responses ``[a]t a minimum . . . every two years to
ensure continued accuracy and usefulness.'' PFMIs, paragraph 3.23.7.
\36\ A QCCP is defined as an entity that (i) is licensed to
operate as a central counterparty (CCP) and is permitted by the
appropriate regulator to operate as such, and (ii) is prudentially
supervised in a jurisdiction where the relevant regulator has
established and publicly indicated that it applies to the CCP, on an
ongoing basis, domestic rules and regulations that are consistent
with the PFMIs. The failure of a CCP to achieve QCCP status could
result in significant costs to its bank customers due to certain
financial incentives for banks, including their subsidiaries and
affiliates, to clear financial derivatives through QCCPs. See Basel
Committee on Banking Supervision, Capital Requirements for Bank
Exposures to Central Counterparties (Apr. 10, 2014), available at
https://www.bis.org/publ/bcbs282.htm.
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Proposed Regulation 39.6(e)(3) would provide that, at any time
during the Commission's review of an application for exemption from
registration as a DCO, the Commission may request that the applicant
submit supplemental information in order for the Commission to process
the application, and would require that the applicant file such
supplemental information in the format and manner specified by the
Commission. A similar provision is contained in Regulation 39.3(a)(3),
which applies to applications for DCO registration.
Proposed Regulation 39.6(e)(4) would state that an applicant for
exemption from registration as a DCO must promptly amend its
application if it discovers a material omission or error, or if there
is a material change in the information provided to the Commission in
the application or other information provided in connection with the
application. This provision is virtually identical to Regulation
39.3(a)(4), which addresses amendments to applications for DCO
registration.
Proposed Regulation 39.6(e)(5) would identify those sections of an
application for exemption from registration that will be made public,
including the cover letter required in proposed Regulation
39.6(e)(2)(i); documents demonstrating that the applicant is organized
in a jurisdiction in which its home country regulator applies to the
applicant statutes, rules, regulations, and/or policies that are
consistent with the PFMIs; disclosures necessary to observe the PFMIs;
\37\ rules that meet the requirements of proposed Regulation 39.6(b)(2)
and (d), as applicable; and any other part of the application not
covered by a request for confidential treatment, subject to Regulation
145.9. This provision is similar to Regulation 39.3(a)(5), which
identifies those portions of an application for registration as a DCO
that are made public.
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\37\ The Disclosure Framework contemplates that central
counterparties will make public disclosures pursuant to the
Disclosure Framework. See CPMI-IOSCO, Principles for financial
market infrastructures: Disclosure framework and Assessment
methodology (Dec. 2012), at 1, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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5. Modification of an Exemption
Proposed Regulation 39.6(f) would provide that the Commission may
modify the terms and conditions of an order of exemption, either at the
request of the exempt DCO or on the Commission's own initiative, based
on changes to or omissions in material facts or circumstances pursuant
to which the order of exemption was issued, or for any reason in the
Commission's discretion. This is a further expression of the
Commission's discretionary authority under section 5b(h) of the CEA to
exempt a clearing organization from registration ``conditionally or
unconditionally,'' and it reflects the Commission's authority to act
with flexibility in responding to changed circumstances affecting an
exempt DCO.
6. Termination of Exemption Upon Request by an Exempt DCO
Proposed Regulation 39.6(g) would set forth the framework under
which an exempt DCO may petition the Commission to terminate its
exemption and the applicable procedures. Specifically, pursuant to
proposed Regulation 39.6(g)(1), an exempt DCO may request that the
Commission terminate its exemption if the exempt DCO: (i) No longer
qualifies for an exemption as a result of changed circumstances; (ii)
intends to cease clearing swaps for U.S. persons; or (iii) submits a
completed Form DCO in order to become a registered DCO in conjunction
with its petition. Proposed Regulation 39.6(g)(2) would provide that
the petition for termination must include an explanation for the
request and describe the exempt DCO's plans for liquidation or transfer
of the positions and related collateral of U.S. persons, if applicable.
Pursuant to proposed Regulation 39.6(g)(3), the Commission would issue
an order of termination within a reasonable time appropriate to the
circumstances or in conjunction with the issuance of an order of
registration, if applicable.
D. Regulation 39.9--Scope
The Commission is proposing to revise Regulation 39.9 to make it
clear that the provisions of subpart B apply to any DCO, as defined
under section 1a(15) of the CEA and Regulation 1.3, that is registered
with the Commission as a DCO pursuant to section 5b of the CEA, but do
not apply to any exempt DCO. This revision would clarify that the
subpart B regulations that address compliance with the DCO Core
Principles applicable to registered DCOs do not impose any obligations
upon exempt DCOs.
III. Proposed Amendments to Part 140--Delegations of Authority
The proposed amendments to Regulation 140.94(c)(4) would delegate
[[Page 39930]]
to the Director of DCR all functions reserved to the Commission under
proposed Regulation 39.6 except for the following: (i) Granting an
exemption under paragraph (a); (ii) prescribing any conditions to an
exemption under paragraph (b); (iii) modifying an exemption under
paragraph (f); and (iv) terminating an exemption under paragraph
(g)(3). Such delegation would expedite consideration of exemption
requests by permitting DCR to more efficiently carry out tasks
associated with the processing of an exemption application. Certain
technical amendments have also been proposed to Regulation 140.94 in
order to adjust the paragraph numbering to accommodate the proposed
amendments to Regulation 140.94(c)(4).
IV. Request for Comments
The Commission generally requests comments on all aspects of the
proposed rules. Additionally, the Commission requests comments on the
following specific issues:
Exempt DCOs are permitted to clear only proprietary
positions of U.S. persons and FCMs. The proposed regulations would
codify this approach. Should the Commission consider permitting an
exempt DCO to clear swaps for FCM customers?
Should the Commission impose any additional conditions on
an exempt DCO or modify any of the existing conditions?
Should any of the conditions imposed on an exempt DCO lead
to an automatic termination of the exemption if the condition is not
met?
V. Consideration of Costs and Benefits
A. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\38\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
Section 15(a) factors.
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\38\ 7 U.S.C. 19(a).
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B. Proposed Regulation 39.6
1. Summary
Section 5b(a) of the CEA requires a clearing organization that
clears swaps to be registered with the Commission as a DCO. Section
5b(h) of the CEA, however, 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.
Pursuant to this authority, the Commission has exempted four non-U.S.
clearing organizations from DCO registration to clear proprietary swap
positions of U.S. persons and FCMs. The proposed regulation would
codify the policies and procedures that the Commission is currently
following with respect to granting exemptions from DCO registration.
Accordingly, the baseline for this consideration of costs and benefits
is the current status, where the Commission has implemented a set of
conditions and procedures for granting exemptions from DCO
registration, but has not codified those conditions and procedures
under Commission regulations.
Specifically, the proposed regulation would set forth the process
by which a non-U.S. clearing organization could obtain an exemption
from DCO registration for the clearing of swaps provided that it meets
the specified eligibility standards and can meet the conditions of an
exemption. The eligibility standards require, among other things, that
a clearing organization applying for exemption must be organized in a
jurisdiction in which a home country regulator applies to the clearing
organization, on an ongoing basis, statutes, rules, regulations,
policies, or a combination thereof that, taken together, are consistent
with the PFMIs, and the clearing organization must observe the PFMIs in
all material respects. The conditions of exemption describe, among
other things, the circumstances in which an exempt DCO would be
permitted to clear swaps for U.S. persons. An exempt DCO is and would
be permitted to clear only ``proprietary'' positions as defined in
Regulation 1.3, and it is not and would not be permitted to clear
``customer'' positions subject to section 4d(f) of the CEA.
2. Benefits
Proposed Regulation 39.6 would provide several benefits. First, an
exempt DCO may clear proprietary swap positions for U.S. persons
without having to prepare and submit an application for DCO
registration, which involves the submission of extensive documentation
to the Commission. Similarly, an exempt DCO is not required to comply
with Commission regulations applicable to registered DCOs, except as
required under Regulation 39.6 or the exempt DCO's order of exemption.
Thus, the significantly reduced application and ongoing compliance
requirements for exempt DCOs may encourage clearing organizations to
seek an exemption from registration. This mitigation of registration-
related requirements may also benefit market participants and the
public more generally. That is, non-U.S. clearing organizations that
are exempt from registration may incur lower compliance costs, which
may, in turn, result in lower costs to their clearing members. In
addition, U.S. persons (as clearing members or affiliates of clearing
members) would likely have access to more clearing organizations in
order to clear their proprietary swaps. Access to more clearing
organizations may also encourage voluntary clearing of swaps that are
not required to be cleared, as certain swaps may not be cleared by any
registered DCOs. This may, in turn, serve to diversify the potential
risk of cleared swaps, because any such risk would become less
concentrated if a larger number of registered and exempt DCOs were
clearing swaps for U.S. persons, and the volume of those swaps could
become more evenly distributed among those registered and exempt DCOs.
Finally, the proposed regulation may also promote competition among
registered and exempt DCOs by encouraging more clearing organizations
to seek an exemption, and it would permit exempt DCOs to clear the same
types of swap transactions for the proprietary accounts of U.S. persons
that may be cleared by registered DCOs.
The Commission requests comment on the potential benefits of
proposed Regulation 39.6, including, where possible, quantitative data.
More specifically, the Commission requests comment on the potential
benefits to clearing organizations that are eligible to become exempt
DCOs and thereby clear swaps for U.S. persons and their affiliates, and
the potential benefits to other market participants or the financial
system as a whole. The Commission further requests comment on any
alternative proposals that might achieve the objectives of the proposed
regulation, and the benefits associated with any such alternatives.
[[Page 39931]]
3. Costs
A clearing organization seeking an exemption incurs some costs in
preparing an application for exemption. If a clearing organization were
not able to seek an exemption, however, it would be required to
register with the Commission and to submit a Form DCO.\39\ While the
Form DCO and the FMI disclosure template set forth in Annex A to the
Disclosure Framework require certain similar types of information to be
provided to the Commission, the Form DCO would require the clearing
organization to provide additional documentation that is not required
pursuant to the Disclosure Framework. Moreover, a clearing organization
is likely to have already prepared the FMI disclosure template in order
to comply with the requirements of its home country regulator, which
must be consistent with the PFMIs, and to achieve QCCP status.\40\
Therefore, the costs involved in applying for an exemption are less
than the costs involved in applying for registration, and the proposed
regulation would not change this. Based on the Commission's Paperwork
Reduction Act estimates, the cost burden to submit Form DCO is
approximately $100,000 per entity,\41\ while that for submitting an
application for exemption is approximately $10,500 per entity.\42\
Thus, there is an estimated cost savings associated with submitting an
application for exemption rather than Form DCO of approximately $89,500
per entity, and the proposed regulation would codify the procedures for
submitting an application for exemption. The Commission seeks comment
about whether these cost estimates are reasonable.
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\39\ For purposes of this analysis, it is assumed that any
clearing organization that is not granted an exemption will be
required to register as a DCO if it clears swaps for any U.S.
person. This assumption, however, is not intended to be a legal
conclusion that, with respect to the particular facts and
circumstances of any particular clearing organization, the CEA would
require registration with the Commission as a DCO.
\40\ See supra section II.C.4 for more detail.
\41\ See Derivatives Clearing Organization General Provisions
and Core Principles, 76 FR 69334, 69410 (Nov. 8, 2011).
\42\ See infra section VI.B for more detail.
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Other potential administrative costs associated with maintaining an
exemption from DCO registration are minimal. For example, an exempt DCO
would be required to make its books and records relating to its
operation as an exempt DCO available for inspection by Commission staff
upon request. This condition of exemption is consistent with section
5b(h) of the CEA, which provides that the Commission may exempt a DCO
from registration with conditions that may include requiring that the
DCO be available for inspection by the Commission and make available
all information requested by the Commission. In addition, this
requirement is imposed on registered DCOs; as a result, an exempt DCO
would be held to this requirement even if it were to choose to register
as a DCO. The Commission notes that there would be no costs imposed on
an exempt DCO in connection with this condition unless and until the
Commission requests to inspect its books and records. Furthermore, an
exempt DCO's home country regulator is and would be required to provide
to the Commission an annual written representation that the exempt DCO
is in good regulatory standing. The Commission believes that the costs
associated with this requirement are minimal, as home country
regulators typically provide a standard letter and are required to
provide it only once a year.
Lastly, exempt DCOs would be held to certain reporting
requirements, the costs of which are limited to providing them to the
Commission on either a regular or event-specific basis. The Commission
has previously considered the costs of regular and event-specific
reporting requirements when adopting Regulation 39.19(c) for registered
DCOs.\43\ The reporting requirements for exempt DCOs are substantially
less extensive than those specified in Regulation 39.19(c). The
Commission believes the costs of the exempt DCO reporting requirements
are not significant but welcomes comment on such costs, particularly
from existing exempt DCOs.
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\43\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69426.
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An exempt DCO may incur costs related to establishing and
maintaining connections to an SDR in order to report the swap data that
would be required by proposed Regulation 39.6(d). In connection with
the analysis required by the Paperwork Reduction Act, the Commission
has estimated an initial cost of $85,478 per exempt DCO to establish an
SDR connection, and an annual cost of $93,750 to maintain this
connection.
As discussed in section VI.B below, an exempt DCO would likely
realize some administrative cost savings with respect to its ongoing
compliance obligations with the Commission. The Commission acknowledges
that it is difficult to differentiate the ongoing costs of complying
with a home country's regulatory requirements from those of complying
with the CEA and Commission regulations given that there may be costs
common to both. Furthermore, the Commission lacks reliable data upon
which to base many of these cost estimates, which it acknowledges could
vary greatly among clearing organizations. Thus, the Commission seeks
comment about such costs.
C. Section 15(a) Factors
1. Protection of Market Participants and the Public
The proposed amendments to Part 39 would protect market
participants and the public by requiring, among other things, that an
exempt DCO: (i) May only clear swaps for U.S. persons for their
proprietary accounts, and not for ``swaps customers'' within the
meaning of the CEA and Commission regulations; (ii) must be organized
in a jurisdiction in which it is subject to supervision and regulation
by a government authority that applies to the clearing organization
statutes, rules, regulations, policies, or a combination thereof that,
taken together, are consistent with the PFMIs; (iii) must submit to the
Commission the FMI disclosure template set forth in Annex A to the
Disclosure Framework required to observe the PFMIs establishing that it
does observe the PFMIs, and must provide information to the Commission,
upon request, that the Commission deems necessary to evaluate its
continued eligibility for exemption or to review its compliance with
any conditions of exemption; and (iv) must be licensed, registered, or
otherwise authorized to act as a clearing organization in its home
country, and its home country regulator must not have made any findings
of material non-observance of the PFMIs or other relevant home country
legal requirements that have not resulted in corrective action.
Furthermore, the proposed amendments to part 39 would provide
additional market safeguards through requiring an MOU or other similar
arrangement with the home country regulator that would enable the
Commission to obtain any information that the Commission deems
necessary to evaluate the initial and continued eligibility of the DCO
for exemption from registration or to review its compliance with any
conditions of such exemption.
These requirements would protect market participants and the public
by ensuring that U.S. ``swaps customers'' would remain subject to the
customer protection regime established in the CEA and Commission
regulations, and that exempt DCOs would be subject to the
internationally recognized PFMI standards.
[[Page 39932]]
2. Efficiency, Competitiveness, and Financial Integrity
Proposed Regulation 39.6 would promote efficiency in the design of
an exempt DCO's settlement and clearing arrangements, operating
structure and procedures, scope of products cleared, and use of
technology because it would permit an exempt DCO to clear proprietary
transactions for U.S. persons through observance of the PFMIs, subject
to supervision and regulation by a home country regulator. Moreover,
the use of a single set of standards to determine eligibility, namely
the internationally recognized PFMIs, would promote operational
efficiency because it would (i) permit a non-U.S. clearing organization
to obtain an exemption from registration that would mitigate
duplicative compliance requirements and (ii) facilitate uniformity in
supervision and regulation of both registered and exempt DCOs.
Proposed Regulation 39.6 may also promote competition among
registered and exempt DCOs because it would permit exempt DCOs to clear
the same types of swap transactions for the proprietary accounts of
U.S. persons that may be cleared by registered DCOs. Unlike their
foreign counterparts, U.S.-based DCOs would still be required to
register with the Commission in order to clear proprietary swap
positions for U.S. persons and would not be eligible for an exemption
under the proposed regulation (or under section 5b(h) of the CEA).
Potentially, this different treatment may create a competitive
disadvantage for U.S.-based DCOs, which would be subject to the
requirements of the CEA and Commission regulations. However, exempt
DCOs would be subject to a foreign supervisory and regulatory framework
that is consistent with the internationally recognized standards set
forth in the PFMIs.
Proposed Regulation 39.6 would be expected to maintain the
financial integrity of clearing organizations that clear proprietary
transactions for U.S. persons because exempt clearing organizations
would be subject to supervision and regulation by a home country
regulator within a legal framework that is consistent with the PFMIs.
Such supervision and regulation is comparable to that applicable to
DCOs under the CEA and Commission regulations, and is sufficiently
comprehensive. In addition, the proposed regulation may contribute to
the financial integrity of the broader financial system by spreading
the potential risk of particular cleared swaps among a greater number
of registered and exempt DCOs.
3. Price Discovery
Price discovery is the process by which prices for underlying
instruments may be determined by, or inferred from, prices of
derivative contracts. The Commission has not identified any impact that
proposed Regulation 39.6 would have on price discovery.
4. Sound Risk Management Practices
Proposed Regulation 39.6 would contribute to the sound risk
management practices of clearing organizations that provide clearing
services to U.S. persons for their proprietary transactions because
exempt DCOs would be subject to the risk management standards that are
included in the PFMIs. Although the risk management requirements of the
CEA and the Commission regulations applicable to registered DCOs would
not be binding upon exempt DCOs, the risk management standards in the
PFMIs are substantially similar.
5. Other Public Interest Considerations
The Commission notes the public interest in access to clearing
organizations outside the United States in light of the international
nature of many swap transactions. The proposed amendments to part 39
would codify the exemption process for non-U.S. clearing organizations
that would permit them to clear proprietary swap transactions for
certain U.S. persons, when such clearing organizations meet the
eligibility requirements and conditions of the proposed rule. Having a
more open and transparent process for obtaining an exemption from
registration may encourage more non-U.S. clearing organizations to seek
an exemption, providing greater harmonization of the U.S. and global
financial markets.
VI. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\44\ The
regulations proposed by the Commission will affect only clearing
organizations. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its regulations on small entities in
accordance with the RFA.\45\ The Commission has previously determined
that clearing organizations are not small entities for the purpose of
the RFA.\46\ Accordingly, the Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed
regulations will not have a significant economic impact on a
substantial number of small entities.
---------------------------------------------------------------------------
\44\ 5 U.S.C. 601 et seq.
\45\ 47 FR 18618 (Apr. 30, 1982).
\46\ See 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \47\ provides that Federal
agencies, including the Commission, may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid control number from the Office of Management
and Budget (OMB). This proposed rulemaking contains reporting
requirements that are collections of information within the meaning of
the PRA. Although the Commission anticipates that fewer than ten
persons will be subject to these requirements, which is below the ``ten
or more persons'' threshold for PRA compliance, the PRA applies to any
recordkeeping, reporting, or disclosure requirement contained in a rule
of general applicability.\48\ The Commission is proposing to revise
Information Collection 3038-0076, which contains the requirements for
applications for registration as a DCO, and Information Collection
3038-0096, which contains swap data reporting requirements, to include
the collection of information in proposed Regulation 39.6. The
responses to the collection of information would be necessary to obtain
the requested exemption from DCO registration.
---------------------------------------------------------------------------
\47\ 44 U.S.C. 3501 et seq.
\48\ 5 CFR 1320.3(c)(4)(i).
---------------------------------------------------------------------------
1. Application for Exemption and Ongoing Reporting Obligations Under
Proposed Regulation 39.6
The number of potential respondents was estimated based on the
number of non-U.S. clearing organizations that have already applied
for, or been granted, an exemption from DCO registration by the
Commission. Based on its experience in addressing petitions for
exemption, the Commission anticipates receiving one or two applications
for exemption per year. Burden hours and costs were estimated based on
existing information collections for DCO registration and reporting,
adjusted to reflect the significantly lower burden of the proposed
regulations. The number of
[[Page 39933]]
respondents for the daily and quarterly reporting and annual
certification requirements is conservatively estimated at a maximum of
seven, based on the number of existing exempt DCOs and the number of
pending petitions. Reporting of specific events and termination of an
exemption are expected to occur infrequently. The burden is estimated
conservatively at two per year for event-specific reporting and at one
per year for reporting of an exemption termination. The Commission has
estimated the burden hours for this proposed collection of information
as follows:
Application for exemption
Estimated number of respondents: 2
Estimated number of reports per respondent: 1
Average number of hours per report: 32
Estimated gross annual reporting burden: 64
Information requested by the Commission
Estimated number of respondents: 2
Estimated number of reports per respondent: 1
Average number of hours per report: 3
Estimated gross annual reporting burden: 6
Daily reporting
Estimated number of respondents: 7
Estimated number of reports per respondent: 250
Average number of hours per report: 0.1
Estimated gross annual reporting burden: 175
Quarterly reporting
Estimated number of respondents: 7
Estimated number of reports per respondent: 4
Average number of hours per report: 2
Estimated gross annual reporting burden: 56
Event-specific reporting
Estimated number of respondents: 2
Estimated number of reports per respondent: 1
Average number of hours per report: 0.5
Estimated gross annual reporting burden: 1
Annual certification
Estimated number of respondents: 7
Estimated number of reports per respondent: 1
Average number of hours per report: 1.5
Estimated gross annual reporting burden: 21
Termination of exemption by request of clearing organization
Estimated number of respondents: 1
Estimated number of reports per respondent: 1
Average number of hours per report: 2
Estimated gross annual reporting burden: 2
Notice to clearing members of termination of exemption
Estimated number of respondents: 1
Estimated number of reports per respondent: 22
Average number of hours per report: 0.1
Estimated gross annual reporting burden: 2.2
2. Reporting by Exempt DCOs in Accordance With Part 45
Proposed Regulation 39.6(d) would require an exempt DCO to report
data regarding the two swaps resulting from the novation of an original
swap to a registered SDR, if the original swap had been reported to a
registered SDR pursuant to part 45 of the Commission's regulations. The
Commission is proposing to revise the information collection for part
45 to add exempt DCOs as an additional category of reporting entity.
The burden for exempt DCOs reporting in accordance with part 45 is
estimated to be approximately one-quarter of the burden for registered
DCOs with respect to both non-recurring and recurring costs because
exempt DCOs will not be required to report all swaps, only those that
result from the novation of original swaps that have been reported to
an SDR.\49\ Consequently, the burden hours for the proposed collection
of information in this rulemaking have been estimated as follows:
---------------------------------------------------------------------------
\49\ Details of the estimated burden related to non-recurring
and recurring costs under part 45 are discussed in the part 45
adopting release. See Swap Data Recordkeeping and Reporting
Requirements, 77 FR at 2171-2176.
Reporting in accordance with part 45
Estimated number of respondents: 7
Estimated number of reports per respondent: 1,987
Average number of hours per report: 0.1
Estimated gross annual reporting burden: 1,393
List of Subjects
17 CFR Part 39
Commodity futures, Default rules and procedures, Exemption, Risk
management, Settlement procedures, System safeguards.
17 CFR Part 140
Authority delegations (Government agencies), Organization and
functions (Government agencies).
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
1. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.
8325.
0
2. Revise Sec. 39.1 to read as follows:
Sec. 39.1 Scope.
The provisions of this subpart A apply to any derivatives clearing
organization, as defined under section 1a(15) of the Act and Sec. 1.3
of this chapter, that is registered or is required to register with the
Commission as a derivatives clearing organization pursuant to section
5b(a) of the Act, or that is applying for an exemption from
registration pursuant to section 5b(h) of the Act.
0
3. In Sec. 39.2, add the following definitions in alphabetical order
to read as follows:
Sec. 39.2 Definitions.
* * * * *
Exempt derivatives clearing organization means a derivatives
clearing organization that the Commission has exempted from
registration under section 5b(a) of the Act, pursuant to section 5b(h)
of the Act and Sec. 39.6.
Good regulatory standing means, with respect to a derivatives
clearing organization that is organized outside of the United States,
and is licensed, registered, or otherwise authorized to act as a
clearing organization in its home country, that either:
(1) There has been no finding by the home country regulator of
material non-observance of the Principles for Financial Market
Infrastructures or other relevant home country legal requirements, or
(2) There has been a finding by the home country regulator of
material non-observance of the Principles for Financial Market
Infrastructures or other relevant home country legal requirements but
any such finding has been or is being resolved to the satisfaction of
the home country regulator by means of corrective action taken by the
derivatives clearing organization.
Home country means, with respect to a derivatives clearing
organization that is organized outside of the United States, the
jurisdiction in which the derivatives clearing organization is
organized.
[[Page 39934]]
Home country regulator means, with respect to a derivatives
clearing organization that is organized outside of the United States,
an appropriate government authority which licenses, regulates,
supervises, or oversees the derivatives clearing organization's
clearing activities in the home country.
* * * * *
Principles for Financial Market Infrastructures means the
Principles for Financial Market Infrastructures jointly published by
the Committee on Payments and Market Infrastructures and the Technical
Committee of the International Organization of Securities Commissions
in April 2012, as updated, revised, or otherwise amended.
* * * * *
0
4. Add Sec. 39.6 to read as follows:
Sec. 39.6 Exemption from derivatives clearing organization
registration.
(a) Eligibility for exemption. The Commission may exempt,
conditionally or unconditionally, a derivatives clearing organization
that is organized outside of the United States, from registration as a
derivatives clearing organization for the clearing of swaps for U.S.
persons, and thereby exempt such derivatives clearing organization from
compliance with provisions of the Act and Commission regulations
applicable to derivatives clearing organizations, if:
(1) The derivatives clearing organization is subject to comparable,
comprehensive supervision and regulation by a home country regulator as
demonstrated by the following:
(i) The derivatives clearing organization is organized in a
jurisdiction in which a home country regulator applies to the
derivatives clearing organization, on an ongoing basis, statutes,
rules, regulations, policies, or a combination thereof that, taken
together, are consistent with the Principles for Financial Market
Infrastructures;
(ii) The derivatives clearing organization observes the Principles
for Financial Market Infrastructures in all material respects; and
(iii) The derivatives clearing organization is in good regulatory
standing in its home country; and
(2) A memorandum of understanding or similar arrangement
satisfactory to the Commission is in effect between the Commission and
the derivatives clearing organization's home country regulator,
pursuant to which, among other things, the home country regulator
agrees to provide to the Commission any information that the Commission
deems necessary to evaluate the initial and continued eligibility of
the derivatives clearing organization for exemption from registration
or to review its compliance with any conditions of such exemption.
(b) Conditions of exemption. An exemption from registration as a
derivatives clearing organization shall be subject to any conditions
the Commission may prescribe including, but not limited to:
(1) Clearing by or for U.S. persons and futures commission
merchants. The exempt derivatives clearing organization shall maintain
rules that limit swaps clearing services for U.S. persons and futures
commission merchants to the following circumstances:
(i) A U.S. person that is a clearing member of the exempt
derivatives clearing organization may clear swaps for itself and those
persons identified in the definition of ``proprietary account'' set
forth in Sec. 1.3 of this chapter;
(ii) A non-U.S. person that is a clearing member of the exempt
derivatives clearing organization may clear swaps for any affiliated
U.S. person identified in the definition of ``proprietary account'' set
forth in Sec. 1.3 of this chapter; and
(iii) An entity that is registered with the Commission as a futures
commission merchant may be a clearing member of the exempt derivatives
clearing organization, 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 Sec. 1.3 of this
chapter.
(2) Open access. The exempt derivatives clearing organization shall
maintain rules with respect to swaps to which one or more of the
counterparties is a U.S. person. Such rules shall:
(i) Provide that all swaps with the same terms and conditions, as
defined by product specifications established under the exempt
derivatives clearing organization's rules, submitted to the exempt
derivatives clearing organization for clearing are economically
equivalent within the exempt derivatives clearing organization and may
be offset with each other within the exempt derivatives clearing
organization, to the extent offsetting is permitted by the exempt
derivatives clearing organization's rules; and
(ii) Provide that there shall be non-discriminatory clearing of a
swap executed bilaterally or on or subject to the rules of an
unaffiliated electronic matching platform or trade execution facility.
(3) Consent to jurisdiction; designation of agent for service of
process. The exempt derivatives clearing organization shall:
(i) Consent to jurisdiction in the United States;
(ii) Designate, authorize, and identify to the Commission, an agent
in the United States who shall accept any notice or service of process,
pleadings, or other documents, including any summons, complaint, order,
subpoena, request for information, or any other written or electronic
documentation or correspondence issued by or on behalf of the
Commission or the United States Department of Justice to the exempt
derivatives clearing organization, in connection with any actions or
proceedings brought against, or investigations relating to, the exempt
derivatives clearing organization or any U.S. person or futures
commission merchant that is a clearing member, or that clears swaps
through an affiliated clearing member, of the exempt derivatives
clearing organization; and
(iii) Promptly inform the Commission of any change in its
designated and authorized agent.
(4) Compliance. The exempt derivatives clearing organization shall
comply, and shall demonstrate compliance as requested by the
Commission, with any condition of its exemption.
(5) Inspection of books and records. The exempt derivatives
clearing organization shall make all documents, books, records,
reports, and other information related to its operation as an exempt
derivatives clearing organization open to inspection and copying by any
representative of the Commission; and in response to a request by any
representative of the Commission, the exempt derivatives clearing
organization shall, promptly and in the form specified, make the
requested books and records available and provide them directly to
Commission representatives.
(6) Observance of the Principles for Financial Market
Infrastructures. On an annual basis, within 60 days following the end
of its fiscal year, the exempt derivatives clearing organization shall
provide to the Commission a certification that it continues to observe
the Principles for Financial Market Infrastructures in all material
respects.
(7) Representation of good regulatory standing. On an annual basis,
within 60 days following the end of its fiscal year, the Commission
shall receive from a home country regulator, at the request of the
exempt derivatives clearing organization, a written representation that
the exempt derivatives clearing organization is in good regulatory
standing.
[[Page 39935]]
(c) General reporting requirements. (1) An exempt derivatives
clearing organization shall provide to the Commission the information
specified in this paragraph and any other information that the
Commission deems necessary, including, but not limited to, information
for the purpose of the Commission evaluating the continued eligibility
of the exempt derivatives clearing organization for exemption from
registration, reviewing compliance by the exempt derivatives clearing
organization with any conditions of the exemption, or conducting
oversight of U.S. persons and their affiliates, and the swaps that are
cleared by such persons through the exempt derivatives clearing
organization. Information provided to the Commission under this
paragraph shall be submitted in accordance with Sec. 39.19(b).
(2) Each exempt derivatives clearing organization shall provide to
the Commission the following information:
(i) A report compiled as of the end of each trading day and
submitted to the Commission by 10:00 a.m. U.S. Central time on the
following business day, containing:
(A) Initial margin requirements and initial margin on deposit for
each U.S. person, with respect to swaps; provided, however, if a
clearing member margins on a portfolio basis its own positions and the
positions of its affiliates, and either the clearing member or any of
its affiliates is a U.S. person, the exempt derivatives clearing
organization shall report initial margin requirements and initial
margin on deposit for all such positions on a combined basis for each
such clearing member; and
(B) Daily variation margin, separately listing the mark-to-market
amount collected from or paid to each U.S. person, with respect to
swaps; provided, however, if a clearing member margins on a portfolio
basis its own positions and the positions of its affiliates, and either
the clearing member or any of its affiliates is a U.S. person, the
exempt derivatives clearing organization shall separately list the
mark-to-market amount collected from or paid to each such clearing
member, on a combined basis.
(ii) A report compiled as of the last day of each fiscal quarter of
the exempt derivatives clearing organization and submitted to the
Commission no later than 17 business days after the end of the exempt
derivatives clearing organization's fiscal quarter, containing the
following information:
(A) The aggregate clearing volume of U.S. persons during the fiscal
quarter, with respect to swaps. If a clearing member is a U.S. person,
the volume figure shall include the transactions of the clearing member
and all affiliates. If a clearing member is not a U.S. person, the
volume figure shall include only transactions of affiliates that are
U.S. persons.
(B) The average open interest of U.S. persons during the fiscal
quarter, with respect to swaps. If a clearing member is a U.S. person,
the open interest figure shall include the positions of the clearing
member and all affiliates. If a clearing member is not a U.S. person,
the open interest figure shall include only positions of affiliates
that are U.S. persons.
(C) A list of U.S. persons and futures commission merchants that
are either clearing members or affiliates of any clearing member, with
respect to the clearing of swaps, as of the last day of the fiscal
quarter.
(iii) Prompt notice regarding any change in the home country
regulatory regime that is material to the exempt derivatives clearing
organization's continuing observance of the Principles for Financial
Market Infrastructures or with any of the requirements set forth in
this section or in the order of exemption issued by the Commission;
(iv) As available to the exempt derivatives clearing organization,
any assessment of the exempt derivatives clearing organization's or the
home country regulator's observance of the Principles for Financial
Market Infrastructures, or any portion thereof, by a home country
regulator or other national authority, or an international financial
institution or international organization;
(v) As available to the exempt derivatives clearing organization,
any examination report, examination findings, or notification of the
commencement of any enforcement or disciplinary action by a home
country regulator;
(vi) Immediate notice of any change with respect to the exempt
derivatives clearing organization's licensure, registration, or other
authorization to act as a derivatives clearing organization in its home
country;
(vii) In the event of a default by a U.S. person or futures
commission merchant clearing swaps, with such event of default
determined in accordance with the rules of the exempt derivatives
clearing organization, immediate notice of the default including the
name of the U.S. person or futures commission merchant, a list of the
positions held by the U.S. person or futures commission merchant, and
the amount of the U.S. person's or futures commission merchant's
financial obligation; and
(viii) Notice of action taken against a U.S. person or futures
commission merchant by an exempt derivatives clearing organization, no
later than two business days after the exempt derivatives clearing
organization takes such action against a U.S. person or futures
commission merchant.
(d) Swap data reporting requirements. If a clearing member clears
through an exempt derivatives clearing organization a swap that has
been reported to a registered swap data repository pursuant to part 45
of this chapter, the exempt derivatives clearing organization shall
report to a registered swap data repository data regarding the two
swaps resulting from the novation of the original swap that had been
submitted to the exempt derivatives clearing organization for clearing.
The exempt derivatives clearing organization shall also report the
termination of the original swap accepted for clearing by the exempt
derivatives clearing organization, to the swap data repository to which
the original swap was reported. In order to avoid duplicative reporting
for such transactions, the exempt derivatives clearing organization
shall have rules that prohibit the reporting, pursuant to part 45 of
this chapter, of the two new swaps by the original counterparties to
the original swap.
(e) Application procedures. (1) An entity seeking to be exempt from
registration as a derivatives clearing organization shall file an
application for exemption with the Secretary of the Commission in the
format and manner specified by the Commission. The Commission will
review the application for exemption and may approve or deny the
application or, if deemed appropriate, exempt the applicant from
registration as a derivatives clearing organization subject to
conditions in addition to those set forth in paragraph (b) of this
section.
(2) Application. An applicant for exemption from registration as a
derivatives clearing organization shall submit to the Commission the
information and documentation described in this section. Such
information and documentation shall be clearly labeled as outlined in
this section. The Commission will not commence processing an
application unless the applicant has filed a complete application. Upon
its own initiative, an applicant may file with its completed
application for exemption additional information that may be necessary
or helpful to the Commission in processing the application. The
application shall include:
[[Page 39936]]
(i) A cover letter containing the following information:
(A) Exact name of applicant as specified in its charter, and the
name under which business will be conducted (including acronyms);
(B) Address of applicant's principal office;
(C) List of principal office(s) and address(es) where clearing
activities are/will be conducted;
(D) A list of all regulatory licenses or registrations of the
applicant (or exemptions from any licensing requirement) and the
regulator granting such license or registration;
(E) Date of the applicant's fiscal year end;
(F) Contact information for the person or persons to whom the
Commission should address questions and correspondence regarding the
application; and
(G) A signature and date by a duly authorized representative of the
applicant.
(ii) A description of the applicant's business plan for providing
clearing services as an exempt derivatives clearing organization,
including information as to the classes of swaps that will be cleared
and whether the swaps are subject to a clearing requirement issued by
the Commission or the applicant's home country regulator;
(iii) Documents that demonstrate that applicant is organized in a
jurisdiction in which its home country regulator applies to the
applicant, on an ongoing basis, statutes, rules, regulations, policies,
or a combination thereof that, taken together, are consistent with the
Principles for Financial Market Infrastructures;
(iv) A written representation from the applicant's home country
regulator that the applicant is in good regulatory standing;
(v) Copies of the applicant's most recent disclosures that are
necessary to observe the Principles for Financial Market
Infrastructures, including the financial market infrastructure
disclosure template set forth in Annex A to the Disclosure Framework
and Assessment Methodology for the Principles for Financial Market
Infrastructures, any other such disclosure framework issued under the
authority of the International Organization of Securities Commissions
that is required for observance of the Principles for Financial Market
Infrastructures, and the URL to the specific page(s) on the applicant's
website where such disclosures may be found;
(vi) A representation that the applicant will comply with each of
the requirements and conditions of exemption set forth in paragraphs
(b), (c), and (d) of this section, and the terms and conditions of its
order of exemption as issued by the Commission;
(vii) A copy of the applicant's rules that meet the requirements of
paragraphs (b)(2) and (d) of this section, as applicable; and
(viii) The applicant's consent to jurisdiction in the United
States, and the name and address of the applicant's designated agent in
the United States, pursuant to paragraph (b)(3) of this section.
(3) Submission of supplemental information. At any time during its
review of the application for exemption from registration as a
derivatives clearing organization, the Commission may request that the
applicant submit supplemental information in order for the Commission
to process the application, and the applicant shall file such
supplemental information in the format and manner specified by the
Commission.
(4) Amendments to pending application. An applicant for exemption
from registration as a derivatives clearing organization shall promptly
amend its application if it discovers a material omission or error, or
if there is a material change in the information provided to the
Commission in the application or other information provided in
connection with the application.
(5) Public information. The following sections of an application
for exemption from registration as a derivatives clearing organization
will be public: The cover letter set forth in paragraph (e)(2)(i) of
this section; the documentation required in paragraphs (e)(2)(iii) and
(e)(2)(v) of this section; rules that meet the requirements of
paragraphs (b)(2) and (d) of this section, as applicable; and any other
part of the application not covered by a request for confidential
treatment, subject to Sec. 145.9 of this chapter.
(f) Modification of an exemption. The Commission may, either at the
request of the exempt derivatives clearing organization or on its own
initiative, modify the terms and conditions of an order of exemption,
based on changes to or omissions in material facts or circumstances
pursuant to which the order of exemption was issued, or for any reason
in its discretion.
(g) Termination of exemption upon request by an exempt derivatives
clearing organization. (1) An exempt derivatives clearing organization
may petition the Commission to terminate its exemption if:
(i) Changed circumstances result in the exempt derivatives clearing
organization no longer qualifying for an exemption;
(ii) The exempt derivatives clearing organization intends to cease
clearing swaps for U.S. persons; or
(iii) In conjunction with the petition, the exempt derivatives
clearing organization submits a completed Form DCO to become a
registered derivatives clearing organization pursuant to section 5b(a)
of the Act.
(2) The petition for termination of exemption shall include a
detailed explanation of the facts and circumstances supporting the
request and the exempt derivatives clearing organization's plans for,
as may be applicable, the liquidation or transfer of the swaps
positions and related collateral of U.S. persons.
(3) The Commission shall issue an order of termination within a
reasonable time appropriate to the circumstances or, as applicable, in
conjunction with the issuance of an order of registration.
(h) Notice to clearing members of termination of exemption.
Following the Commission's issuance of an order of termination (unless
issued in conjunction with the issuance of an order of registration),
the exempt derivatives clearing organization shall provide immediate
notice of such termination to its clearing members. Such notice shall
include:
(1) A copy of the Commission's order of termination;
(2) A description of the procedures for orderly disposition of any
open swaps positions that were cleared for U.S. persons; and
(3) An instruction to clearing members, requiring that they provide
the exempt derivatives clearing organization's notice of such
termination to all U.S. persons clearing swaps through such clearing
members.
0
5. Revise Sec. 39.9 to read as follows:
Sec. 39.9 Scope.
The provisions of this subpart B apply to any derivatives clearing
organization, as defined under section 1a(15) of the Act and Sec. 1.3
of this chapter, that is registered with the Commission as a
derivatives clearing organization pursuant to section 5b of the Act.
The provisions of this subpart B do not apply to any exempt derivatives
clearing organization, as defined under Sec. 39.2.
[[Page 39937]]
PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
0
6. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and
16(b).
0
7. Amend Sec. 140.94 as follows:
0
a. Revise the introductory text of paragraph (c);
0
b. Redesignate paragraphs (c)(4) through (c)(13) as paragraphs (c)(5)
through (c)(14); and
0
c. Add new paragraph (c)(4).
The revisions and additions read as follows:
Sec. 140.94 Delegation of authority to the Director of the Division
of Swap Dealer and Intermediary Oversight and the Director of the
Division of Clearing and Risk.
* * * * *
(c) The Commission hereby delegates, until such time as the
Commission orders otherwise, the following functions to the Director of
the Division of Clearing and Risk and to such members of the
Commission's staff acting under his or her direction as he or she may
designate from time to time:
* * * * *
(4) All functions reserved to the Commission in Sec. 39.6 of this
chapter, except for the authority to:
(i) Grant an exemption under Sec. 39.6(a) of this chapter;
(ii) Prescribe conditions to an exemption under Sec. 39.6(b) of
this chapter;
(iii) Modify an exemption under Sec. 39.6(f) of this chapter; and
(iv) Terminate an exemption under Sec. 39.6(g)(3) of this chapter.
* * * * *
Issued in Washington, DC, on August 8, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Exemption From Derivatives Clearing Organization
Registration--Commission Voting Summary and Chairman's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz
and Behnam voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
This proposal is part of Project KISS's simple and
straightforward efforts to make what has been an internal process
public and transparent. Under the Commodity Exchange Act (CEA), the
Commission may conditionally or unconditionally exempt a derivatives
clearing organization (DCO) from registration for the clearing of
swaps if the Commission determines that the clearing organization is
subject to ``comparable, comprehensive supervision and regulation''
by appropriate government authorities in the clearing organization's
home country. Pursuant to this authority, the Commission has
exempted four non-U.S. clearing organizations from DCO registration.
The Commission is proposing to adopt regulations that would
codify the policies and procedures that the Commission is currently
following with respect to granting exemptions from DCO registration.
The proposed regulations are consistent with the policies and
procedures that the Commission is currently following, and with the
terms and conditions that the Commission has imposed on each of the
clearing organizations to which it has previously issued orders of
exemption.
The exempt DCO process applies a comparable, outcomes-based
approach to reflect the Commission's recognition that a foreign
jurisdiction may have different regulations for its central
counterparties (CCP) but share the same regulatory goals. Under the
proposal, for CCPs in foreign jurisdictions, a framework that
conforms to the Committee on Payments and Market Infrastructures
(CPMI) and the International Organization of Securities Commissions
(IOSCO) Principles for Financial Market Infrastructures (PFMI) would
be deemed comparable to the CFTC's requirements for domestic CCPs.
The proposal is part of the Commission's continued efforts to
foster cross-border cooperation and show deference to home country
regulation that is deemed comparable to the Commission's
regulations. As our regulatory counterparts continue to implement
swaps reforms in their markets, it is critical that the Commission
endeavor to ensure that its rules do not unnecessarily conflict and
fragment the global marketplace. For this reason, the Commission
should operate on the basis of comity, not uniformity, with non-U.S.
regulators. This avoids the untenable state of overlapping and
duplicative regulations. The current proposal reflects this vision.
I support this proposed rule from the Division of Clearing and
Risk (DCR). I look forward to hearing comments on the proposal.
[FR Doc. 2018-17335 Filed 8-10-18; 8:45 am]
BILLING CODE 6351-01-P
