Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 34819-34838 [2019-15262]

Download as PDF Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules Avenue, Burlington, MA 01803; phone: 781– 238–7757; fax: 781–238–7199; email: neil.doh@faa.gov. (2) Refer to European Union Aviation Safety Agency AD 2018–0262, dated December 6, 2018, for more information. You may examine the EASA AD in the AD docket on the internet at https://www.regulations.gov by searching for and locating it in Docket No. FAA–2019–0260. (3) For service information identified in this AD, contact Ipeco Holdings Limited, Aviation Way, Southend-on-Sea, SS2 6UN, United Kingdom; phone: 44 1702 549371; fax: 44 1702 540782; email: sales@Ipeco.com. You may view this referenced service information at the FAA, Engine & Propeller Standards Branch, 1200 District Avenue, Burlington, MA 01803. For information on the availability of this material at the FAA, call 781–238–7759. Issued in Burlington, Massachusetts, on July 12, 2019. Robert J. Ganley, Manager, Engine & Propeller Standards Branch, Aircraft Certification Service. [FR Doc. 2019–15413 Filed 7–18–19; 8:45 am] BILLING CODE 4910–13–P COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 39 and 140 RIN 3038–AE87 Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations Commodity Futures Trading Commission. ACTION: Notice of proposed rulemaking. AGENCY: The Commodity Futures Trading Commission (Commission) is proposing amendments to its regulations that would permit derivatives clearing organizations (DCOs) organized outside of the United States (hereinafter referred to as ‘‘nonU.S. clearing organizations’’) that do not pose substantial risk to the U.S. financial system to register with the Commission yet comply with the core principles applicable to DCOs set forth in the Commodity Exchange Act (CEA) through compliance with their home country regulatory regime, subject to certain conditions and limitations. The Commission is also proposing certain related amendments to the delegation provisions in its regulations. DATES: Comments must be received on or before September 17, 2019. ADDRESSES: You may submit comments, identified by ‘‘Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations’’ and RIN 3038–AE87, by any of the following methods: jspears on DSK30JT082PROD with PROPOSALS SUMMARY: VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 • 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; Brian Baum, Special Counsel, 202–418– 5654, bbaum@cftc.gov; August A. Imholtz III, Special Counsel, 202–418– 5140, aimholtz@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, 1 17 CFR 145.9. Commission regulations referred to in this release 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. PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 34819 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. DCO Registration Framework B. Overview of Proposed Requirements II. Proposed Amendments to Part 39 A. Regulation 39.2—Definitions B. Regulation 39.3(a)—Application Procedures C. Regulation 39.4—Procedures for Implementing DCO Rules and Clearing New Products D. Regulation 39.9—Scope E. Subpart D—Provisions Applicable to DCOs Subject to Alternative Compliance III. Proposed Amendments to Part 140— Organization, Functions, and Procedures of the Commission IV. Request for Comments V. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Cost-Benefit Considerations D. Antitrust Considerations I. Background A. DCO Registration Framework Section 5b(a) of the CEA provides that a clearing organization may not ‘‘perform the functions of a [DCO]’’ 2 with respect to futures or swaps unless the clearing organization is registered with the Commission.3 With respect to futures, section 4(a) of the CEA restricts the execution of a futures contract to a designated contract market (DCM), and § 38.601 of the Commission’s regulations requires any transaction executed on or through a DCM to be 2 The term ‘‘derivatives clearing organization’’ is statutorily defined to mean a clearing organization in general. However, for purposes of the discussion in this release, the term ‘‘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 § 1.3, 17 CFR 1.3. 3 7 U.S.C. 7a–1(a). Under section 2(i) of the CEA, 7 U.S.C. 2(i), activities outside of the United States are not subject to the swap provisions of the CEA, including any rules prescribed or regulations promulgated thereunder, unless those activities either ‘‘have a direct and significant connection with activities in, or effect on, commerce of the United States,’’ or contravene any rule or regulation established to prevent evasion of a CEA provision enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (Dodd-Frank Act). Therefore, pursuant to section 2(i), the DCO registration requirement extends to any clearing organization whose clearing activities outside of the United States have a ‘‘direct and significant connection with activities in, or effect on, commerce of the United States.’’ E:\FR\FM\19JYP1.SGM 19JYP1 34820 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules cleared at a DCO.4 This is distinguished from foreign futures which, if executed on or through a registered foreign board of trade, must be cleared through a DCO or a clearing organization that observes the CPMI–IOSCO Principles for Financial Market Infrastructures and is in good regulatory standing in its home country jurisdiction.5 With respect to swaps, the CEA permits the Commission to exempt from DCO registration a non-U.S. clearing organization that is ‘‘subject to comparable, comprehensive supervision and regulation’’ by its home country regulator.6 The Commission has granted exemptions from DCO registration but so far has limited exempt DCOs to clearing only proprietary swaps for U.S. persons. As a result, a non-U.S. clearing organization currently must register as a DCO if it wants to clear swaps for customers of futures commission merchants (FCMs). In order to register and maintain registration as a DCO, a clearing organization must comply with each of the core principles applicable to DCOs set forth in the CEA (DCO Core Principles) and any requirement that the Commission imposes by rule or regulation.7 Most of the requirements applicable to DCOs are set forth in part 39 of the Commission’s regulations (Part 39), which the Commission adopted to implement the DCO Core Principles.8 Of the 16 DCOs currently registered with the Commission, six are organized outside of the United States.9 These six 4 See 7 U.S.C. 6; and 17 CFR 38.601. 17 CFR 48.7(d). 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 has not granted, nor developed a framework for granting, such exemptions. In 2018, the Commission proposed regulations that would codify the policies and procedures that the Commission currently follows with respect to granting exemptions from DCO registration to non-U.S. clearing organizations. See Exemption From Derivatives Clearing Organization Registration, 83 FR 39923 (Aug. 13, 2018). On July 11, 2019, as a supplement to that proposal, the Commission approved a separate notice of proposed rulemaking, entitled ‘‘Exemption from Derivatives Clearing Organization Registration,’’ that will be published in the Federal Register. In that release, the Commission is further proposing to permit exempt DCOs to clear swaps for U.S. customers through foreign intermediaries. All references to exempt DCOs contained in this release are consistent with the existing exempt DCO regime and are not indicative of the Commission’s response to comments received on the initial proposal. 7 7 U.S.C. 7a–1(c)(2)(A)(i). 8 Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 69334 (Nov. 8, 2011). 9 The six registered DCOs organized outside of the United States are Eurex Clearing AG, ICE Clear Europe Limited, ICE NGX Canada Inc., LCH Limited, LCH SA, and Singapore Exchange Derivatives Clearing Limited. jspears on DSK30JT082PROD with PROPOSALS 5 See VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 DCOs are also registered (or have comparable status) in their respective home countries, which means they are subject to compliance with the CEA and Part 39 and their home country regulatory regimes, as well as oversight by the Commission and their home country regulators. There are, however, meaningful differences in the extent to which U.S. persons clear trades through these six non-U.S. DCOs. For example, nearly half of the swaps business at LCH Limited, if measured on the basis of required initial margin, is attributable to U.S. persons.10 In contrast, certain other non-U.S. DCOs, such as LCH SA and Eurex Clearing AG, for example, hold significantly less initial margin from U.S. persons, both in absolute terms and as a percentage of the total required initial margin at the DCO. The Commission, recognizing this regulatory overlap and considering the dynamics of the marketplace, is proposing a new DCO registration framework that would differentiate between clearing organizations organized in the United States (U.S. clearing organizations) and non-U.S. clearing organizations. The proposed framework would also distinguish non-U.S. clearing organizations that do not pose substantial risk to the U.S. financial system from those that do. Under the new framework, the status of U.S. clearing organizations would not change. A U.S. clearing organization would still be required to register as a DCO and to comply with the CEA and all Commission regulations applicable to DCOs. In addition, any non-U.S. clearing organization that wants to clear futures listed for trading on a DCM would be subject to the current registration requirements. Finally, any non-U.S. clearing organization that wants to clear swaps, either proprietary or customer, for U.S. persons, and is determined by the Commission to pose substantial risk to the U.S. financial system (as discussed further below), would be subject to the current requirements as well. However, a non-U.S. clearing organization that wants to clear swaps for U.S. persons (and not futures listed for trading on a DCM) and has not been determined by the Commission to pose substantial risk to the U.S. financial system would have two additional options. First, the non-U.S. clearing organization could still apply for an exemption from DCO registration. The Commission recognizes that this option may not appeal to some non-U.S. 10 Nearly half of the total required initial margin that U.S. persons post globally in connection with cleared swaps is held at LCH Limited. PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 clearing organizations because, as previously noted, an exempt DCO is currently limited to clearing proprietary swaps for U.S. persons.11 If the non-U.S. clearing organization wants to clear swaps for FCM customers, but does not want to be subject to full compliance with Commission regulations, it would have the option to register and maintain registration as a DCO by relying largely on its home country regulatory regime, as discussed below. The Commission believes these proposed changes would allow the Commission to make more effective use of its resources by focusing its oversight almost exclusively on those DCOs that are either organized in the United States or pose substantial risk to the U.S. financial system. The Commission further believes this rulemaking would advance a territorial, risk-based approach to the regulation of clearing organizations that shows appropriate deference to non-U.S. regulation that achieves a similar result as the DCO Core Principles where the non-U.S. regulator itself has a substantial regulatory interest in the DCOs located in its jurisdiction. A deference-based cross-border policy recognizes that market participants and market facilities in a globalized swap market are subject to multiple regulators and potentially face duplicative regulations. Under the proposed framework, the Commission would allow a non-U.S. DCO to satisfy the DCO Core Principles by complying with the corresponding requirements in its home jurisdiction, except with respect to certain Commission regulations, including critical customer protection safeguards and swap data reporting requirements, as discussed below. In this way, the proposed framework would help preserve the benefits of an integrated, global swap market by reducing the degree to which a DCO would be subject to multiple sets of regulations, while ensuring protection for U.S. customers. Further, the proposed approach encourages collaboration and coordination among U.S. and foreign regulators in establishing comprehensive regulatory standards for swaps clearing. B. Overview of Proposed Requirements The CEA requires a DCO to comply with the DCO Core Principles and any requirement that the Commission imposes by rule or regulation. The CEA further provides that, subject to any rule or regulation prescribed by the 11 But see Exemption from Derivatives Clearing Organization Registration, approved on July 11, 2019 (proposing to permit exempt DCOs to clear swaps for U.S. customers through foreign intermediaries). E:\FR\FM\19JYP1.SGM 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules Commission, a DCO has ‘‘reasonable discretion’’ in establishing the manner by which the DCO complies with each DCO Core Principle.12 Currently, a DCO is required to comply with all Commission regulations that were adopted to implement the DCO Core Principles. The Commission is proposing regulations that would allow a non-U.S. clearing organization that seeks to clear swaps for U.S. persons,13 including FCM customers, to register as a DCO and, in most instances, comply with the applicable legal requirements in its home country as an alternative means of complying with the DCO Core Principles. A non-U.S. clearing organization would be eligible for this alternative compliance regime if: (1) The Commission determines that the clearing organization’s compliance with its home country regulatory regime would satisfy the DCO Core Principles; 14 (2) the clearing organization is in good regulatory standing in its home country; (3) the Commission determines that the clearing organization does not pose substantial risk to the U.S. financial system; and (4) a memorandum of understanding (MOU) or similar arrangement satisfactory to the Commission is in effect between the Commission and the clearing organization’s home country regulator. Each of these requirements is described in greater detail below. An applicant for alternative compliance would be required to file only certain exhibits of Form DCO,15 including a regulatory compliance chart in which the applicant would identify the applicable legal requirements 16 in its home country that correspond with each DCO Core Principle and explain how the applicant satisfies those requirements. Under the current registration regime, an applicant must demonstrate compliance with the DCO 12 7 U.S.C. 7a–1(c)(2)(A)(ii). Commission proposes to use the interpretation 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. 14 The Commission notes that the home country regulatory regime would not need to satisfy the Commission’s regulations under Part 39. 15 Whereas an applicant for DCO registration must file the numerous and extensive exhibits required by Form DCO, an applicant for alternative compliance would only be required to file certain exhibits. See Appendix A to Part 39, 17 CFR part 39, appendix A. 16 Home country ‘‘legal requirements’’ would include those standards or other requirements that are legally binding in the applicant’s home country. jspears on DSK30JT082PROD with PROPOSALS 13 The VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 Core Principles and Part 39. Under the alternative compliance regime, an applicant must demonstrate: (1) That compliance with its home country requirements would satisfy the DCO Core Principles, and (2) compliance with those requirements. If the application is approved by the Commission, the DCO would be permitted to comply with its home country regulatory regime rather than Part 39 (with the exception of § 39.15, which concerns treatment of funds). Because the DCO would clear swaps for customers 17 through registered FCMs, the DCO would be required to fully comply with the Commission’s customer protection requirements,18 as well as the swap data reporting requirements in part 45 of the Commission’s regulations. The DCO would also be held to certain ongoing and event-specific reporting requirements that are more limited in scope than the reporting requirements for existing DCOs. The proposed eligibility criteria, conditions, and reporting requirements would be set forth in proposed subpart D of Part 39. Assuming all other eligibility criteria continue to be met, the alternative compliance regime would be available to the non-U.S. DCO unless and until its U.S. clearing activity (as measured by initial margin requirements) grows to the point that the Commission determines the DCO poses substantial risk to the U.S. financial system, as described below. If this alternative compliance regime is adopted, any currently registered non-U.S. DCO that does not currently pose substantial risk to the U.S. financial system would be able to apply. II. Proposed Amendments to Part 39 A. Regulation 39.2—Definitions 1. Good Regulatory Standing In a recent notice of proposed rulemaking regarding exempt DCOs, the Commission proposed a definition of ‘‘good regulatory standing’’ that is consistent with the definition that the Commission has been applying to 17 Section 2(e) of the CEA makes it unlawful for any person, other than an eligible contract participant, to enter into a swap unless the swap is entered into on, or subject to the rules of, a DCM. 7 U.S.C. 2(e). ‘‘Eligible contract participant’’ is defined in section 1a(18) of the CEA and § 1.3. 7 U.S.C. 1a(18); 17 CFR 1.3. 18 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. 7 U.S.C. 6(c). Any swaps customer funds held by a DCO are also subject to the segregation requirements of section 4d(f)(2) of the CEA and related regulations. PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 34821 exempt DCOs.19 The Commission is now proposing to add to the definition of ‘‘good regulatory standing’’ separate language that would cover DCOs subject to alternative compliance. The proposed definition of ‘‘good regulatory standing’’ as it relates to exempt DCOs remains unchanged. With the addition of the separate language, the Commission is proposing to define ‘‘good regulatory standing’’ to mean, with respect to a DCO subject to alternative compliance, either there has been no finding by the home country regulator of material nonobservance of the 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 DCO. The Commission believes that the proposed definition, as it relates to DCOs subject to alternative compliance, establishes a basis for providing the Commission with a high degree of assurance as to the DCO’s compliance with the relevant legal requirements in its home country, while only seeking from the home country regulator a reasonable representation. Although the Commission proposes to limit this to instances of ‘‘material’’ non-observance of relevant home country legal requirements, the Commission requests comment as to whether it should instead require all instances of nonobservance. 2. Substantial Risk to the U.S. Financial System For purposes of this rulemaking, the Commission is proposing to define ‘‘substantial risk to the U.S. financial system’’ to mean, with respect to a nonU.S. DCO, that (1) the DCO holds 20 percent or more of the required initial margin of U.S. clearing members for swaps across all registered and exempt DCOs; and (2) 20 percent or more of the initial margin requirements for swaps at that DCO is attributable to U.S. clearing members; provided, however, where one or both of these thresholds are close to 20 percent, the Commission may exercise discretion in determining 19 See Exemption From Derivatives Clearing Organization Registration, 83 FR at 39924–39925 (proposing to define ‘‘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 regulator of material non-observance of the Principles for Financial Market Infrastructures 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). E:\FR\FM\19JYP1.SGM 19JYP1 34822 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS whether the DCO poses substantial risk to the U.S. financial system. For purposes of this definition and proposed §§ 39.6 and 39.51, the Commission is proposing to clarify that ‘‘U.S. clearing member’’ means a clearing member organized in the United States or whose ultimate parent company is organized in the United States, or an FCM.20 This definition sets forth the test the Commission would use to identify those non-U.S. DCOs that pose substantial risk to the U.S. financial system, as these DCOs would not be eligible for the alternative compliance proposed in this release. The proposed test consists of two prongs. The first prong, which is directly related to systemic risk, is whether the DCO holds 20 percent or more of the required initial margin 21 of U.S. clearing members for swaps across all registered and exempt DCOs. The Commission notes that its primary systemic risk-related concern is the potential for loss of clearing services for a significant part of the U.S. swaps market in the event of a catastrophic occurrence affecting the DCO. The second prong is whether U.S. clearing members account for 20 percent or more of the initial margin requirements for swaps at that DCO. This prong of the test, intended to respect international comity, would capture a non-U.S. DCO only if a large enough proportion of its clearing activity were attributable to U.S. clearing members such that the U.S. has a substantial interest warranting more active oversight by the Commission.22 20 The Commission is proposing an identical definition of ‘‘substantial risk to the U.S. financial system’’ in a separate rulemaking regarding exemption from DCO registration. See Exemption from Derivatives Clearing Organization Registration, approved on July 11, 2019. 21 In general, initial margin requirements are riskbased and are meant to cover a DCO’s potential future exposure to clearing members based on price movements in the interval between the last collection of variation margin and the time within which the DCO estimates that it would be able to liquidate a defaulting clearing member’s portfolio. The Commission believes the relative risk that a DCO poses to the financial system can be identified by the cumulative sum of initial margin collected by the DCO. Therefore, the Commission has found initial margin to be an appropriate measure of risk. 22 In developing this proposal, the Commission is guided by principles of international comity, which counsel due regard for the important interests of foreign sovereigns. See Restatement (Third) of Foreign Relations Law of the United States (the Restatement). The Restatement provides that even where a country has a basis for jurisdiction, it should not prescribe law with respect to a person or activity in another country when the exercise of such jurisdiction is unreasonable. See Restatement section 403(1). The reasonableness of such an exercise of jurisdiction, in turn, is to be determined by evaluating all relevant factors, including certain specifically enumerated factors where appropriate: (1) The link of the activity to the territory of the VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 The Commission believes that, in the context of this test, the term ‘‘substantial’’ would reasonably apply to proportions of approximately 20 percent or greater. The Commission stresses that this is not a bright-line test; by offering this figure, the Commission does not intend to suggest that, for example, a DCO that holds 20.1 percent of the required initial margin of U.S. clearing members would potentially pose substantial risk to the U.S. financial system, while a DCO that holds 19.9 percent would not. The Commission is instead seeking to offer some indication of how it would assess the meaning of the term ‘‘substantial’’ in the test. The Commission recognizes that a test based solely on initial margin requirements may not fully capture the risk of a given DCO. The Commission therefore proposes to retain discretion in determining whether a non-U.S. DCO poses substantial risk to the U.S. financial system, particularly where the DCO is close to 20 percent on both prongs of the test. In these cases, in making its determination, the Commission may look at other factors that may reduce or mitigate the DCO’s risk to the U.S. financial system or provide a better indication of the DCO’s risk to the U.S. financial system. B. Regulation 39.3(a)—Application Procedures The Commission is proposing to amend § 39.3(a) to establish in paragraph (a)(3) alternative application procedures for a non-U.S. clearing organization that is seeking to register as a DCO to clear swaps, does not pose substantial risk to the U.S. financial regulating state, i.e., the extent to which the activity takes place within the territory, or has substantial, direct, and foreseeable effect upon or in the territory; (2) the connections, such as nationality, residence, or economic activity, between the regulating state and the persons principally responsible for the activity to be regulated, or between that state and those whom the regulation is designed to protect; (3) the character of the activity to be regulated, the importance of regulation to the regulating state, the extent to which other states regulate such activities, and the degree to which the desirability of such regulation is generally accepted; (4) the existence of justified expectations that might be protected or hurt by the regulation; (5) the importance of the regulation to the international political, legal, or economic system; (6) the extent to which the regulation is consistent with the traditions of the international system; (7) the extent to which another state may have an interest in regulating the activity; and (8) the likelihood of conflict with regulation by another state. See Restatement section 403(2). Notably, the Restatement does not preclude concurrent regulation by multiple jurisdictions. However, where concurrent jurisdiction by two or more jurisdictions creates conflict, the Restatement recommends that each country evaluate its own interests in exercising jurisdiction and those of the other jurisdiction, and where possible, to consult with each other. PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 system, and wants to comply with its home country regulatory regime as a means of satisfying the DCO Core Principles.23 Specifically, any such clearing organization may apply for registration in accordance with the terms of § 39.3(a)(3) in lieu of filing the application described in § 39.3(a)(2).24 Proposed § 39.3(a)(3) would require an applicant to submit to the Commission the following sections of Form DCO: Cover sheet, Exhibit A–1 (regulatory compliance chart), Exhibit A–2 (proposed rulebook), Exhibit A–3 (narrative summary of proposed clearing activities), Exhibit A–4 (detailed business plan), Exhibit A–7 (documents setting forth the applicant’s corporate organizational structure), Exhibit A–8 (documents establishing the applicant’s legal status and certificate(s) of good standing or its equivalent), Exhibit A–9 (description of pending legal proceedings or governmental investigations), Exhibit A–10 (agreements with outside service providers with respect to the treatment of customer funds), Exhibits F–1 through F–3 (documents that demonstrate compliance with the treatment of funds requirements with respect to FCM customers), and Exhibit R (ring-fencing memorandum). For purposes of § 39.3(a)(3), the applicant would be required to demonstrate to the Commission in Exhibit A–1 the extent to which compliance with the applicable legal requirements in its home country would constitute compliance with the DCO Core Principles.25 To satisfy this requirement, the applicant would be required to provide in Exhibit A–1 the citation and full text of each applicable legal requirement in its home country that corresponds with each DCO Core Principle and an explanation of how the 23 The proposed rule text includes changes to § 39.3(a) that were first proposed in a separate rulemaking. See Derivatives Clearing Organization General Provisions and Core Principles, 84 FR 22226 (May 16, 2019). 24 Regulation 39.3(a)(2) provides that any entity seeking to register as a DCO shall submit to the Commission a completed Form DCO, which shall include a cover sheet, all applicable exhibits, and any supplemental materials, as provided in Appendix A to Part 39. 25 By way of comparison, the Commission has made this determination, in part, with regard to EU regulation. See Comparability Determination for the European Union: Dually-Registered Derivatives Clearing Organizations and Central Counterparties, 81 FR 15260 (Mar. 22, 2016). The Commission notes, however, that this determination was made by comparing EU regulations with the Commission’s regulations. Because the DCO Core Principles are broader than the Commission’s regulations in most cases, the Commission expects it will be less burdensome for an applicant to demonstrate that compliance with its home country legal requirements would constitute compliance with the DCO Core Principles. E:\FR\FM\19JYP1.SGM 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules applicant satisfies those requirements. To the extent that the DCO’s home country regulatory regime lacks legal requirements that correspond to those DCO Core Principles less related to risk, the Commission may, in its discretion, grant registration subject to conditions that would address the relevant DCO Core Principles.26 C. Regulation 39.4—Procedures for Implementing DCO Rules and Clearing New Products jspears on DSK30JT082PROD with PROPOSALS Regulation 39.4(b) provides that proposed new or amended rules of a DCO not voluntarily submitted for Commission approval pursuant to § 40.5 must be submitted to the Commission pursuant to the self-certification procedures of § 40.6, as required by section 5c(c) of the CEA,27 prior to their implementation.28 Pursuant to the Commission’s authority under section 4(c) of the CEA,29 the Commission is proposing in § 39.4(c) to exempt DCOs that are subject to alternative compliance from submitting rules pursuant to section 5c(c) of the CEA and § 40.6, unless the rule relates to the DCO’s compliance with the requirements of part 45 of the Commission’s regulations,30 or section 4d(f) of the CEA,31 parts 1 or 22 of the 26 For example, if the DCO’s home country regulatory regime lacks legal requirements that would satisfy DCO Core Principle M (regarding information sharing), the Commission may grant registration subject to conditions that would address information sharing. 27 7 U.S.C. 7a–2(c). 28 17 CFR 40.6. A ‘‘rule,’’ by definition, includes any constitutional provision, article of incorporation, bylaw, rule, regulation, resolution, interpretation, stated policy, advisory, terms and conditions, trading protocol, agreement or instrument corresponding thereto, including those that authorize a response or establish standards for responding to a specific emergency, and any amendment or addition thereto or repeal thereof, made or issued by a registered entity or by the governing board thereof or any committee thereof, in whatever form adopted. 17 CFR 40.1(i). 29 7 U.S.C. 6(c). Section 4(c) of the CEA provides that, in order to promote responsible economic or financial innovation and fair competition, the Commission, by rule, regulation, or order, may exempt any transaction or class of transactions (including any person or class of persons offering, entering into, rendering advice, or rendering other services with respect to, the transaction) from any of the provisions of the CEA other than certain enumerated provisions, if the Commission determines that the exemption would be consistent with the public interest and the purposes of the CEA, that the transactions will be entered into solely between appropriate persons, and that the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory responsibilities under the CEA. 30 17 CFR part 45 (setting forth swap data reporting and recordkeeping requirements). 31 7 U.S.C. 6d(f) (relating to segregation of customer funds). VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 Commission’s regulations,32 or § 39.15,33 which set forth the Commission’s customer protection requirements, as such DCOs would be subject to compliance with these requirements. The Commission is proposing this limited exemption from the rule submission requirements for DCOs that are subject to alternative compliance as they would be subject to the applicable laws in their home country and oversight by their respective home country regulators. Accordingly, the Commission believes that the review of any new or amended rule unrelated to the Commission’s customer protection regime would be more appropriately handled by the DCO’s home country regulator. The Commission requests comment as to whether it should require, as part of the application process for alternative compliance, that there is a rule review or approval process under the home country regime. The Commission believes the proposed exemption in § 39.4(c) is consistent with the public interest, as it would allow the Commission to focus on reviewing those critical rules that relate to areas where the Commission exercises direct oversight rather than review other rules for which duplication of review with the home country regulator is not necessary. The proposed exemption would reflect the protection of customers—and safeguarding of money, securities, or other property deposited by customers—as a fundamental component of the Commission’s regulatory oversight of the derivatives markets by requiring these DCOs to certify rules relating to the Commission’s customer protection requirements. A DCO’s new or amended customer protection-related rules would also continue to be made transparent to FCMs and their customers, as § 40.6(a)(2) requires a DCO to certify that it has posted on its website a copy of the rule submission.34 At the same time, the proposed exemption in § 39.4(c) would reduce the time and resources necessary for DCOs to file rules unrelated to the Commission’s customer protection or swap data reporting requirements. In light of the foregoing, the Commission believes the proposed exemption would be consistent with the public interest 32 17 CFR parts 1 and 22 (setting forth general regulations under the CEA, including treatment of customer funds, and requirements for cleared swaps, respectively). 33 17 CFR 39.15 (setting forth requirements for the treatment of customer funds). 34 The Commission also publicly posts on its website all § 40.6 rule certifications for which confidential treatment is not requested. PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 34823 and the purposes of the CEA. The Commission also believes the proposed exemption would not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or selfregulatory duties under the CEA, as the Commission would continue to receive submissions for new rules or rule changes concerning customer protection and swap data reporting, matters for which the DCO is subject to compliance with Commission regulation.35 D. Regulation 39.9—Scope The Commission recently proposed to revise § 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 § 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.36 The Commission is proposing to further revise § 39.9 to provide that the provisions of subpart B apply to any DCO, except as otherwise provided by Commission order. This change is intended to reflect the fact that a DCO registered through the alternative compliance procedures under proposed § 39.3(a)(3) would not be held to the requirements in subpart B, with the exception of § 39.15 and those requirements for which the Commission did not find there to be alternative compliance in the DCO’s home country regulatory regime, as provided in the DCO’s order. This provision also would allow the Commission to not apply to a particular DCO any subpart B requirement that the Commission deems irrelevant or otherwise inapplicable due to, for example, certain characteristics of the DCO’s business model. E. Subpart D—Provisions Applicable to DCOs Subject to Alternative Compliance 1. Regulation 39.50—Scope The Commission is proposing new § 39.50 to state that the provisions of subpart D of Part 39 apply to any DCO that is registered through the process described in § 39.3(a)(3) (i.e., DCOs subject to alternative compliance). Proposed § 39.51 would be contained in subpart D and would set forth the requirements for alternative compliance, as discussed below. 35 The factor under section 4(c) of whether a transaction is entered into solely between appropriate persons does not apply here because there are no transactions implicated by this proposed exemption. 36 See Exemption From Derivatives Clearing Organization Registration, 83 FR at 39929. E:\FR\FM\19JYP1.SGM 19JYP1 34824 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules 2. Regulation 39.51—Alternative Compliance a. Eligibility for Alternative Compliance jspears on DSK30JT082PROD with PROPOSALS Proposed § 39.51(a) would provide that the Commission may register, subject to any terms and conditions as the Commission determines to be appropriate, a clearing organization for the clearing of swaps for U.S. persons if all of the eligibility requirements listed in proposed § 39.51(a)(1) and (a)(2) are met and the clearing organization satisfies the conditions set forth in § 39.51(b).37 Each of these requirements is described below. Proposed § 39.51(a)(1)(i) would require that, in order to be eligible for alternative compliance as a DCO, the Commission must determine that compliance with the clearing organization’s home country regulatory regime would satisfy the DCO Core Principles. Under proposed § 39.51(a)(1)(ii), a clearing organization would be required to be in good regulatory standing in its home country. Under proposed § 39.51(a)(1)(iii), the Commission must also determine that the clearing organization does not pose substantial risk to the U.S. financial system (as previously discussed). Proposed § 39.51(a)(1)(iv) would provide that, in order for a clearing organization to be eligible for alternative compliance as a DCO, an MOU or similar arrangement satisfactory to the Commission must be in effect between the Commission and the clearing organization’s home country regulator,38 pursuant to which, among other things, the home country regulator agrees to provide to the Commission any information that the Commission deems appropriate to evaluate the clearing organization’s initial and continued eligibility for registration or to review compliance with any conditions of such registration. The Commission has customarily entered into MOUs or similar arrangements in connection with the supervision of non-U.S. clearing organizations that are registered or exempt from DCO registration. In the context of DCOs subject to alternative compliance, satisfactory MOUs or 37 The eligibility requirements listed in proposed § 39.51(a)(1) and (a)(2) and the conditions set forth in proposed § 39.51(b) would be pre-conditions to the Commission’s issuance of a registration order in this regard. 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 registration order. 38 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. VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 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.39 Although the Commission would retain the right to conduct site visits, the Commission would not expect to conduct routine site visits to such DCOs. Under proposed § 39.51(a)(2), if the DCO’s home country regulatory regime lacks legal requirements that correspond to those DCO Core Principles less related to risk, the Commission may, in its discretion, grant registration subject to conditions that would address the relevant DCO Core Principles. b. Conditions of Alternative Compliance Proposed § 39.51(b) sets forth conditions of alternative compliance. These conditions are similar to the conditions that the Commission has imposed on exempt DCOs.40 Under proposed § 39.51(b)(1), a DCO subject to alternative compliance would be required to comply with the DCO Core Principles through its compliance with applicable legal requirements in its home country, and any other requirements specified in its registration order including, but not limited to, section 4d(f) of the CEA, parts 1, 22, and 45 of the Commission’s regulations, subpart A of Part 39, and § 39.15. Because the DCO would clear swaps for FCM customers, the DCO would be subject to the Commission’s customer protection requirements set forth in section 4d(f) of the CEA, parts 1 and 22 of the Commission’s regulations, and § 39.15. The DCO would also be subject to part 45 of the Commission’s regulations, which sets forth swap data recordkeeping and reporting requirements, and subpart A of Part 39, which contains general provisions applicable to DCOs, including registration procedures. Proposed § 39.51(b)(2) would codify the ‘‘open access’’ requirements of section 2(h)(1)(B) of the CEA with respect to swaps cleared by a DCO to which one or more of the counterparties is a U.S. person.41 Paragraph (b)(2)(i) would require a DCO to have rules providing that all such swaps with the same terms and conditions (as defined by product specifications established under the DCO’s rules) submitted to the 39 For existing non-U.S. DCOs that wish to be subject to alternative compliance, the Commission believes the MOUs currently in place with their respective home country regulators would be sufficient to satisfy this requirement. 40 See Exemption From Derivatives Clearing Organization Registration, 83 FR at 39926–39927. 41 7 U.S.C. 2(h)(1)(B). PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 DCO for clearing are economically equivalent and may be offset with each other, to the extent that offsetting is permitted by the DCO’s rules. Paragraph (b)(2)(ii) would require a DCO to have 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. Proposed § 39.51(b)(3) would provide that a DCO must 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 DCO or any of its U.S. clearing members. The name of the designated agent would be submitted as part of the clearing organization’s application for registration. If a DCO appoints another agent to accept such notice or service of process, the DCO would be required to promptly inform the Commission of this change. This condition is also included in existing DCO registration orders. Proposed § 39.51(b)(4) is a general provision that would require a DCO to comply, and demonstrate compliance as requested by the Commission, with any condition of the DCO’s registration order. Proposed § 39.51(b)(5) would require a DCO to make all documents, books, records, reports, and other information related to its operation as a DCO (hereinafter, ‘‘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. The Commission notes that it does not anticipate conducting routine site visits to DCOs subject to alternative compliance. However, the Commission may request a DCO to provide books and records related to its operation as a DCO subject to alternative compliance in order for the Commission to ensure that, among other things, the DCO continues to meet the eligibility requirements for alternative compliance as well as the conditions of its registration.42 42 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 appropriate to evaluate the clearing organization’s initial and continued eligibility for registration or to review compliance with any conditions of such registration, the Commission E:\FR\FM\19JYP1.SGM 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules Proposed § 39.51(b)(6) would require that a DCO request and the Commission receive an annual written representation from a home country regulator that the DCO is in good regulatory standing, within 60 days following the end of the DCO’s fiscal year. This requirement would help the Commission assess the DCO’s compliance with its home country legal requirements, and thus, compliance with the DCO Core Principles, and continued eligibility for alternative compliance. Under proposed § 39.51(b)(7), the Commission may condition alternative compliance on any other facts and circumstances it deems relevant. In doing so, the Commission would be mindful of principles of international comity. For example, the Commission could take into account the extent to which the relevant foreign regulatory authorities defer to the Commission with respect to oversight of DCOs organized in the United States. This approach would advance the goal of regulatory harmonization, consistent with the express directive of Congress that the Commission coordinate and cooperate with foreign regulatory authorities on matters related to the regulation of swaps.43 c. General Reporting Requirements jspears on DSK30JT082PROD with PROPOSALS Proposed § 39.51(c)(1) sets forth general reporting requirements pursuant to which a DCO subject to alternative compliance would have to 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 § 39.19(b).44 Such information would be used by the Commission, among other things, to evaluate the continued eligibility of the DCO for alternative compliance, review the DCO’s compliance with any would retain the authority to access books and records directly from a DCO. 43 In order to promote effective and consistent global regulation of swaps, section 752 of the DoddFrank 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. 44 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 § 39.6(c)(2)(i). VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 conditions of its registration, or conduct oversight of U.S. clearing activity. Proposed § 39.51(c)(2)(i) would require a DCO to compile a report as of the end of each trading day, and submit the report to the Commission by 10:00 a.m. U.S. Central time on the following business day, containing the following information with respect to swaps: (A) Total initial margin requirements for all clearing members; (B) initial margin requirements and initial margin on deposit for each U.S. clearing member, by house origin and by each customer origin, and by each individual customer account; and (C) daily variation margin, separately listing the mark-to-market amount collected from or paid to each clearing member, by house origin and by each customer origin, and by each individual customer account. These requirements are identical to reporting requirements in § 39.19(c)(1)(i)(A) and (B) that apply to registered DCOs and similar to reporting requirements in proposed § 39.6(c)(2)(i) that would apply to exempt DCOs.45 These reports would provide the Commission with information regarding the cash flows associated with U.S. persons clearing swaps through DCOs subject to alternative compliance in order for the Commission to assess the risk exposure of U.S. persons and the extent of the DCO’s U.S. clearing activity.46 Proposed § 39.51(c)(2)(ii) would require a 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 list of U.S. clearing members, with respect to the clearing of swaps. This requirement is the same as the one that would apply to exempt DCOs in proposed § 39.6(c)(2)(ii)(C).47 This report would help the Commission to better understand the extent of U.S. clearing activity at the DCO. Paragraphs (c)(2)(iii) through (c)(2)(vii) of proposed § 39.51 each would require a DCO to provide information to the Commission upon the occurrence of certain specified events. These requirements are similar to reporting requirements in proposed § 39.6(c)(2)(iii) through (c)(2)(viii) that 45 See 17 CFR 39.19(c)(1)(i)(A) and (c)(1)(i)(B). See also Exemption From Derivatives Clearing Organization Registration, 83 FR at 39927 (discussing similar reporting requirements for exempt DCOs). 46 The Commission notes that, given the timesensitive nature of the data in these reports, the reports would need to be provided directly from the DCO, as is the case with existing registered and exempt DCOs. 47 See Exemption From Derivatives Clearing Organization Registration, 83 FR at 39927–39928. PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 34825 would apply to exempt DCOs.48 Several of the proposed required notifications are intended to provide the Commission with information relevant to the DCO’s continued eligibility for alternative compliance or its compliance with the conditions of its registration. Proposed § 39.51(c)(2)(iii) would require a DCO to provide prompt notice to the Commission regarding any change in its home country regulatory regime. The Commission requests comment on whether the Commission should require a DCO subject to alternative compliance to provide prompt notice of any material change in its home country regulatory regime. If so, should the Commission attempt to define ‘‘material’’ (and, if so, how)? Proposed § 39.51(c)(2)(iv) would require a DCO to provide to the Commission, to the extent that it is available to the DCO, any examination report or examination findings by a home country regulator, and notify the Commission within five business days after it becomes aware of the commencement of any enforcement or disciplinary action or investigation by a home country regulator. Proposed § 39.51(c)(2)(v) would require a 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. In addition, the Commission is proposing some required notifications that would assist the Commission in its oversight of U.S. clearing members and FCMs. Proposed § 39.51(c)(2)(vi) would require a DCO to provide immediate notice to the Commission in the event of a default (as defined by the DCO in its rules) by any clearing member, including the amount of the clearing member’s financial obligation. If the defaulting clearing member is a U.S. clearing member, the notice must also include the name of the U.S. clearing member and a list of the positions it held. Proposed § 39.51(c)(2)(vii) would require a DCO to provide notice of any action that it has taken against a U.S clearing member, no later than two business days after the DCO takes such action. Proposed paragraphs (c)(2)(vi) and (c)(2)(vii) of § 39.51 are similar to paragraphs (c)(4)(vii) and (c)(4)(xi) of § 39.19, which currently apply to registered DCOs.49 48 See id. at 39928. provisions are also substantially similar to paragraphs (c)(2)(vii) and (c)(2)(viii) of proposed § 39.6, which would apply to exempt DCOs. See Exemption From Derivatives Clearing Organization Registration, 83 FR at 39928. 49 These E:\FR\FM\19JYP1.SGM 19JYP1 34826 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS d. Modification of Registration Upon Commission Initiative Proposed § 39.51(d) would permit the Commission to modify the terms and conditions of an order of registration, in its discretion and upon its own initiative, based on changes to or omissions in facts or circumstances pursuant to which the order was issued, or if any of the terms and conditions of the order have not been met.50 For example, the Commission could modify the terms of a registration order upon a determination that compliance with the DCO’s home country regulatory regime does not satisfy the DCO Core Principles, the DCO is not in good regulatory standing in its home country, or the DCO poses substantial risk to the U.S. financial system. Proposed §§ 39.51(d)(2), (d)(3), and (d)(4) would set forth the process for modification of registration upon the Commission’s initiative. Proposed § 39.51(d)(2) would require the Commission to first provide written notification to a DCO that the Commission is considering modifying the DCO’s registration order and the basis for that consideration. Proposed § 39.51(d)(3) would provide up to 30 days for a DCO to respond to the Commission’s notification in writing following receipt of the notification, or at such later time as the Commission may permit in writing. The Commission believes that a minimum 30-day timeframe would allow the Commission to take timely action to protect its regulatory interests while providing the DCO with sufficient time to develop its response. In its response, the DCO may provide potential mitigating factors for the Commission to consider where, for example, the DCO faces a potential finding of substantial risk to the U.S. financial system. Proposed § 39.51(d)(4) would provide that, following receipt of a response from the DCO, or after expiration of the time permitted for a response, the Commission may either: (i) Issue an order requiring the DCO to comply with all requirements applicable to DCOs registered through the process described in § 39.3(a)(2),51 effective as of a date to be specified in the order, which is intended to provide the DCO with a reasonable amount of time to come into compliance with the CEA and 50 The Commission notes that it has authority to suspend or revoke a DCO’s registration under the CEA. See 7 U.S.C. 7b. 51 Regulation 39.3(a)(2) provides that any entity seeking to register as a DCO shall submit to the Commission a completed Form DCO, which shall include a cover sheet, all applicable exhibits, and any supplemental materials, as provided in Appendix A to Part 39. VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 Commission regulations or request a vacation of registration in accordance with § 39.3(f); (ii) issue an amended order of registration that modifies the terms and conditions of the order; or (iii) provide written notification to the DCO that the registration order will remain in effect without modification to its terms and conditions. III. Proposed Amendments to Part 140—Organization, Functions, and Procedures of the Commission The Commission is proposing amendments to § 140.94(c) in order to delegate authority to the Director of the Division of Clearing and Risk for all functions reserved to the Commission in proposed § 39.51, except for the authority to grant registration to a DCO, prescribe conditions to alternative compliance of a DCO, and modify a DCO’s registration order. The Commission is proposing to adopt § 140.94(c)(15) to reflect this delegation. The Commission notes that the authority being delegated in this regard is ministerial in nature; significant functions are still being reserved to the Commission. IV. Request for Comments In addition to the specific requests for comment noted elsewhere, the Commission generally requests comments on all aspects of the proposed rules. The Commission also requests comments on the following specific issues: 1. Does the proposed alternative compliance regime, including both the application process and the ongoing requirements, strike the right balance between the Commission’s regulatory interests and the regulatory interests of non-U.S. DCOs’ home country regulators? 2. Are there additional regulatory requirements under the CEA or Commission regulations that should not apply to non-U.S. DCOs with alternative compliance in the interest of deference and allowing such DCOs to satisfy the DCO Core Principles through compliance with their home country regulatory regimes while still protecting the Commission’s regulatory interests? 3. Should the Commission take into account regulations in Part 39, in addition to the DCO Core Principles, in determining whether alternative compliance is appropriate for a non-U.S. clearing organization? 4. Should the Commission require additional, or less, information from an applicant for alternative compliance as part of its application under proposed § 39.3(a)(3)? PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 5. Is the proposed test for ‘‘substantial risk to the U.S. financial system’’ the best measure of such risk? If not, please explain why, and if there is a better measure/metric that the Commission should use, please provide a rationale and supporting data, if available. 6. What is the frequency with which the Commission should reassess a DCO’s ‘‘risk to the U.S. financial system’’ for purposes of the test, and across what time period, after it is registered under the alternative compliance regime? 7. Does the proposed exemption from self-certification of rules in § 39.4(c) meet the standards for exemptive relief set out in section 4(c) of the CEA? a. In addition to rules that relate to the DCO’s compliance with the requirements of section 4d(f) of the CEA, parts 1, 22, or 45 of the Commission’s regulations, or § 39.15, should the Commission require other rules to be filed pursuant to section 5c(c) of the CEA? If so, should the Commission retain discretion in determining which other rules must be filed based on, for example, the particular facts and circumstances? Or should the Commission enumerate the types of rules that must be filed (e.g., rules related to certain products cleared by the DCO)? 8. Should non-U.S. DCOs with alternative compliance be excused from reporting any particular data streams in order to limit duplicative reporting obligations in the cross-border context without jeopardizing U.S. customer protections, particularly given the existence of an MOU between the Commission and the DCO’s home country regulator as a requirement for eligibility for alternative compliance? V. 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.52 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.53 The Commission has previously determined that clearing organizations 52 5 U.S.C. 601 et seq. FR 18618 (Apr. 30, 1982). 53 47 E:\FR\FM\19JYP1.SGM 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules are not small entities for the purpose of the RFA.54 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) 55 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. The Commission is proposing to revise Information Collection 3038– 0076, which contains the requirements for DCO registration and compliance, to include the collection of information in proposed §§ 39.3(a)(3) and 39.51, as well as changes to the existing information collection requirements for registered DCOs as a result of this proposal. The responses to the collection of information would be necessary to obtain DCO registration under the proposed alternative compliance process. jspears on DSK30JT082PROD with PROPOSALS 1. Alternative DCO Application Process Under Proposed § 39.3(a)(3) Regulation 39.3(a)(2) sets forth the requirements for filing an application for registration as a DCO. The Commission is proposing new § 39.3(a)(3), which would establish the application procedures for DCOs that wish to be subject to alternative compliance. Currently, Information Collection 3038–0076 reflects that each application for DCO registration takes 421 hours to complete, including all exhibits. Because the alternative application procedures would require substantially fewer documents and exhibits, the Commission is estimating that each such application would require 100 hours to complete. DCO application for alternative compliance, including all exhibits, supplements and amendments: Estimated number of respondents: 1. Estimated number of reports per respondent: 1. Average number of hours per report: 100. Estimated gross annual reporting burden: 100. 54 See 66 FR 45604, 45609 (Aug. 29, 2001). 55 44 U.S.C. 3501 et seq. VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 34827 2. Ongoing Reporting Requirements for DCOs Subject to Alternative Compliance in Accordance With Proposed § 39.51 submissions by registered entities. Therefore, no adjustment to Information Collection 3038–0093 is necessary. Proposed § 39.51 would include reporting requirements for DCOs subject to alternative compliance that are substantially similar to those proposed for exempt DCOs.56 The estimated number of respondents is based on approximately three existing registered DCOs that may choose to convert to alternative compliance and one new registrant per year. 3. Adjustment to Part 39 Reporting and Recordkeeping Requirements Daily Reporting Estimated number of respondents: 6. Estimated number of reports per respondent: 250. Average number of hours per report: 0.1. Estimated gross annual reporting burden: 150. Quarterly Reporting Estimated number of respondents: 6. Estimated number of reports per respondent: 4. Average number of hours per report: 1. Estimated gross annual reporting burden: 24. Event-Specific Reporting Estimated number of respondents: 6. Estimated number of reports per respondent: 1. Average number of hours per report: 0.5. Estimated gross annual reporting burden: 3. Annual Certification of Good Regulatory Standing Estimated number of respondents: 6. Estimated number of reports per respondent: 1. Average number of hours per report: 1. Estimated gross annual reporting burden: 6. As proposed under § 39.4(c), DCOs subject to alternative compliance would not be required to comply with § 40.6 regarding certification of rules, other than rules relating to customer protection. Although this change could potentially reduce the burden related to rule submissions by registered entities, which is covered in Information Collection 3038–0093, the Commission is not proposing any changes to that information collection burden because its current estimate of 50 responses annually per respondent covers a broad range of the number of annual 56 See Exemption From Derivatives Clearing Organization Registration, 83 FR 39923 (Aug. 13, 2018). PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 As noted above, the Commission anticipates that approximately three currently registered DCOs may seek registration under the alternative compliance process; accordingly, the information collection burden applicable to DCO applicants and registered DCOs will be reduced. Currently, collection 3038–0076 reflects that there are 2 applicants for DCO registration annually and that it takes each applicant 421 hours to complete and submit the form, including all exhibits. The Commission is reducing the number of applicants for full DCO registration from two to one based on the expectation that one of the annual DCO applicants will seek registration subject to alternative compliance. Form DCO—§ 39.3(a)(2) Estimated number of respondents: 1. Estimated number of reports per respondent: 1. Average number of hours per report: 421. Estimated gross annual reporting burden: 421. The information collection burden for registered DCOs, based on the Commission’s proposed alternative compliance regime, is estimated to be reduced by three, from 16 to 13. The reduction in the number of respondents is the sole change in the burden estimates previously stated for registered DCOs. The revised burden estimates are as follows: CCO Annual Report Estimated number of respondents: 13. Estimated number of reports per respondent: 1. Average number of hours per report: 73. Estimated gross annual reporting burden: 949. Annual Financial Reports Estimated number of respondents: 13. Estimated number of reports per respondent: 1. Average number of hours per report: 2,640. Estimated gross annual reporting burden: 34,320. Quarterly Financial Reports Estimated number of respondents: 13. Estimated number of reports per respondent: 4. Average number of hours per report: 8. E:\FR\FM\19JYP1.SGM 19JYP1 34828 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules Estimated gross annual reporting burden: 416. Daily Reporting Estimated number of respondents: 13. Estimated number of reports per respondent: 250. Average number of hours per report: 0.5. Estimated gross annual reporting burden: 1,625. Event-Specific Reporting Estimated number of respondents: 13. Estimated number of reports per respondent: 20. Average number of hours per report: 0.5. Estimated gross annual reporting burden: 130. Public Information Estimated number of respondents: 13. Estimated number of reports per respondent: 4. Average number of hours per report: 2. Estimated gross annual reporting burden: 104. Governance Disclosures Estimated number of respondents: 13. Estimated number of reports per respondent: 6. Average number of hours per report: 3. Estimated gross annual reporting burden: 234. jspears on DSK30JT082PROD with PROPOSALS Registered DCOs—Recordkeeping Estimated number of respondents: 13. Estimated number of reports per respondent: 1. Average number of hours per report: 150. Estimated number of respondentsrequest to vacate: 1. Estimated number of reports per respondent-request to vacate: 0.33. Average number of hours per reportrequest to vacate: 1. Estimated gross annual recordkeeping burden: 1951.57 Proposed § 39.4(c) would exempt DCOs subject to alternative compliance from self-certifying rules unless the rule relates to the requirements under section 4d(f) of the CEA, parts 1, 22, or 45 of the Commission’s regulations, or § 39.15. While this proposed change is likely to reduce the number of rule certification submissions that would 57 The total annual recordkeeping burden estimate reflects the combined figures for 13 registered DCOs with an annual burden of one response and 150 hours per response (13 × 1 × 150 = 1950), and one vacated DCO registration every three years with an annual burden of one hour, which is not affected by this proposal. VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 otherwise be required for DCOs subject to alternative compliance, the Commission is not expecting that this will affect the overall burden for rule certification filings by all registered entities, covered in Information Collection 3038–0093. The number of rule submissions in that information collection is intended to represent an average number of submissions per registered entity. Because the average number of submissions covers a wide range of variability in the actual numbers of rule certification submissions by registered entities, the Commission believes that the small number of DCOs subject to alternative compliance which would not be required to certify all rules would be covered by the existing burden estimate in Information Collection 3038–0093. 4. Request for Comments The Commission invites the public and other Federal agencies to comment on any aspect of the proposed information collection requirements discussed above. The Commission will consider public comments on this proposed collection of information in: (1) Evaluating whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have a practical use; (2) Evaluating the accuracy of the estimated burden of the proposed collection of information, including the degree to which the methodology and the assumptions that the Commission employed were valid; (3) Enhancing the quality, utility, and clarity of the information proposed to be collected; and (4) Minimizing the burden of the proposed information collection requirements on registered entities, including through the use of appropriate automated, electronic, mechanical, or other technological information collection techniques, e.g., permitting electronic submission of responses. Copies of the submission from the Commission to OMB are available from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC 20581, (202) 418–5160 or from https://RegInfo.gov. Organizations and individuals desiring to submit comments on the proposed information collection requirements should send those comments to: • The Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Desk Officer of the Commodity Futures Trading Commission; PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 • (202) 395–6566 (fax); or • OIRAsubmissions@omb.eop.gov (email). Please provide the Commission with a copy of submitted comments so that all comments can be summarized and addressed in the final rulemaking, and please refer to the ADDRESSES section of this rulemaking for instructions on submitting comments to the Commission. OMB is required to make a decision concerning the proposed information collection requirements between 30 and 60 days after publication of this Release in the Federal Register. Therefore, a comment to OMB is best assured of receiving full consideration if OMB receives it within 30 calendar days of publication of this Release. Nothing in the foregoing affects the deadline enumerated above for public comment to the Commission on the proposed rules. C. Cost-Benefit Considerations 1. Introduction Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders.58 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. The baseline for the Commission’s consideration of the costs and benefits of this proposed rulemaking are: (1) The DCO Core Principles; (2) the general provisions applicable to DCOs under subparts A and B of Part 39; (3) Form DCO in Appendix A to Part 39; (4) Parts 1, 22, and 40 of the Commission’s regulations; and (5) § 140.94. The Commission notes that this consideration is based on its understanding that the swaps market functions internationally with (i) transactions that involve U.S. firms occurring across different international jurisdictions; (ii) some entities organized outside of the United States that are prospective Commission registrants; and (iii) some entities that typically operate both within and outside the United States and that 58 7 E:\FR\FM\19JYP1.SGM U.S.C. 19(a). 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules follow substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the discussion of costs and benefits below refers to the effects of the proposed regulations on all relevant swaps activity, whether based on their actual occurrence in the United States or on their connection with, or effect on U.S. commerce pursuant to, section 2(i) of the CEA.59 The Commission recognizes that the proposed rules may impose costs. The Commission has endeavored to assess the expected costs and benefits of the proposed rulemaking in quantitative terms, including PRA-related costs, where possible. In situations where the Commission is unable to quantify the costs and benefits, the Commission identifies and considers the costs and benefits of the applicable proposed rules in qualitative terms. The lack of data and information to estimate those costs is attributable in part to the nature of the proposed rules. Additionally, the initial and recurring compliance costs for any particular DCO will depend on the size, existing infrastructure, level of clearing activity, practices, and cost structure of the DCO. 2. Proposed Amendments to Part 39 a. Summary jspears on DSK30JT082PROD with PROPOSALS Section 5b(a) of the CEA requires a clearing organization that clears swaps to be registered with the Commission as a DCO. Once registered, a DCO is required to comply with the CEA and all Commission regulations applicable to DCOs, regardless of whether the DCO is subject to other regulation and oversight, as non-U.S. DCOs typically are. The proposed regulations would allow a non-U.S. DCO that the Commission determines does not pose substantial risk to the U.S. financial system to be subject to an alternative compliance regime that relies in part on the DCO’s home country regulatory regime and would result in reduced regulatory obligations as compared to the existing registration requirements. Specifically, the DCO would comply with the DCO Core Principles in the CEA by complying with its home country’s legal requirements rather than the requirements of subpart B of Part 39 59 Pursuant to section 2(i) of the CEA, activities outside of the United States are not subject to the swap provisions of the CEA, including any rules prescribed or regulations promulgated thereunder, unless those activities either ‘‘have a direct and significant connection with activities in, or effect on, commerce of the United States;’’ or contravene any rule or regulation established to prevent evasion of a CEA provision enacted under the Dodd-Frank Act, Public Law 111–203, 124 Stat. 1376. 7 U.S.C. 2(i). VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 (with the exception of § 39.15). The DCO still would be subject to subpart A of Part 39 and the Commission’s customer protection and swap data reporting requirements, as well as reporting and other conditions in its registration order. Lastly, the Commission is proposing in § 39.4(c) to exempt DCOs that are subject to alternative compliance from selfcertifying rules pursuant to § 40.6, unless the rule relates to the Commission’s customer protection or swap data reporting requirements. b. Benefits There are currently 16 DCOs registered with the Commission, six of which are organized outside of the United States and have comparable registration status in their respective home countries. These non-U.S. DCOs are regulated both by the Commission and their home country regulators. The proposed regulations would allow the Commission to register a nonU.S. DCO through the alternative compliance procedures if the Commission has determined that, among other things, compliance with the DCO’s home country regulatory regime satisfies the DCO Core Principles. Therefore, to the extent that the DCO’s home country laws and regulations impose obligations similar to those imposed by the CEA, the proposal would significantly reduce duplicative regulatory requirements for the DCO. The Commission is mindful that legal and regulatory compliance is not costless. Compliance with two different regulatory regimes, even if they are similar, requires legal and compliance staff capable of understanding, interpreting, and applying both regimes, which potentially requires hiring additional personnel or retaining additional outside advisors. Compliance with two regimes also requires a DCO to spend additional time and resources. Moreover, the specific requirements of each regime may differ even if both regimes satisfy the DCO Core Principles. For example, different legal regimes may impose different requirements regarding acceptable accounting standards, the methods by which clearing members may be held accountable for violating a DCO’s rules, the forms and locations in which records must be kept, and the type and manner of making information available to the public. Complying with both sets of requirements—that achieve effectively the same regulatory outcomes—may be costly, operationally difficult, or otherwise impractical. Because the proposal would PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 34829 substantially reduce an eligible DCO’s expenditures for duplicative compliance activities, it would significantly decrease the overall ongoing legal and compliance costs incurred by DCOs subject to alternative compliance. In addition, the proposed exemption in § 39.4(c) from self-certifying certain rules to the Commission would significantly reduce the ongoing compliance costs of DCOs subject to alternative compliance, as they would be required to self-certify only rules that relate to the Commission’s customer protection or swap data reporting requirements. Because § 40.6 requires a DCO to include certain information in its rule submissions, the proposed exemption would save such DCOs the time and expense of preparing selfcertifications for rules that pertain to other matters. Moreover, the alternative application procedures included in proposed § 39.3(a)(3) are significantly simplified compared to the existing DCO application procedures under § 39.3(a)(2). The existing procedures require submission of a complete Form DCO, which includes over three dozen exhibits. Commission staff carefully reviews each such application and typically asks numerous questions and, when necessary, requests amended exhibits and supplementary documents to evaluate and promote compliance with the CEA and Commission regulations. In contrast, the proposed alternative application procedures would require the submission of relatively few sections of Form DCO, mostly drawn from Exhibits A and F thereto. Preparing the sections of Form DCO that would be required under the proposed alternative application procedures should therefore be significantly less time-consuming and expensive than preparing the entire Form DCO under the existing application procedures. Moreover, with far fewer items for the Commission to review, the applicant is likely to receive significantly fewer questions from Commission staff and will require substantially less time and expense to respond to staff questions and prepare new or amended documents in response to staff requests. It is also likely that, as a result, the Commission may be able to make a final determination on an application under the proposed alternative application procedures in less time than is typically required under the existing procedures. Given the lower initial application and ongoing compliance costs, the Commission anticipates that some nonU.S. clearing organizations that are not currently registered as DCOs, including, E:\FR\FM\19JYP1.SGM 19JYP1 34830 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS but not limited to, exempt DCOs, would pursue registration with alternative compliance. Because of the significantly reduced requirements under alternative compliance, the Commission believes it would be considerably easier for nonU.S. clearing organizations to comply with those requirements while still fully complying with their home country regime. As a result, the Commission believes that this proposal may increase the number of registered DCOs over time. Because exempt DCOs are currently not permitted to offer customer clearing, customers would have more clearing options if exempt DCOs were to become registered DCOs. If clearing organizations that are neither registered nor exempt from registration were to register, both customers and clearing members would have more clearing options. Access to more clearing organizations may encourage more clearing of swaps, while reducing the concentration risk among DCOs. Moreover, given the reduced costs expected to be borne by DCOs subject to alternative compliance and the greater competition resulting from the likely increase in the number of registered DCOs, it is possible that some registered DCOs may pass some of their cost savings to their clearing members and customers. In addition to their direct benefits, such cost reductions may have the indirect benefit of encouraging greater use of clearing, thereby increasing the safety and stability of the broader financial system. Finally, the proposed regulations would promote and perhaps encourage international comity by showing deference to non-U.S. regulators in the oversight of non-U.S. DCOs that do not pose substantial risk to the U.S. financial system. If regulators in other countries deferred to U.S. oversight of U.S. DCOs active in overseas markets, the reduced registration and compliance burdens on such DCOs would be an additional benefit of the proposed regulation. c. Costs A non-U.S. clearing organization applying under the proposed alternative application procedures would incur costs in preparing the application. This would include preparing and submitting certain parts of the Form DCO, including the requirement to provide in Exhibit A–1 the citation and full text of each applicable legal requirement in its home country that corresponds with each core principle and an explanation of how the applicant satisfies those requirements. If a clearing organization were required instead to apply under the existing application process, VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 however, it would need to prepare and submit a complete Form DCO, which is a significantly more costly and burdensome process. Thus, although an applicant would incur costs in preparing the application under proposed § 39.3(a)(3), the proposed alternative application procedures would represent a substantial cost savings relative to the existing procedures. DCOs registered under the existing procedures, including non-U.S. DCOs that are ineligible for alternative compliance, may face a competitive disadvantage as a result of this proposal. A DCO subject to full Commission regulation and oversight may have higher ongoing compliance costs than a DCO subject to alternative compliance. This competitive disadvantage is mitigated by the fact that DCOs subject to alternative compliance would, as a precondition of such registration, be required to be overseen by a home country regulator that is likely to impose costs similar to those associated with Commission regulation. Such nonU.S. DCOs, then, may have compliance costs in their home countries that a U.S.-based DCO might not. The Commission does not anticipate that the proposal would impose costs on clearing members or customers. The proposal would likely increase the number of registered DCOs and permit some DCOs to register under a new procedure that may allow them to pass on cost savings to clearing members and customers. Therefore, the Commission believes that clearing members and customers may face reduced costs as a result of this proposal. To the extent that DCOs subject to alternative compliance do not save costs relative to traditionally registered DCOs, or do not pass cost savings to their clearing members or customers, the Commission notes that, to the extent products are available for clearing through more than one DCO, clearing members and customers may be able to simply continue clearing through traditionally registered DCOs, likely without any change in costs. Furthermore, the Commission does not believe that the proposal would materially increase the risk to the U.S. financial system. DCOs that pose substantial risk to the U.S. financial system would not be eligible to register under the proposed alternative process.60 Furthermore, a DCO cannot 60 It may also be possible that the Commission’s proposed test for ‘‘substantial risk to the U.S. financial system’’ may not be properly calibrated, allowing certain non-U.S. DCOs to register under the alternative registration regime when they may pose sufficient risk to the U.S. financial system to PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 avail itself of this process unless the Commission determines that a DCO’s compliance with its home country regulatory regime would satisfy the DCO Core Principles, meaning that the DCO would be subject to regulation comparable to that imposed on DCOs registered under the existing procedure. An MOU or similar arrangement must be in effect between the Commission and the DCO’s home country regulator, allowing the Commission to receive information from the home country regulator to help monitor the DCO’s continuing compliance with its legal and regulatory obligations. In addition, DCOs that register under the proposed alternative process would remain subject to the Commission’s customer protection requirements set forth in section 4d(f) of the CEA, parts 1 and 22 of the Commission’s regulations, and § 39.15. The Commission also notes that foreign regulators have a strong incentive to ensure the safety and soundness of the clearing organizations that they regulate, and their oversight, combined with the alternative compliance regime, will enable the Commission to more efficiently allocate its own resources in the oversight of traditionally registered DCOs. Finally, the proposal would not increase the risks posed by exempt DCOs or by clearing organizations that are neither registered nor exempt from registration. Lastly, the Commission does not anticipate any costs to DCOs associated with the exemption in proposed § 39.4(c). 3. Section 15(a) Factors a. Protection of Market Participants and the Public The proposed regulations would not materially reduce the protections available to market participants and the public because they would require, among other things, that a DCO subject to alternative compliance: (i) Must demonstrate to the Commission that compliance with the applicable legal requirements in its home country would constitute compliance with the DCO Core Principles; (ii) must be licensed, registered, or otherwise authorized to act as a clearing organization in its home country and be in good regulatory standing; and (iii) must not pose warrant greater oversight by the Commission. However, the Commission believes that even if these non-U.S. DCOs are permitted to register under the alternative registration regime, this risk will be mitigated by the Commission’s determination that compliance with the foreign jurisdiction’s legal regime would satisfy the DCO Core Principles, as discussed above, and the Commission’s access to daily and periodic reports regarding the DCO and its risks. E:\FR\FM\19JYP1.SGM 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules substantial risk to the U.S. financial system. The regulations would also protect market participants and the public by ensuring that FCM customers clearing through a DCO subject to alternative compliance would continue to receive the full benefits of the customer protection regime established in the CEA and Commission regulations. Although the Commission acknowledges the possibility that some foreign regulatory regimes may ultimately prove to be less effective than that of the United States, the Commission believes that this risk is mitigated for the reasons discussed above. jspears on DSK30JT082PROD with PROPOSALS b. Efficiency, Competitiveness, and Financial Integrity The proposed regulations would promote efficiency in the operations of DCOs subject to alternative compliance by reducing duplicative regulatory requirements. This reduction in duplicative requirements would likely result in most DCOs being subject largely to only their home country regulatory regimes, which could promote competitiveness among DCOs. Furthermore, adopting the proposed regulations might prompt other regulators to adopt similar rules that would defer to the Commission in the regulation of U.S. DCOs operating outside the United States, which could increase competitiveness by reducing the regulatory burdens on such DCOs. The proposed regulations would be expected to maintain the financial integrity of swap transactions cleared by DCOs because DCOs subject to alternative compliance would be required to comply with a home country regulatory regime that satisfies the DCO Core Principles and because they would be required to satisfy the Commission’s regulations regarding customer protection. In addition, the proposed regulations may contribute to the financial integrity of the broader financial system by spreading the potential risk of particular swaps among a greater number of DCOs, thus reducing concentration risk. c. Price Discovery Price discovery is the process of determining the price level for an asset through the interaction of buyers and sellers and based on supply and demand conditions. The Commission has not identified any impact that the proposed regulations would have on price discovery. This is because price discovery occurs before a transaction is submitted for clearing through the interaction of bids and offers on a trading system or platform, or in the VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 over-the-counter market. The proposed rule would not impact requirements under the CEA or Commission regulations regarding price discovery. d. Sound Risk Management Practices The proposed regulations would continue to encourage sound risk management practices because a DCO would be eligible for alternative compliance only if it is held to risk management requirements in its home country that satisfy the DCO Core Principles and are comparable to the Commission’s risk management requirements. e. Other Public Interest Considerations The Commission notes the public interest in access to clearing organizations outside of the United States in light of the international nature of many swap transactions. The proposed regulations might encourage international comity by deferring, under certain conditions, to the regulators of other countries in the oversight of home country clearing organizations. The Commission expects that such regulators will defer to the Commission in the supervision and regulation of DCOs domiciled in the United States, thereby reducing the regulatory and compliance burdens to which such DCOs are subject. D. Antitrust Considerations Section 15(b) of the CEA requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the CEA, in issuing any order or adopting any Commission rule or regulation.61 The Commission believes that the public interest to be protected by the antitrust laws is the promotion of competition. The Commission requests comment on whether the proposed rulemaking implicates any other specific public interest to be protected by the antitrust laws. The Commission has considered the proposed rulemaking to determine whether it is anticompetitive. The Commission believes that the proposed rulemaking may promote greater competition in swap clearing because it would reduce the regulatory burden for non-U.S. clearing organizations, which might encourage them to register to clear the same types of swaps for U.S. persons that are currently cleared by registered DCOs. Unlike non-U.S. DCOs subject to this alternative compliance, U.S. DCOs, and non-U.S. DCOs that pose substantial PO 00000 61 7 U.S.C. 19(b). Frm 00016 Fmt 4702 Sfmt 4702 34831 risk to the U.S. financial system, would be held to the requirements of the CEA and Commission regulations and subject to the direct oversight of the Commission. This may appear to create a competitive disadvantage for these DCOs; however, non-U.S. DCOs subject to alternative compliance would be meeting similar requirements through compliance with their home country regulatory regimes and would be subject to the direct oversight of their home country regulators. Further, to the extent that the U.S. clearing activity of a nonU.S. DCO subject to alternative compliance grows to the point that the DCO poses substantial risk to the U.S. financial system, and therefore, a threat to competition, it would be required to comply with all requirements applicable to DCOs and be subject to the Commission’s direct oversight. The Commission has not identified any less anticompetitive means of achieving the purposes of the CEA. The Commission requests comment on whether there are less anticompetitive means of achieving the relevant purposes of the CEA that would otherwise be served by adopting the proposed rules. List of Subjects 17 CFR Part 39 Clearing, Customer protection, Derivatives clearing organization, Procedures, Registration, Swaps. 17 CFR Part 140 Authority delegations (Government agencies), Organization and functions (Government agencies). For the reasons stated in the preamble, the Commodity Futures Trading Commission proposes to amend 17 CFR chapter I as follows: PART 39—DERIVATIVES CLEARING ORGANIZATIONS 1. The authority citation for part 39 is revised to read as follows: ■ Authority: 7 U.S.C. 2, 7a–1, and 12a(5); 12 U.S.C. 5464; 15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203, title VII, sec. 752, July 21, 2010, 124 Stat. 1749. 2. In § 39.2, add the definitions of ‘‘Good regulatory standing’’ and ‘‘substantial risk’’ in alphabetical order to read as follows: ■ § 39.2 Definitions. * * * * * Good regulatory standing means, with respect to a derivatives clearing organization that is organized outside of the United States, and is licensed, E:\FR\FM\19JYP1.SGM 19JYP1 jspears on DSK30JT082PROD with PROPOSALS 34832 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules registered, or otherwise authorized to act as a clearing organization in its home country, that: (1) In the case of an exempt derivatives clearing organization, either there has been no finding by the home country regulator of material nonobservance of the Principles for Financial Market Infrastructures or other relevant home country legal requirements, or there has been a finding by the home country regulator of material non-observance of the Principles for Financial Market Infrastructures or other relevant home country legal requirements but any such finding has been or is being resolved to the satisfaction of the home country regulator by means of corrective action taken by the derivatives clearing organization; or (2) In the case of a derivatives clearing organization registered through the process described in § 39.3(a)(3), either there has been no finding by the home country regulator of material nonobservance of the relevant home country legal requirements, or there has been a finding by the home country regulator of material non-observance of the relevant home country legal requirements but any such finding has been or is being resolved to the satisfaction of the home country regulator by means of corrective action taken by the derivatives clearing organization. * * * * * Substantial risk to the U.S. financial system means, with respect to a derivatives clearing organization organized outside of the United States, that— (1) The derivatives clearing organization holds 20% or more of the required initial margin of U.S. clearing members for swaps across all registered and exempt derivatives clearing organizations; and (2) 20% or more of the initial margin requirements for swaps at that derivatives clearing organization is attributable to U.S. clearing members; provided, however, where one or both of these thresholds are close to 20%, the Commission may exercise discretion in determining whether the derivatives clearing organization poses substantial risk to the U.S. financial system. For purposes of this definition and §§ 39.6 and 39.51, U.S. clearing member means a clearing member organized in the United States, a clearing member whose ultimate parent company is organized in the United States, or a futures commission merchant. * * * * * VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 3. In § 39.3, revise paragraphs (a)(3), (a)(4), and (a)(5) and add paragraphs (a)(6) and (a)(7) to read as follows: ■ § 39.3 Procedures for registration. (a) * * * (3) Alternative application procedures. An entity that is organized outside of the United States, is seeking to register as a derivatives clearing organization for the clearing of swaps, and does not pose substantial risk to the U.S. financial system may apply for registration in accordance with the terms of this paragraph in lieu of filing the application described in paragraph (a)(2) of this section. If the application is approved by the Commission, the derivatives clearing organization’s compliance with its home country’s regulatory regime would satisfy the core principles set forth in section 5b(c)(2) of the Act, subject to the requirements of subpart D of this part. The applicant shall submit to the Commission the following sections of Form DCO, as provided in the appendix to this part: cover sheet, Exhibit A–1 (regulatory compliance chart), Exhibit A–2 (proposed rulebook), Exhibit A–3 (narrative summary of proposed clearing activities), Exhibit A–4 (detailed business plan), Exhibit A–7 (documents setting forth the applicant’s corporate organizational structure), Exhibit A–8 (documents establishing the applicant’s legal status and certificate(s) of good standing or its equivalent), Exhibit A–9 (description of pending legal proceedings or governmental investigations), Exhibit A–10 (agreements with outside service providers with respect to the treatment of customer funds), Exhibits F–1 through F–3 (documents that demonstrate compliance with the treatment of funds requirements with respect to customers of futures commission merchants), and Exhibit R (ring-fencing memorandum). For purposes of this paragraph, the applicant must demonstrate to the Commission, in Exhibit A–1, the extent to which compliance with the applicable legal requirements in its home country would constitute compliance with the core principles set forth in section 5b(c)(2) of the Act. To satisfy this requirement, the applicant shall provide in Exhibit A–1 the citation and full text of each applicable legal requirement in its home country that corresponds with each core principle and an explanation of how the applicant satisfies those requirements. (4) Submission of supplemental information. The filing of a completed application is a minimum requirement and does not create a presumption that PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 the application is materially complete or that supplemental information will not be required. At any time during the application review process, the Commission may request that the applicant provide supplemental information in order for the Commission to process the application. The applicant shall provide supplemental information in the format and manner specified by the Commission. (5) Application amendments. An applicant 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. An applicant is only required to submit exhibits and other information that are relevant to the application amendment. (6) Public information. The following sections of an application for registration as a derivatives clearing organization will be public: First page of the Form DCO cover sheet (up to and including the General Information section), Exhibit A–1 (regulatory compliance chart), Exhibit A–2 (proposed rulebook), Exhibit A–3 (narrative summary of proposed clearing activities), Exhibit A–7 (documents setting forth the applicant’s corporate organizational structure), Exhibit A–8 (documents establishing the applicant’s legal status and certificate(s) of good standing or its equivalent), and any other part of the application not covered by a request for confidential treatment, subject to § 145.9 of this chapter. (7) Extension of time for review. The Commission may further extend the review period in paragraph (a)(1) of this section for any period of time to which the applicant agrees in writing. * * * * * ■ 4. In § 39.4, redesignate paragraphs (c) through (e) as paragraphs (d) through (f) and add new paragraph (c) to read as follows: § 39.4 Procedures for implementing derivatives clearing organization rules and clearing new products. * * * * * (c) Exemption from self-certification of rules. Notwithstanding the rule certification requirements of section 5c(c)(1) of the Act and § 40.6 of this chapter, a derivatives clearing organization that is registered through the process described in § 39.3(a)(3) is not required to certify a rule unless the rule relates to the requirements under section 4d(f) of the Act, parts 1, 22, or 45 of this chapter, or § 39.15. * * * * * E:\FR\FM\19JYP1.SGM 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules ■ 5. Revise § 39.9 to read as follows: § 39.9 Scope. Except as otherwise provided by Commission order, the provisions of this subpart B apply to any derivatives clearing organization, as defined under section 1a(15) of the Act and § 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. ■ 6. Add and reserve §§ 39.43 through 39.49. ■ 7. Add subpart D, consisting of §§ 39.50 and 39.51, to read as follows: Subpart D—Provisions Applicable to Derivatives Clearing Organizations Subject to Alternative Compliance Sec. 39.50 39.51 § 39.50 Scope. Alternative compliance. Scope. The provisions of this subpart D apply to any derivatives clearing organization that is registered through the process described in § 39.3(a)(3). jspears on DSK30JT082PROD with PROPOSALS § 39.51 Alternative compliance. (a) Eligibility for alternative compliance. (1) The Commission may register, subject to any terms and conditions as the Commission determines to be appropriate, a derivatives clearing organization for the clearing of swaps for U.S. persons if: (i) The Commission determines that compliance by the derivatives clearing organization with its home country regulatory regime constitutes compliance with the core principles set forth in section 5b(c)(2) of the Act; (ii) The derivatives clearing organization is in good regulatory standing in its home country; (iii) The Commission determines the derivatives clearing organization does not pose substantial risk to the U.S. financial system; and (iv) 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 appropriate to evaluate the initial and continued eligibility of the derivatives clearing organization for alternative registration or to review its compliance with any conditions of such registration. (2) To the extent that the derivatives clearing organization’s home country VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 regulatory regime lacks legal requirements that correspond to those core principles less related to risk, the Commission may, in its discretion, grant registration subject to conditions that would address the relevant core principles. (b) Conditions of alternative compliance. A derivatives clearing organization subject to alternative compliance shall be subject to any conditions the Commission may prescribe including, but not limited to: (1) Applicable requirements under the Act and Commission regulations. The derivatives clearing organization shall comply with: The core principles set forth in section 5b(c)(2) of the Act through its compliance with applicable legal requirements in its home country; and other requirements applicable to derivatives clearing organizations as specified in the derivatives clearing organization’s registration order including, but not limited to, section 4d(f) of the Act, parts 1, 22, and 45 of this chapter, and subpart A and § 39.15 of this part. (2) Open access. The derivatives clearing organization shall have rules with respect to swaps to which one or more of the counterparties is a U.S. person that: (i) Provide that all swaps with the same terms and conditions, as defined by product specifications established under the derivatives clearing organization’s rules, submitted to the derivatives clearing organization for clearing are economically equivalent within the derivatives clearing organization and may be offset with each other within the derivatives clearing organization, to the extent offsetting is permitted by the 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 process. The 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 derivatives PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 34833 clearing organization, in connection with any actions or proceedings brought against, or investigations relating to, the derivatives clearing organization or any of its U.S. clearing members; and (iii) Promptly inform the Commission of any change in its designated and authorized agent. (4) Compliance. The derivatives clearing organization shall comply, and shall demonstrate compliance as requested by the Commission, with any condition of its registration. (5) Inspection of books and records. The derivatives clearing organization shall make all documents, books, records, reports, and other information related to its operation as a 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 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) Representation of good regulatory standing. On an annual basis, within 60 days following the end of its fiscal year, a derivatives clearing organization shall request and the Commission must receive from a home country regulator a written representation that the derivatives clearing organization is in good regulatory standing. (7) Other conditions. The Commission may condition alternative compliance on any other facts and circumstances it deems relevant. (c) General reporting requirements. (1) A 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 derivatives clearing organization for alternative compliance, reviewing compliance by the derivatives clearing organization with any conditions of its registration, or conducting oversight of U.S. clearing members, and the swaps that are cleared by such persons through the derivatives clearing organization. Information provided to the Commission under this paragraph shall be submitted in accordance with § 39.19(b). (2) Each 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 E:\FR\FM\19JYP1.SGM 19JYP1 jspears on DSK30JT082PROD with PROPOSALS 34834 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules time on the following business day, containing with respect to swaps: (A) Total initial margin requirements for all clearing members; (B) Initial margin requirements and initial margin on deposit for each U.S. clearing member, by house origin and by each customer origin, and by each individual customer account; and (C) Daily variation margin, separately listing the mark-to-market amount collected from or paid to each U.S. clearing member, by house origin and by each customer origin, and by each individual customer account. (ii) A report compiled as of the last day of each fiscal quarter of the derivatives clearing organization and submitted to the Commission no later than 17 business days after the end of the derivatives clearing organization’s fiscal quarter, containing a list of U.S. clearing members, 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; (iv) As available to the derivatives clearing organization, any examination report or examination findings by a home country regulator, and notify the Commission within five business days after it becomes aware of the commencement of any enforcement or disciplinary action or investigation by a home country regulator; (v) Immediate notice of any change with respect to the derivatives clearing organization’s licensure, registration, or other authorization to act as a derivatives clearing organization in its home country; (vi) In the event of a default by a clearing member clearing swaps, with such event of default determined in accordance with the rules of the derivatives clearing organization, immediate notice of the default including the amount of the clearing member’s financial obligation; provided, however, if the defaulting clearing member is a U.S. clearing member, the notice shall also include the name of the U.S. clearing member and a list of the positions held by the U.S. clearing member; and (vii) Notice of action taken against a U.S. clearing member by a derivatives clearing organization, no later than two business days after the derivatives clearing organization takes such action against a U.S. clearing member. (d) Modification of registration upon Commission initiative. (1) The Commission may, in its discretion and upon its own initiative, modify the terms and conditions of an order of registration granted through the process VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 described in § 39.3(a)(3) if the Commission determines that there are changes to or omissions in facts or circumstances pursuant to which the order was issued, or that any of the terms and conditions of its order have not been met, including, but not limited to, the requirement that: (i) Compliance with the derivatives clearing organization’s home country regulatory regime satisfies the core principles set forth in section 5b(c)(2) of the Act; (ii) The derivatives clearing organization is in good regulatory standing in its home country; or (iii) The derivatives clearing organization does not pose substantial risk to the U.S. financial system. (2) The Commission shall provide written notification to a derivatives clearing organization that it is considering whether to modify an order of registration pursuant to this paragraph and the basis for that consideration. (3) The derivatives clearing organization may respond to the notification in writing no later than 30 business days following receipt of the notification, or at such later time as the Commission permits in writing. (4) Following receipt of a response from the derivatives clearing organization, or after expiration of the time permitted for a response, the Commission may: (i) Issue an order requiring the derivatives clearing organization to comply with all requirements applicable to derivatives clearing organizations registered through the process described in § 39.3(a)(2), effective as of a date to be specified therein. The specified date shall be intended to provide the derivatives clearing organization with a reasonable amount of time to come into compliance with the Act and Commission regulations or request a vacation of registration in accordance with § 39.3(f); (ii) Issue an amended order of registration that modifies the terms and conditions of the order; or (iii) Provide written notification to the derivatives clearing organization that the order of registration will remain in effect without modification to its terms and conditions. 9. Amend § 140.94 by revising paragraph (c) introductory text and paragraph (c)(1) and adding paragraph (c)(15) to 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: (1) The authority to review applications for registration as a derivatives clearing organization filed with the Commission under § 39.3(a)(1) of this chapter, to determine that an application is materially complete pursuant to § 39.3(a)(2) of this chapter, to request additional information in support of an application pursuant to § 39.3(a)(4) of this chapter, to extend the review period for an application pursuant to § 39.3(a)(7) of this chapter, to stay the running of the 180-day review period if an application is incomplete pursuant to § 39.3(b)(1) of this chapter, to review requests for amendments to orders of registration filed with the Commission under § 39.3(d)(1) of this chapter, to request additional information in support of a request for an amendment to an order of registration pursuant to § 39.3(d)(2) of this chapter, and to request additional information in support of a rule submission pursuant to § 39.3(g)(3) of this chapter; * * * * * (15) All functions reserved to the Commission in § 39.51 of this chapter, except for the authority to: (i) Grant registration under § 39.51(a) of this chapter; (ii) Prescribe conditions to registration under § 39.51(b) of this chapter; and (iii) Modify registration under § 39.51(d)(4) of this chapter. * * * * * PART 140—ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION Issued in Washington, DC, on July 12, 2019, by the Commission. Christopher Kirkpatrick, Secretary of the Commission. 8. The authority citation for part 140 continues to read as follows: Note: The following appendices will not appear in the Code of Federal Regulations. ■ Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and 16(b). PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 E:\FR\FM\19JYP1.SGM 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules Appendices to Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations— Commission Voting Summary, Chairman’s Statement, and Commissioners’ Statements Appendix 1—Commission Voting Summary On this matter, Chairman Giancarlo and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative. jspears on DSK30JT082PROD with PROPOSALS Appendix 2—Statement of Chairman J. Christopher Giancarlo This proposal addresses the registration of non-U.S. DCOs that clear swaps for U.S. persons. The CFTC has almost two decades of experience overseeing non-U.S. DCOs engaging in activity in U.S. derivatives markets. LCH Ltd was the first non-U.S. DCO to register with the CFTC 18 years ago. Other CCPs became registered after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DoddFrank Act).1 Through its supervisory powers, the CFTC has informally calibrated its dayto-day oversight of these registered DCOs based on the principle of deference to the oversight of primary regulators, while taking into account the specific circumstances of a particular non-U.S. DCO. The main purpose of this rulemaking is to address the current informality of the CFTC’s approach and, in doing so, introduce significant additional areas where the CFTC can defer, appropriately and consistent with its risk oversight responsibilities, to non-U.S. DCOs’ home country supervisors. Among other things, this proposal sets forth a framework under which non-U.S. DCOs that do not pose a substantial risk to the U.S. financial system would have the option of being fully registered with the CFTC as a DCO but meet their registration requirements through compliance with their home country requirements. These DCOs that are ‘‘fully registered with alternative compliance’’ would still be able to offer customer clearing through futures commission merchants (FCMs), just like other fully registered DCOs. Consistent with the commitment to apply supervisory deference under Title VII of the Dodd-Frank Act where appropriate, the home country regulator would have supervisory primacy over these DCOs with the CFTC much more narrowly focused than is currently the case, from both a legal and practical perspective, on U.S. customer funds protection at these DCOs. This narrow focus on customer funds protection is appropriate to help ensure the legal requirements relating to segregation at both the FCM and DCO level are met, and that, if necessary, the bankruptcy protections afforded to customers under the CFTC’s FCM model work as intended. In determining whether a non-U.S. CCP potentially poses ‘‘substantial risk to the U.S. 1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010), available at: https://www.cftc.gov/sites/ default/files/idc/groups/public/@swaps/documents/ file/hr4173_enrolledbill.pdf. VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 financial system,’’ the proposal would use objective criteria and provide transparency about such criteria. The proposed definition of substantial risk to the U.S. financial system consists of two 20 percent tests. The first focuses on the percentage of initial margin from a ‘‘U.S. origin’’ (i.e., initial margin posted by U.S.-domiciled clearing members and clearing members ultimately owned by U.S.-domiciled holding companies, regardless of the domicile of the clearing member) at a specific non-U.S. DCO. The second focuses on the ‘‘U.S. origin’’ business of the non-U.S. DCO as a percentage of the overall U.S. cleared swaps market. Where both of these ‘‘20/20’’ thresholds are close to 20 percent, the Commission would be able to exercise discretion in determining whether the DCO poses substantial risk to the U.S. financial system. I believe that objective and transparent criteria, such as the ones set forth in the proposal, are what all regulators around the world should strive for to provide appropriate predictability and stability to the markets. I thank CFTC staff for their fine work that resulted in today’s proposal. I look forward to reviewing comments from the public. Appendix 3—Supporting Statement of Commissioner Brian Quintenz This proposed rule would reduce the degree to which CFTC-registered foreign derivatives clearing organizations (DCO) are subject to duplicative regulation by the CFTC and their home country regulator. The proposal would permit a foreign DCO that does not pose ‘‘substantial risk to the U.S. financial system’’ to comply with its home country authorities’ regulations instead of most CFTC regulations. To satisfy CFTC regulations, the foreign DCO would only need to comply with certain of our customer protection and swap data reporting requirements. The proposal recognizes that foreign regulators have a substantial interest and expertise in supervising DCOs located in their home jurisdictions. Deference to their oversight is appropriate when compliance with the home country regulatory regime would achieve compliance with DCO core principles. This proposal is consistent with, and in many ways an expansion of, the CFTC’s 2016 Equivalence Agreement with the European Commission, pursuant to which the CFTC granted substituted compliance to dually-registered DCOs based in the European Union.1 I also strongly support the proposal’s transparent, fact-based procedure for determining when a foreign DCO poses ‘‘substantial risk to the U.S. financial system.’’ The proposal defines ‘‘substantial risk’’ to mean two simple criteria: (i) The foreign DCO holds 20 percent or more of the required initial margin of U.S. clearing members for swaps across all registered and exempt DCOs; and (ii) 20 percent or more of the initial margin requirements for swaps at Determination for the European Union: Dually-Registered Derivatives Clearing Organizations and Central Counterparties, 81 FR 15260 (March 22, 2016). PO 00000 1 Comparability Frm 00020 Fmt 4702 Sfmt 4702 34835 that foreign DCO is attributable to U.S. clearing members. I think this two-prong test correctly assesses the DCO’s focus on U.S. firms and impact on the U.S. marketplace. Today’s proposal contrasts starkly with the European Securities and Markets Authority’s (ESMA) recent proposal to determine the systemic importance of a foreign DCO to the European Union and thereby apply the European Market Infrastructure Regulation (EMIR) and ESMA oversight. Unlike today’s CFTC proposal, ESMA has not proposed any quantitative thresholds for assessing systemic importance. Instead, ESMA proposed 14 ‘‘indicators’’ for determining systemic importance that would grant it considerable discretion and raise serious questions about the judgement and consistency of the indicators’ application. I hope that, through its consultative process, ESMA decides to revise its criteria and ultimately adopts a predictable, transparent, and appropriately calibrated threshold regime for such an important and extraterritorial regulatory determination. I welcome comments and suggestions from market participants and foreign jurisdictions about all aspects of the Commission’s proposed alternative compliance regime for non-U.S. DCOs. It is also my hope that incoming Chairman Tarbert will prioritize finalizing a version of this proposal. Lastly, I look forward to discussing this proposal, and advocating for its deference-based approach, with our regulatory colleagues around the globe. Appendix 4—Statement of Commissioner Dawn D. Stump Overview In responding to the financial crisis, both the Group of 20 Nations (G–20) and the U.S. Congress recognized that the derivatives markets are global and in doing so provided for international coordination and a practical application of regulatory deference. I want to commend the Chairman for his leadership in reminding us of the global commitments made in 2009 and the subsequent efforts Congress made to encourage global regulatory harmonization. Specifically, the G–20 leaders stated the clear responsibility we have ‘‘to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage.’’ 1 More directly related to the subjects before us today, Congress, in the Dodd-Frank Act, amended the Commodity Exchange Act to provide: ‘‘The Commission may exempt, conditionally or unconditionally, a derivatives clearing organization from registration . . . for the clearing of swaps if the Commission determines that the derivatives clearing organization is subject to comparable, comprehensive supervision and regulation by. . . the appropriate government 1 Leaders’ Statement from the 2009 G–20 Summit in Pittsburgh, Pa. 7 (Sept. 24–25, 2009), https:// www.treasury.gov/resource-center/international/g7g20/Documents/pittsburgh_summit_leaders_ statement_250909.pdf. E:\FR\FM\19JYP1.SGM 19JYP1 jspears on DSK30JT082PROD with PROPOSALS 34836 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules authorities in the home country of the organization.’’ 2 I believe deference to comparable regulatory regimes is essential. Historically, such deference has been the guiding principle of the CFTC’s approach to regulating cross-border derivatives. We cannot effectively supervise central counterparties (CCPs) in every corner of the world. We can, however, evaluate the regulatory requirements in a CCP’s home country to determine if they are sufficiently commensurate to our own. We will never have the exact same rules around the globe. We should rather strive to minimize the frequency and impact of duplicative regulatory oversight while also demanding high comparable standards, just as Congress intended. Had we previously established a more comprehensive structure for those comparably-regulated, foreign CCPs seeking to offer swaps clearing to U.S. customers, then CCPs wishing to seek an exemption would have been able to do so under a regime that Congress provided for in the Dodd-Frank Act. Alternatively, those that wanted to register as a DCO would have done so voluntarily in response to a business rationale demanded by their clearing members and customers. However, by not having previously established an exemption process, the CFTC left only one path for customer clearing on non-U.S. DCOs, which resulted in compelling several non-U.S. CCPs to become dually registered with both their home country regulator and the CFTC. As a result, relationships with our global regulatory counterparts became strained, and there have been many unfortunate consequences such that now we must provide new ground rules. So today, we are advancing an overdue conversation on applying international regulatory deference through the establishment of a test to identify non-U.S. CCPs that pose substantial risk to the U.S. financial system. To be clear, neither of the proposals we are considering today would be available to DCOs that pose such risk. I fear that this point may be lost or confused by the fact that we are presenting these as two separate rulemakings. While I would have preferred a single rulemaking to alleviate any confusion, I want to make clear that we are simply proposing two regulatory options, each of which is only available to those DCOs that do NOT pose substantial risk to the U.S. financial system under the proposed test. I encourage commenters to provide input on the proposals as if they are a single package, particularly where the request for comments in one proposal may be relevant or more applicable to consideration of the other proposal. These proposals are a step towards achieving the goals established in 2009—an effort I wholeheartedly support. However, I have concerns that these proposals may be a bit too rigid to pragmatically facilitate increased swaps clearing by U.S. customers, as we are committed to do by the original G– 20 and Congressional directives. Under the Alternative Compliance proposal, non-U.S. DCOs can permit customer access only if a 27 U.S.C. 7a–1(h) (2012). VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 futures commission merchant (FCM) is directly facilitating the clearing while the other available option—provided for in the Exempt DCO proposal—completely disallows the FCM from being involved in customer clearing. While I recognize that the blunt nature of these bright line distinctions makes it easier to regulate, I worry that it may not be workable in practice. I support putting these proposals out for public comment in hopes that those who participate in these markets and who are expected to apply the new swap clearing mandates will be able to lend their voices to the discussion. However, I anticipate that the elements left unaddressed in these proposals, which are detailed in the requests for comments, may require a re-proposal at some future date. Nonetheless, if that is to occur we will be well served to have that discussion with the benefit of public comments. Registration With Alternative Compliance for Non-U.S. DCOs This proposal is designed to more clearly spell out how we would provide regulatory oversight for those clearinghouses that do not pose substantial risk to the U.S. financial system and that may obtain Alternative Compliance by demonstrating fulfillment of statutorily-established core principles. Unfortunately, the proposal fails to address, and in my opinion may even worsen, a challenge of great concern to this Commission—the increased strain on our registered FCMs. Under the Alternative Compliance proposal, any non-U.S. DCO seeking to apply the regime would be required to do so ONLY through clearing members that are FCMs, and may not do so through an affiliate of the FCM in the home country that is already acting as a clearing member of the DCO. This is the status quo, and frankly it often makes very little economic sense for both the FCM and its affiliate to be capitalizing a clearinghouse simultaneously. Consideration should be given to the efficiency of utilizing an affiliated entity, which would allow this to be a business decision between FCMs and their customers, rather than a regulatory impediment to sustaining FCMs that play a critical role in cleared derivatives markets. It is costly for an FCM to join any clearinghouse and may be especially uneconomic if the FCM only has a few customers who wish to access a particular non-U.S. DCO. It may make more sense to structure the arrangement with the assistance of a non-U.S. affiliate, already actively participating as a member of the DCO. To do otherwise limits U.S. customer choice and access to clearing of the product in a foreign jurisdiction, which seems at odds with the reform agenda of encouraging clearing— mandated or not. To be clear, two affiliated entities may each be subjected to risk mutualization obligations at the same CCP, and unfortunately, this proposal does not discuss how we might address this duplicative burden. Rather, we are requesting comment in the separate Exempt DCO proposal about how this problem might be addressed through an affiliate guarantee arrangement such that an FCM could potentially participate as a PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 ‘‘special’’ member whose obligations to the DCO could be guaranteed by its non-FCM affiliate acting as a ‘‘traditional’’ member of the DCO. I hope commenters will consider and discuss this concept in the context of the proposed Alternative Compliance regime where it is more applicable to CFTCregistered FCMs at non-U.S., CFTC-registered DCOs. I hope that commenters will also provide other potential solutions to help alleviate undue burdens on FCMs and their customers in the context of the Alternative Compliance proposal. As a Commission, I believe we are all concerned about the consolidation these clearing service providers are already experiencing and the constraint on the availability of clearing services for market participants. I hope we will be able to avoid policies that unnecessarily challenge the economics of, or otherwise impede, operating as an FCM. Otherwise, we might find that our mandate to increase swaps clearing is futile: Simply put, the clearinghouses don’t work without clearing members and so we must seek to preserve both. Closing At the beginning of this year I penned an opinion piece in the Financial Times 3 in which I attempted to appeal to our international regulatory partners to recommit to a coordinated approach, ensuring that our alliance remains strong rather than fractured. Regulatory conflicts are at odds with our shared mission and do a disservice to global market participants. I am committed to advancing a coordinated approach, and I believe the proposals we are putting forward today are a first step in that process. There is, however, more work to be done both in the way of the CFTC extending deference to other jurisdictions and vice versa. I hope our international regulatory partners will also take the opportunity to reset and recognize that our shared interest of advancing derivatives clearing is best achieved by respecting each jurisdiction’s successful implementation of the principles agreed to ten years ago. Otherwise, it might unfortunately become challenging to advance the concept of deference under consideration today to the next stage of the process. Appendix 5—Supporting Statement of Commissioner Dan M. Berkovitz I support issuing for public comment the proposed rulemaking (‘‘Proposal’’) to permit registration with alternative compliance for non-U.S. derivatives clearing organizations (‘‘non-U.S. DCOs’’). Under the Proposal, a non-U.S. DCO that does not pose ‘‘substantial risk to the U.S. financial system’’ would be permitted to elect to comply with certain Commodity Exchange Act (‘‘CEA’’) core principles for DCOs through compliance with its home country regulatory regime.1 The non-U.S. DCO still would be required to comply with the CFTC’s customer protection and swap data reporting requirements. This registration 3 Dawn DeBerry Stump, Opinion, We Must Rethink Our Clearinghouse Rules, Fin. Times (Jan. 24, 2019). 1 Proposal, section I.A. E:\FR\FM\19JYP1.SGM 19JYP1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS alternative would permit U.S. persons to access foreign swap markets while benefitting from customer protections under the U.S. Bankruptcy Code and CFTC regulations without introducing significant new risks into the financial system. The alternative compliance framework seeks to satisfy both the CFTC interest in protecting U.S. customers accessing a nonU.S. DCO and the interests of the home regulator in overseeing the activities of the non-U.S. DCO within its jurisdiction. It maintains key U.S. customer protection requirements and U.S. Bankruptcy Code treatment for U.S. customer funds held by CFTC-registered futures commission merchants (‘‘FCMs’’).2 At the same time, this framework recognizes the interests of the non-U.S. DCO’s home country regulator by relying on its oversight of other DCO activities. I look forward to comments on whether the Proposal maintains for the Commission an appropriate level of regulatory oversight for non-U.S. DCOs operating within this framework. The effective regulation of central clearinghouses for derivatives is critical to managing risk throughout global financial markets. Under the CEA, the Commission may exempt a non-U.S. DCO from the registration requirement if the Commission determines that the non-U.S. DCO is subject to ‘‘comparable, comprehensive supervision and regulation’’ by its home regulator.3 The Exempt DCO Proposal, which the Commission also is considering today, would set forth, for the first time, objective standards for determining whether a particular non-U.S. DCO is eligible for such an exemption.4 The threshold for permitting non-U.S. DCOs under the Exempt DCO Proposal to be eligible to elect exemption from registration—that the DCO not pose a ‘‘substantial risk to the U.S. financial system’’—is the same standard for permitting a non-U.S. DCO to be eligible to register with alternative compliance under this Proposal. Thus, under the set of proposals the Commission is considering today, a non-U.S. DCO that does not pose substantial risk to the U.S. financial system could apply, at its election, either for an exemption from DCO registration, or for registration with alternative compliance. Of course, it could apply for full DCO registration as well. I support the Commission’s movement towards objective standards and defined processes for establishing registration 2 The Proposal would require each applicant for registration with alternative compliance to: (a) Address compliance with certain Commission customer protection and reporting rules in its application; (b) submit DCO rules that relate to protection of customer funds and swap reporting to the Commission; and (c) comply with the Commission’s customer protection rules and reporting requirements largely through the required use of registered FCMs. 3 See Commodity Exchange Act sec. 5b(h), 7 U.S.C. 7a–1(h). 4 Although I support the development of objective standards for this purpose, I cannot support the Exempt DCO Proposal because, among other things, it fails to maintain appropriate protections for U.S. customers. Please see my dissenting statement for further detail on the failures of the Exempt DCO Proposal. VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 alternatives for non-U.S. DCOs. Non-U.S. DCOs that conduct a substantial amount of U.S. customer-related activity will remain subject to full CFTC registration and regulation and U.S. customers on such DCOs are generally protected under the U.S. Bankruptcy Code and CFTC customer protection regulations. For a non-U.S. DCO that is below that ‘‘substantial risk’’ threshold, this Proposal creates an ‘‘alternative compliance mechanism’’ that would permit the non-U.S. DCO to register with the Commission and provide clearing for U.S. customers, but also to comply with certain DCO core principles by complying with its home country requirements. Under this alternative, the non-U.S. DCO would still be subject to some CFTC customer protection regulations and U.S. customers would continue to receive protections under the U.S. Bankruptcy Code for funds held at the FCMs that must be used as intermediaries.5 ‘‘Substantial Risk’’ Threshold Issues As noted above, only those non-U.S. DCOs that do not pose a ‘‘substantial risk to the U.S. financial system’’ would be permitted to register with alternative compliance. A nonU.S. DCO would be deemed to present a ‘‘substantial risk to the U.S. financial system’’ if: (1) It holds 20% or more of the required initial margin of U.S. members for swaps aggregated across all registered and exempt DCOs; and (2) 20% or more of the initial margin for swaps required at the DCO is attributable to U.S. members. The 20/20 criteria would not be a bright line test. If either of the conditions is present, or close to present, the Commission may nonetheless determine that the non-U.S. DCO presents substantial risk to the U.S. financial system and therefore must fully register. Although I support issuance of this Proposal, I have significant concerns about adopting the 20/20 criteria as a ‘‘risk-based’’ standard. Although the 20/20 criteria are characterized as a risk-based standard (i.e., ‘‘substantial risk to the U.S. financial system’’), the criteria would more accurately be described as establishing an activity-based test. The proposed 20/20 criteria directly measure the level of initial margin deposited at the non-U.S. DCO rather than risk presented to the U.S. financial system. The Proposal is devoid of reasoned analysis as to the basis for the 20/20 criteria in terms of actual risk presented to the U.S. financial system. It is not difficult to envision scenarios in which a lesser amount of initial margin at a non-U.S. DCO by U.S. participants may actually represent increased risk to the U.S. financial system, and a greater amount of margin may represent lesser risk. In the Proposal, the Commission concedes that ‘‘a test based solely on initial margin requirements may not fully capture the risk of a given DCO.’’ 6 ability of non-U.S. DCOs that are registered with alternative compliance to provide clearing services to U.S. customers with the customer protections provided under U.S. law obviates the need for the Commission’s contortions found in the Exempt DCO Proposal to allow exempt DCOs to provide customer clearing but without any U.S. customer protections established by the CFTC. 6 Proposal, section II.A.2. PO 00000 5 The Frm 00022 Fmt 4702 Sfmt 4702 34837 In my view, an activity-related test is, in fact, the more appropriate standard for determining registration requirements. In effect, the Proposal gets the result right, but for the wrong reasons. ‘‘Substantial risk to the U.S. financial system’’ is difficult—if not impossible—to measure in a straightforward, objective formula, especially as markets change over time. The activity-based thresholds in the Dodd-Frank Act for the regulation of swaps markets and entities were adopted largely due to the spectacular failure of the risk-based approach prior to the financial crisis. Other registration thresholds and registration exemptions in the CEA and the Commission’s regulations, for example for swap dealers, FCMs, commodity pool operators, and commodity trading advisors, are based on activity rather than risk. Importantly, the standard in CEA Section 2(i) for the application of the swaps provisions to activities outside the U.S. (‘‘direct and significant connection with activities in, or effect on, commerce of the United States’’) is activity-based and not risk-based. The threshold for exemption from registration for non-U.S. DCOs should be activity-based as well. It is not apparent from the information provided in the Proposal why the 20/20 test should be the appropriate standard for determining whether a non-U.S. DCO need not fully register with the CFTC. Do the proposed criteria accurately measure the appropriate level of clearing activity? Are additional or different metrics more appropriate for measuring when clearing activity for U.S. customers becomes substantial and full registration becomes appropriate? I look forward to reviewing comments addressing these and the other issues regarding the 20/20 test. No Substituted Compliance Review I also am concerned that the Proposal may not establish sufficiently clear or adequate standards for the review of a non-U.S. DCO’s application for alternative compliance. In contrast to the standard and proposed process for granting a request for exemption from DCO registration,7 the Proposal would not require the CFTC to make any determination that the home jurisdiction’s requirements for the DCO are comparable to, and as comprehensive as, the core principles for which alternative compliance is being sought.8 It is not clear why a vaguer standard should apply to DCOs seeking registration with alternative compliance. The Proposal establishes what, in essence, appears to be a regime similar to substituted compliance for certain DCO core principles, yet it does not follow the process the CEA requires and the CFTC has implemented in other circumstances for establishing a substituted compliance regime.9 Further, the Proposal 7 See Commodity Exchange Act sec. 5b(h), 7 U.S.C. 7a–1(h). 8 See Exemption from Derivatives Clearing Organization Registration, section I (July 11, 2019). 9 See Commodity Exchange Act secs. 5b(h), 5h(g), 4(b)(1)(A) (7 U.S.C. 7a–1(h), 7b–3(g), 6(b)(1)(A)) (establishing a ‘‘comparable, comprehensive supervision and regulation’’ standard for exempt DCOs, exempt swap execution facilities, and foreign E:\FR\FM\19JYP1.SGM Continued 19JYP1 34838 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Proposed Rules does not require that the non-U.S. DCO observe the Principles for Financial Market Infrastructure. I look forward to comments on, and further clarification of, these issues. Reciprocity In this rulemaking the Commission proposes to recognize the interests of other jurisdictions in the regulation of non-U.S. DCOs. To the extent that non-U.S. jurisdictions adopt similar approaches that recognize the interests of the U.S. in the regulation of DCOs located in the U.S., the global marketplace as a whole will benefit. However, to the extent that another jurisdiction does not appropriately recognize the interests of the U.S. in regulating U.S. DCOs, then U.S. DCOs could be fully regulated by both the U.S. and the other nonU.S. jurisdiction, subjecting the U.S. DCOs to unnecessary additional costs and potentially conflicting requirements.10 Prior to granting any applications for alternative compliance for a non-U.S. DCO, the Commission should determine that the home jurisdiction of the non-U.S. DCO has adopted a comparable approach to the regulation (including exemption from regulation) of U.S. DCOs.11 I invite comment on whether reciprocity or a similar mechanism should be incorporated into the regulation. I thank the staff of the Division of Clearing and Risk for their work on this Proposal and appreciate their professional engagement with my office to address many of our comments. [FR Doc. 2019–15262 Filed 7–18–19; 8:45 am] BILLING CODE 6351–01–P POSTAL REGULATORY COMMISSION 39 CFR Part 3050 [Docket No. RM2019–10; Order No. 5153] Periodic Reporting Postal Regulatory Commission. Notice of proposed rulemaking. AGENCY: jspears on DSK30JT082PROD with PROPOSALS ACTION: boards of trade, respectively); 78 FR 45,292, 45,342– 45 (July 22, 2013) (establishing the ‘‘comparable and comprehensive’’ standard for substituted compliance determinations by the Commission for swap dealer regulations in foreign jurisdictions). 10 This situation presents a classic ‘‘prisoner’s dilemma,’’ in which the overall welfare of the two parties is maximized by the parties acting cooperatively (in this case, mutual recognition of regulatory interests), whereas individual welfare may be maximized by defection (no recognition of the other party’s interests) when the other party cooperates (recognition of the other party’s interests). The most rational and effective strategy for a party in a prisoner’s dilemma where parties repeatedly interact with one another and one party seeks cooperation but the other party may defect is for the cooperating party to respond to any defection with tit-for-tat. See Robert Axelrod, The Evolution of Cooperation (Basic Books, 2006). 11 The Restatement (Third) of Foreign Relations Law of the United States recognizes that, in the exercise of international comity, reciprocity is an appropriate consideration in determining whether to exercise jurisdiction extraterritorially. Restatement (Third) of Foreign Relations Law of the United States sec. 403 (Am. Law Inst. 2018). VerDate Sep<11>2014 16:55 Jul 18, 2019 Jkt 247001 The Commission is acknowledging a recent filing requesting the Commission initiate a rulemaking proceeding to consider changes to analytical principles relating to periodic reports (Proposal Five). This document informs the public of the filing, invites public comment, and takes other administrative steps. DATES: Comments are due: August 26, 2019. ADDRESSES: Submit comments electronically via the Commission’s Filing Online system at https:// www.prc.gov. Those who cannot submit comments electronically should contact the person identified in the FOR FURTHER INFORMATION CONTACT section by telephone for advice on filing alternatives. FOR FURTHER INFORMATION CONTACT: David A. Trissell, General Counsel, at 202–789–6820. SUPPLEMENTARY INFORMATION: SUMMARY: Table of Contents I. Introduction II. Proposal Five III. Notice and Comment IV. Ordering Paragraphs I. Introduction On July 12, 2019, the Postal Service filed a petition pursuant to 39 CFR 3050.11 requesting that the Commission initiate a rulemaking proceeding to consider changes to analytical principles relating to the Postal Service’s periodic reports.1 The Petition identifies the proposed analytical changes filed in this docket as Proposal Five. II. Proposal Five Background. Proposal Five relates to the methodology used to calculate indemnity costs for both Domestic and International Indemnities. Petition, Proposal Five at 1–2. The Postal Service previously submitted a proposal to change the treatment of International Indemnities in response to the Commission’s FY 2017 Annual Compliance Determination (ACD).2 In the FY 2018 ACD, the 1 Petition of the United States Postal Service for the Initiation of a Proceeding to Consider Proposed Changes in Analytical Principles (Proposal Five), July 12, 2019 (Petition). The Postal Service also filed a notice of filing non-public material relating to Proposal Five. Notice of Filing of USPS– RM2019–10/NP1 and Application for Nonpublic Treatment, July 12, 2019. 2 Id.; see Docket No. RM2018–9, Petition of the United States Postal Service for the Initiation of a Proceeding to Consider Proposed Changes in Analytical Principles (Proposal Six), June 26, 2018; Docket No. RM2018–9, Order on Analytical Principles Used in Periodic Reporting (Proposal Six), August 28, 2018 (Order No. 4798). PO 00000 Frm 00023 Fmt 4702 Sfmt 4702 Commission found that, despite the change in the treatment of International Indemnities, Outbound International Insurance costs exceeded revenue during FY 2018.3 The Commission noted that ‘‘[w]hen additional insurance is purchased for a mailpiece, all of the associated indemnity is assigned to the Outbound International Insurance product, rather than the amount of the indemnity greater than the value of the built-in insurance.’’ FY 2018 ACD at 108. The Commission also found that ‘‘the data the Postal Service provided concerning Outbound International Insurance raises concerns about the accuracy of the revenue data, as discrepancies exist between published rates and reported revenue per piece.’’ Id. Accordingly, the Commission directed the Postal Service to investigate the discrepancies between ‘‘published rates and reported revenue per piece[ ]’’ and file a report within 120 days of issuance of the ACD ‘‘on the results of this investigation and on the feasibility of disaggregating indemnities between insurance included in the product and additional insurance purchased for the mailpiece.’’ Id. In response, the Postal Service indicates that it has ‘‘investigated the feasibility of disaggregating indemnities between insurance included in the product and additional insurance purchased for the mailpiece, and has developed the methodology presented in this proposal’’ for both Domestic and International Indemnities. Petition, Proposal Five at 2. Proposal. The Postal Service’s proposal seeks to revise the methodology used to calculate costs for both Domestic and International Indemnities ‘‘to more accurately account for indemnity coverage that is included in the base price of a product, versus indemnity coverage that is purchased in addition to the base price.’’ Id. at 1. The proposal would modify the decision rule that currently ‘‘ignores the insurance included with the product when the indemnity exceeds the predetermined amount ($50, $100, or $200, depending on the product).’’ Id. at 2. Under the existing methodology, ‘‘any additional insurance purchased beyond that included with the product was responsible for the incurrence of the entire insurance indemnity.’’ Id. The proposal would revise the costing of indemnities by attributing the portion of an indemnity up to the predetermined base amount to the product. Id. 3 Docket No. ACD2018, Annual Compliance Determination, April 12, 2019, at 108 (FY 2018 ACD). E:\FR\FM\19JYP1.SGM 19JYP1

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 84, Number 139 (Friday, July 19, 2019)]
[Proposed Rules]
[Pages 34819-34838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15262]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 140

RIN 3038-AE87


Registration With Alternative Compliance for Non-U.S. Derivatives 
Clearing Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
proposing amendments to its regulations that would permit derivatives 
clearing organizations (DCOs) organized outside of the United States 
(hereinafter referred to as ``non-U.S. clearing organizations'') that 
do not pose substantial risk to the U.S. financial system to register 
with the Commission yet comply with the core principles applicable to 
DCOs set forth in the Commodity Exchange Act (CEA) through compliance 
with their home country regulatory regime, subject to certain 
conditions and limitations. The Commission is also proposing certain 
related amendments to the delegation provisions in its regulations.

DATES: Comments must be received on or before September 17, 2019.

ADDRESSES: You may submit comments, identified by ``Registration with 
Alternative Compliance for Non-U.S. Derivatives Clearing 
Organizations'' and RIN 3038-AE87, 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\
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    \1\ 17 CFR 145.9. Commission regulations referred to in this 
release 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.
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    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]; Brian Baum, Special Counsel, 
202-418-5654, [email protected]; August A. Imholtz III, Special Counsel, 
202-418-5140, [email protected]; Abigail S. Knauff, Special Counsel, 
202-418-5123, [email protected]; Division of Clearing and Risk, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. DCO Registration Framework
    B. Overview of Proposed Requirements
II. Proposed Amendments to Part 39
    A. Regulation 39.2--Definitions
    B. Regulation 39.3(a)--Application Procedures
    C. Regulation 39.4--Procedures for Implementing DCO Rules and 
Clearing New Products
    D. Regulation 39.9--Scope
    E. Subpart D--Provisions Applicable to DCOs Subject to 
Alternative Compliance
III. Proposed Amendments to Part 140--Organization, Functions, and 
Procedures of the Commission
IV. Request for Comments
V. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

A. DCO Registration Framework

    Section 5b(a) of the CEA provides that a clearing organization may 
not ``perform the functions of a [DCO]'' \2\ with respect to futures or 
swaps unless the clearing organization is registered with the 
Commission.\3\ With respect to futures, section 4(a) of the CEA 
restricts the execution of a futures contract to a designated contract 
market (DCM), and Sec.  38.601 of the Commission's regulations requires 
any transaction executed on or through a DCM to be

[[Page 34820]]

cleared at a DCO.\4\ This is distinguished from foreign futures which, 
if executed on or through a registered foreign board of trade, must be 
cleared through a DCO or a clearing organization that observes the 
CPMI-IOSCO Principles for Financial Market Infrastructures and is in 
good regulatory standing in its home country jurisdiction.\5\
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    \2\ The term ``derivatives clearing organization'' is 
statutorily defined to mean a clearing organization in general. 
However, for purposes of the discussion in this release, the term 
``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 Sec.  1.3, 
17 CFR 1.3.
    \3\ 7 U.S.C. 7a-1(a). Under section 2(i) of the CEA, 7 U.S.C. 
2(i), activities outside of the United States are not subject to the 
swap provisions of the CEA, including any rules prescribed or 
regulations promulgated thereunder, unless those activities either 
``have a direct and significant connection with activities in, or 
effect on, commerce of the United States,'' or contravene any rule 
or regulation established to prevent evasion of a CEA provision 
enacted under the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203, 124 Stat. 1376 (Dodd-Frank Act). 
Therefore, pursuant to section 2(i), the DCO registration 
requirement extends to any clearing organization whose clearing 
activities outside of the United States have a ``direct and 
significant connection with activities in, or effect on, commerce of 
the United States.''
    \4\ See 7 U.S.C. 6; and 17 CFR 38.601.
    \5\ See 17 CFR 48.7(d).
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    With respect to swaps, the CEA permits the Commission to exempt 
from DCO registration a non-U.S. clearing organization that is 
``subject to comparable, comprehensive supervision and regulation'' by 
its home country regulator.\6\ The Commission has granted exemptions 
from DCO registration but so far has limited exempt DCOs to clearing 
only proprietary swaps for U.S. persons. As a result, a non-U.S. 
clearing organization currently must register as a DCO if it wants to 
clear swaps for customers of futures commission merchants (FCMs).
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    \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 has not granted, nor 
developed a framework for granting, such exemptions. In 2018, the 
Commission proposed regulations that would codify the policies and 
procedures that the Commission currently follows with respect to 
granting exemptions from DCO registration to non-U.S. clearing 
organizations. See Exemption From Derivatives Clearing Organization 
Registration, 83 FR 39923 (Aug. 13, 2018). On July 11, 2019, as a 
supplement to that proposal, the Commission approved a separate 
notice of proposed rulemaking, entitled ``Exemption from Derivatives 
Clearing Organization Registration,'' that will be published in the 
Federal Register. In that release, the Commission is further 
proposing to permit exempt DCOs to clear swaps for U.S. customers 
through foreign intermediaries. All references to exempt DCOs 
contained in this release are consistent with the existing exempt 
DCO regime and are not indicative of the Commission's response to 
comments received on the initial proposal.
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    In order to register and maintain registration as a DCO, a clearing 
organization must comply with each of the core principles applicable to 
DCOs set forth in the CEA (DCO Core Principles) and any requirement 
that the Commission imposes by rule or regulation.\7\ Most of the 
requirements applicable to DCOs are set forth in part 39 of the 
Commission's regulations (Part 39), which the Commission adopted to 
implement the DCO Core Principles.\8\
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    \7\ 7 U.S.C. 7a-1(c)(2)(A)(i).
    \8\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR 69334 (Nov. 8, 2011).
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    Of the 16 DCOs currently registered with the Commission, six are 
organized outside of the United States.\9\ These six DCOs are also 
registered (or have comparable status) in their respective home 
countries, which means they are subject to compliance with the CEA and 
Part 39 and their home country regulatory regimes, as well as oversight 
by the Commission and their home country regulators. There are, 
however, meaningful differences in the extent to which U.S. persons 
clear trades through these six non-U.S. DCOs. For example, nearly half 
of the swaps business at LCH Limited, if measured on the basis of 
required initial margin, is attributable to U.S. persons.\10\ In 
contrast, certain other non-U.S. DCOs, such as LCH SA and Eurex 
Clearing AG, for example, hold significantly less initial margin from 
U.S. persons, both in absolute terms and as a percentage of the total 
required initial margin at the DCO. The Commission, recognizing this 
regulatory overlap and considering the dynamics of the marketplace, is 
proposing a new DCO registration framework that would differentiate 
between clearing organizations organized in the United States (U.S. 
clearing organizations) and non-U.S. clearing organizations. The 
proposed framework would also distinguish non-U.S. clearing 
organizations that do not pose substantial risk to the U.S. financial 
system from those that do.
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    \9\ The six registered DCOs organized outside of the United 
States are Eurex Clearing AG, ICE Clear Europe Limited, ICE NGX 
Canada Inc., LCH Limited, LCH SA, and Singapore Exchange Derivatives 
Clearing Limited.
    \10\ Nearly half of the total required initial margin that U.S. 
persons post globally in connection with cleared swaps is held at 
LCH Limited.
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    Under the new framework, the status of U.S. clearing organizations 
would not change. A U.S. clearing organization would still be required 
to register as a DCO and to comply with the CEA and all Commission 
regulations applicable to DCOs. In addition, any non-U.S. clearing 
organization that wants to clear futures listed for trading on a DCM 
would be subject to the current registration requirements. Finally, any 
non-U.S. clearing organization that wants to clear swaps, either 
proprietary or customer, for U.S. persons, and is determined by the 
Commission to pose substantial risk to the U.S. financial system (as 
discussed further below), would be subject to the current requirements 
as well.
    However, a non-U.S. clearing organization that wants to clear swaps 
for U.S. persons (and not futures listed for trading on a DCM) and has 
not been determined by the Commission to pose substantial risk to the 
U.S. financial system would have two additional options. First, the 
non-U.S. clearing organization could still apply for an exemption from 
DCO registration. The Commission recognizes that this option may not 
appeal to some non-U.S. clearing organizations because, as previously 
noted, an exempt DCO is currently limited to clearing proprietary swaps 
for U.S. persons.\11\ If the non-U.S. clearing organization wants to 
clear swaps for FCM customers, but does not want to be subject to full 
compliance with Commission regulations, it would have the option to 
register and maintain registration as a DCO by relying largely on its 
home country regulatory regime, as discussed below.
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    \11\ But see Exemption from Derivatives Clearing Organization 
Registration, approved on July 11, 2019 (proposing to permit exempt 
DCOs to clear swaps for U.S. customers through foreign 
intermediaries).
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    The Commission believes these proposed changes would allow the 
Commission to make more effective use of its resources by focusing its 
oversight almost exclusively on those DCOs that are either organized in 
the United States or pose substantial risk to the U.S. financial 
system. The Commission further believes this rulemaking would advance a 
territorial, risk-based approach to the regulation of clearing 
organizations that shows appropriate deference to non-U.S. regulation 
that achieves a similar result as the DCO Core Principles where the 
non-U.S. regulator itself has a substantial regulatory interest in the 
DCOs located in its jurisdiction. A deference-based cross-border policy 
recognizes that market participants and market facilities in a 
globalized swap market are subject to multiple regulators and 
potentially face duplicative regulations. Under the proposed framework, 
the Commission would allow a non-U.S. DCO to satisfy the DCO Core 
Principles by complying with the corresponding requirements in its home 
jurisdiction, except with respect to certain Commission regulations, 
including critical customer protection safeguards and swap data 
reporting requirements, as discussed below. In this way, the proposed 
framework would help preserve the benefits of an integrated, global 
swap market by reducing the degree to which a DCO would be subject to 
multiple sets of regulations, while ensuring protection for U.S. 
customers. Further, the proposed approach encourages collaboration and 
coordination among U.S. and foreign regulators in establishing 
comprehensive regulatory standards for swaps clearing.

B. Overview of Proposed Requirements

    The CEA requires a DCO to comply with the DCO Core Principles and 
any requirement that the Commission imposes by rule or regulation. The 
CEA further provides that, subject to any rule or regulation prescribed 
by the

[[Page 34821]]

Commission, a DCO has ``reasonable discretion'' in establishing the 
manner by which the DCO complies with each DCO Core Principle.\12\ 
Currently, a DCO is required to comply with all Commission regulations 
that were adopted to implement the DCO Core Principles. The Commission 
is proposing regulations that would allow a non-U.S. clearing 
organization that seeks to clear swaps for U.S. persons,\13\ including 
FCM customers, to register as a DCO and, in most instances, comply with 
the applicable legal requirements in its home country as an alternative 
means of complying with the DCO Core Principles.
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    \12\ 7 U.S.C. 7a-1(c)(2)(A)(ii).
    \13\ The Commission proposes to use the interpretation 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.
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    A non-U.S. clearing organization would be eligible for this 
alternative compliance regime if: (1) The Commission determines that 
the clearing organization's compliance with its home country regulatory 
regime would satisfy the DCO Core Principles; \14\ (2) the clearing 
organization is in good regulatory standing in its home country; (3) 
the Commission determines that the clearing organization does not pose 
substantial risk to the U.S. financial system; and (4) a memorandum of 
understanding (MOU) or similar arrangement satisfactory to the 
Commission is in effect between the Commission and the clearing 
organization's home country regulator. Each of these requirements is 
described in greater detail below.
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    \14\ The Commission notes that the home country regulatory 
regime would not need to satisfy the Commission's regulations under 
Part 39.
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    An applicant for alternative compliance would be required to file 
only certain exhibits of Form DCO,\15\ including a regulatory 
compliance chart in which the applicant would identify the applicable 
legal requirements \16\ in its home country that correspond with each 
DCO Core Principle and explain how the applicant satisfies those 
requirements. Under the current registration regime, an applicant must 
demonstrate compliance with the DCO Core Principles and Part 39. Under 
the alternative compliance regime, an applicant must demonstrate: (1) 
That compliance with its home country requirements would satisfy the 
DCO Core Principles, and (2) compliance with those requirements. If the 
application is approved by the Commission, the DCO would be permitted 
to comply with its home country regulatory regime rather than Part 39 
(with the exception of Sec.  39.15, which concerns treatment of funds). 
Because the DCO would clear swaps for customers \17\ through registered 
FCMs, the DCO would be required to fully comply with the Commission's 
customer protection requirements,\18\ as well as the swap data 
reporting requirements in part 45 of the Commission's regulations. The 
DCO would also be held to certain ongoing and event-specific reporting 
requirements that are more limited in scope than the reporting 
requirements for existing DCOs. The proposed eligibility criteria, 
conditions, and reporting requirements would be set forth in proposed 
subpart D of Part 39.
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    \15\ Whereas an applicant for DCO registration must file the 
numerous and extensive exhibits required by Form DCO, an applicant 
for alternative compliance would only be required to file certain 
exhibits. See Appendix A to Part 39, 17 CFR part 39, appendix A.
    \16\ Home country ``legal requirements'' would include those 
standards or other requirements that are legally binding in the 
applicant's home country.
    \17\ Section 2(e) of the CEA makes it unlawful for any person, 
other than an eligible contract participant, to enter into a swap 
unless the swap is entered into on, or subject to the rules of, a 
DCM. 7 U.S.C. 2(e). ``Eligible contract participant'' is defined in 
section 1a(18) of the CEA and Sec.  1.3. 7 U.S.C. 1a(18); 17 CFR 
1.3.
    \18\ 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. 7 U.S.C. 6(c). Any swaps customer 
funds held by a DCO are also subject to the segregation requirements 
of section 4d(f)(2) of the CEA and related regulations.
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    Assuming all other eligibility criteria continue to be met, the 
alternative compliance regime would be available to the non-U.S. DCO 
unless and until its U.S. clearing activity (as measured by initial 
margin requirements) grows to the point that the Commission determines 
the DCO poses substantial risk to the U.S. financial system, as 
described below. If this alternative compliance regime is adopted, any 
currently registered non-U.S. DCO that does not currently pose 
substantial risk to the U.S. financial system would be able to apply.

II. Proposed Amendments to Part 39

A. Regulation 39.2--Definitions

1. Good Regulatory Standing
    In a recent notice of proposed rulemaking regarding exempt DCOs, 
the Commission proposed a definition of ``good regulatory standing'' 
that is consistent with the definition that the Commission has been 
applying to exempt DCOs.\19\ The Commission is now proposing to add to 
the definition of ``good regulatory standing'' separate language that 
would cover DCOs subject to alternative compliance. The proposed 
definition of ``good regulatory standing'' as it relates to exempt DCOs 
remains unchanged. With the addition of the separate language, the 
Commission is proposing to define ``good regulatory standing'' to mean, 
with respect to a DCO subject to alternative compliance, either there 
has been no finding by the home country regulator of material non-
observance of the relevant home country legal requirements, or there 
has been 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 DCO. The Commission believes 
that the proposed definition, as it relates to DCOs subject to 
alternative compliance, establishes a basis for providing the 
Commission with a high degree of assurance as to the DCO's compliance 
with the relevant legal requirements in its home country, while only 
seeking from the home country regulator a reasonable representation. 
Although the Commission proposes to limit this to instances of 
``material'' non-observance of relevant home country legal 
requirements, the Commission requests comment as to whether it should 
instead require all instances of non-observance.
---------------------------------------------------------------------------

    \19\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR at 39924-39925 (proposing to define ``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 regulator of material non-observance of the Principles for 
Financial Market Infrastructures 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).
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2. Substantial Risk to the U.S. Financial System
    For purposes of this rulemaking, the Commission is proposing to 
define ``substantial risk to the U.S. financial system'' to mean, with 
respect to a non-U.S. DCO, that (1) the DCO holds 20 percent or more of 
the required initial margin of U.S. clearing members for swaps across 
all registered and exempt DCOs; and (2) 20 percent or more of the 
initial margin requirements for swaps at that DCO is attributable to 
U.S. clearing members; provided, however, where one or both of these 
thresholds are close to 20 percent, the Commission may exercise 
discretion in determining

[[Page 34822]]

whether the DCO poses substantial risk to the U.S. financial system. 
For purposes of this definition and proposed Sec. Sec.  39.6 and 39.51, 
the Commission is proposing to clarify that ``U.S. clearing member'' 
means a clearing member organized in the United States or whose 
ultimate parent company is organized in the United States, or an 
FCM.\20\
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    \20\ The Commission is proposing an identical definition of 
``substantial risk to the U.S. financial system'' in a separate 
rulemaking regarding exemption from DCO registration. See Exemption 
from Derivatives Clearing Organization Registration, approved on 
July 11, 2019.
---------------------------------------------------------------------------

    This definition sets forth the test the Commission would use to 
identify those non-U.S. DCOs that pose substantial risk to the U.S. 
financial system, as these DCOs would not be eligible for the 
alternative compliance proposed in this release. The proposed test 
consists of two prongs. The first prong, which is directly related to 
systemic risk, is whether the DCO holds 20 percent or more of the 
required initial margin \21\ of U.S. clearing members for swaps across 
all registered and exempt DCOs. The Commission notes that its primary 
systemic risk-related concern is the potential for loss of clearing 
services for a significant part of the U.S. swaps market in the event 
of a catastrophic occurrence affecting the DCO. The second prong is 
whether U.S. clearing members account for 20 percent or more of the 
initial margin requirements for swaps at that DCO. This prong of the 
test, intended to respect international comity, would capture a non-
U.S. DCO only if a large enough proportion of its clearing activity 
were attributable to U.S. clearing members such that the U.S. has a 
substantial interest warranting more active oversight by the 
Commission.\22\
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    \21\ In general, initial margin requirements are risk-based and 
are meant to cover a DCO's potential future exposure to clearing 
members based on price movements in the interval between the last 
collection of variation margin and the time within which the DCO 
estimates that it would be able to liquidate a defaulting clearing 
member's portfolio. The Commission believes the relative risk that a 
DCO poses to the financial system can be identified by the 
cumulative sum of initial margin collected by the DCO. Therefore, 
the Commission has found initial margin to be an appropriate measure 
of risk.
    \22\ In developing this proposal, the Commission is guided by 
principles of international comity, which counsel due regard for the 
important interests of foreign sovereigns. See Restatement (Third) 
of Foreign Relations Law of the United States (the Restatement). The 
Restatement provides that even where a country has a basis for 
jurisdiction, it should not prescribe law with respect to a person 
or activity in another country when the exercise of such 
jurisdiction is unreasonable. See Restatement section 403(1). The 
reasonableness of such an exercise of jurisdiction, in turn, is to 
be determined by evaluating all relevant factors, including certain 
specifically enumerated factors where appropriate: (1) The link of 
the activity to the territory of the regulating state, i.e., the 
extent to which the activity takes place within the territory, or 
has substantial, direct, and foreseeable effect upon or in the 
territory; (2) the connections, such as nationality, residence, or 
economic activity, between the regulating state and the persons 
principally responsible for the activity to be regulated, or between 
that state and those whom the regulation is designed to protect; (3) 
the character of the activity to be regulated, the importance of 
regulation to the regulating state, the extent to which other states 
regulate such activities, and the degree to which the desirability 
of such regulation is generally accepted; (4) the existence of 
justified expectations that might be protected or hurt by the 
regulation; (5) the importance of the regulation to the 
international political, legal, or economic system; (6) the extent 
to which the regulation is consistent with the traditions of the 
international system; (7) the extent to which another state may have 
an interest in regulating the activity; and (8) the likelihood of 
conflict with regulation by another state. See Restatement section 
403(2). Notably, the Restatement does not preclude concurrent 
regulation by multiple jurisdictions. However, where concurrent 
jurisdiction by two or more jurisdictions creates conflict, the 
Restatement recommends that each country evaluate its own interests 
in exercising jurisdiction and those of the other jurisdiction, and 
where possible, to consult with each other.
---------------------------------------------------------------------------

    The Commission believes that, in the context of this test, the term 
``substantial'' would reasonably apply to proportions of approximately 
20 percent or greater. The Commission stresses that this is not a 
bright-line test; by offering this figure, the Commission does not 
intend to suggest that, for example, a DCO that holds 20.1 percent of 
the required initial margin of U.S. clearing members would potentially 
pose substantial risk to the U.S. financial system, while a DCO that 
holds 19.9 percent would not. The Commission is instead seeking to 
offer some indication of how it would assess the meaning of the term 
``substantial'' in the test.
    The Commission recognizes that a test based solely on initial 
margin requirements may not fully capture the risk of a given DCO. The 
Commission therefore proposes to retain discretion in determining 
whether a non-U.S. DCO poses substantial risk to the U.S. financial 
system, particularly where the DCO is close to 20 percent on both 
prongs of the test. In these cases, in making its determination, the 
Commission may look at other factors that may reduce or mitigate the 
DCO's risk to the U.S. financial system or provide a better indication 
of the DCO's risk to the U.S. financial system.

B. Regulation 39.3(a)--Application Procedures

    The Commission is proposing to amend Sec.  39.3(a) to establish in 
paragraph (a)(3) alternative application procedures for a non-U.S. 
clearing organization that is seeking to register as a DCO to clear 
swaps, does not pose substantial risk to the U.S. financial system, and 
wants to comply with its home country regulatory regime as a means of 
satisfying the DCO Core Principles.\23\ Specifically, any such clearing 
organization may apply for registration in accordance with the terms of 
Sec.  39.3(a)(3) in lieu of filing the application described in Sec.  
39.3(a)(2).\24\
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    \23\ The proposed rule text includes changes to Sec.  39.3(a) 
that were first proposed in a separate rulemaking. See Derivatives 
Clearing Organization General Provisions and Core Principles, 84 FR 
22226 (May 16, 2019).
    \24\ Regulation 39.3(a)(2) provides that any entity seeking to 
register as a DCO shall submit to the Commission a completed Form 
DCO, which shall include a cover sheet, all applicable exhibits, and 
any supplemental materials, as provided in Appendix A to Part 39.
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    Proposed Sec.  39.3(a)(3) would require an applicant to submit to 
the Commission the following sections of Form DCO: Cover sheet, Exhibit 
A-1 (regulatory compliance chart), Exhibit A-2 (proposed rulebook), 
Exhibit A-3 (narrative summary of proposed clearing activities), 
Exhibit A-4 (detailed business plan), Exhibit A-7 (documents setting 
forth the applicant's corporate organizational structure), Exhibit A-8 
(documents establishing the applicant's legal status and certificate(s) 
of good standing or its equivalent), Exhibit A-9 (description of 
pending legal proceedings or governmental investigations), Exhibit A-10 
(agreements with outside service providers with respect to the 
treatment of customer funds), Exhibits F-1 through F-3 (documents that 
demonstrate compliance with the treatment of funds requirements with 
respect to FCM customers), and Exhibit R (ring-fencing memorandum).
    For purposes of Sec.  39.3(a)(3), the applicant would be required 
to demonstrate to the Commission in Exhibit A-1 the extent to which 
compliance with the applicable legal requirements in its home country 
would constitute compliance with the DCO Core Principles.\25\ To 
satisfy this requirement, the applicant would be required to provide in 
Exhibit A-1 the citation and full text of each applicable legal 
requirement in its home country that corresponds with each DCO Core 
Principle and an explanation of how the

[[Page 34823]]

applicant satisfies those requirements. To the extent that the DCO's 
home country regulatory regime lacks legal requirements that correspond 
to those DCO Core Principles less related to risk, the Commission may, 
in its discretion, grant registration subject to conditions that would 
address the relevant DCO Core Principles.\26\
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    \25\ By way of comparison, the Commission has made this 
determination, in part, with regard to EU regulation. See 
Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central 
Counterparties, 81 FR 15260 (Mar. 22, 2016). The Commission notes, 
however, that this determination was made by comparing EU 
regulations with the Commission's regulations. Because the DCO Core 
Principles are broader than the Commission's regulations in most 
cases, the Commission expects it will be less burdensome for an 
applicant to demonstrate that compliance with its home country legal 
requirements would constitute compliance with the DCO Core 
Principles.
    \26\ For example, if the DCO's home country regulatory regime 
lacks legal requirements that would satisfy DCO Core Principle M 
(regarding information sharing), the Commission may grant 
registration subject to conditions that would address information 
sharing.
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C. Regulation 39.4--Procedures for Implementing DCO Rules and Clearing 
New Products

    Regulation 39.4(b) provides that proposed new or amended rules of a 
DCO not voluntarily submitted for Commission approval pursuant to Sec.  
40.5 must be submitted to the Commission pursuant to the self-
certification procedures of Sec.  40.6, as required by section 5c(c) of 
the CEA,\27\ prior to their implementation.\28\ Pursuant to the 
Commission's authority under section 4(c) of the CEA,\29\ the 
Commission is proposing in Sec.  39.4(c) to exempt DCOs that are 
subject to alternative compliance from submitting rules pursuant to 
section 5c(c) of the CEA and Sec.  40.6, unless the rule relates to the 
DCO's compliance with the requirements of part 45 of the Commission's 
regulations,\30\ or section 4d(f) of the CEA,\31\ parts 1 or 22 of the 
Commission's regulations,\32\ or Sec.  39.15,\33\ which set forth the 
Commission's customer protection requirements, as such DCOs would be 
subject to compliance with these requirements.
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    \27\ 7 U.S.C. 7a-2(c).
    \28\ 17 CFR 40.6. A ``rule,'' by definition, includes any 
constitutional provision, article of incorporation, bylaw, rule, 
regulation, resolution, interpretation, stated policy, advisory, 
terms and conditions, trading protocol, agreement or instrument 
corresponding thereto, including those that authorize a response or 
establish standards for responding to a specific emergency, and any 
amendment or addition thereto or repeal thereof, made or issued by a 
registered entity or by the governing board thereof or any committee 
thereof, in whatever form adopted. 17 CFR 40.1(i).
    \29\ 7 U.S.C. 6(c). Section 4(c) of the CEA provides that, in 
order to promote responsible economic or financial innovation and 
fair competition, the Commission, by rule, regulation, or order, may 
exempt any transaction or class of transactions (including any 
person or class of persons offering, entering into, rendering 
advice, or rendering other services with respect to, the 
transaction) from any of the provisions of the CEA other than 
certain enumerated provisions, if the Commission determines that the 
exemption would be consistent with the public interest and the 
purposes of the CEA, that the transactions will be entered into 
solely between appropriate persons, and that the exemption will not 
have a material adverse effect on the ability of the Commission or 
any contract market to discharge its regulatory or self-regulatory 
responsibilities under the CEA.
    \30\ 17 CFR part 45 (setting forth swap data reporting and 
recordkeeping requirements).
    \31\ 7 U.S.C. 6d(f) (relating to segregation of customer funds).
    \32\ 17 CFR parts 1 and 22 (setting forth general regulations 
under the CEA, including treatment of customer funds, and 
requirements for cleared swaps, respectively).
    \33\ 17 CFR 39.15 (setting forth requirements for the treatment 
of customer funds).
---------------------------------------------------------------------------

    The Commission is proposing this limited exemption from the rule 
submission requirements for DCOs that are subject to alternative 
compliance as they would be subject to the applicable laws in their 
home country and oversight by their respective home country regulators. 
Accordingly, the Commission believes that the review of any new or 
amended rule unrelated to the Commission's customer protection regime 
would be more appropriately handled by the DCO's home country 
regulator. The Commission requests comment as to whether it should 
require, as part of the application process for alternative compliance, 
that there is a rule review or approval process under the home country 
regime.
    The Commission believes the proposed exemption in Sec.  39.4(c) is 
consistent with the public interest, as it would allow the Commission 
to focus on reviewing those critical rules that relate to areas where 
the Commission exercises direct oversight rather than review other 
rules for which duplication of review with the home country regulator 
is not necessary. The proposed exemption would reflect the protection 
of customers--and safeguarding of money, securities, or other property 
deposited by customers--as a fundamental component of the Commission's 
regulatory oversight of the derivatives markets by requiring these DCOs 
to certify rules relating to the Commission's customer protection 
requirements. A DCO's new or amended customer protection-related rules 
would also continue to be made transparent to FCMs and their customers, 
as Sec.  40.6(a)(2) requires a DCO to certify that it has posted on its 
website a copy of the rule submission.\34\
---------------------------------------------------------------------------

    \34\ The Commission also publicly posts on its website all Sec.  
40.6 rule certifications for which confidential treatment is not 
requested.
---------------------------------------------------------------------------

    At the same time, the proposed exemption in Sec.  39.4(c) would 
reduce the time and resources necessary for DCOs to file rules 
unrelated to the Commission's customer protection or swap data 
reporting requirements. In light of the foregoing, the Commission 
believes the proposed exemption would be consistent with the public 
interest and the purposes of the CEA. The Commission also believes the 
proposed exemption would not have a material adverse effect on the 
ability of the Commission or any contract market to discharge its 
regulatory or self-regulatory duties under the CEA, as the Commission 
would continue to receive submissions for new rules or rule changes 
concerning customer protection and swap data reporting, matters for 
which the DCO is subject to compliance with Commission regulation.\35\
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    \35\ The factor under section 4(c) of whether a transaction is 
entered into solely between appropriate persons does not apply here 
because there are no transactions implicated by this proposed 
exemption.
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D. Regulation 39.9--Scope

    The Commission recently proposed to revise Sec.  39.9 to make it 
clear that the provisions of subpart B apply to any DCO, as defined 
under section 1a(15) of the CEA and Sec.  1.3, that is registered with 
the Commission as a DCO pursuant to section 5b of the CEA, but do not 
apply to any exempt DCO.\36\ The Commission is proposing to further 
revise Sec.  39.9 to provide that the provisions of subpart B apply to 
any DCO, except as otherwise provided by Commission order. This change 
is intended to reflect the fact that a DCO registered through the 
alternative compliance procedures under proposed Sec.  39.3(a)(3) would 
not be held to the requirements in subpart B, with the exception of 
Sec.  39.15 and those requirements for which the Commission did not 
find there to be alternative compliance in the DCO's home country 
regulatory regime, as provided in the DCO's order. This provision also 
would allow the Commission to not apply to a particular DCO any subpart 
B requirement that the Commission deems irrelevant or otherwise 
inapplicable due to, for example, certain characteristics of the DCO's 
business model.
---------------------------------------------------------------------------

    \36\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR at 39929.
---------------------------------------------------------------------------

E. Subpart D--Provisions Applicable to DCOs Subject to Alternative 
Compliance

1. Regulation 39.50--Scope
    The Commission is proposing new Sec.  39.50 to state that the 
provisions of subpart D of Part 39 apply to any DCO that is registered 
through the process described in Sec.  39.3(a)(3) (i.e., DCOs subject 
to alternative compliance). Proposed Sec.  39.51 would be contained in 
subpart D and would set forth the requirements for alternative 
compliance, as discussed below.

[[Page 34824]]

2. Regulation 39.51--Alternative Compliance
a. Eligibility for Alternative Compliance
    Proposed Sec.  39.51(a) would provide that the Commission may 
register, subject to any terms and conditions as the Commission 
determines to be appropriate, a clearing organization for the clearing 
of swaps for U.S. persons if all of the eligibility requirements listed 
in proposed Sec.  39.51(a)(1) and (a)(2) are met and the clearing 
organization satisfies the conditions set forth in Sec.  39.51(b).\37\ 
Each of these requirements is described below.
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    \37\ The eligibility requirements listed in proposed Sec.  
39.51(a)(1) and (a)(2) and the conditions set forth in proposed 
Sec.  39.51(b) would be pre-conditions to the Commission's issuance 
of a registration order in this regard. 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 registration order.
---------------------------------------------------------------------------

    Proposed Sec.  39.51(a)(1)(i) would require that, in order to be 
eligible for alternative compliance as a DCO, the Commission must 
determine that compliance with the clearing organization's home country 
regulatory regime would satisfy the DCO Core Principles. Under proposed 
Sec.  39.51(a)(1)(ii), a clearing organization would be required to be 
in good regulatory standing in its home country. Under proposed Sec.  
39.51(a)(1)(iii), the Commission must also determine that the clearing 
organization does not pose substantial risk to the U.S. financial 
system (as previously discussed).
    Proposed Sec.  39.51(a)(1)(iv) would provide that, in order for a 
clearing organization to be eligible for alternative compliance as a 
DCO, an MOU or similar arrangement satisfactory to the Commission must 
be in effect between the Commission and the clearing organization's 
home country regulator,\38\ pursuant to which, among other things, the 
home country regulator agrees to provide to the Commission any 
information that the Commission deems appropriate to evaluate the 
clearing organization's initial and continued eligibility for 
registration or to review compliance with any conditions of such 
registration. The Commission has customarily entered into MOUs or 
similar arrangements in connection with the supervision of non-U.S. 
clearing organizations that are registered or exempt from DCO 
registration. In the context of DCOs subject to alternative compliance, 
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.\39\ Although the Commission would retain the right to conduct 
site visits, the Commission would not expect to conduct routine site 
visits to such DCOs.
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    \38\ 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.
    \39\ For existing non-U.S. DCOs that wish to be subject to 
alternative compliance, the Commission believes the MOUs currently 
in place with their respective home country regulators would be 
sufficient to satisfy this requirement.
---------------------------------------------------------------------------

    Under proposed Sec.  39.51(a)(2), if the DCO's home country 
regulatory regime lacks legal requirements that correspond to those DCO 
Core Principles less related to risk, the Commission may, in its 
discretion, grant registration subject to conditions that would address 
the relevant DCO Core Principles.
b. Conditions of Alternative Compliance
    Proposed Sec.  39.51(b) sets forth conditions of alternative 
compliance. These conditions are similar to the conditions that the 
Commission has imposed on exempt DCOs.\40\
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    \40\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR at 39926-39927.
---------------------------------------------------------------------------

    Under proposed Sec.  39.51(b)(1), a DCO subject to alternative 
compliance would be required to comply with the DCO Core Principles 
through its compliance with applicable legal requirements in its home 
country, and any other requirements specified in its registration order 
including, but not limited to, section 4d(f) of the CEA, parts 1, 22, 
and 45 of the Commission's regulations, subpart A of Part 39, and Sec.  
39.15. Because the DCO would clear swaps for FCM customers, the DCO 
would be subject to the Commission's customer protection requirements 
set forth in section 4d(f) of the CEA, parts 1 and 22 of the 
Commission's regulations, and Sec.  39.15. The DCO would also be 
subject to part 45 of the Commission's regulations, which sets forth 
swap data recordkeeping and reporting requirements, and subpart A of 
Part 39, which contains general provisions applicable to DCOs, 
including registration procedures.
    Proposed Sec.  39.51(b)(2) would codify the ``open access'' 
requirements of section 2(h)(1)(B) of the CEA with respect to swaps 
cleared by a DCO to which one or more of the counterparties is a U.S. 
person.\41\ Paragraph (b)(2)(i) would require a DCO to have rules 
providing that all such swaps with the same terms and conditions (as 
defined by product specifications established under the DCO's rules) 
submitted to the DCO for clearing are economically equivalent and may 
be offset with each other, to the extent that offsetting is permitted 
by the DCO's rules. Paragraph (b)(2)(ii) would require a DCO to have 
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.
---------------------------------------------------------------------------

    \41\ 7 U.S.C. 2(h)(1)(B).
---------------------------------------------------------------------------

    Proposed Sec.  39.51(b)(3) would provide that a DCO must 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 DCO or any of its U.S. clearing 
members. The name of the designated agent would be submitted as part of 
the clearing organization's application for registration. If a DCO 
appoints another agent to accept such notice or service of process, the 
DCO would be required to promptly inform the Commission of this change. 
This condition is also included in existing DCO registration orders.
    Proposed Sec.  39.51(b)(4) is a general provision that would 
require a DCO to comply, and demonstrate compliance as requested by the 
Commission, with any condition of the DCO's registration order.
    Proposed Sec.  39.51(b)(5) would require a DCO to make all 
documents, books, records, reports, and other information related to 
its operation as a DCO (hereinafter, ``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. The Commission notes that it does not anticipate 
conducting routine site visits to DCOs subject to alternative 
compliance. However, the Commission may request a DCO to provide books 
and records related to its operation as a DCO subject to alternative 
compliance in order for the Commission to ensure that, among other 
things, the DCO continues to meet the eligibility requirements for 
alternative compliance as well as the conditions of its 
registration.\42\
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    \42\ 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 
appropriate to evaluate the clearing organization's initial and 
continued eligibility for registration or to review compliance with 
any conditions of such registration, the Commission would retain the 
authority to access books and records directly from a DCO.

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[[Page 34825]]

    Proposed Sec.  39.51(b)(6) would require that a DCO request and the 
Commission receive an annual written representation from a home country 
regulator that the DCO is in good regulatory standing, within 60 days 
following the end of the DCO's fiscal year. This requirement would help 
the Commission assess the DCO's compliance with its home country legal 
requirements, and thus, compliance with the DCO Core Principles, and 
continued eligibility for alternative compliance.
    Under proposed Sec.  39.51(b)(7), the Commission may condition 
alternative compliance on any other facts and circumstances it deems 
relevant. In doing so, the Commission would be mindful of principles of 
international comity. For example, the Commission could take into 
account the extent to which the relevant foreign regulatory authorities 
defer to the Commission with respect to oversight of DCOs organized in 
the United States. This approach would advance the goal of regulatory 
harmonization, consistent with the express directive of Congress that 
the Commission coordinate and cooperate with foreign regulatory 
authorities on matters related to the regulation of swaps.\43\
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    \43\ In order to promote effective and consistent global 
regulation of swaps, section 752 of the Dodd-Frank Act directs the 
Commission to consult and coordinate with foreign regulatory 
authorities on the establishment of consistent international 
standards with respect to the regulation of swaps, among other 
things. Section 752 of the Dodd-Frank Act, Public Law 111-203, 124 
Stat. 1376 (2010), codified at 15 U.S.C. 8325.
---------------------------------------------------------------------------

c. General Reporting Requirements
    Proposed Sec.  39.51(c)(1) sets forth general reporting 
requirements pursuant to which a DCO subject to alternative compliance 
would have to 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 Sec.  39.19(b).\44\ Such information would be used by 
the Commission, among other things, to evaluate the continued 
eligibility of the DCO for alternative compliance, review the DCO's 
compliance with any conditions of its registration, or conduct 
oversight of U.S. clearing activity.
---------------------------------------------------------------------------

    \44\ 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 Sec.  
39.6(c)(2)(i).
---------------------------------------------------------------------------

    Proposed Sec.  39.51(c)(2)(i) would require a DCO to compile a 
report as of the end of each trading day, and submit the report to the 
Commission by 10:00 a.m. U.S. Central time on the following business 
day, containing the following information with respect to swaps: (A) 
Total initial margin requirements for all clearing members; (B) initial 
margin requirements and initial margin on deposit for each U.S. 
clearing member, by house origin and by each customer origin, and by 
each individual customer account; and (C) daily variation margin, 
separately listing the mark-to-market amount collected from or paid to 
each clearing member, by house origin and by each customer origin, and 
by each individual customer account. These requirements are identical 
to reporting requirements in Sec.  39.19(c)(1)(i)(A) and (B) that apply 
to registered DCOs and similar to reporting requirements in proposed 
Sec.  39.6(c)(2)(i) that would apply to exempt DCOs.\45\ These reports 
would provide the Commission with information regarding the cash flows 
associated with U.S. persons clearing swaps through DCOs subject to 
alternative compliance in order for the Commission to assess the risk 
exposure of U.S. persons and the extent of the DCO's U.S. clearing 
activity.\46\
---------------------------------------------------------------------------

    \45\ See 17 CFR 39.19(c)(1)(i)(A) and (c)(1)(i)(B). See also 
Exemption From Derivatives Clearing Organization Registration, 83 FR 
at 39927 (discussing similar reporting requirements for exempt 
DCOs).
    \46\ The Commission notes that, given the time-sensitive nature 
of the data in these reports, the reports would need to be provided 
directly from the DCO, as is the case with existing registered and 
exempt DCOs.
---------------------------------------------------------------------------

    Proposed Sec.  39.51(c)(2)(ii) would require a 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 list of U.S. clearing members, with 
respect to the clearing of swaps. This requirement is the same as the 
one that would apply to exempt DCOs in proposed Sec.  
39.6(c)(2)(ii)(C).\47\ This report would help the Commission to better 
understand the extent of U.S. clearing activity at the DCO.
---------------------------------------------------------------------------

    \47\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR at 39927-39928.
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    Paragraphs (c)(2)(iii) through (c)(2)(vii) of proposed Sec.  39.51 
each would require a DCO to provide information to the Commission upon 
the occurrence of certain specified events. These requirements are 
similar to reporting requirements in proposed Sec.  39.6(c)(2)(iii) 
through (c)(2)(viii) that would apply to exempt DCOs.\48\ Several of 
the proposed required notifications are intended to provide the 
Commission with information relevant to the DCO's continued eligibility 
for alternative compliance or its compliance with the conditions of its 
registration.
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    \48\ See id. at 39928.
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    Proposed Sec.  39.51(c)(2)(iii) would require a DCO to provide 
prompt notice to the Commission regarding any change in its home 
country regulatory regime. The Commission requests comment on whether 
the Commission should require a DCO subject to alternative compliance 
to provide prompt notice of any material change in its home country 
regulatory regime. If so, should the Commission attempt to define 
``material'' (and, if so, how)?
    Proposed Sec.  39.51(c)(2)(iv) would require a DCO to provide to 
the Commission, to the extent that it is available to the DCO, any 
examination report or examination findings by a home country regulator, 
and notify the Commission within five business days after it becomes 
aware of the commencement of any enforcement or disciplinary action or 
investigation by a home country regulator. Proposed Sec.  
39.51(c)(2)(v) would require a 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.
    In addition, the Commission is proposing some required 
notifications that would assist the Commission in its oversight of U.S. 
clearing members and FCMs. Proposed Sec.  39.51(c)(2)(vi) would require 
a DCO to provide immediate notice to the Commission in the event of a 
default (as defined by the DCO in its rules) by any clearing member, 
including the amount of the clearing member's financial obligation. If 
the defaulting clearing member is a U.S. clearing member, the notice 
must also include the name of the U.S. clearing member and a list of 
the positions it held. Proposed Sec.  39.51(c)(2)(vii) would require a 
DCO to provide notice of any action that it has taken against a U.S 
clearing member, no later than two business days after the DCO takes 
such action. Proposed paragraphs (c)(2)(vi) and (c)(2)(vii) of Sec.  
39.51 are similar to paragraphs (c)(4)(vii) and (c)(4)(xi) of Sec.  
39.19, which currently apply to registered DCOs.\49\
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    \49\ These provisions are also substantially similar to 
paragraphs (c)(2)(vii) and (c)(2)(viii) of proposed Sec.  39.6, 
which would apply to exempt DCOs. See Exemption From Derivatives 
Clearing Organization Registration, 83 FR at 39928.

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[[Page 34826]]

d. Modification of Registration Upon Commission Initiative
    Proposed Sec.  39.51(d) would permit the Commission to modify the 
terms and conditions of an order of registration, in its discretion and 
upon its own initiative, based on changes to or omissions in facts or 
circumstances pursuant to which the order was issued, or if any of the 
terms and conditions of the order have not been met.\50\ For example, 
the Commission could modify the terms of a registration order upon a 
determination that compliance with the DCO's home country regulatory 
regime does not satisfy the DCO Core Principles, the DCO is not in good 
regulatory standing in its home country, or the DCO poses substantial 
risk to the U.S. financial system.
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    \50\ The Commission notes that it has authority to suspend or 
revoke a DCO's registration under the CEA. See 7 U.S.C. 7b.
---------------------------------------------------------------------------

    Proposed Sec. Sec.  39.51(d)(2), (d)(3), and (d)(4) would set forth 
the process for modification of registration upon the Commission's 
initiative. Proposed Sec.  39.51(d)(2) would require the Commission to 
first provide written notification to a DCO that the Commission is 
considering modifying the DCO's registration order and the basis for 
that consideration.
    Proposed Sec.  39.51(d)(3) would provide up to 30 days for a DCO to 
respond to the Commission's notification in writing following receipt 
of the notification, or at such later time as the Commission may permit 
in writing. The Commission believes that a minimum 30-day timeframe 
would allow the Commission to take timely action to protect its 
regulatory interests while providing the DCO with sufficient time to 
develop its response. In its response, the DCO may provide potential 
mitigating factors for the Commission to consider where, for example, 
the DCO faces a potential finding of substantial risk to the U.S. 
financial system.
    Proposed Sec.  39.51(d)(4) would provide that, following receipt of 
a response from the DCO, or after expiration of the time permitted for 
a response, the Commission may either: (i) Issue an order requiring the 
DCO to comply with all requirements applicable to DCOs registered 
through the process described in Sec.  39.3(a)(2),\51\ effective as of 
a date to be specified in the order, which is intended to provide the 
DCO with a reasonable amount of time to come into compliance with the 
CEA and Commission regulations or request a vacation of registration in 
accordance with Sec.  39.3(f); (ii) issue an amended order of 
registration that modifies the terms and conditions of the order; or 
(iii) provide written notification to the DCO that the registration 
order will remain in effect without modification to its terms and 
conditions.
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    \51\ Regulation 39.3(a)(2) provides that any entity seeking to 
register as a DCO shall submit to the Commission a completed Form 
DCO, which shall include a cover sheet, all applicable exhibits, and 
any supplemental materials, as provided in Appendix A to Part 39.
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III. Proposed Amendments to Part 140--Organization, Functions, and 
Procedures of the Commission

    The Commission is proposing amendments to Sec.  140.94(c) in order 
to delegate authority to the Director of the Division of Clearing and 
Risk for all functions reserved to the Commission in proposed Sec.  
39.51, except for the authority to grant registration to a DCO, 
prescribe conditions to alternative compliance of a DCO, and modify a 
DCO's registration order. The Commission is proposing to adopt Sec.  
140.94(c)(15) to reflect this delegation. The Commission notes that the 
authority being delegated in this regard is ministerial in nature; 
significant functions are still being reserved to the Commission.

IV. Request for Comments

    In addition to the specific requests for comment noted elsewhere, 
the Commission generally requests comments on all aspects of the 
proposed rules. The Commission also requests comments on the following 
specific issues:
    1. Does the proposed alternative compliance regime, including both 
the application process and the ongoing requirements, strike the right 
balance between the Commission's regulatory interests and the 
regulatory interests of non-U.S. DCOs' home country regulators?
    2. Are there additional regulatory requirements under the CEA or 
Commission regulations that should not apply to non-U.S. DCOs with 
alternative compliance in the interest of deference and allowing such 
DCOs to satisfy the DCO Core Principles through compliance with their 
home country regulatory regimes while still protecting the Commission's 
regulatory interests?
    3. Should the Commission take into account regulations in Part 39, 
in addition to the DCO Core Principles, in determining whether 
alternative compliance is appropriate for a non-U.S. clearing 
organization?
    4. Should the Commission require additional, or less, information 
from an applicant for alternative compliance as part of its application 
under proposed Sec.  39.3(a)(3)?
    5. Is the proposed test for ``substantial risk to the U.S. 
financial system'' the best measure of such risk? If not, please 
explain why, and if there is a better measure/metric that the 
Commission should use, please provide a rationale and supporting data, 
if available.
    6. What is the frequency with which the Commission should reassess 
a DCO's ``risk to the U.S. financial system'' for purposes of the test, 
and across what time period, after it is registered under the 
alternative compliance regime?
    7. Does the proposed exemption from self-certification of rules in 
Sec.  39.4(c) meet the standards for exemptive relief set out in 
section 4(c) of the CEA?
    a. In addition to rules that relate to the DCO's compliance with 
the requirements of section 4d(f) of the CEA, parts 1, 22, or 45 of the 
Commission's regulations, or Sec.  39.15, should the Commission require 
other rules to be filed pursuant to section 5c(c) of the CEA? If so, 
should the Commission retain discretion in determining which other 
rules must be filed based on, for example, the particular facts and 
circumstances? Or should the Commission enumerate the types of rules 
that must be filed (e.g., rules related to certain products cleared by 
the DCO)?
    8. Should non-U.S. DCOs with alternative compliance be excused from 
reporting any particular data streams in order to limit duplicative 
reporting obligations in the cross-border context without jeopardizing 
U.S. customer protections, particularly given the existence of an MOU 
between the Commission and the DCO's home country regulator as a 
requirement for eligibility for alternative compliance?

V. 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.\52\ 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.\53\ The Commission has previously determined 
that clearing organizations

[[Page 34827]]

are not small entities for the purpose of the RFA.\54\ 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.
---------------------------------------------------------------------------

    \52\ 5 U.S.C. 601 et seq.
    \53\ 47 FR 18618 (Apr. 30, 1982).
    \54\ See 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \55\ 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. The Commission is proposing to revise Information Collection 
3038-0076, which contains the requirements for DCO registration and 
compliance, to include the collection of information in proposed 
Sec. Sec.  39.3(a)(3) and 39.51, as well as changes to the existing 
information collection requirements for registered DCOs as a result of 
this proposal. The responses to the collection of information would be 
necessary to obtain DCO registration under the proposed alternative 
compliance process.
---------------------------------------------------------------------------

    \55\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

1. Alternative DCO Application Process Under Proposed Sec.  39.3(a)(3)
    Regulation 39.3(a)(2) sets forth the requirements for filing an 
application for registration as a DCO. The Commission is proposing new 
Sec.  39.3(a)(3), which would establish the application procedures for 
DCOs that wish to be subject to alternative compliance. Currently, 
Information Collection 3038-0076 reflects that each application for DCO 
registration takes 421 hours to complete, including all exhibits. 
Because the alternative application procedures would require 
substantially fewer documents and exhibits, the Commission is 
estimating that each such application would require 100 hours to 
complete.
    DCO application for alternative compliance, including all exhibits, 
supplements and amendments:
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 100.
    Estimated gross annual reporting burden: 100.
2. Ongoing Reporting Requirements for DCOs Subject to Alternative 
Compliance in Accordance With Proposed Sec.  39.51
    Proposed Sec.  39.51 would include reporting requirements for DCOs 
subject to alternative compliance that are substantially similar to 
those proposed for exempt DCOs.\56\ The estimated number of respondents 
is based on approximately three existing registered DCOs that may 
choose to convert to alternative compliance and one new registrant per 
year.
---------------------------------------------------------------------------

    \56\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR 39923 (Aug. 13, 2018).
---------------------------------------------------------------------------

Daily Reporting
    Estimated number of respondents: 6.
    Estimated number of reports per respondent: 250.
    Average number of hours per report: 0.1.
    Estimated gross annual reporting burden: 150.
Quarterly Reporting
    Estimated number of respondents: 6.
    Estimated number of reports per respondent: 4.
    Average number of hours per report: 1.
    Estimated gross annual reporting burden: 24.
Event-Specific Reporting
    Estimated number of respondents: 6.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 0.5.
    Estimated gross annual reporting burden: 3.
Annual Certification of Good Regulatory Standing
    Estimated number of respondents: 6.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 1.
    Estimated gross annual reporting burden: 6.
    As proposed under Sec.  39.4(c), DCOs subject to alternative 
compliance would not be required to comply with Sec.  40.6 regarding 
certification of rules, other than rules relating to customer 
protection. Although this change could potentially reduce the burden 
related to rule submissions by registered entities, which is covered in 
Information Collection 3038-0093, the Commission is not proposing any 
changes to that information collection burden because its current 
estimate of 50 responses annually per respondent covers a broad range 
of the number of annual submissions by registered entities. Therefore, 
no adjustment to Information Collection 3038-0093 is necessary.
3. Adjustment to Part 39 Reporting and Recordkeeping Requirements
    As noted above, the Commission anticipates that approximately three 
currently registered DCOs may seek registration under the alternative 
compliance process; accordingly, the information collection burden 
applicable to DCO applicants and registered DCOs will be reduced. 
Currently, collection 3038-0076 reflects that there are 2 applicants 
for DCO registration annually and that it takes each applicant 421 
hours to complete and submit the form, including all exhibits. The 
Commission is reducing the number of applicants for full DCO 
registration from two to one based on the expectation that one of the 
annual DCO applicants will seek registration subject to alternative 
compliance.
Form DCO--Sec.  39.3(a)(2)
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 421.
    Estimated gross annual reporting burden: 421.
    The information collection burden for registered DCOs, based on the 
Commission's proposed alternative compliance regime, is estimated to be 
reduced by three, from 16 to 13. The reduction in the number of 
respondents is the sole change in the burden estimates previously 
stated for registered DCOs. The revised burden estimates are as 
follows:
CCO Annual Report
    Estimated number of respondents: 13.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 73.
    Estimated gross annual reporting burden: 949.
Annual Financial Reports
    Estimated number of respondents: 13.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 2,640.
    Estimated gross annual reporting burden: 34,320.
Quarterly Financial Reports
    Estimated number of respondents: 13.
    Estimated number of reports per respondent: 4.
    Average number of hours per report: 8.

[[Page 34828]]

    Estimated gross annual reporting burden: 416.
Daily Reporting
    Estimated number of respondents: 13.
    Estimated number of reports per respondent: 250.
    Average number of hours per report: 0.5.
    Estimated gross annual reporting burden: 1,625.
Event-Specific Reporting
    Estimated number of respondents: 13.
    Estimated number of reports per respondent: 20.
    Average number of hours per report: 0.5.
    Estimated gross annual reporting burden: 130.
Public Information
    Estimated number of respondents: 13.
    Estimated number of reports per respondent: 4.
    Average number of hours per report: 2.
    Estimated gross annual reporting burden: 104.
Governance Disclosures
    Estimated number of respondents: 13.
    Estimated number of reports per respondent: 6.
    Average number of hours per report: 3.
    Estimated gross annual reporting burden: 234.
Registered DCOs--Recordkeeping
    Estimated number of respondents: 13.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 150.
    Estimated number of respondents-request to vacate: 1.
    Estimated number of reports per respondent-request to vacate: 0.33.
    Average number of hours per report-request to vacate: 1.
    Estimated gross annual recordkeeping burden: 1951.\57\
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    \57\ The total annual recordkeeping burden estimate reflects the 
combined figures for 13 registered DCOs with an annual burden of one 
response and 150 hours per response (13 x 1 x 150 = 1950), and one 
vacated DCO registration every three years with an annual burden of 
one hour, which is not affected by this proposal.
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    Proposed Sec.  39.4(c) would exempt DCOs subject to alternative 
compliance from self-certifying rules unless the rule relates to the 
requirements under section 4d(f) of the CEA, parts 1, 22, or 45 of the 
Commission's regulations, or Sec.  39.15. While this proposed change is 
likely to reduce the number of rule certification submissions that 
would otherwise be required for DCOs subject to alternative compliance, 
the Commission is not expecting that this will affect the overall 
burden for rule certification filings by all registered entities, 
covered in Information Collection 3038-0093. The number of rule 
submissions in that information collection is intended to represent an 
average number of submissions per registered entity. Because the 
average number of submissions covers a wide range of variability in the 
actual numbers of rule certification submissions by registered 
entities, the Commission believes that the small number of DCOs subject 
to alternative compliance which would not be required to certify all 
rules would be covered by the existing burden estimate in Information 
Collection 3038-0093.
4. Request for Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. The Commission will consider public 
comments on this proposed collection of information in:
    (1) Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    (2) Evaluating the accuracy of the estimated burden of the proposed 
collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
    (3) Enhancing the quality, utility, and clarity of the information 
proposed to be collected; and
    (4) Minimizing the burden of the proposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques, e.g., permitting electronic 
submission of responses.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC 
20581, (202) 418-5160 or from https://RegInfo.gov. Organizations and 
individuals desiring to submit comments on the proposed information 
collection requirements should send those comments to:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
     [email protected] (email).
    Please provide the Commission with a copy of submitted comments so 
that all comments can be summarized and addressed in the final 
rulemaking, and please refer to the ADDRESSES section of this 
rulemaking for instructions on submitting comments to the Commission. 
OMB is required to make a decision concerning the proposed information 
collection requirements between 30 and 60 days after publication of 
this Release in the Federal Register. Therefore, a comment to OMB is 
best assured of receiving full consideration if OMB receives it within 
30 calendar days of publication of this Release. Nothing in the 
foregoing affects the deadline enumerated above for public comment to 
the Commission on the proposed rules.

C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\58\ 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.
---------------------------------------------------------------------------

    \58\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The baseline for the Commission's consideration of the costs and 
benefits of this proposed rulemaking are: (1) The DCO Core Principles; 
(2) the general provisions applicable to DCOs under subparts A and B of 
Part 39; (3) Form DCO in Appendix A to Part 39; (4) Parts 1, 22, and 40 
of the Commission's regulations; and (5) Sec.  140.94.
    The Commission notes that this consideration is based on its 
understanding that the swaps market functions internationally with (i) 
transactions that involve U.S. firms occurring across different 
international jurisdictions; (ii) some entities organized outside of 
the United States that are prospective Commission registrants; and 
(iii) some entities that typically operate both within and outside the 
United States and that

[[Page 34829]]

follow substantially similar business practices wherever located. Where 
the Commission does not specifically refer to matters of location, the 
discussion of costs and benefits below refers to the effects of the 
proposed regulations on all relevant swaps activity, whether based on 
their actual occurrence in the United States or on their connection 
with, or effect on U.S. commerce pursuant to, section 2(i) of the 
CEA.\59\
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    \59\ Pursuant to section 2(i) of the CEA, activities outside of 
the United States are not subject to the swap provisions of the CEA, 
including any rules prescribed or regulations promulgated 
thereunder, unless those activities either ``have a direct and 
significant connection with activities in, or effect on, commerce of 
the United States;'' or contravene any rule or regulation 
established to prevent evasion of a CEA provision enacted under the 
Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376. 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission recognizes that the proposed rules may impose costs. 
The Commission has endeavored to assess the expected costs and benefits 
of the proposed rulemaking in quantitative terms, including PRA-related 
costs, where possible. In situations where the Commission is unable to 
quantify the costs and benefits, the Commission identifies and 
considers the costs and benefits of the applicable proposed rules in 
qualitative terms. The lack of data and information to estimate those 
costs is attributable in part to the nature of the proposed rules. 
Additionally, the initial and recurring compliance costs for any 
particular DCO will depend on the size, existing infrastructure, level 
of clearing activity, practices, and cost structure of the DCO.
2. Proposed Amendments to Part 39
a. Summary
    Section 5b(a) of the CEA requires a clearing organization that 
clears swaps to be registered with the Commission as a DCO. Once 
registered, a DCO is required to comply with the CEA and all Commission 
regulations applicable to DCOs, regardless of whether the DCO is 
subject to other regulation and oversight, as non-U.S. DCOs typically 
are. The proposed regulations would allow a non-U.S. DCO that the 
Commission determines does not pose substantial risk to the U.S. 
financial system to be subject to an alternative compliance regime that 
relies in part on the DCO's home country regulatory regime and would 
result in reduced regulatory obligations as compared to the existing 
registration requirements. Specifically, the DCO would comply with the 
DCO Core Principles in the CEA by complying with its home country's 
legal requirements rather than the requirements of subpart B of Part 39 
(with the exception of Sec.  39.15). The DCO still would be subject to 
subpart A of Part 39 and the Commission's customer protection and swap 
data reporting requirements, as well as reporting and other conditions 
in its registration order. Lastly, the Commission is proposing in Sec.  
39.4(c) to exempt DCOs that are subject to alternative compliance from 
self-certifying rules pursuant to Sec.  40.6, unless the rule relates 
to the Commission's customer protection or swap data reporting 
requirements.
b. Benefits
    There are currently 16 DCOs registered with the Commission, six of 
which are organized outside of the United States and have comparable 
registration status in their respective home countries. These non-U.S. 
DCOs are regulated both by the Commission and their home country 
regulators.
    The proposed regulations would allow the Commission to register a 
non-U.S. DCO through the alternative compliance procedures if the 
Commission has determined that, among other things, compliance with the 
DCO's home country regulatory regime satisfies the DCO Core Principles. 
Therefore, to the extent that the DCO's home country laws and 
regulations impose obligations similar to those imposed by the CEA, the 
proposal would significantly reduce duplicative regulatory requirements 
for the DCO.
    The Commission is mindful that legal and regulatory compliance is 
not costless. Compliance with two different regulatory regimes, even if 
they are similar, requires legal and compliance staff capable of 
understanding, interpreting, and applying both regimes, which 
potentially requires hiring additional personnel or retaining 
additional outside advisors. Compliance with two regimes also requires 
a DCO to spend additional time and resources. Moreover, the specific 
requirements of each regime may differ even if both regimes satisfy the 
DCO Core Principles. For example, different legal regimes may impose 
different requirements regarding acceptable accounting standards, the 
methods by which clearing members may be held accountable for violating 
a DCO's rules, the forms and locations in which records must be kept, 
and the type and manner of making information available to the public. 
Complying with both sets of requirements--that achieve effectively the 
same regulatory outcomes--may be costly, operationally difficult, or 
otherwise impractical. Because the proposal would substantially reduce 
an eligible DCO's expenditures for duplicative compliance activities, 
it would significantly decrease the overall ongoing legal and 
compliance costs incurred by DCOs subject to alternative compliance.
    In addition, the proposed exemption in Sec.  39.4(c) from self-
certifying certain rules to the Commission would significantly reduce 
the ongoing compliance costs of DCOs subject to alternative compliance, 
as they would be required to self-certify only rules that relate to the 
Commission's customer protection or swap data reporting requirements. 
Because Sec.  40.6 requires a DCO to include certain information in its 
rule submissions, the proposed exemption would save such DCOs the time 
and expense of preparing self-certifications for rules that pertain to 
other matters.
    Moreover, the alternative application procedures included in 
proposed Sec.  39.3(a)(3) are significantly simplified compared to the 
existing DCO application procedures under Sec.  39.3(a)(2). The 
existing procedures require submission of a complete Form DCO, which 
includes over three dozen exhibits. Commission staff carefully reviews 
each such application and typically asks numerous questions and, when 
necessary, requests amended exhibits and supplementary documents to 
evaluate and promote compliance with the CEA and Commission 
regulations. In contrast, the proposed alternative application 
procedures would require the submission of relatively few sections of 
Form DCO, mostly drawn from Exhibits A and F thereto. Preparing the 
sections of Form DCO that would be required under the proposed 
alternative application procedures should therefore be significantly 
less time-consuming and expensive than preparing the entire Form DCO 
under the existing application procedures. Moreover, with far fewer 
items for the Commission to review, the applicant is likely to receive 
significantly fewer questions from Commission staff and will require 
substantially less time and expense to respond to staff questions and 
prepare new or amended documents in response to staff requests. It is 
also likely that, as a result, the Commission may be able to make a 
final determination on an application under the proposed alternative 
application procedures in less time than is typically required under 
the existing procedures.
    Given the lower initial application and ongoing compliance costs, 
the Commission anticipates that some non-U.S. clearing organizations 
that are not currently registered as DCOs, including,

[[Page 34830]]

but not limited to, exempt DCOs, would pursue registration with 
alternative compliance. Because of the significantly reduced 
requirements under alternative compliance, the Commission believes it 
would be considerably easier for non-U.S. clearing organizations to 
comply with those requirements while still fully complying with their 
home country regime. As a result, the Commission believes that this 
proposal may increase the number of registered DCOs over time. Because 
exempt DCOs are currently not permitted to offer customer clearing, 
customers would have more clearing options if exempt DCOs were to 
become registered DCOs. If clearing organizations that are neither 
registered nor exempt from registration were to register, both 
customers and clearing members would have more clearing options. Access 
to more clearing organizations may encourage more clearing of swaps, 
while reducing the concentration risk among DCOs.
    Moreover, given the reduced costs expected to be borne by DCOs 
subject to alternative compliance and the greater competition resulting 
from the likely increase in the number of registered DCOs, it is 
possible that some registered DCOs may pass some of their cost savings 
to their clearing members and customers. In addition to their direct 
benefits, such cost reductions may have the indirect benefit of 
encouraging greater use of clearing, thereby increasing the safety and 
stability of the broader financial system.
    Finally, the proposed regulations would promote and perhaps 
encourage international comity by showing deference to non-U.S. 
regulators in the oversight of non-U.S. DCOs that do not pose 
substantial risk to the U.S. financial system. If regulators in other 
countries deferred to U.S. oversight of U.S. DCOs active in overseas 
markets, the reduced registration and compliance burdens on such DCOs 
would be an additional benefit of the proposed regulation.
c. Costs
    A non-U.S. clearing organization applying under the proposed 
alternative application procedures would incur costs in preparing the 
application. This would include preparing and submitting certain parts 
of the Form DCO, including the requirement to provide in Exhibit A-1 
the citation and full text of each applicable legal requirement in its 
home country that corresponds with each core principle and an 
explanation of how the applicant satisfies those requirements. If a 
clearing organization were required instead to apply under the existing 
application process, however, it would need to prepare and submit a 
complete Form DCO, which is a significantly more costly and burdensome 
process. Thus, although an applicant would incur costs in preparing the 
application under proposed Sec.  39.3(a)(3), the proposed alternative 
application procedures would represent a substantial cost savings 
relative to the existing procedures.
    DCOs registered under the existing procedures, including non-U.S. 
DCOs that are ineligible for alternative compliance, may face a 
competitive disadvantage as a result of this proposal. A DCO subject to 
full Commission regulation and oversight may have higher ongoing 
compliance costs than a DCO subject to alternative compliance. This 
competitive disadvantage is mitigated by the fact that DCOs subject to 
alternative compliance would, as a precondition of such registration, 
be required to be overseen by a home country regulator that is likely 
to impose costs similar to those associated with Commission regulation. 
Such non-U.S. DCOs, then, may have compliance costs in their home 
countries that a U.S.-based DCO might not.
    The Commission does not anticipate that the proposal would impose 
costs on clearing members or customers. The proposal would likely 
increase the number of registered DCOs and permit some DCOs to register 
under a new procedure that may allow them to pass on cost savings to 
clearing members and customers. Therefore, the Commission believes that 
clearing members and customers may face reduced costs as a result of 
this proposal. To the extent that DCOs subject to alternative 
compliance do not save costs relative to traditionally registered DCOs, 
or do not pass cost savings to their clearing members or customers, the 
Commission notes that, to the extent products are available for 
clearing through more than one DCO, clearing members and customers may 
be able to simply continue clearing through traditionally registered 
DCOs, likely without any change in costs.
    Furthermore, the Commission does not believe that the proposal 
would materially increase the risk to the U.S. financial system. DCOs 
that pose substantial risk to the U.S. financial system would not be 
eligible to register under the proposed alternative process.\60\ 
Furthermore, a DCO cannot avail itself of this process unless the 
Commission determines that a DCO's compliance with its home country 
regulatory regime would satisfy the DCO Core Principles, meaning that 
the DCO would be subject to regulation comparable to that imposed on 
DCOs registered under the existing procedure. An MOU or similar 
arrangement must be in effect between the Commission and the DCO's home 
country regulator, allowing the Commission to receive information from 
the home country regulator to help monitor the DCO's continuing 
compliance with its legal and regulatory obligations. In addition, DCOs 
that register under the proposed alternative process would remain 
subject to the Commission's customer protection requirements set forth 
in section 4d(f) of the CEA, parts 1 and 22 of the Commission's 
regulations, and Sec.  39.15. The Commission also notes that foreign 
regulators have a strong incentive to ensure the safety and soundness 
of the clearing organizations that they regulate, and their oversight, 
combined with the alternative compliance regime, will enable the 
Commission to more efficiently allocate its own resources in the 
oversight of traditionally registered DCOs. Finally, the proposal would 
not increase the risks posed by exempt DCOs or by clearing 
organizations that are neither registered nor exempt from registration.
---------------------------------------------------------------------------

    \60\ It may also be possible that the Commission's proposed test 
for ``substantial risk to the U.S. financial system'' may not be 
properly calibrated, allowing certain non-U.S. DCOs to register 
under the alternative registration regime when they may pose 
sufficient risk to the U.S. financial system to warrant greater 
oversight by the Commission. However, the Commission believes that 
even if these non-U.S. DCOs are permitted to register under the 
alternative registration regime, this risk will be mitigated by the 
Commission's determination that compliance with the foreign 
jurisdiction's legal regime would satisfy the DCO Core Principles, 
as discussed above, and the Commission's access to daily and 
periodic reports regarding the DCO and its risks.
---------------------------------------------------------------------------

    Lastly, the Commission does not anticipate any costs to DCOs 
associated with the exemption in proposed Sec.  39.4(c).
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
    The proposed regulations would not materially reduce the 
protections available to market participants and the public because 
they would require, among other things, that a DCO subject to 
alternative compliance: (i) Must demonstrate to the Commission that 
compliance with the applicable legal requirements in its home country 
would constitute compliance with the DCO Core Principles; (ii) must be 
licensed, registered, or otherwise authorized to act as a clearing 
organization in its home country and be in good regulatory standing; 
and (iii) must not pose

[[Page 34831]]

substantial risk to the U.S. financial system. The regulations would 
also protect market participants and the public by ensuring that FCM 
customers clearing through a DCO subject to alternative compliance 
would continue to receive the full benefits of the customer protection 
regime established in the CEA and Commission regulations. Although the 
Commission acknowledges the possibility that some foreign regulatory 
regimes may ultimately prove to be less effective than that of the 
United States, the Commission believes that this risk is mitigated for 
the reasons discussed above.
b. Efficiency, Competitiveness, and Financial Integrity
    The proposed regulations would promote efficiency in the operations 
of DCOs subject to alternative compliance by reducing duplicative 
regulatory requirements. This reduction in duplicative requirements 
would likely result in most DCOs being subject largely to only their 
home country regulatory regimes, which could promote competitiveness 
among DCOs. Furthermore, adopting the proposed regulations might prompt 
other regulators to adopt similar rules that would defer to the 
Commission in the regulation of U.S. DCOs operating outside the United 
States, which could increase competitiveness by reducing the regulatory 
burdens on such DCOs.
    The proposed regulations would be expected to maintain the 
financial integrity of swap transactions cleared by DCOs because DCOs 
subject to alternative compliance would be required to comply with a 
home country regulatory regime that satisfies the DCO Core Principles 
and because they would be required to satisfy the Commission's 
regulations regarding customer protection. In addition, the proposed 
regulations may contribute to the financial integrity of the broader 
financial system by spreading the potential risk of particular swaps 
among a greater number of DCOs, thus reducing concentration risk.
c. Price Discovery
    Price discovery is the process of determining the price level for 
an asset through the interaction of buyers and sellers and based on 
supply and demand conditions. The Commission has not identified any 
impact that the proposed regulations would have on price discovery. 
This is because price discovery occurs before a transaction is 
submitted for clearing through the interaction of bids and offers on a 
trading system or platform, or in the over-the-counter market. The 
proposed rule would not impact requirements under the CEA or Commission 
regulations regarding price discovery.
d. Sound Risk Management Practices
    The proposed regulations would continue to encourage sound risk 
management practices because a DCO would be eligible for alternative 
compliance only if it is held to risk management requirements in its 
home country that satisfy the DCO Core Principles and are comparable to 
the Commission's risk management requirements.
e. Other Public Interest Considerations
    The Commission notes the public interest in access to clearing 
organizations outside of the United States in light of the 
international nature of many swap transactions. The proposed 
regulations might encourage international comity by deferring, under 
certain conditions, to the regulators of other countries in the 
oversight of home country clearing organizations. The Commission 
expects that such regulators will defer to the Commission in the 
supervision and regulation of DCOs domiciled in the United States, 
thereby reducing the regulatory and compliance burdens to which such 
DCOs are subject.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\61\
---------------------------------------------------------------------------

    \61\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is the promotion of competition. The Commission 
requests comment on whether the proposed rulemaking implicates any 
other specific public interest to be protected by the antitrust laws. 
The Commission has considered the proposed rulemaking to determine 
whether it is anticompetitive. The Commission believes that the 
proposed rulemaking may promote greater competition in swap clearing 
because it would reduce the regulatory burden for non-U.S. clearing 
organizations, which might encourage them to register to clear the same 
types of swaps for U.S. persons that are currently cleared by 
registered DCOs. Unlike non-U.S. DCOs subject to this alternative 
compliance, U.S. DCOs, and non-U.S. DCOs that pose substantial risk to 
the U.S. financial system, would be held to the requirements of the CEA 
and Commission regulations and subject to the direct oversight of the 
Commission. This may appear to create a competitive disadvantage for 
these DCOs; however, non-U.S. DCOs subject to alternative compliance 
would be meeting similar requirements through compliance with their 
home country regulatory regimes and would be subject to the direct 
oversight of their home country regulators. Further, to the extent that 
the U.S. clearing activity of a non-U.S. DCO subject to alternative 
compliance grows to the point that the DCO poses substantial risk to 
the U.S. financial system, and therefore, a threat to competition, it 
would be required to comply with all requirements applicable to DCOs 
and be subject to the Commission's direct oversight.
    The Commission has not identified any less anticompetitive means of 
achieving the purposes of the CEA. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the CEA that would otherwise be served by adopting the 
proposed rules.

List of Subjects

17 CFR Part 39

    Clearing, Customer protection, Derivatives clearing organization, 
Procedures, Registration, Swaps.

17 CFR Part 140

    Authority delegations (Government agencies), Organization and 
functions (Government agencies).

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
1. The authority citation for part 39 is revised to read as follows:

    Authority: 7 U.S.C. 2, 7a-1, and 12a(5); 12 U.S.C. 5464; 15 
U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July 
21, 2010, 124 Stat. 1749.

0
2. In Sec.  39.2, add the definitions of ``Good regulatory standing'' 
and ``substantial risk'' in alphabetical order to read as follows:


Sec.  39.2  Definitions.

* * * * *
    Good regulatory standing means, with respect to a derivatives 
clearing organization that is organized outside of the United States, 
and is licensed,

[[Page 34832]]

registered, or otherwise authorized to act as a clearing organization 
in its home country, that:
    (1) In the case of an exempt derivatives clearing organization, 
either there has been no finding by the home country regulator of 
material non-observance of the Principles for Financial Market 
Infrastructures or other relevant home country legal requirements, or 
there has been a finding by the home country regulator of material non-
observance of the Principles for Financial Market Infrastructures or 
other relevant home country legal requirements but any such finding has 
been or is being resolved to the satisfaction of the home country 
regulator by means of corrective action taken by the derivatives 
clearing organization; or
    (2) In the case of a derivatives clearing organization registered 
through the process described in Sec.  39.3(a)(3), either there has 
been no finding by the home country regulator of material non-
observance of the relevant home country legal requirements, or there 
has been a finding by the home country regulator of material non-
observance of the relevant home country legal requirements but any such 
finding has been or is being resolved to the satisfaction of the home 
country regulator by means of corrective action taken by the 
derivatives clearing organization.
* * * * *
    Substantial risk to the U.S. financial system means, with respect 
to a derivatives clearing organization organized outside of the United 
States, that--
    (1) The derivatives clearing organization holds 20% or more of the 
required initial margin of U.S. clearing members for swaps across all 
registered and exempt derivatives clearing organizations; and
    (2) 20% or more of the initial margin requirements for swaps at 
that derivatives clearing organization is attributable to U.S. clearing 
members; provided, however, where one or both of these thresholds are 
close to 20%, the Commission may exercise discretion in determining 
whether the derivatives clearing organization poses substantial risk to 
the U.S. financial system. For purposes of this definition and 
Sec. Sec.  39.6 and 39.51, U.S. clearing member means a clearing member 
organized in the United States, a clearing member whose ultimate parent 
company is organized in the United States, or a futures commission 
merchant.
* * * * *
0
3. In Sec.  39.3, revise paragraphs (a)(3), (a)(4), and (a)(5) and add 
paragraphs (a)(6) and (a)(7) to read as follows:


Sec.  39.3  Procedures for registration.

    (a) * * *
    (3) Alternative application procedures. An entity that is organized 
outside of the United States, is seeking to register as a derivatives 
clearing organization for the clearing of swaps, and does not pose 
substantial risk to the U.S. financial system may apply for 
registration in accordance with the terms of this paragraph in lieu of 
filing the application described in paragraph (a)(2) of this section. 
If the application is approved by the Commission, the derivatives 
clearing organization's compliance with its home country's regulatory 
regime would satisfy the core principles set forth in section 5b(c)(2) 
of the Act, subject to the requirements of subpart D of this part. The 
applicant shall submit to the Commission the following sections of Form 
DCO, as provided in the appendix to this part: cover sheet, Exhibit A-1 
(regulatory compliance chart), Exhibit A-2 (proposed rulebook), Exhibit 
A-3 (narrative summary of proposed clearing activities), Exhibit A-4 
(detailed business plan), Exhibit A-7 (documents setting forth the 
applicant's corporate organizational structure), Exhibit A-8 (documents 
establishing the applicant's legal status and certificate(s) of good 
standing or its equivalent), Exhibit A-9 (description of pending legal 
proceedings or governmental investigations), Exhibit A-10 (agreements 
with outside service providers with respect to the treatment of 
customer funds), Exhibits F-1 through F-3 (documents that demonstrate 
compliance with the treatment of funds requirements with respect to 
customers of futures commission merchants), and Exhibit R (ring-fencing 
memorandum). For purposes of this paragraph, the applicant must 
demonstrate to the Commission, in Exhibit A-1, the extent to which 
compliance with the applicable legal requirements in its home country 
would constitute compliance with the core principles set forth in 
section 5b(c)(2) of the Act. To satisfy this requirement, the applicant 
shall provide in Exhibit A-1 the citation and full text of each 
applicable legal requirement in its home country that corresponds with 
each core principle and an explanation of how the applicant satisfies 
those requirements.
    (4) Submission of supplemental information. The filing of a 
completed application is a minimum requirement and does not create a 
presumption that the application is materially complete or that 
supplemental information will not be required. At any time during the 
application review process, the Commission may request that the 
applicant provide supplemental information in order for the Commission 
to process the application. The applicant shall provide supplemental 
information in the format and manner specified by the Commission.
    (5) Application amendments. An applicant 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. An applicant is only required to submit exhibits and other 
information that are relevant to the application amendment.
    (6) Public information. The following sections of an application 
for registration as a derivatives clearing organization will be public: 
First page of the Form DCO cover sheet (up to and including the General 
Information section), Exhibit A-1 (regulatory compliance chart), 
Exhibit A-2 (proposed rulebook), Exhibit A-3 (narrative summary of 
proposed clearing activities), Exhibit A-7 (documents setting forth the 
applicant's corporate organizational structure), Exhibit A-8 (documents 
establishing the applicant's legal status and certificate(s) of good 
standing or its equivalent), and any other part of the application not 
covered by a request for confidential treatment, subject to Sec.  145.9 
of this chapter.
    (7) Extension of time for review. The Commission may further extend 
the review period in paragraph (a)(1) of this section for any period of 
time to which the applicant agrees in writing.
* * * * *
0
4. In Sec.  39.4, redesignate paragraphs (c) through (e) as paragraphs 
(d) through (f) and add new paragraph (c) to read as follows:


Sec.  39.4  Procedures for implementing derivatives clearing 
organization rules and clearing new products.

* * * * *
    (c) Exemption from self-certification of rules. Notwithstanding the 
rule certification requirements of section 5c(c)(1) of the Act and 
Sec.  40.6 of this chapter, a derivatives clearing organization that is 
registered through the process described in Sec.  39.3(a)(3) is not 
required to certify a rule unless the rule relates to the requirements 
under section 4d(f) of the Act, parts 1, 22, or 45 of this chapter, or 
Sec.  39.15.
* * * * *

[[Page 34833]]

0
5. Revise Sec.  39.9 to read as follows:


Sec.  39.9  Scope.

    Except as otherwise provided by Commission order, the provisions of 
this subpart B apply to any derivatives clearing organization, as 
defined under section 1a(15) of the Act and Sec.  1.3 of this chapter, 
that is registered with the Commission as a derivatives clearing 
organization pursuant to section 5b of the Act. The provisions of this 
subpart B do not apply to any exempt derivatives clearing organization, 
as defined under Sec.  39.2.
0
6. Add and reserve Sec. Sec.  39.43 through 39.49.
0
7. Add subpart D, consisting of Sec. Sec.  39.50 and 39.51, to read as 
follows:

Subpart D--Provisions Applicable to Derivatives Clearing 
Organizations Subject to Alternative Compliance

Sec.
39.50 Scope.
39.51 Alternative compliance.


Sec.  39.50  Scope.

    The provisions of this subpart D apply to any derivatives clearing 
organization that is registered through the process described in Sec.  
39.3(a)(3).


Sec.  39.51  Alternative compliance.

    (a) Eligibility for alternative compliance. (1) The Commission may 
register, subject to any terms and conditions as the Commission 
determines to be appropriate, a derivatives clearing organization for 
the clearing of swaps for U.S. persons if:
    (i) The Commission determines that compliance by the derivatives 
clearing organization with its home country regulatory regime 
constitutes compliance with the core principles set forth in section 
5b(c)(2) of the Act;
    (ii) The derivatives clearing organization is in good regulatory 
standing in its home country;
    (iii) The Commission determines the derivatives clearing 
organization does not pose substantial risk to the U.S. financial 
system; and
    (iv) 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 appropriate to evaluate the initial and continued eligibility of 
the derivatives clearing organization for alternative registration or 
to review its compliance with any conditions of such registration.
    (2) To the extent that the derivatives clearing organization's home 
country regulatory regime lacks legal requirements that correspond to 
those core principles less related to risk, the Commission may, in its 
discretion, grant registration subject to conditions that would address 
the relevant core principles.
    (b) Conditions of alternative compliance. A derivatives clearing 
organization subject to alternative compliance shall be subject to any 
conditions the Commission may prescribe including, but not limited to:
    (1) Applicable requirements under the Act and Commission 
regulations. The derivatives clearing organization shall comply with: 
The core principles set forth in section 5b(c)(2) of the Act through 
its compliance with applicable legal requirements in its home country; 
and other requirements applicable to derivatives clearing organizations 
as specified in the derivatives clearing organization's registration 
order including, but not limited to, section 4d(f) of the Act, parts 1, 
22, and 45 of this chapter, and subpart A and Sec.  39.15 of this part.
    (2) Open access. The derivatives clearing organization shall have 
rules with respect to swaps to which one or more of the counterparties 
is a U.S. person that:
    (i) Provide that all swaps with the same terms and conditions, as 
defined by product specifications established under the derivatives 
clearing organization's rules, submitted to the derivatives clearing 
organization for clearing are economically equivalent within the 
derivatives clearing organization and may be offset with each other 
within the derivatives clearing organization, to the extent offsetting 
is permitted by the 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 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 
derivatives clearing organization, in connection with any actions or 
proceedings brought against, or investigations relating to, the 
derivatives clearing organization or any of its U.S. clearing members; 
and
    (iii) Promptly inform the Commission of any change in its 
designated and authorized agent.
    (4) Compliance. The derivatives clearing organization shall comply, 
and shall demonstrate compliance as requested by the Commission, with 
any condition of its registration.
    (5) Inspection of books and records. The derivatives clearing 
organization shall make all documents, books, records, reports, and 
other information related to its operation as a 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 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) Representation of good regulatory standing. On an annual basis, 
within 60 days following the end of its fiscal year, a derivatives 
clearing organization shall request and the Commission must receive 
from a home country regulator a written representation that the 
derivatives clearing organization is in good regulatory standing.
    (7) Other conditions. The Commission may condition alternative 
compliance on any other facts and circumstances it deems relevant.
    (c) General reporting requirements. (1) A 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 
derivatives clearing organization for alternative compliance, reviewing 
compliance by the derivatives clearing organization with any conditions 
of its registration, or conducting oversight of U.S. clearing members, 
and the swaps that are cleared by such persons through the derivatives 
clearing organization. Information provided to the Commission under 
this paragraph shall be submitted in accordance with Sec.  39.19(b).
    (2) Each 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

[[Page 34834]]

time on the following business day, containing with respect to swaps:
    (A) Total initial margin requirements for all clearing members;
    (B) Initial margin requirements and initial margin on deposit for 
each U.S. clearing member, by house origin and by each customer origin, 
and by each individual customer account; and
    (C) Daily variation margin, separately listing the mark-to-market 
amount collected from or paid to each U.S. clearing member, by house 
origin and by each customer origin, and by each individual customer 
account.
    (ii) A report compiled as of the last day of each fiscal quarter of 
the derivatives clearing organization and submitted to the Commission 
no later than 17 business days after the end of the derivatives 
clearing organization's fiscal quarter, containing a list of U.S. 
clearing members, 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;
    (iv) As available to the derivatives clearing organization, any 
examination report or examination findings by a home country regulator, 
and notify the Commission within five business days after it becomes 
aware of the commencement of any enforcement or disciplinary action or 
investigation by a home country regulator;
    (v) Immediate notice of any change with respect to the derivatives 
clearing organization's licensure, registration, or other authorization 
to act as a derivatives clearing organization in its home country;
    (vi) In the event of a default by a clearing member clearing swaps, 
with such event of default determined in accordance with the rules of 
the derivatives clearing organization, immediate notice of the default 
including the amount of the clearing member's financial obligation; 
provided, however, if the defaulting clearing member is a U.S. clearing 
member, the notice shall also include the name of the U.S. clearing 
member and a list of the positions held by the U.S. clearing member; 
and
    (vii) Notice of action taken against a U.S. clearing member by a 
derivatives clearing organization, no later than two business days 
after the derivatives clearing organization takes such action against a 
U.S. clearing member.
    (d) Modification of registration upon Commission initiative. (1) 
The Commission may, in its discretion and upon its own initiative, 
modify the terms and conditions of an order of registration granted 
through the process described in Sec.  39.3(a)(3) if the Commission 
determines that there are changes to or omissions in facts or 
circumstances pursuant to which the order was issued, or that any of 
the terms and conditions of its order have not been met, including, but 
not limited to, the requirement that:
    (i) Compliance with the derivatives clearing organization's home 
country regulatory regime satisfies the core principles set forth in 
section 5b(c)(2) of the Act;
    (ii) The derivatives clearing organization is in good regulatory 
standing in its home country; or
    (iii) The derivatives clearing organization does not pose 
substantial risk to the U.S. financial system.
    (2) The Commission shall provide written notification to a 
derivatives clearing organization that it is considering whether to 
modify an order of registration pursuant to this paragraph and the 
basis for that consideration.
    (3) The derivatives clearing organization may respond to the 
notification in writing no later than 30 business days following 
receipt of the notification, or at such later time as the Commission 
permits in writing.
    (4) Following receipt of a response from the derivatives clearing 
organization, or after expiration of the time permitted for a response, 
the Commission may:
    (i) Issue an order requiring the derivatives clearing organization 
to comply with all requirements applicable to derivatives clearing 
organizations registered through the process described in Sec.  
39.3(a)(2), effective as of a date to be specified therein. The 
specified date shall be intended to provide the derivatives clearing 
organization with a reasonable amount of time to come into compliance 
with the Act and Commission regulations or request a vacation of 
registration in accordance with Sec.  39.3(f);
    (ii) Issue an amended order of registration that modifies the terms 
and conditions of the order; or
    (iii) Provide written notification to the derivatives clearing 
organization that the order of registration will remain in effect 
without modification to its terms and conditions.

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0
8. 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
9. Amend Sec.  140.94 by revising paragraph (c) introductory text and 
paragraph (c)(1) and adding paragraph (c)(15) to 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:
    (1) The authority to review applications for registration as a 
derivatives clearing organization filed with the Commission under Sec.  
39.3(a)(1) of this chapter, to determine that an application is 
materially complete pursuant to Sec.  39.3(a)(2) of this chapter, to 
request additional information in support of an application pursuant to 
Sec.  39.3(a)(4) of this chapter, to extend the review period for an 
application pursuant to Sec.  39.3(a)(7) of this chapter, to stay the 
running of the 180-day review period if an application is incomplete 
pursuant to Sec.  39.3(b)(1) of this chapter, to review requests for 
amendments to orders of registration filed with the Commission under 
Sec.  39.3(d)(1) of this chapter, to request additional information in 
support of a request for an amendment to an order of registration 
pursuant to Sec.  39.3(d)(2) of this chapter, and to request additional 
information in support of a rule submission pursuant to Sec.  
39.3(g)(3) of this chapter;
* * * * *
    (15) All functions reserved to the Commission in Sec.  39.51 of 
this chapter, except for the authority to:
    (i) Grant registration under Sec.  39.51(a) of this chapter;
    (ii) Prescribe conditions to registration under Sec.  39.51(b) of 
this chapter; and
    (iii) Modify registration under Sec.  39.51(d)(4) of this chapter.
* * * * *

    Issued in Washington, DC, on July 12, 2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.


[[Page 34835]]



Appendices to Registration With Alternative Compliance for Non-U.S. 
Derivatives Clearing Organizations--Commission Voting Summary, 
Chairman's Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    This proposal addresses the registration of non-U.S. DCOs that 
clear swaps for U.S. persons. The CFTC has almost two decades of 
experience overseeing non-U.S. DCOs engaging in activity in U.S. 
derivatives markets. LCH Ltd was the first non-U.S. DCO to register 
with the CFTC 18 years ago. Other CCPs became registered after the 
enactment of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Dodd-Frank Act).\1\ Through its supervisory 
powers, the CFTC has informally calibrated its day-to-day oversight 
of these registered DCOs based on the principle of deference to the 
oversight of primary regulators, while taking into account the 
specific circumstances of a particular non-U.S. DCO.
---------------------------------------------------------------------------

    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
---------------------------------------------------------------------------

    The main purpose of this rulemaking is to address the current 
informality of the CFTC's approach and, in doing so, introduce 
significant additional areas where the CFTC can defer, appropriately 
and consistent with its risk oversight responsibilities, to non-U.S. 
DCOs' home country supervisors. Among other things, this proposal 
sets forth a framework under which non-U.S. DCOs that do not pose a 
substantial risk to the U.S. financial system would have the option 
of being fully registered with the CFTC as a DCO but meet their 
registration requirements through compliance with their home country 
requirements.
    These DCOs that are ``fully registered with alternative 
compliance'' would still be able to offer customer clearing through 
futures commission merchants (FCMs), just like other fully 
registered DCOs. Consistent with the commitment to apply supervisory 
deference under Title VII of the Dodd-Frank Act where appropriate, 
the home country regulator would have supervisory primacy over these 
DCOs with the CFTC much more narrowly focused than is currently the 
case, from both a legal and practical perspective, on U.S. customer 
funds protection at these DCOs. This narrow focus on customer funds 
protection is appropriate to help ensure the legal requirements 
relating to segregation at both the FCM and DCO level are met, and 
that, if necessary, the bankruptcy protections afforded to customers 
under the CFTC's FCM model work as intended.
    In determining whether a non-U.S. CCP potentially poses 
``substantial risk to the U.S. financial system,'' the proposal 
would use objective criteria and provide transparency about such 
criteria. The proposed definition of substantial risk to the U.S. 
financial system consists of two 20 percent tests. The first focuses 
on the percentage of initial margin from a ``U.S. origin'' (i.e., 
initial margin posted by U.S.-domiciled clearing members and 
clearing members ultimately owned by U.S.-domiciled holding 
companies, regardless of the domicile of the clearing member) at a 
specific non-U.S. DCO. The second focuses on the ``U.S. origin'' 
business of the non-U.S. DCO as a percentage of the overall U.S. 
cleared swaps market. Where both of these ``20/20'' thresholds are 
close to 20 percent, the Commission would be able to exercise 
discretion in determining whether the DCO poses substantial risk to 
the U.S. financial system.
    I believe that objective and transparent criteria, such as the 
ones set forth in the proposal, are what all regulators around the 
world should strive for to provide appropriate predictability and 
stability to the markets.
    I thank CFTC staff for their fine work that resulted in today's 
proposal. I look forward to reviewing comments from the public.

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    This proposed rule would reduce the degree to which CFTC-
registered foreign derivatives clearing organizations (DCO) are 
subject to duplicative regulation by the CFTC and their home country 
regulator. The proposal would permit a foreign DCO that does not 
pose ``substantial risk to the U.S. financial system'' to comply 
with its home country authorities' regulations instead of most CFTC 
regulations. To satisfy CFTC regulations, the foreign DCO would only 
need to comply with certain of our customer protection and swap data 
reporting requirements.
    The proposal recognizes that foreign regulators have a 
substantial interest and expertise in supervising DCOs located in 
their home jurisdictions. Deference to their oversight is 
appropriate when compliance with the home country regulatory regime 
would achieve compliance with DCO core principles. This proposal is 
consistent with, and in many ways an expansion of, the CFTC's 2016 
Equivalence Agreement with the European Commission, pursuant to 
which the CFTC granted substituted compliance to dually-registered 
DCOs based in the European Union.\1\
---------------------------------------------------------------------------

    \1\ Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central 
Counterparties, 81 FR 15260 (March 22, 2016).
---------------------------------------------------------------------------

    I also strongly support the proposal's transparent, fact-based 
procedure for determining when a foreign DCO poses ``substantial 
risk to the U.S. financial system.'' The proposal defines 
``substantial risk'' to mean two simple criteria: (i) The foreign 
DCO holds 20 percent or more of the required initial margin of U.S. 
clearing members for swaps across all registered and exempt DCOs; 
and (ii) 20 percent or more of the initial margin requirements for 
swaps at that foreign DCO is attributable to U.S. clearing members. 
I think this two-prong test correctly assesses the DCO's focus on 
U.S. firms and impact on the U.S. marketplace.
    Today's proposal contrasts starkly with the European Securities 
and Markets Authority's (ESMA) recent proposal to determine the 
systemic importance of a foreign DCO to the European Union and 
thereby apply the European Market Infrastructure Regulation (EMIR) 
and ESMA oversight. Unlike today's CFTC proposal, ESMA has not 
proposed any quantitative thresholds for assessing systemic 
importance. Instead, ESMA proposed 14 ``indicators'' for determining 
systemic importance that would grant it considerable discretion and 
raise serious questions about the judgement and consistency of the 
indicators' application. I hope that, through its consultative 
process, ESMA decides to revise its criteria and ultimately adopts a 
predictable, transparent, and appropriately calibrated threshold 
regime for such an important and extraterritorial regulatory 
determination.
    I welcome comments and suggestions from market participants and 
foreign jurisdictions about all aspects of the Commission's proposed 
alternative compliance regime for non-U.S. DCOs. It is also my hope 
that incoming Chairman Tarbert will prioritize finalizing a version 
of this proposal. Lastly, I look forward to discussing this 
proposal, and advocating for its deference-based approach, with our 
regulatory colleagues around the globe.

Appendix 4--Statement of Commissioner Dawn D. Stump

Overview

    In responding to the financial crisis, both the Group of 20 
Nations (G-20) and the U.S. Congress recognized that the derivatives 
markets are global and in doing so provided for international 
coordination and a practical application of regulatory deference. I 
want to commend the Chairman for his leadership in reminding us of 
the global commitments made in 2009 and the subsequent efforts 
Congress made to encourage global regulatory harmonization. 
Specifically, the G-20 leaders stated the clear responsibility we 
have ``to take action at the national and international level to 
raise standards together so that our national authorities implement 
global standards consistently in a way that ensures a level playing 
field and avoids fragmentation of markets, protectionism, and 
regulatory arbitrage.'' \1\ More directly related to the subjects 
before us today, Congress, in the Dodd-Frank Act, amended the 
Commodity Exchange Act to provide: ``The Commission may exempt, 
conditionally or unconditionally, a derivatives clearing 
organization from registration . . . for the clearing of swaps if 
the Commission determines that the derivatives clearing organization 
is subject to comparable, comprehensive supervision and regulation 
by. . . the appropriate government

[[Page 34836]]

authorities in the home country of the organization.'' \2\
---------------------------------------------------------------------------

    \1\ Leaders' Statement from the 2009 G-20 Summit in Pittsburgh, 
Pa. 7 (Sept. 24-25, 2009), https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
    \2\ 7 U.S.C. 7a-1(h) (2012).
---------------------------------------------------------------------------

    I believe deference to comparable regulatory regimes is 
essential. Historically, such deference has been the guiding 
principle of the CFTC's approach to regulating cross-border 
derivatives. We cannot effectively supervise central counterparties 
(CCPs) in every corner of the world. We can, however, evaluate the 
regulatory requirements in a CCP's home country to determine if they 
are sufficiently commensurate to our own. We will never have the 
exact same rules around the globe. We should rather strive to 
minimize the frequency and impact of duplicative regulatory 
oversight while also demanding high comparable standards, just as 
Congress intended.
    Had we previously established a more comprehensive structure for 
those comparably-regulated, foreign CCPs seeking to offer swaps 
clearing to U.S. customers, then CCPs wishing to seek an exemption 
would have been able to do so under a regime that Congress provided 
for in the Dodd-Frank Act. Alternatively, those that wanted to 
register as a DCO would have done so voluntarily in response to a 
business rationale demanded by their clearing members and customers. 
However, by not having previously established an exemption process, 
the CFTC left only one path for customer clearing on non-U.S. DCOs, 
which resulted in compelling several non-U.S. CCPs to become dually 
registered with both their home country regulator and the CFTC.
    As a result, relationships with our global regulatory 
counterparts became strained, and there have been many unfortunate 
consequences such that now we must provide new ground rules. So 
today, we are advancing an overdue conversation on applying 
international regulatory deference through the establishment of a 
test to identify non-U.S. CCPs that pose substantial risk to the 
U.S. financial system. To be clear, neither of the proposals we are 
considering today would be available to DCOs that pose such risk. I 
fear that this point may be lost or confused by the fact that we are 
presenting these as two separate rulemakings. While I would have 
preferred a single rulemaking to alleviate any confusion, I want to 
make clear that we are simply proposing two regulatory options, each 
of which is only available to those DCOs that do NOT pose 
substantial risk to the U.S. financial system under the proposed 
test. I encourage commenters to provide input on the proposals as if 
they are a single package, particularly where the request for 
comments in one proposal may be relevant or more applicable to 
consideration of the other proposal.
    These proposals are a step towards achieving the goals 
established in 2009--an effort I wholeheartedly support. However, I 
have concerns that these proposals may be a bit too rigid to 
pragmatically facilitate increased swaps clearing by U.S. customers, 
as we are committed to do by the original G-20 and Congressional 
directives. Under the Alternative Compliance proposal, non-U.S. DCOs 
can permit customer access only if a futures commission merchant 
(FCM) is directly facilitating the clearing while the other 
available option--provided for in the Exempt DCO proposal--
completely disallows the FCM from being involved in customer 
clearing. While I recognize that the blunt nature of these bright 
line distinctions makes it easier to regulate, I worry that it may 
not be workable in practice. I support putting these proposals out 
for public comment in hopes that those who participate in these 
markets and who are expected to apply the new swap clearing mandates 
will be able to lend their voices to the discussion. However, I 
anticipate that the elements left unaddressed in these proposals, 
which are detailed in the requests for comments, may require a re-
proposal at some future date. Nonetheless, if that is to occur we 
will be well served to have that discussion with the benefit of 
public comments.

Registration With Alternative Compliance for Non-U.S. DCOs

    This proposal is designed to more clearly spell out how we would 
provide regulatory oversight for those clearinghouses that do not 
pose substantial risk to the U.S. financial system and that may 
obtain Alternative Compliance by demonstrating fulfillment of 
statutorily-established core principles.
    Unfortunately, the proposal fails to address, and in my opinion 
may even worsen, a challenge of great concern to this Commission--
the increased strain on our registered FCMs. Under the Alternative 
Compliance proposal, any non-U.S. DCO seeking to apply the regime 
would be required to do so ONLY through clearing members that are 
FCMs, and may not do so through an affiliate of the FCM in the home 
country that is already acting as a clearing member of the DCO. This 
is the status quo, and frankly it often makes very little economic 
sense for both the FCM and its affiliate to be capitalizing a 
clearinghouse simultaneously. Consideration should be given to the 
efficiency of utilizing an affiliated entity, which would allow this 
to be a business decision between FCMs and their customers, rather 
than a regulatory impediment to sustaining FCMs that play a critical 
role in cleared derivatives markets.
    It is costly for an FCM to join any clearinghouse and may be 
especially uneconomic if the FCM only has a few customers who wish 
to access a particular non-U.S. DCO. It may make more sense to 
structure the arrangement with the assistance of a non-U.S. 
affiliate, already actively participating as a member of the DCO. To 
do otherwise limits U.S. customer choice and access to clearing of 
the product in a foreign jurisdiction, which seems at odds with the 
reform agenda of encouraging clearing--mandated or not.
    To be clear, two affiliated entities may each be subjected to 
risk mutualization obligations at the same CCP, and unfortunately, 
this proposal does not discuss how we might address this duplicative 
burden. Rather, we are requesting comment in the separate Exempt DCO 
proposal about how this problem might be addressed through an 
affiliate guarantee arrangement such that an FCM could potentially 
participate as a ``special'' member whose obligations to the DCO 
could be guaranteed by its non-FCM affiliate acting as a 
``traditional'' member of the DCO. I hope commenters will consider 
and discuss this concept in the context of the proposed Alternative 
Compliance regime where it is more applicable to CFTC-registered 
FCMs at non-U.S., CFTC-registered DCOs. I hope that commenters will 
also provide other potential solutions to help alleviate undue 
burdens on FCMs and their customers in the context of the 
Alternative Compliance proposal.
    As a Commission, I believe we are all concerned about the 
consolidation these clearing service providers are already 
experiencing and the constraint on the availability of clearing 
services for market participants. I hope we will be able to avoid 
policies that unnecessarily challenge the economics of, or otherwise 
impede, operating as an FCM. Otherwise, we might find that our 
mandate to increase swaps clearing is futile: Simply put, the 
clearinghouses don't work without clearing members and so we must 
seek to preserve both.

Closing

    At the beginning of this year I penned an opinion piece in the 
Financial Times \3\ in which I attempted to appeal to our 
international regulatory partners to recommit to a coordinated 
approach, ensuring that our alliance remains strong rather than 
fractured. Regulatory conflicts are at odds with our shared mission 
and do a disservice to global market participants. I am committed to 
advancing a coordinated approach, and I believe the proposals we are 
putting forward today are a first step in that process. There is, 
however, more work to be done both in the way of the CFTC extending 
deference to other jurisdictions and vice versa. I hope our 
international regulatory partners will also take the opportunity to 
reset and recognize that our shared interest of advancing 
derivatives clearing is best achieved by respecting each 
jurisdiction's successful implementation of the principles agreed to 
ten years ago. Otherwise, it might unfortunately become challenging 
to advance the concept of deference under consideration today to the 
next stage of the process.
---------------------------------------------------------------------------

    \3\ Dawn DeBerry Stump, Opinion, We Must Rethink Our 
Clearinghouse Rules, Fin. Times (Jan. 24, 2019).
---------------------------------------------------------------------------

Appendix 5--Supporting Statement of Commissioner Dan M. Berkovitz

    I support issuing for public comment the proposed rulemaking 
(``Proposal'') to permit registration with alternative compliance 
for non-U.S. derivatives clearing organizations (``non-U.S. DCOs'').
    Under the Proposal, a non-U.S. DCO that does not pose 
``substantial risk to the U.S. financial system'' would be permitted 
to elect to comply with certain Commodity Exchange Act (``CEA'') 
core principles for DCOs through compliance with its home country 
regulatory regime.\1\ The non-U.S. DCO still would be required to 
comply with the CFTC's customer protection and swap data reporting 
requirements. This registration

[[Page 34837]]

alternative would permit U.S. persons to access foreign swap markets 
while benefitting from customer protections under the U.S. 
Bankruptcy Code and CFTC regulations without introducing significant 
new risks into the financial system.
---------------------------------------------------------------------------

    \1\ Proposal, section I.A.
---------------------------------------------------------------------------

    The alternative compliance framework seeks to satisfy both the 
CFTC interest in protecting U.S. customers accessing a non-U.S. DCO 
and the interests of the home regulator in overseeing the activities 
of the non-U.S. DCO within its jurisdiction. It maintains key U.S. 
customer protection requirements and U.S. Bankruptcy Code treatment 
for U.S. customer funds held by CFTC-registered futures commission 
merchants (``FCMs'').\2\ At the same time, this framework recognizes 
the interests of the non-U.S. DCO's home country regulator by 
relying on its oversight of other DCO activities. I look forward to 
comments on whether the Proposal maintains for the Commission an 
appropriate level of regulatory oversight for non-U.S. DCOs 
operating within this framework.
---------------------------------------------------------------------------

    \2\ The Proposal would require each applicant for registration 
with alternative compliance to: (a) Address compliance with certain 
Commission customer protection and reporting rules in its 
application; (b) submit DCO rules that relate to protection of 
customer funds and swap reporting to the Commission; and (c) comply 
with the Commission's customer protection rules and reporting 
requirements largely through the required use of registered FCMs.
---------------------------------------------------------------------------

    The effective regulation of central clearinghouses for 
derivatives is critical to managing risk throughout global financial 
markets. Under the CEA, the Commission may exempt a non-U.S. DCO 
from the registration requirement if the Commission determines that 
the non-U.S. DCO is subject to ``comparable, comprehensive 
supervision and regulation'' by its home regulator.\3\ The Exempt 
DCO Proposal, which the Commission also is considering today, would 
set forth, for the first time, objective standards for determining 
whether a particular non-U.S. DCO is eligible for such an 
exemption.\4\ The threshold for permitting non-U.S. DCOs under the 
Exempt DCO Proposal to be eligible to elect exemption from 
registration--that the DCO not pose a ``substantial risk to the U.S. 
financial system''--is the same standard for permitting a non-U.S. 
DCO to be eligible to register with alternative compliance under 
this Proposal. Thus, under the set of proposals the Commission is 
considering today, a non-U.S. DCO that does not pose substantial 
risk to the U.S. financial system could apply, at its election, 
either for an exemption from DCO registration, or for registration 
with alternative compliance. Of course, it could apply for full DCO 
registration as well.
---------------------------------------------------------------------------

    \3\ See Commodity Exchange Act sec. 5b(h), 7 U.S.C. 7a-1(h).
    \4\ Although I support the development of objective standards 
for this purpose, I cannot support the Exempt DCO Proposal because, 
among other things, it fails to maintain appropriate protections for 
U.S. customers. Please see my dissenting statement for further 
detail on the failures of the Exempt DCO Proposal.
---------------------------------------------------------------------------

    I support the Commission's movement towards objective standards 
and defined processes for establishing registration alternatives for 
non-U.S. DCOs. Non-U.S. DCOs that conduct a substantial amount of 
U.S. customer-related activity will remain subject to full CFTC 
registration and regulation and U.S. customers on such DCOs are 
generally protected under the U.S. Bankruptcy Code and CFTC customer 
protection regulations.
    For a non-U.S. DCO that is below that ``substantial risk'' 
threshold, this Proposal creates an ``alternative compliance 
mechanism'' that would permit the non-U.S. DCO to register with the 
Commission and provide clearing for U.S. customers, but also to 
comply with certain DCO core principles by complying with its home 
country requirements. Under this alternative, the non-U.S. DCO would 
still be subject to some CFTC customer protection regulations and 
U.S. customers would continue to receive protections under the U.S. 
Bankruptcy Code for funds held at the FCMs that must be used as 
intermediaries.\5\
---------------------------------------------------------------------------

    \5\ The ability of non-U.S. DCOs that are registered with 
alternative compliance to provide clearing services to U.S. 
customers with the customer protections provided under U.S. law 
obviates the need for the Commission's contortions found in the 
Exempt DCO Proposal to allow exempt DCOs to provide customer 
clearing but without any U.S. customer protections established by 
the CFTC.
---------------------------------------------------------------------------

``Substantial Risk'' Threshold Issues

    As noted above, only those non-U.S. DCOs that do not pose a 
``substantial risk to the U.S. financial system'' would be permitted 
to register with alternative compliance. A non-U.S. DCO would be 
deemed to present a ``substantial risk to the U.S. financial 
system'' if: (1) It holds 20% or more of the required initial margin 
of U.S. members for swaps aggregated across all registered and 
exempt DCOs; and (2) 20% or more of the initial margin for swaps 
required at the DCO is attributable to U.S. members. The 20/20 
criteria would not be a bright line test. If either of the 
conditions is present, or close to present, the Commission may 
nonetheless determine that the non-U.S. DCO presents substantial 
risk to the U.S. financial system and therefore must fully register.
    Although I support issuance of this Proposal, I have significant 
concerns about adopting the 20/20 criteria as a ``risk-based'' 
standard. Although the 20/20 criteria are characterized as a risk-
based standard (i.e., ``substantial risk to the U.S. financial 
system''), the criteria would more accurately be described as 
establishing an activity-based test. The proposed 20/20 criteria 
directly measure the level of initial margin deposited at the non-
U.S. DCO rather than risk presented to the U.S. financial system. 
The Proposal is devoid of reasoned analysis as to the basis for the 
20/20 criteria in terms of actual risk presented to the U.S. 
financial system. It is not difficult to envision scenarios in which 
a lesser amount of initial margin at a non-U.S. DCO by U.S. 
participants may actually represent increased risk to the U.S. 
financial system, and a greater amount of margin may represent 
lesser risk. In the Proposal, the Commission concedes that ``a test 
based solely on initial margin requirements may not fully capture 
the risk of a given DCO.'' \6\
---------------------------------------------------------------------------

    \6\ Proposal, section II.A.2.
---------------------------------------------------------------------------

    In my view, an activity-related test is, in fact, the more 
appropriate standard for determining registration requirements. In 
effect, the Proposal gets the result right, but for the wrong 
reasons. ``Substantial risk to the U.S. financial system'' is 
difficult--if not impossible--to measure in a straightforward, 
objective formula, especially as markets change over time. The 
activity-based thresholds in the Dodd-Frank Act for the regulation 
of swaps markets and entities were adopted largely due to the 
spectacular failure of the risk-based approach prior to the 
financial crisis. Other registration thresholds and registration 
exemptions in the CEA and the Commission's regulations, for example 
for swap dealers, FCMs, commodity pool operators, and commodity 
trading advisors, are based on activity rather than risk. 
Importantly, the standard in CEA Section 2(i) for the application of 
the swaps provisions to activities outside the U.S. (``direct and 
significant connection with activities in, or effect on, commerce of 
the United States'') is activity-based and not risk-based. The 
threshold for exemption from registration for non-U.S. DCOs should 
be activity-based as well.
    It is not apparent from the information provided in the Proposal 
why the 20/20 test should be the appropriate standard for 
determining whether a non-U.S. DCO need not fully register with the 
CFTC. Do the proposed criteria accurately measure the appropriate 
level of clearing activity? Are additional or different metrics more 
appropriate for measuring when clearing activity for U.S. customers 
becomes substantial and full registration becomes appropriate? I 
look forward to reviewing comments addressing these and the other 
issues regarding the 20/20 test.

No Substituted Compliance Review

    I also am concerned that the Proposal may not establish 
sufficiently clear or adequate standards for the review of a non-
U.S. DCO's application for alternative compliance. In contrast to 
the standard and proposed process for granting a request for 
exemption from DCO registration,\7\ the Proposal would not require 
the CFTC to make any determination that the home jurisdiction's 
requirements for the DCO are comparable to, and as comprehensive as, 
the core principles for which alternative compliance is being 
sought.\8\ It is not clear why a vaguer standard should apply to 
DCOs seeking registration with alternative compliance. The Proposal 
establishes what, in essence, appears to be a regime similar to 
substituted compliance for certain DCO core principles, yet it does 
not follow the process the CEA requires and the CFTC has implemented 
in other circumstances for establishing a substituted compliance 
regime.\9\ Further, the Proposal

[[Page 34838]]

does not require that the non-U.S. DCO observe the Principles for 
Financial Market Infrastructure. I look forward to comments on, and 
further clarification of, these issues.
---------------------------------------------------------------------------

    \7\ See Commodity Exchange Act sec. 5b(h), 7 U.S.C. 7a-1(h).
    \8\ See Exemption from Derivatives Clearing Organization 
Registration, section I (July 11, 2019).
    \9\ See Commodity Exchange Act secs. 5b(h), 5h(g), 4(b)(1)(A) (7 
U.S.C. 7a-1(h), 7b-3(g), 6(b)(1)(A)) (establishing a ``comparable, 
comprehensive supervision and regulation'' standard for exempt DCOs, 
exempt swap execution facilities, and foreign boards of trade, 
respectively); 78 FR 45,292, 45,342-45 (July 22, 2013) (establishing 
the ``comparable and comprehensive'' standard for substituted 
compliance determinations by the Commission for swap dealer 
regulations in foreign jurisdictions).
---------------------------------------------------------------------------

Reciprocity

    In this rulemaking the Commission proposes to recognize the 
interests of other jurisdictions in the regulation of non-U.S. DCOs. 
To the extent that non-U.S. jurisdictions adopt similar approaches 
that recognize the interests of the U.S. in the regulation of DCOs 
located in the U.S., the global marketplace as a whole will benefit. 
However, to the extent that another jurisdiction does not 
appropriately recognize the interests of the U.S. in regulating U.S. 
DCOs, then U.S. DCOs could be fully regulated by both the U.S. and 
the other non-U.S. jurisdiction, subjecting the U.S. DCOs to 
unnecessary additional costs and potentially conflicting 
requirements.\10\ Prior to granting any applications for alternative 
compliance for a non-U.S. DCO, the Commission should determine that 
the home jurisdiction of the non-U.S. DCO has adopted a comparable 
approach to the regulation (including exemption from regulation) of 
U.S. DCOs.\11\ I invite comment on whether reciprocity or a similar 
mechanism should be incorporated into the regulation.
---------------------------------------------------------------------------

    \10\ This situation presents a classic ``prisoner's dilemma,'' 
in which the overall welfare of the two parties is maximized by the 
parties acting cooperatively (in this case, mutual recognition of 
regulatory interests), whereas individual welfare may be maximized 
by defection (no recognition of the other party's interests) when 
the other party cooperates (recognition of the other party's 
interests). The most rational and effective strategy for a party in 
a prisoner's dilemma where parties repeatedly interact with one 
another and one party seeks cooperation but the other party may 
defect is for the cooperating party to respond to any defection with 
tit-for-tat. See Robert Axelrod, The Evolution of Cooperation (Basic 
Books, 2006).
    \11\ The Restatement (Third) of Foreign Relations Law of the 
United States recognizes that, in the exercise of international 
comity, reciprocity is an appropriate consideration in determining 
whether to exercise jurisdiction extraterritorially. Restatement 
(Third) of Foreign Relations Law of the United States sec. 403 (Am. 
Law Inst. 2018).
---------------------------------------------------------------------------

    I thank the staff of the Division of Clearing and Risk for their 
work on this Proposal and appreciate their professional engagement 
with my office to address many of our comments.

[FR Doc. 2019-15262 Filed 7-18-19; 8:45 am]
BILLING CODE 6351-01-P

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