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