The Commodity Futures Trading Commission (CFTC) has issued a notice of proposed rulemaking (NPR) proposing to codify the CFTC’s existing policies and procedures governing how clearing organizations organized outside of the United States may seek an exemption from registration as a derivatives clearing organization (DCO) for the clearing of CFTC-regulated swaps.1 By codifying these policies and procedures, the CFTC hopes to promote cross-border comity and make the exemption application process more transparent and less burdensome for non-U.S. clearing organizations.
Eligibility for Exemption
To qualify for an exemption from DCO registration, a non-U.S. clearing organization would be required to satisfy the following requirements:
- It must be subject to “comparable, comprehensive supervision and regulation” by appropriate government authorities in the clearing organization’s home country. This requirement would be satisfied where the home country’s regulatory framework (1) is consistent with and achieves the same outcome as the statutory and regulatory requirements applicable to registered DCOs and (2) conforms to the Principles for Financial Market Infrastructures (PFMIs).2
- It must observe the PFMIs in all material respects.
- It must be in good regulatory standing in its home country.
- It must be regulated in its home country by regulator(s) that have entered into a memorandum of understanding or similar arrangement with the CFTC pursuant to which the home country regulator(s) agrees to provide the CFTC with information about the clearing organization.
- It must consent to jurisdiction in the United States and appoint an agent in the United States.
The NPR provides that a U.S. person3 that is a member of an exempt DCO would be permitted to clear swaps only for itself and any affiliate that meets the definition of a “proprietary account” under CFTC Rule 1.3. Further, a clearing member would not be permitted to clear swaps for “swaps customers” within the meaning of the Commodity Exchange Act and CFTC regulations.4 While the CFTC indicated that these limitations are consistent with the CFTC’s existing policies and procedures, they also limit the utility of the proposal for many market participants that are not in a position to become members of an exempt non-U.S. DCO. This is an area in which market participants, such as investment managers and commercial energy companies, may wish to (a) examine the possibility of becoming a clearing member of a non-U.S. exempt DCO on which it wants to trade and (b) comment to the CFTC on the NPR.
Although the NPR only purports to codify the policies and procedures that the CFTC currently follows with respect to granting exemptions from DCO registration, the proposal indicates a CFTC trend toward policies that promote cross-border comity rather than asserting CFTC jurisdiction over foreign markets.5 Further, in addition to soliciting comments on the NPR generally, the CFTC specifically requested comments on whether exempt DCOs should be permitted to clear swaps for futures commission merchants’ customers, which would represent an expansion of the current policy that would demonstrate additional deference to the regulatory regime of an exempt DCO’s home country.
The CFTC must receive comments on the NPR by October 12, 2018.
1 The NPR can be found here.
2 See CPMI–IOSCO, Principles for Financial Market Infrastructures (Apr. 2012), available here. The Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) developed the PFMI, which apply to clearing organizations and 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.
3 For purposes of the proposed rule and other CFTC swaps rules, “U.S. person” has the meaning given in the CFTC’s Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292, 45316–17 (July 26, 2013) available here. Under this definition, a U.S. person includes collective investment vehicles, including hedge funds, that are directly or indirectly majority-owned by U.S. persons or that have their principal place of business in the United States (this generally means that non-U.S. funds operated by U.S.-based investment managers are “U.S. persons” for CFTC swaps purposes). Thus, a fund organized outside of the United States may nonetheless be a U.S. person if the manager is located in the United States or the fund is majority-owned by U.S. investors.
4 See, e.g., CFTC Rule 22.1.
5 See Statement of Chairman J. Christopher Giancarlo Regarding the Proposed Rule on Exemption from DCO Registration (Aug. 8, 2018). Chairman Giancarlo stated that the NPR reflects the CFTC’s recognition “that a foreign jurisdiction may have different regulations for its central counterparties (CCP) but share the same regulatory goals.”
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