The CFTC adopted final rules for granting derivatives clearing organization ("DCO") registration exemptions to non-U.S. clearing organizations seeking to clear proprietary swaps for certain U.S. persons and futures commission merchants ("FCMs") (see prior coverage of the proposal).

Under the final rules, the CFTC may exempt a non-U.S. clearing organization from DCO registration for the clearing of swaps if it determines, among other things, that the clearing organization is "subject to comparable, comprehensive supervision and regulation by a home country regulator." In addition, the non-U.S. clearing organization would need to show that:

  • it is organized in a jurisdiction where a home country regulator applies to the clearing organization rules, regulations and policies that are consistent with the 2012 CPMI-IOSCO Principles for Financial Market Infrastructures ("PFMIs");
  • it follows the PFMIs in all material respects; and
  • it is in "good regulatory standing" in its home country.

The adopted rules permit U.S. persons that are clearing members of the exempt DCO to clear proprietary swaps. FCMs are allowed to be clearing members of the exempt DCO, as well as maintain accounts with affiliated brokers that are clearing members, but only for the purposes of clearing proprietary swaps. The rule does not permit exempt DCOs to clear for swaps for U.S. customers. (The CFTC declined to adopt, with certain exceptions, a 2019 supplemental proposal that would have enabled non-U.S. DCOs that do not pose a substantial risk to the U.S. financial system to offer clearing to U.S. persons through foreign clearing members.)

The final rule goes into effect 30 days after publication in the Federal Register.

Commissioner Statements

CFTC Chair Heath Tarbert supported the final rule as a codification of existing staff guidance, but noted that it is "a modest first step" that reflects "the CFTC's continued efforts to foster cross-border cooperation and show deference to home country regulation that is deemed comparable to [its] own regulations." Mr. Tarbert also expressed support for further deliberation over whether to permit exempt DCOs to clear swaps for U.S. customers who are eligible contract participants.

Commissioner Brian Quintenz also supported the final rule and, like Chair Tarbert, emphasized his continued support for the CFTC's 2019 proposal. Commissioner Quintenz argued that eligible contract participants "have the resources, sophistication, and incentives" to distinguish between customer protections of exempt DCOs and those of CFTC-registered DCOs.

Commissioners Rostin Behnam and Dan Berkovitz each supported the new rules and the CFTC's choice not to adopt the expansion to U.S. customers in the 2019 proposal. Mr. Behnam suggested that the 2019 proposal was not appropriately scrutinized and would have enabled clearing through foreign intermediaries that are "wholly outside the [CFTC's] direct regulation and oversight." Commissioner Benham also expressed concern that the rules refer to the PFMIs as adopted in 2012, but cited the CFTC explicitly reserving on its ability to incorporate future amendments to the PFMIs. Mr. Berkovitz restated his view that the 2019 proposal would have "subjected U.S. customer accounts to foreign bankruptcy and other regulations, promoted the use of foreign intermediaries at the expense of U.S. firms, and exceeded [the CFTC's] limited exemptive authority." Mr. Berkovitz also noted that if circumstances were to change (e.g., amendments to the CEA), he could support amendments (to provide clearing to U.S. customers) if such amendments: (i) place U.S. FCMs "on an equal footing with their foreign counterparts when competing for U.S. customer clearing at [e]xempt DCOs"; and (ii) do not create advantages for unregistered exempt DCOs over registered DCOs.

Commentary

As adopted, the rules essentially maintain the status quo by codifying existing staff guidance: FCMs that become clearing members of an exempt DCO can clear their own swaps as well as swaps of affiliates that qualify under the definition of "proprietary account" in CFTC Regulation 1.3.

The most notable thing about this action is what the CFTC did not do. The 2019 proposal would have permitted U.S. customers to clear swaps at exempted DCOs, but only through non-U.S./non-FCM intermediaries. The long and short of the analysis, as highlighted by Mr. Berkovitz and Mr. Quintenz's statements in particular, is the balance between safeguards to protect customers and permitting market participants willing and able to handle different risks to do so. For now at least, the CFTC moved forward on the customer protection side of this analysis.

Commissioner Berkovitz's statement is worth reading for those looking for tea leaves as to whether the CFTC will address the broader proposal in the future. (Note Mr. Berkovitz's connection to the Obama-era CFTC.) In short, his statement seems to suggest an openness as to the policy of such an approach, but less so as to whether the current state of the law permits it (in particular, as to CEA Section 4d and the Bankruptcy Code).

Primary Sources

  1. CFTC Voting Draft: Exemption from Derivatives Clearing Organization Registration
  2. CFTC Press Release: CFTC Unanimously Approves Final Rule for Granting Exemptions from Derivatives Clearing Organization Registration
  3. CFTC Statement, Heath P. Tarbert: Statement in Support of Foreign Clearinghouse Registration Exemption Framework
  4. CFTC Statement, Brian Quintenz: Supporting Statement Regarding Exemption from Derivatives Clearing Organization Registration Final Rule
  5. CFTC Statement, Rostin Behnam: Concurring Statement Regarding Exemption from Derivatives Clearing Organization Registration; Final Rule
  6. CFTC Statement, Dan M. Berkovitz: Statement on Registration Exemptions for Derivatives Clearing Organizations, Final Rule

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.