On August 8, the Commodity Futures Trading Commission announced that it has proposed rules pursuant to which a clearing organization located outside of the United States may obtain an exemption from registration as a derivatives clearing organization (DCO) in order to provide swaps clearing services to certain US persons. The proposed rules codify the CFTC’s existing policies and procedures for granting such exemptions. To date, the CFTC has exempted four non-US clearing organizations from registration: ASX Clear (Futures) Pty Limited, Japan Securities Clearing Corporation, Korea Exchange, Inc., and OTC Clearing Hong Kong.
The CFTC is permitted to exempt a non-US clearing organization from registration as a DCO for clearing swaps to the extent the CFTC determines the clearing organization is subject to comparable, comprehensive supervision and regulation by its home country authorities. The CFTC is proposing to use a clearing organization’s compliance with the Principles for Financial Market Infrastructure (PFMIs) as the standard for making such determination as it finds the PFMIs to be comparable to the core principles set forth for DCOs in the Commodity Exchange Act and CFTC regulations.
In order to qualify for an exemption, a non-US clearing organization must be subject to regulation in its home country consistent with the PFMIs, observe the PFMIs in all material respects, and be in good standing with its home regulator. The CFTC and a clearing organization’s home regulator also must have entered into a memorandum of understanding pursuant to which the home regulator agrees to provide the CFTC relevant information, and the clearing organization must consent to jurisdiction in the United States and appoint an agent in the United States. On an annual basis, within 60 days following the end of its fiscal year, the clearing organization must provide the CFTC a certification of its material compliance with the PFMIs as well as report on various metrics, including margin, volume, open interest and the clearance of swaps.
As is the case under the existing policies and procedures, a clearing member of a clearing organization that qualifies for an exemption as a DCO would be permitted to clear swaps only for itself and any affiliate that meets the definition of a “proprietary account” in CFTC Rule 1.3; the clearing member could not clear for “cleared swaps customers” as defined in CFTC Rule 22.1.
The proposed rules are available here. Comments with respect to the proposed rules are due 60 days after the proposed rules are published in the Federal Register.