CFTC Adopts Alternative Compliance Mechanism For Non-U.S. DCOs

The CFTC unanimously adopted amendments to rules requiring registration for non-U.S. derivatives clearing organizations ("DCOs"). As previously covered, the CFTC proposed amendments to Part 39 and Part 140 to permit non-U.S. DCOs that clear swaps (but not futures) for U.S. persons to register with the CFTC, but be primarily subject to the rules of their home country regulators.

For a non-U.S. DCO to be eligible for the alternative compliance mechanism, the following requirements must be met:

1. The CFTC must determine that the non-U.S. DCO's compliance with its home country regulations would satisfy the CFTC's "DCO Core Principles," as set out in Part 39 of the CFTC Rules;
2. The non-U.S. DCO must be in "good regulatory standing" with its home country regulator (which the CFTC noted does not entail that the non-U.S. DCO must at all times maintain a clean regulatory slate with its home country regulator); and
3. There must be a memorandum of understanding (or similar arrangement "satisfactory to the Commission") in place between the CFTC and the non-U.S. DCO's home country regulator.

As a further condition of eligibility, the non-U.S. DCO must not pose a "substantial risk to the U.S. financial system." The CFTC stated that, with respect to a non-U.S. DCO, "substantial risk" is posed when the non-U.S. DCO holds (i) 20% or more of its required initial margin of U.S. clearing members for swaps across all registered and exempt DCOs, and (ii) 20% or more of the initial margin requirements for swaps at that DCO is attributable to U.S. clearing members. The CFTC has the ultimate discretion in determining whether the non-U.S. DCO satisfies the "substantial risk" test.

The alternative compliance mechanism requires that all swaps for U.S. customers be cleared through a CFTC-registered futures commission merchant ("FCM"). The non-U.S. DCO availing itself of alternative compliance will be obligated to satisfy the CFTC's customer protection requirements and the swap data reporting requirements in Part 45 of the CFTC Rules. The CFTC did not take any action on a related proposal to permit exempt DCOs to clear swaps for U.S. customers through non-U.S., non-CFTC-registered FCMs.

Commissioner Statements

Chair Heath P. Tarbert noted that the CFTC's approach to international regulatory comity has already been "bearing fruit" and that the European Union has adopted a similar mechanism to enable non-EU clearinghouses to meet EU requirements through compliance with the rules of their home jurisdictions.

Commissioner Dawn D. Stump emphasized that additional work needs to be done by the CFTC to (i) provide substituted compliance as to the Part 45 reporting requirements of DCOs, (ii) exempt foreign central counterparties from registration with the CFTC, and (iii) give U.S. customers the option to use a CFTC-registered FCM to access an exempt DCO.

Commissioner Dan M. Berkovitz stated that the amendments enable the CFTC to protect U.S. investors and market participants while acknowledging the interests of foreign regulators.

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

Commentary

The CFTC rule adoption is a positive step for market liquidity and cross-border trading. It represents a further return to the CFTC's historical position of co-operation with non-U.S. regulators and recognition of non-U.S. regulatory schemes.

Primary Sources

1. CFTC Voting Draft: Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations
2. CFTC Press Release: CFTC Finalizes Rules to Improve Swap Data Reporting, Approves Other Measures at September 17 Open Meeting
3. CFTC Statement, Heath P. Tarbert: Statement in Support of Final Rule on Alternative Compliance for Non-U.S. Clearinghouses
4. CFTC Statement, Dawn D. Stump: Statement Regarding Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations
5. CFTC Statement, Dan M. Berkovitz: Statement Regarding Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations

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