Federal Register, Volume 84 Issue 141 (Tuesday, July 23, 2019) 
[Federal Register Volume 84, Number 141 (Tuesday, July 23, 2019)]
[Proposed Rules]
[Pages 35456-35482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15258]

 

[[Page 35455]]

Vol. 84

Tuesday,

No. 141

July 23, 2019

Part II

 

 

Commodity Futures Trading Commission

 

 

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17 CFR Parts 3, 39 et al.

 

 

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Exemption From Derivatives Clearing Organization Registration; Proposed
Rule

Federal Register / Vol. 84 , No. 141 / Tuesday, July 23, 2019 /
Proposed Rules

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3, 39 and 140

RIN 3038-AE65

Exemption From Derivatives Clearing Organization Registration

AGENCY: Commodity Futures Trading Commission.

ACTION: Supplemental notice of proposed rulemaking.

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SUMMARY: In August 2018, the Commodity Futures Trading Commission
(Commission) proposed regulations that would codify the policies and
procedures that the Commission is currently following with respect to
granting exemptions from registration as a derivatives clearing
organization (registered DCO) (2018 Proposal). The Commission is
issuing this supplemental notice of proposed rulemaking to further
propose to permit DCOs that are exempt from registration (exempt DCOs)
to clear swaps for U.S. customers under certain circumstances. To
facilitate this, the Commission also is proposing to allow persons
located outside of the United States to accept funds from U.S. persons
to margin swaps cleared at an exempt DCO, without registering as
futures commission merchants (FCMs). In addition, the Commission is
proposing certain amendments to the delegation provisions in part 140
of its regulations.

DATES: Comments must be received on or before September 23, 2019.

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 in this
release 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]; Brian Baum, Special Counsel,
202-418-5654, [email protected]; August A. Imholtz III, Special Counsel,
202-418-5140, [email protected]; Abigail S. Knauff, Special Counsel,
202-418-5123, [email protected]; Division of Clearing and Risk; Thomas
J. Smith, Deputy Director, 202-418-5495, [email protected]; Division of
Swap Dealer and Intermediary Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC
20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Proposed Amendments to Part 3
III. Proposed Amendments to Part 39
    A. Overview of Supplements to 2018 Proposal
    B. Regulation 39.2–Definitions
    C. Regulation 39.6–Exemption from DCO Registration
IV. Proposed Amendments to Part 140
V. Request for Comments
VI. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

    Section 5b(a) of the Commodity Exchange Act (CEA) provides that a
clearing organization may not “perform the functions of a [registered
DCO]” 2 with respect to swaps unless the clearing organization is
registered with the Commission.3 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 its home
country regulator.4 To date, the Commission has exempted four
clearing organizations organized outside of the United States
(hereinafter referred to as “non-U.S. clearing organizations”) from
DCO registration for the clearing of

[[Page 35457]]

proprietary swaps for U.S. persons and FCMs.5
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    2 The term “derivatives clearing organization” is
statutorily defined to mean a clearing organization in general.
However, for purposes of the discussion in this release, the term
“registered 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 Sec.  1.3
of the Commission’s regulations, 17 CFR 1.3.
    3 7 U.S.C. 7a-1(a). Under section 2(i) of the CEA, 7 U.S.C.
2(i), activities outside of the United States are not subject to the
swap provisions of the CEA, including any rules prescribed or
regulations promulgated thereunder, unless those activities either
have a direct and significant connection with activities in, or
effect on, commerce of the United States, or contravene any rule or
regulation established to prevent evasion of a CEA provision enacted
under the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (Dodd-Frank Act). Therefore,
pursuant to section 2(i), the DCO registration requirement extends
to any clearing organization whose clearing activities outside of
the United States have a direct and significant connection with
activities in, or effect on, commerce of the United States.
    4 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 has not granted, nor
developed a framework for granting, such exemptions. 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. Further, the Commission has deemed a supervisory
and regulatory framework that conforms to the Principles for
Financial Market Infrastructures to be comparable to, and as
comprehensive as, the supervisory and regulatory requirements
applicable to registered DCOs. For further background, see 2018
Proposal, 83 FR at 39924.
    5 See ASX Clear (Futures) Pty Amended Order of Exemption from
Registration (Jan. 28, 2016), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexemption.pdf; Korea Exchange, Inc. Order of
Exemption from Registration (Oct. 26, 2015), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-15.pdf; Japan Securities Clearing Corporation
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 Clearing Hong Kong Limited 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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    In the 2018 Proposal,6 the Commission proposed regulations that
would codify the policies and procedures that the Commission currently
follows with respect to granting exemptions from DCO registration.7
The Commission has reviewed the comments received on the 2018 Proposal
8 and is proposing these supplemental regulations in light of those
comments.9 Most significantly, the Commission is now proposing to
permit exempt DCOs to clear swaps for U.S. customers 10 under certain
circumstances.11
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    6 See Exemption From Derivatives Clearing Organization
Registration, 83 FR 39923 (Aug. 13, 2018).
    7 2018 Proposal, 83 FR 39923.
    8 The Commission received four substantive comment letters:
Japan Securities Clearing Corporation (JSCC) comment letter (Oct.
10, 2018); ASX Clear (Futures) Pty comment letter (Oct. 11, 2018);
Futures Industry Association (FIA) and Securities and Financial
Markets Association (SIFMA) comment letter (Oct. 12, 2018); and
International Swaps and Derivatives Association, Inc. (ISDA) comment
letter (Oct. 12, 2018).
    9 Procedurally, this supplemental proposal is not a
replacement or withdrawal of the 2018 Proposal. Unless specifically
amended in this release, all regulatory provisions proposed in the
2018 Proposal remain under active consideration for adoption as
final rules. The Commission welcomes comment on both the 2018
Proposal and this supplemental proposal.
    10 See 17 CFR 1.3 for the definition of “customer.” In
accordance with Section 2(e) of the CEA, which requires that swaps
be transacted on or subject to the rules of a designated contract
market unless entered into by an eligible contract participant, such
“U.S. customers” must be eligible contract participants. 7 U.S.C.
2(e).
    11 In response to the Commission’s request for comment in Part
IV of the 2018 Proposal (83 FR 39923, 39930) as to whether the
Commission should “consider permitting an exempt DCO to clear swaps
for FCM customers,” three commenters answered in the affirmative.
See ASX Clear (Futures) Pty comment letter at 1 (stating that
“ASXCF supports the CFTC permitting exempt DCOs to clear swaps for
U.S. person customers. ASXCF believes it would be beneficial to
allow U.S person customers to access the broadest possible range of
central clearing facilities (“CCPs”) as this would provide U.S
person customers with flexibility and choice in accessing the best
commercial solutions for the products that they use subject to those
CCPs meeting global QCCP standards under the CPMI-IOSCO Principles
for Financial Market Infrastructures (PFMIs).”); JSCC comment
letter at 5 (stating that “JSCC would like the CFTC to consider the
potential benefits of allowing U.S. customers to access exempt DCOs,
using a similar approach to the correspondent clearing structure
adopted for foreign futures markets, by permitting . . . non-U.S.
clearing members in an exempt DCO to clear for U.S. customers,
without the necessity to register as a FCM, as long as those non-
U.S. clearing members can demonstrate that they are properly
supervised, regulated, and licensed to provide customer clearing
services in their home countries, where the regulatory authority
maintains appropriate cooperative arrangements with the CFTC.”);
and ISDA comment letter at 3 (stating “[i]n response to the
Commission’s question about customer clearing, and ISDA strongly
believes that the CFTC should permit exempt DCOs to clear swaps for
customers.”).
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    Specifically, the Commission is proposing to permit U.S. customers
to clear at an exempt DCO only through a foreign intermediary and not
through an FCM. As discussed below, the Commission is not currently
proposing to permit an FCM to clear U.S. customer positions at an
exempt DCO (either directly or indirectly through a foreign member of
the exempt DCO) due to uncertainty regarding the protection of U.S.
customer funds in these circumstances in the event of an insolvency of
the FCM.12 The Commission continues to consider and evaluate this
issue, including possible approaches to deal with the uncertainty 13
and the possible risks to customers (both those of registered and
exempt DCOs) that may result from that uncertainty, and requests public
comment to assist in that regard.
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    12 See Appendix A to Futures Industry Association (FIA) and
Securities and Financial Markets Association (SIFMA) comment letter
(Oct. 12, 2018), Promoting U.S. Access to Non-U.S. Swaps Markets: A
Roadmap to Reverse Fragmentation, at 27 (Dec. 14, 2017) (FIA/SIFMA
White Paper) (“The discrepancy between the [Bankruptcy] Code’s
`clearing organization’ definition (which is limited to registered
DCOs) and the DCO definition in the CEA (which includes any CCP for
swaps, whether registered or not), as well as the absence of a
separate prong in the `commodity contract’ definition for `foreign
cleared swaps’ like the prong for `foreign futures,’ creates
uncertainty as to whether swaps cleared through a non-U.S. CCP are
commodity contracts under the Code if the CCP does not register as a
DCO.”).
    13 See, e.g., FIA/SIFMA White Paper at 27-36, attached as
Appendix A to FIA/SIFMA comment letter (Oct. 12, 2018).
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II. Proposed Amendments to Part 3

    The Commission’s current exempt DCO framework permits U.S. persons
to clear proprietary swap transactions at an exempt DCO, provided that
the U.S. person is a direct clearing member, or an affiliate of a
direct clearing member, of the exempt DCO. Thus, a clearing member of
an exempt DCO at this time may not clear swap transactions for U.S.
persons that are customers of the clearing member.
    The Commission is proposing in this release to expand the exempt
DCO framework to permit an exempt DCO to clear swap transactions for
U.S. persons that are not clearing members, or affiliates of clearing
members, of the exempt DCO (i.e., U.S. persons that are customers of a
clearing member).
    This proposal would further require a foreign intermediary that
clears for customers that are U.S. persons to be a direct clearing
member of the exempt DCO. As a direct clearing member, the foreign
intermediary must comply with any regulations of the home country
regulator applicable to the foreign intermediary’s activities as a
market intermediary, including regulations addressing the holding and
safeguarding of customer funds.
    In order to permit foreign intermediaries to clear swaps for U.S.
persons, the Commission is proposing to exercise its authority under
section 4(c) of the CEA to exempt foreign intermediaries from the
prohibition in section 4d(f) of the CEA against accepting customer
funds to clear swaps at a registered or exempt DCO without registering
as FCMs.14 Specifically, the Commission is proposing to amend Sec. 
3.10(c), which addresses, among other things, exemption from FCM
registration provisions for certain persons. Proposed Sec. 
3.10(c)(7)(i) would provide an exemption to a person located outside of
the United States, its territories, or possessions (i.e., a foreign
intermediary) from the requirement to register as an FCM if the foreign
intermediary accepts funds from U.S. persons to margin, guarantee, or
secure swap transactions cleared by an exempt DCO.15
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    14 7 U.S.C. 6(c). Section 4(c) of the CEA provides that, in
order to promote responsible economic or financial innovation and
fair competition, the Commission, by rule, regulation, or order,
after notice and opportunity for hearing, may exempt any agreement,
contract, or transaction, or class thereof, including any person or
class of persons offering, entering into, rendering advice, or
rendering other services with respect to, the agreement, contract,
or transaction, from the contract market designation requirements of
section 4(a) of the CEA, or any other provision of the CEA other
than certain enumerated provisions, if the Commission determines
that the exemption would be consistent with the public interest and
the purposes of the CEA, and that the agreement, contract, or
transaction will be entered into solely between appropriate persons
and will not have a material adverse effect on the ability of the
Commission or any designated contract market (DCM) to discharge its
regulatory or self-regulatory duties.
    15 The Commission is proposing to amend Sec.  3.10(c) by
adding a new paragraph (7). The Commission previously proposed a new
paragraph (6) to Sec.  3.10(c) which has not been finalized. See
Exemption from Registration for Certain Foreign Persons, 81 FR 51824
(Aug. 5, 2016).
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    The Commission is further proposing Sec.  3.10(c)(7)(ii) to provide
that a foreign

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intermediary exempt from registering as an FCM under Sec. 
3.10(c)(7)(i) is not required to comply with provisions of the CEA and
of the rules, regulations, or orders issued by the Commission that are
applicable solely to a registered FCM. Proposed paragraph (c)(7)(ii)
would provide that a foreign intermediary that is exempt from
registering as an FCM under Sec.  3.10(c)(7)(i) would not be required
to comply with the Commission’s regulations applicable to FCMs,
including minimum capital, segregation of customer funds, and financial
reporting requirements.16 The purpose of this proposed provision is
to clarify that the foreign intermediary would be exempt not only from
the registration requirement of section 4d(f) of the CEA, but also from
all other provisions and regulations applicable to FCMs, including
regulations regarding the holding of customer segregated funds and FCM
capital and financial reporting requirements.
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    16 See 17 CFR 1.17 for FCM capital requirements; 17 CFR parts
1 and 22 for treatment of customer funds, and requirements for
cleared swaps, respectively); and 17 CFR 1.10, 1.12, 1.16, and 1.32
for certain financial and operational reporting requirements.
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    Proposed Sec.  3.10(c)(7)(iii) would prohibit a foreign
intermediary exempt from registering as an FCM under Sec. 
3.10(c)(7)(i) from engaging in any other activities that would require
the foreign intermediary to register as an FCM, and from voluntarily
registering as an FCM.17 This provision is consistent with proposed
Sec.  39.6(b)(1)(i) discussed below, which provides as a condition of
the exempt DCO’s exemption that only a foreign intermediary that is not
an FCM may clear U.S. customers’ positions.18 The proposed FCM
registration exemption for foreign intermediaries is also consistent
with the exempt DCO framework being proposed by the Commission. As
noted above, the proposed exempt DCO framework is based on deference to
the regulation and supervision of the exempt DCO by its home country
regulator.
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    17 The Commission is proposing to prohibit a foreign
intermediary from voluntarily registering as an FCM due to the
uncertainty of how customer funds held by the FCM to margin swaps
cleared at an exempt DCO would be treated under a bankruptcy
proceeding. See section III.C.2. below for further discussion of
potential issues associated with an FCM insolvency proceeding.
Proposed Sec.  3.10(c)(7)(i), however, would not prohibit an FCM
from clearing proprietary swaps at an exempt DCO.
    18 See the discussion at notes 47-55, below.
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    Proposed Sec.  3.10(c)(7)(iv) would require a foreign intermediary
exempt from registering as an FCM under Sec.  3.10(c)(7)(i) to directly
clear the swaps of U.S. persons at the exempt DCO. A foreign
intermediary may not use another intermediary to clear U.S. persons’
swap transactions. The purpose of this provision is to ensure that the
foreign intermediary, as a direct clearing member of the exempt DCO, is
subject to the rules and supervision of the exempt DCO. If a foreign
intermediary is not a direct clearing member, an exempt DCO may not be
in a position to directly monitor the foreign intermediary’s activities
and ensure that the exempt DCO complies with the conditions of its
exemption.
    Proposed Sec.  3.10(c)(7)(v) would provide that a foreign
intermediary exempt from registering as an FCM under Sec. 
3.10(c)(7)(i) may provide trading advice to U.S. persons with respect
to swaps cleared by an exempt DCO without registering as a commodity
trading advisor (CTA), provided that the foreign intermediary does not
engage in any other activity requiring registration as a CTA. The
Commission recognizes that a foreign intermediary, in soliciting and
accepting orders from U.S. persons for swaps cleared at an exempt DCO,
may provide advice regarding those swap transactions, which generally
would require the foreign intermediary to register with the Commission
as a CTA.19 The proposed CTA registration exemption for foreign
intermediaries is consistent, however, with the exempt DCO framework
being proposed by the Commission. As noted above, the proposed exempt
DCO framework is based on deference to the regulation and supervision
of the exempt DCO by its home country regulator, which would include
regulations governing the providing of trading advice.20
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    19 A CTA is defined in Sec.  1.3 of the Commission’s
regulations, 17 CFR 1.3, in relevant part, as any person who, for
compensation or profit, engages in the business of advising others,
either directly or through publications, writings or electronic
media, as to the value of or the advisability of trading in any
contract of sale of a commodity for future delivery, security
futures product, or swap. See also 7 U.S.C. 1a(12).
    20 See proposed Sec.  3.10(c)(7)(iv).
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    In proposing the CTA registration exemption, the Commission is
removing a potential impediment or disincentive for foreign
intermediaries to accept U.S. persons as customers, which would provide
U.S. persons with greater access to swap markets while also focusing
the Commission’s and National Futures Association’s resources on
markets and registrants that have a greater connection to the U.S.
marketplace.21 In addition, the proposal would limit the availability
of the CTA registration exemption to instances where the foreign
intermediary is providing trading advice solely to U.S. persons with
respect to its solicitation for, and acceptance of, swap transactions
that are cleared by an exempt DCO.22 A foreign intermediary that
engages in any activity that requires CTA registration beyond providing
trading advice to U.S. persons solely with respect to swap transactions
cleared by an exempt DCO would still be required to register as a CTA,
absent another available registration exemption.23
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    21 National Futures Association is the self-regulatory
organization with oversight responsibility for CTAs.
    22 The Commission notes that the proposed CTA registration
exemption for a foreign intermediary is analogous to the exclusion
of an FCM from the definition of a CTA contained in section 1(a)(12)
of the CEA.
    23 See, e.g., 17 CFR 4.14(a)(10) (providing an exemption from
registration for CTAs that advise 15 or fewer persons within the
preceding 12 months and that do not hold themselves out to the
public as CTAs).
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    The Commission believes the proposed exemption in Sec.  3.10(c)(7)
promotes responsible financial innovation and fair competition, while
also being consistent with the public interest and the purposes of the
CEA. The Commission further believes that the proposal is limited to
appropriate persons, as only U.S. persons that are eligible contract
participants would be permitted to maintain accounts with a foreign
intermediary for swaps cleared at an exempt DCO.24 Eligible contract
participants are generally required to meet certain financial or other
standards that are intended to distinguish them from less sophisticated
retail investors.
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    24 Section 2(e) of the CEA makes it unlawful for any person,
other than an eligible contract participant, to enter into a swap
unless the swap is entered into on, or subject to the rules of, a
DCM. 7 U.S.C. 2(e). “Eligible contract participant” is defined in
section 1a(18) of the CEA and Sec.  1.3. 7 U.S.C. 1a(18); 17 CFR
1.3. The Commission’s regulations require any transaction executed
on or through a DCM to be cleared at a registered DCO. See 17 CFR
38.601.
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    As noted above, the exemption is necessary to effectuate the
proposed exempt DCO framework; absent such an exemption, foreign
intermediaries would be prohibited from accepting U.S. customer funds
to clear swaps at an exempt DCO without registering as FCMs. In this
connection, the Commission believes that the proposed exemption is
consistent with the purposes of the CEA in that the proposal would
provide U.S. persons with additional options regarding the trading and
clearing of swap transactions. The ability of U.S. customers (i.e.,
U.S. persons that are not direct members of exempt DCOs, or the
affiliates of such members) to use foreign intermediaries to carry
their accounts for clearing at exempt DCOs would potentially expand the
number of intermediaries that

[[Page 35459]]

currently clear swaps for U.S. persons. Currently, only 17 FCMs clear
swaps for customers, with a substantial concentration in a small number
of entities (the top five and the top ten FCMs carry 76 percent and 98
percent of the total cleared swaps customer funds, respectively).25
The expansion of the exempt DCO framework to include foreign
intermediaries clearing for U.S. customers has the potential for
increasing the number of market intermediaries clearing for U.S.
persons and reducing the concentration of U.S. customer funds in a
small number of FCMs.
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    25 See Financial Data for FCMs (as of March 31, 2019),
available at https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
—————————————————————————

    The proposal also furthers the public interest and purposes of the
CEA by providing U.S. customers (i.e., U.S. persons that are not direct
members of exempt DCOs, or the affiliates of such members) with access
to swaps that are cleared in foreign jurisdictions that U.S. customers
otherwise would not be able to access. As noted above, U.S. customers
are not currently permitted to clear swaps at non-U.S. clearing
organizations that are not registered with the Commission, which may
impact their ability to effectively hedge certain exposures. This
limited access may become a more acute issue as margin rules for non-
cleared swap transactions come fully into effect. Full implementation
of the non-cleared margin rules may incentivize market participants not
currently subject to them to engage in more cleared swap transactions
and fewer non-cleared swap transactions. This would reduce liquidity in
the non-cleared markets and provide for greater liquidity in more
standardized, cleared contracts. To the extent that liquidity develops
in contracts cleared at non-U.S. clearing organizations that are not
registered DCOs, U.S. customers would not have access to those cleared
markets absent the proposed exempt DCO framework.26
—————————————————————————

    26 Further, the possible reduction in liquidity in the non-
cleared markets for similar contracts could potentially impact
execution quality for U.S. customers in the non-cleared markets.
—————————————————————————

    The risks to U.S. swaps customers from clearing swaps traded on
exempt DCOs through foreign intermediaries that are not registered as
FCMs would be mitigated under the proposal by requiring exempt DCOs to
be in in good regulatory standing in their home country jurisdictions,
and subject to comparable, comprehensive supervision and regulation by
their home country regulators that includes a regulatory structure that
is consistent with the PFMIs. Furthermore, as discussed below, the
proposal would provide that an exempt DCO must require a foreign
intermediary to provide written notice to, and obtain acknowledgement
from, a U.S. person prior to clearing any swaps for such person that
the clearing member is not a registered FCM, that the exempt DCO is not
registered with the Commission, and that the protections of the U.S.
Bankruptcy Code (Bankruptcy Code) do not apply to the U.S. person’s
funds. The notice also must explicitly compare the protections
available to the U.S. person under U.S. law and the laws of the exempt
DCO’s home country regulatory regime.
    The Commission also does not believe that exempting foreign
intermediaries from FCM registration to clear swap transactions for
U.S. persons at exempt DCOs will have a material adverse effect on the
ability of the Commission to discharge its regulatory duties. As
discussed in section III below, a non-U.S. clearing organization must
not pose substantial risk to the U.S. financial system in order to
qualify for an exemption from DCO registration. In addition, the
proposed exempt DCO framework is based on deference to the regulation
and supervision of an exempt DCO by its home country regulator,
including the regulation and supervision of the foreign intermediaries
that are clearing members of the exempt DCO. The exempt DCO must be
organized in a jurisdiction in which it is subject, on an ongoing
basis, to statutes, rules, regulations, policies, or a combination
thereof that, taken together, are consistent with the PFMIs, including
principles related to the segregation of customer funds.27 An exempt
DCO also must agree to provide the Commission with information
necessary to evaluate its initial and continued eligibility for
exemption and its compliance with any conditions of exemption.
Accordingly, the Commission believes that the exempt DCO framework
provides an effective balancing of regulatory protections with
financial innovation to provide U.S. customers with access to cleared
swap markets that are otherwise not available to them.
—————————————————————————

    27 See Principle 14, Segregation and portability, PFMIs,
issued by the Committee on Payment and Settlement Systems and the
Technical Committee of the International Organizations of Securities
Commissions, April 2012.
—————————————————————————

III. Proposed Amendments to Part 39

A. Overview of Supplements to 2018 Proposal

    In addition to certain technical revisions, the Commission is
proposing certain supplements to its 2018 Proposal. As noted above, the
2018 Proposal would codify existing requirements that exempt DCOs
report to the Commission certain information regarding swap clearing by
U.S. persons. The Commission proposed these requirements because it
recognized that U.S. swap clearing activity at an exempt DCO could grow
such that the exempt DCO poses substantial risk to the U.S. financial
system. The Commission believes that when the amount of U.S. clearing
activity at an exempt DCO reaches that point, the DCO should be
registered with, and be subject to oversight by, the Commission. The
Commission is issuing this supplemental proposal to require that, for a
clearing organization to be eligible for an exemption from
registration, the Commission must determine that the clearing
organization does not pose substantial risk to the U.S. financial
system. The Commission is proposing a test the Commission would use in
making this determination, as discussed below. The Commission also is
proposing in this release to reduce the daily and quarterly reporting
requirements for exempt DCOs to include only information necessary for
the Commission to evaluate the continued eligibility of the exempt DCO
for exemption under the “substantial risk” test and assess the DCO’s
U.S. clearing activity.
    In addition, the supplemental conditions of exemption would require
an exempt DCO to have rules that prohibit the clearing of customer
positions, including U.S. customer positions, by FCMs. Furthermore, an
exempt DCO would be required to have rules requiring any clearing
member seeking to clear for a U.S. customer to provide written notice
to, and obtain acknowledgement from, the customer prior to clearing,
among other things, that the protections of the Bankruptcy Code do not
apply to the U.S. customer’s funds and comparing the protections
available to the U.S. customer under U.S. law and the exempt DCO’s home
country regime.
    Lastly, the Commission is proposing to add a process and conditions
under which the Commission may modify or terminate an exemption upon
its own initiative.

B. Regulation 39.2–Definitions

1. Principles for Financial Market Infrastructures
    The Commission is proposing to modify the definition of
“Principles for Financial Market Infrastructures” as

[[Page 35460]]

previously proposed in Sec.  39.2.28 The Commission previously
proposed to define this term to mean the “[PFMIs] jointly published by
the Committee on Payments and Market Infrastructures and the Technical
Committee of the International Organization of Securities and
Commissions in April 2012, as updated, revised or otherwise amended.”
29 The Commission proposed the “as updated, revised or otherwise
amended” qualifying language to recognize that CPMI-IOSCO could offer
further interpretation of or guidance on the PFMIs.30
—————————————————————————

    28 See 2018 Proposal, 83 FR at 39925.
    29 Id. at 33934.
    30 Id. at n.14.
—————————————————————————

    The Commission is proposing in this release to strike the
qualifying language from the definition. The Commission notes that, in
adopting regulations under subpart C of part 39,31 the Commission
looked to the Principles and Key Considerations in the PFMIs, but it
has not adopted subsequent guidance on the PFMIs. While an exempt DCO’s
home country regulator may voluntarily adopt or amend its statutes,
rules, regulations, policies, or combination thereof to incorporate
subsequent interpretations and guidance, the home country regulator is
not required to do so to maintain a regulatory regime that is
comparable to and as comprehensive as the PFMIs. The Commission
believes that striking that portion of the proposed definition would
provide exempt DCOs with greater regulatory certainty, as a DCO’s
eligibility to remain exempt from registration would not be contingent
on whether a home country regulator has adopted CPMI-IOSCO’s latest
interpretations or guidance.
—————————————————————————

    31 See Derivatives Clearing Organizations and International
Standards, 78 FR 72476 (Dec. 2, 2013).
—————————————————————————

2. Substantial Risk to the U.S. Financial System
    For purposes of this rulemaking, the Commission is proposing to
define “substantial risk to the U.S. financial system” to mean, with
respect to an exempt or registered non-U.S. DCO, that (1) the DCO holds
20 percent or more of the required initial margin of U.S. clearing
members for swaps across all registered and exempt DCOs; and (2) 20
percent or more of the initial margin requirements for swaps at that
DCO is attributable to U.S. clearing members; provided, however, where
one or both of these thresholds are close to 20 percent, the Commission
may exercise discretion in determining whether the DCO poses
substantial risk to the U.S. financial system. For purposes of this
definition and proposed Sec. Sec.  39.6 and 39.51, the Commission is
proposing to clarify that “U.S. clearing member” means a clearing
member organized in the United States or whose ultimate parent company
is organized in the United States, or an FCM.32
—————————————————————————

    32 On July 11, 2019, the Commission approved a separate notice
of proposed rulemaking entitled “Registration with Alternative
Compliance for Non-U.S. Derivatives Clearing Organizations,” that
will be published in the Federal Register. In that release, the
Commission is proposing an identical definition of “substantial
risk to the U.S. financial system.”
—————————————————————————

    This definition sets forth the test the Commission would use to
identify those non-U.S. DCOs that pose substantial risk to the U.S.
financial system, as these DCOs would not be eligible for an exemption
from DCO registration. The proposed test consists of two prongs. The
first prong, which is directly related to systemic risk, is whether the
DCO holds 20 percent or more of the required initial margin 33 of
U.S. clearing members for swaps across all registered and exempt DCOs.
The Commission notes that its primary systemic risk-related concern is
the potential for loss of clearing services for a significant part of
the U.S. swaps market in the event of a catastrophic occurrence
affecting the DCO. The second prong is whether U.S. clearing members
account for 20 percent or more of the initial margin requirements for
swaps at that DCO. This prong of the test, intended to respect
international comity, would capture a non-U.S. DCO only if a large
enough proportion of its clearing activity were attributable to U.S.
clearing members such that the U.S. has a substantial interest
warranting more active oversight by the Commission.34
—————————————————————————

    33 In general, initial margin requirements are risk-based and
are meant to cover a registered or exempt DCO’s potential future
exposure to clearing members based on price movements in the
interval between the last collection of variation margin and the
time within which the DCO estimates that it would be able to
liquidate a defaulting clearing member’s portfolio. The relative
risk that a DCO poses to the financial system can be identified by
the cumulative sum of initial margin collected by the DCO. As a
result, the Commission has found initial margin to be an appropriate
measure of risk.
    34 In developing this proposal, the Commission is guided by
principles of international comity, which counsel due regard for the
important interests of foreign sovereigns. See Restatement (Third)
of Foreign Relations Law of the United States (the Restatement). The
Restatement provides that even where a country has a basis for
jurisdiction, it should not prescribe law with respect to a person
or activity in another country when the exercise of such
jurisdiction is unreasonable. See Restatement section 403(1). The
reasonableness of such an exercise of jurisdiction, in turn, is to
be determined by evaluating all relevant factors, including certain
specifically enumerated factors where appropriate: (1) The link of
the activity to the territory of the regulating state, i.e., the
extent to which the activity takes place within the territory, or
has substantial, direct, and foreseeable effect upon or in the
territory; (2) the connections, such as nationality, residence, or
economic activity, between the regulating state and the persons
principally responsible for the activity to be regulated, or between
that state and those whom the regulation is designed to protect; (3)
the character of the activity to be regulated, the importance of
regulation to the regulating state, the extent to which other states
regulate such activities, and the degree to which the desirability
of such regulation is generally accepted; (4) the existence of
justified expectations that might be protected or hurt by the
regulation; (5) the importance of the regulation to the
international political, legal, or economic system; (6) the extent
to which the regulation is consistent with the traditions of the
international system; (7) the extent to which another state may have
an interest in regulating the activity; and (8) the likelihood of
conflict with regulation by another state. See Restatement section
403(2). Notably, the Restatement does not preclude concurrent
regulation by multiple jurisdictions. However, where concurrent
jurisdiction by two or more jurisdictions creates conflict, the
Restatement recommends that each country evaluate its own interests
in exercising jurisdiction and those of the other jurisdiction, and
where possible, to consult with each other.
—————————————————————————

    The Commission believes that, in the context of this test, the term
“substantial” would reasonably apply to proportions of approximately
20 percent or greater. The Commission stresses that this is not a
bright-line test; by offering this figure, the Commission does not
intend to suggest that, for example, a DCO that holds 20.1 percent of
the required initial margin of U.S. clearing members would potentially
pose substantial risk to the U.S. financial system, while a DCO that
holds 19.9 percent would not. The Commission is instead seeking to
offer some indication of how it would assess the meaning of the term
“substantial” in the test.
    The Commission recognizes that a test based solely on initial
margin requirements may not fully capture the risk of a given DCO. The
Commission therefore proposes to retain discretion in determining
whether a non-U.S. DCO poses substantial risk to the U.S. financial
system, particularly where the DCO is close to 20 percent on both
prongs of the test. In these cases, in making its determination, the
Commission may look at other factors that may reduce or mitigate the
DCO’s risk to the U.S. financial system or provide a better indication
of the DCO’s risk to the U.S. financial system.

C. Regulation 39.6–Exemption From DCO Registration

    As discussed above, the Commission is proposing to expand its
exempt DCO framework to permit exempt DCOs to clear customer positions
of U.S. persons through foreign intermediaries that are not registered
as FCMs. The Commission is therefore proposing certain changes to Sec. 
39.6 as previously proposed to effectuate this approach.

[[Page 35461]]

1. Regulation 39.6(a)–Eligibility for Exemption
    As previously proposed, Sec.  39.6(a) would provide that the
Commission may exempt a non-U.S. clearing organization from
registration as a DCO for the clearing of swaps for U.S. persons,35
and thereby exempt such clearing organization from compliance with the
provisions of the CEA and Commission regulations applicable to
registered DCOs, if the Commission determines that all of the
eligibility requirements listed in proposed Sec.  39.6(a) are met, and
that the clearing organization satisfies the conditions set forth in
Sec.  39.6(b).36 As an additional eligibility requirement, the
Commission is proposing to require in Sec.  39.6(a)(2) 37 that the
clearing organization does not pose substantial risk to the U.S.
financial system, as determined by the Commission (as discussed above).
—————————————————————————

    35 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) (2013 Cross-Border
Guidance), 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.
    36 The eligibility requirements listed in proposed Sec. 
39.6(a) and the conditions set forth in proposed Sec.  39.6(b) would
be pre-conditions to the Commission’s issuance of any order
exempting a clearing organization from the DCO registration
requirement 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.
    37 To implement the proposed change, the Commission is
proposing to renumber previously proposed Sec.  39.6(a)(2) as Sec. 
39.6(a)(3).
—————————————————————————

    The Commission has found that the existing reporting requirements
for exempt DCOs provide the Commission with relevant information in
order to analyze the risks presented by U.S. persons clearing at an
exempt DCO and to assess the extent to which U.S. business is being
cleared by each exempt DCO. As discussed below, the Commission is
proposing in this release to modify the daily and quarterly reporting
requirements for exempt DCOs to include only information necessary for
the Commission to evaluate whether an exempt DCO meets the
“substantial risk to the U.S. financial system” definition and to
assess the extent to which U.S. business is being cleared by each
exempt DCO. Based on this information, to the extent that an exempt
DCO’s cleared swaps activity for U.S. persons reaches a level such that
the exempt DCO would pose substantial risk to the U.S. financial
system, the Commission may find that it does not qualify for an
exemption from DCO registration.
2. Regulation 39.6(b)–Conditions of Exemption
    Proposed Sec.  39.6(b) sets forth conditions to which an exempt DCO
would be subject. The Commission is proposing in this release to modify
these conditions, as discussed below.
    As originally proposed, the effect of Sec.  39.6(b)(1) was to
prohibit the clearing of all U.S. customer positions at an exempt DCO.
To effectuate clearing of U.S. customer positions at an exempt DCO as
set forth in this release, the Commission is proposing to modify the
conditions set forth in Sec.  39.6(b)(1) to specify that: (i) An
intermediary that clears swaps for a U.S. person may not be registered
with the Commission as an FCM; and (ii) an 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 Sec.  1.3 of the Commission’s regulations.38
—————————————————————————

    38 The text of proposed Sec.  39.6(b)(1)(ii), previously
proposed as Sec.  39.6(b)(1)(iii), is unchanged. It 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 proposed modifications to the conditions in Sec.  39.6(b)(1)
are due to uncertainty as to whether, in the event of an FCM bankruptcy
proceeding, swaps customers funds deposited at exempt DCOs, or
margining swaps cleared at exempt DCOs, would be treated as customer
property under the Bankruptcy Code to the same extent as if they were
deposited at a registered DCO. The CEA and Commission regulations
establish a customer protection regime that is intended to ensure that
an FCM holds, at all times, a sufficient amount of money, securities,
and/or property in specially designated customer segregated accounts
with authorized depositories to satisfy the FCM’s total outstanding
obligation to each customer engaging in cleared swap transactions.39
Specifically, section 4d(f)(1) of the CEA provides that it is unlawful
for any person to accept money, securities, or property (i.e., funds)
from, for, or on behalf of a swaps customer to margin swaps cleared
through a registered or exempt DCO (including funds accruing to the
customer as a result of such swaps) unless the person is registered as
an FCM.40 In addition, any swaps customer funds held by a registered
or exempt DCO are subject to the segregation requirements of section
4d(f)(2) of the CEA and part 22 of the Commission’s regulations, which
includes a requirement that the DCO must treat and deal with a swaps
customer’s funds as belonging to the swaps customer of the FCM and not
as the property of other persons, including the FCM.41
—————————————————————————

    39 See 17 CFR 22.2(f) (setting forth requirements for FCM
treatment of cleared swaps and associated cleared swaps customer
collateral).
    40 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).
    41 See 17 CFR 22.3(a) (setting forth requirements for
registered DCO treatment of cleared swaps customer collateral).
—————————————————————————

    The segregation requirements are intended to ensure that customer
property in an FCM insolvency proceeding is not subject to the risk of
the FCM’s proprietary business operations and is available for
distribution to customers. In this regard, section 766 of the
Bankruptcy Code provides that the trustee in an FCM liquidation
proceeding “shall distribute customer property ratably to customers on
the basis and to the extent of such customers’ allowed net equity
claims,” except for certain administrative expenses.42
—————————————————————————

    42 See 11 U.S.C. 766(h) (emphasis added).
—————————————————————————

    The Bankruptcy Code definitions of “customer” and “customer
property,” in turn, are tied to claims based on a “commodity
contract.” 43 The Commission notes that one prong of the Bankruptcy
Code’s definition of “commodity contract” requires that a commodity
contract be cleared through a “clearing organization,” 44 which the
Bankruptcy Code defines as a DCO “registered under the [CEA].” 45
When the CEA was amended by the Dodd-Frank Act to provide for exempt
DCOs, the Bankruptcy Code was not similarly amended. Commenters have
suggested, however, that another prong of the Bankruptcy Code’s
definition of

[[Page 35462]]

“commodity contract” may be applicable to exempt DCOs.46 The
Commission continues to consider and evaluate this issue, and, as
discussed below, requests public comment to assist in that regard.
—————————————————————————

    43 See 11 U.S.C. 766(9)(A).
    44 See Section 761(4)(F)(ii) of the Bankruptcy Code (referring
to, “with respect to a futures commission merchant or a clearing
organization,” a contract “that is cleared by a clearing
organization”).
    45 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). See also Sec.  190.01(f) of
the Commission’s regulations, 17 CFR 190.01(f) (stating that, for
purposes of the Commission’s part 190 bankruptcy rules, “clearing
organization” has the same meaning as that set forth in section
761(2) of the Bankruptcy Code).
    46 See FIA/SIFMA White Paper at 27-29, attached as Appendix A
to FIA/SIFMA comment letter (Oct. 12, 2018) (discussing the fact
that, in amending the “commodity contract” definition in the
Bankruptcy Code in the Dodd-Frank Act, Congress retained the prong
covering “any other contract, option, agreement, or transaction
that is similar to a contract, option, agreement, or transaction
referred to in [the definition of commodity contract],” as well as
discussing related Dodd-Frank Act amendments to the CEA).
—————————————————————————

    The Commission is proposing to require in Sec.  39.6(b)(2) that an
exempt DCO have rules that require any clearing member proposing to
clear for a U.S. person to provide written notice to, and obtain
acknowledgement from, the U.S. person prior to clearing that the
clearing member is not a registered FCM, the DCO is exempt from
registration, and the protections of the U.S. Bankruptcy Code do not
apply to the U.S. person’s funds. The notice must explicitly compare
the protections available to the U.S. person under U.S. law and the
exempt DCO’s home country regulatory regime. This requirement would
serve as notice to U.S. persons of the standards and risks that would
apply in the exempt DCO’s home country with respect to clearing through
the non-FCM clearing member and the exempt DCO.47
—————————————————————————

    47 By way of comparison, a registered FCM accepting U.S.
customer funds for trading foreign futures or options on a
registered foreign board of trade must provide its customers (which
may include retail customers, i.e., customers that are not eligible
contract participants) with a disclosure statement addressing the
risks of trading in foreign markets under Sec.  30.6(a). 17 CFR
30.6(a).
—————————————————————————

    Furthermore, Sec.  39.6(b)(6) as previously proposed would require
that an 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. The Commission is proposing in this release
to modify this condition, proposed to be renumbered as Sec. 
39.6(b)(7), to specify the information that an exempt DCO must provide
to the Commission if it is unable to provide an unconditional
certification that it continues to observe the PFMIs in all material
respects. Specifically, the exempt DCO would be required to identify
the underlying material non-observance of the PFMIs and explain whether
and how such non-observance has been or is being resolved by the exempt
DCO. The Commission has encountered issues with conditional
certifications and believes this supplemental proposal would provide
greater regulatory certainty to an exempt DCO that has identified an
issue with its compliance with the PFMIs, while also providing the
Commission with the assurance it requires regarding the exempt DCO’s
observance of the PFMIs.
    Lastly, under proposed Sec.  39.6(b)(9), the Commission may
condition an exemption on any other facts and circumstances it deems
relevant. In doing so, the Commission would be mindful of principles of
international comity. For example, the Commission could take into
account the extent to which the relevant foreign regulatory authorities
defer to the Commission with respect to oversight of registered DCOs
organized in the United States. This approach would advance the goal of
regulatory harmonization, consistent with the express directive of
Congress that the Commission coordinate and cooperate with foreign
regulatory authorities on matters related to the regulation of
swaps.48
—————————————————————————

    48 In order to promote effective and consistent global
regulation of swaps, section 752 of the 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.
—————————————————————————

3. Regulation 39.6(c)–General Reporting Requirements
    As previously proposed, Sec.  39.6(c)(1) sets forth general
reporting requirements pursuant to which an exempt DCO would have to
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
Sec.  39.19(b).49 The Commission is proposing in this release to
modify the daily and quarterly reporting requirements for exempt DCOs
to include only information necessary for the Commission to evaluate
the continued eligibility of the exempt DCO for exemption and to assess
the extent to which U.S. business is being cleared by each exempt DCO.
—————————————————————————

    49 Regulation 39.19(b), 17 CFR 39.19(b), requires that a
registered DCO submit reports electronically and in a format and
manner specified by the Commission 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 Sec.  39.6(c)(2)(i).
—————————————————————————

    Specifically, proposed Sec.  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) Total initial
margin requirements for all clearing members; (B) initial margin
requirements and initial margin on deposit for each U.S. clearing
member,50 by house origin and by each customer origin, and by each
individual customer account; (C) with respect to an intermediary that
clears swaps for a U.S. person, initial margin requirements and initial
margin on deposit for each individual customer account of each U.S.
person; and (D) daily variation margin, separately listing the mark-to-
market amount collected from or paid to each U.S. clearing member. 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
separately list the mark-to-market amount collected from or paid to
each such clearing member, on a combined basis. These reports would
provide the Commission with information regarding the margin 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.51
—————————————————————————

    50 The Commission is proposing to define “U.S. clearing
member,” for purposes of proposed Sec.  39.6, to mean a clearing
member organized in the United States or whose parent company is
organized in the United States, or an FCM.
    51 These requirements are similar to reporting requirements in
Sec.  39.19(c)(1)(i)(A) and (B) that apply to registered DCOs and
similar to reporting requirements in proposed Sec.  39.51(c)(2)(i)
that would apply to registered DCOs subject to alternative
compliance. See 17 CFR 39.19(c)(1)(i)(A) and (c)(1)(i)(B). See also
Registration with Alternative Compliance for Non-U.S. Derivatives
Clearing Organizations, approved on July 11, 2019 (discussing
similar reporting requirements for registered DCOs subject to
alternative compliance).
—————————————————————————

    Proposed Sec.  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 list of U.S. persons and FCMs
52 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. The Commission is no

[[Page 35463]]

longer proposing to require exempt DCOs to report the aggregate
clearing volume of U.S. persons during the fiscal quarter, or the
average open interest of U.S. persons during the fiscal quarter.
—————————————————————————

    52 Such FCMs may or may not be U.S. persons. 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.
—————————————————————————

    As previously proposed, Sec.  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. The
Commission is supplementing this proposal to require immediate notice
in the event of a default by any clearing member, including the amount
of the clearing member’s financial obligation. The Commission
recognizes that the default of any clearing member may impact U.S.
clearing members and U.S. persons clearing at the exempt DCO. If the
defaulting clearing member is a U.S. clearing member, or clears for a
U.S. person, the notice must also include the name of the defaulting
clearing member and, as applicable, the name(s) of the U.S. person(s)
for whom the clearing member clears and a list of the positions it
held.
4. Regulation 39.6(e)–Application Procedures
    Proposed Sec.  39.6(e) sets forth the application procedures for a
clearing organization that seeks to be exempt from DCO registration. As
previously proposed, Sec.  39.6(e)(2) would require an applicant to
submit a complete application, including all applicable information and
documentation as detailed therein. In this supplemental proposal, the
application procedures and associated materials remain mostly as
previously proposed. The only changes the Commission is proposing in
this release relate to Sec.  39.6(e)(2)(vii), which would require that
an applicant for exemption submit a copy of its rules that: Meet the
open access requirements in Sec.  39.6(b)(2) (proposed to be renumbered
as Sec.  39.6(b)(3)); meet the swap data reporting requirements in
Sec.  39.6(d); and provide written notice of protections available to
U.S. persons (per newly proposed Sec.  39.6(b)(2)). The Commission is
proposing to additionally require a draft of the notice that meets the
requirements of newly proposed Sec.  39.6(b)(2), as applicable, as part
of the application.
    As previously proposed, Sec.  39.6(e)(5) identifies those sections
of an application for exemption from registration that would be made
public. The Commission is proposing in this release to add the draft
rules proposed to be included in Sec.  39.6(e)(2)(vii), as discussed
above.
5. Regulation 39.6(f)–Modification or Termination of Exemption Upon
Commission Initiative
    As previously proposed, Sec.  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. The
Commission is now proposing to supplement this proposed provision to
permit the Commission to terminate an exemption upon its own
initiative, and also to set forth the process by which the Commission
may issue such a modification or termination. Proposed Sec.  39.6(f)
would provide that the Commission may modify or terminate an exemption
from DCO registration, in its discretion and upon its own initiative,
if the Commission determines that any of the terms and conditions of
its order of exemption, including compliance with Sec.  39.6, are not
met.
    For example, the Commission could modify or terminate an exemption
upon a determination that an exempt DCO has failed to observe the PFMIs
in any material respect. The Commission may receive information
regarding the failure of the exempt DCO to comply with any of the terms
and conditions of its order of exemption from a variety of sources,
including, but not limited to, assessments conducted by a home country
regulator or other national authority, or an international financial
institution or international organization, or information otherwise
received from a home country (or other) regulator.
    The Commission could also modify or terminate an exemption upon its
determination that the exempt DCO is no longer subject to “comparable,
comprehensive supervision and regulation” by its home country
regulator. As the Commission is statutorily required to determine that
a non-U.S. clearing organization is subject to “comparable,
comprehensive supervision and regulation” by a home country regulator
to be eligible for an exemption from DCO registration,53 the
Commission would be required to modify or terminate an exemption upon a
subsequent determination that the home country regulator’s supervision
and regulation no longer meets that standard.
—————————————————————————

    53 Section 5b(h) of the CEA, 7 U.S.C. 7a-1(h).
—————————————————————————

    Further, the Commission could modify or terminate an exemption upon
its determination that the exempt DCO poses substantial risk to the U.S
financial system. The reporting requirements for exempt DCOs would
provide the Commission with information regarding the margin associated
with U.S. persons clearing swaps through an exempt DCO in order for the
Commission to assess the risk exposure of U.S. persons and the extent
of the exempt DCO’s U.S. clearing activity. To the extent that an
exempt DCO’s cleared swaps activity for U.S. persons reaches a level
such that the exempt DCO would pose substantial risk to the U.S.
financial system, the Commission may find that it does not qualify for
an exemption from DCO registration.
    Proposed Sec. Sec.  39.6(f)(2), (f)(3), and (f)(4) would set forth
the process for modification or termination of an exemption upon the
Commission’s initiative. Proposed Sec.  39.6(f)(2) would require the
Commission to first provide written notification to an exempt DCO that
the Commission is considering whether to modify or terminate the DCO’s
exemption and the basis for that consideration.
    Proposed Sec.  39.6(f)(3) would permit an exempt DCO to respond to
such a notification in writing no later than 30 business days following
receipt of the Commission’s notification, or at such later time as the
Commission may permit in writing. The Commission believes that a
minimum 30-business day timeframe would allow the Commission to take
timely action to protect its regulatory interests while providing the
exempt DCO with sufficient time to develop its response.
    Proposed Sec.  39.6(f)(4) would provide that, following receipt of
a response from the exempt DCO, or after expiration of the time
permitted for a response, the Commission may either: (i) Issue an order
terminating the exemption as of a date specified in the order; (ii)
issue an amended order of exemption that modifies the terms and
conditions of the exemption; or (iii) provide written notification to
the exempt DCO that the Commission has determined to neither modify nor
terminate the exemption. The date for termination specified in a
termination

[[Page 35464]]

order would provide the exempt DCO with a reasonable amount of time to
wind down its swap clearing services for U.S. persons, including the
liquidation or transfer of the positions and related collateral of U.S.
persons, as necessary.
    Lastly, the Commission is proposing a technical change to proposed
Sec.  39.6(g), which relates to a termination of exemption upon request
by an exempt DCO. Specifically, as previously proposed, Sec. 
39.6(g)(1)(iii) provides that an exempt DCO may petition the Commission
to terminate its exemption if, in conjunction with the petition, the
exempt DCO submits a completed Form DCO to become registered as a DCO
pursuant to section 5b(a) of the CEA. To provide for the alternative
compliance process that would be set forth in proposed Sec. 
39.3(a)(3),54 the Commission is proposing in this release to instead
refer to an application for registration in accordance with Sec. 
39.3(a)(2) or Sec.  39.3(a)(3), as applicable.
—————————————————————————

    54 Registration with Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, approved on July 11, 2019.
—————————————————————————

IV. Proposed Amendments to Part 140

    The Commission previously proposed amendments to Sec.  140.94 to
delegate authority to the Division of Clearing and Risk (DCR) for all
functions reserved to the Commission in proposed Sec.  39.6, subject to
certain exceptions. Specifically, the Commission did not propose to
delegate its authority to grant, modify, or terminate an exemption or
prescribe conditions to an exemption order. Consistent with that
proposal, the Commission is proposing in this release to supplement its
delegation to DCR to include certain functions related to the
modification or termination of an exemption order upon the Commission’s
initiative. These functions would include, but would not be limited to,
sending an exempt DCO notice of an intention to modify or terminate its
exemption order. However, the Commission alone would retain the
authority to modify or terminate the exemption order. The Commission is
proposing an additional amendment to Sec.  140.94(c)(4) to reflect this
change.

V. Request for Comments

    In addition to the specific requests for comment noted elsewhere,
the Commission generally requests comments on all aspects of the rules
proposed in the 2018 Proposal and the supplemental rules proposed in
this release. The Commission also requests comments on the following
specific issues:
    1. Due to uncertainty regarding the applicability of the Bankruptcy
Code in the event of an insolvency of an FCM clearing for customers
directly at, or through a foreign member of, the exempt DCO, the
proposed regulations would permit U.S. customer positions to be cleared
at an exempt DCO but only through a foreign intermediary that is not
registered as an FCM.
    a. Can the Bankruptcy Code be read to permit swaps customer funds
to be deposited at an exempt DCO by an FCM directly, or through a
foreign member of the exempt DCO, and still receive the same
protections as swaps customer funds deposited at a registered DCO? Why
or why not?
    b. Does the Bankruptcy Code or other relevant laws distinguish
swaps customer funds of U.S. persons from non-U.S. persons that are
deposited at an exempt DCO by an FCM for purposes of distribution of
such funds to the U.S. and non-U.S. persons in the event of the FCM’s
insolvency? If so, please explain which laws are relevant and how such
laws address the distribution of customer funds of U.S. and non-U.S.
persons.
    c. Should the Commission permit FCMs to clear swaps for U.S.
customers that are eligible contract participants at exempt DCOs
despite uncertainty of bankruptcy protection in such arrangements? Why
or why not?
    d. Can any concerns regarding uncertainty with respect to U.S.
customers whose transactions are cleared by an FCM directly or
indirectly at an exempt DCO be sufficiently addressed by–
    (1) Requiring, similar to the requirement in proposed Sec. 
39.6(b)(2), that an exempt DCO have rules that require an FCM seeking
to clear swaps for a U.S. customer to provide written notice to, and
obtain acknowledgement from, the U.S. customer prior to clearing that
the exempt DCO is exempt from registration with the Commission, and
that the protections of the Bankruptcy Code may not apply to the U.S.
customer’s funds? Why or why not?
    (2) Limiting clearing of swap positions by U.S. customers at exempt
DCOs through FCMs to only a specified subset(s) of eligible contract
participants? Why or why not?
    e. Can any concerns regarding potential uncertainty with respect to
other U.S. customers (i.e., customers who limit their activities to
transactions cleared at registered DCOs) of an FCM that clears
transactions for customers at an exempt DCO be sufficiently addressed
through disclosure or other means? Why or why not? In this regard,
please address the potential of (1) a bankruptcy court in an FCM
bankruptcy proceeding delaying the transfer of all swaps customer
positions to another FCM to address potential legal challenges to the
bankruptcy status of customer positions cleared at an exempt DCO,
resulting in the need to close out customer positions, or (2) a
shortfall in swaps customer funds affecting all swaps customers of the
FCM due to the bankruptcy of an affiliated foreign clearing member of
the FCM through which the FCM clears customer transactions at the
exempt DCO?
    f. Does the proposal strike the right balance between customer
protection and providing greater access to swaps clearing? Are there
additional measures the Commission should take to enhance customer
protection?
    2. Commenters also suggested a regime for swaps similar to that of
futures, in which a distinct set of Commission regulations–part 30–
governs “foreign futures” traded outside of the United States.55
The Commission notes that the foreign futures regime is expressly
contemplated by the CEA. Section 4(b)(2) of the CEA,56 for example,
authorizes the Commission to adopt rules and regulations requiring the
“safeguarding of customers’ funds” by any person located inside the
United States who engages in the offer or sale of a futures contract
made on or subject to the rules of a board of trade, exchange, or
market located outside the United States. The CEA does not include
similar provisions for swaps, however. Similarly, the Bankruptcy Code
establishes separate protections for foreign futures, traded on or
subject to the rules of, a board of trade outside the United States,
through a “foreign futures commission merchant,” but has no similar
provisions for swaps.57 Although these statutory distinctions do not
necessarily preclude the Commission from constructing a “part 30-
type” regime for swaps, the Commission is not proposing to do so at
this time. However, the Commission is requesting additional comment on
constructing a “part 30-type” regime for swaps.
—————————————————————————

    55 FIA/SIFMA comment letter (Oct. 12, 2018).
    56 7 U.S.C. 6(b)(2).
    57 11 U.S.C. 761(4)(a), (11), and (12).
—————————————————————————

    3. As proposed, Sec.  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

[[Page 35465]]

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. The Commission notes that the intention would be to apply this
requirement to U.S. customer trades cleared at an exempt DCO; however,
the Commission requests comment as to whether this would pose
challenges. Furthermore, should the Commission consider removing this
requirement altogether?
    4. Is the proposed test for “substantial risk to the U.S.
financial system” the best measure of such risk? If not, please
explain why, and if there is a better measure/metric that the
Commission should use when implementing the exempt DCO regime, please
provide a rationale and supporting data, if available.
    5. What is the frequency with which the Commission should reassess
an exempt DCO’s “risk to the U.S. financial system” for purposes of
the test, and across what time period?
    6. With respect to the written notice of protections available to
U.S. persons required by proposed Sec.  39.6(b)(2), the Commission
invites comment as to the elements that should be required in any such
disclosure, and how detailed such a disclosure should be in describing
the relevant bankruptcy regimes.
    7. The Commission requests that non-U.S. clearing organizations
provide estimates of the percentage of initial margin deposited with
the clearing organization that is attributable to clearing members that
have a U.S. parent company.
    8. The Commission requests that U.S. swaps market participants
provide examples of swaps that they would like to clear at non-U.S.
clearing organizations. Relatedly, to the extent that U.S. swaps market
participants currently are engaging in these swaps on an uncleared
basis, the Commission requests information about whether counterparties
to these swaps are predominantly financial entities or commercial end-
users.
    9. The Commission requests information concerning legal,
operational, or other impediments, if any, to (1) FCMs becoming members
of exempt DCOs, and (2) exempt DCOs, and non-U.S. clearing
organizations that may choose to become exempt DCOs, complying with
cleared swaps customer funds protection and segregation rules set forth
in parts 1, 22, 39, and 190 of the Commission’s regulations.
    10. The Commission requests estimates from swap dealers, FCMs, and
their affiliates of the percentages of their swap business, measured in
terms of initial margin, that they estimate is cleared at particular
non-U.S. DCOs, either registered or exempt.
    11. In the 2018 Proposal, the Commission proposed to define “good
regulatory standing” to mean that either there has been no finding by
the home country 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 exempt DCO.58 Although the Commission
proposed to limit this to instances of “material” non-observance of
the PFMIs or other relevant home country legal requirements, the
Commission requests comment as to whether it should instead require all
instances of non-observance.
—————————————————————————

    58 See 2018 Proposal, 83 FR at 39924-39925.
—————————————————————————

    12. Commenters suggested the Commission should clarify that a non-
U.S. clearing organization clearing swaps does not trigger registration
as a DCO solely because it permits participation (direct or indirect)
by foreign branches of U.S. bank swap dealers (foreign branches).59
The commenters argued that because such participation takes place
outside the United States, it does not involve use of U.S.
jurisdictional means by the non-U.S. clearing organization. The
commenters noted that the Commission has recognized in other contexts
that applying the Dodd-Frank Act’s registration requirements to parties
transacting with foreign branches would result in competitive
disparities that are not necessary to mitigate risk to the United
States.60 The commenters also noted that subjecting non-U.S. clearing
organizations clearing swaps to registration as DCOs when they permit
participation by foreign branches discourages those non-U.S. clearing
organizations from permitting such participation, and that, to access
those non-U.S. clearing organizations, U.S. banks must incur the costs,
including the additional regulatory burden, of “subsidiarizing” their
local clearing operations.61 To date, the Commission has not
addressed directly the scope of the DCO registration requirement for
non-U.S. clearing organizations clearing swaps in the specific context
of foreign branches, and the Commission declines to do so at this time.
However, the Commission requests additional comment on whether the
Commission should address the scope of the registration requirement
under section 2(i) with respect to foreign branches, as suggested by
the commenters.
—————————————————————————

    59 See FIA/SIFMA White Paper at 36-38, attached as Appendix A
to FIA/SIFMA comment letter (Oct. 12, 2018).
    60 See id. at 37 (citing the 2013 Cross-Border Guidance at
45,324 (“The Commission understands that commenters are concerned
that foreign entities, in order to avoid swap dealer status, may
decrease their swap dealing business with foreign branches of U.S.
registered swap dealers and guaranteed affiliates that are swap
dealers. Therefore, the Commission’s policy, based on its
interpretation of Section 2(i) of the CEA, will be that swap dealing
transactions with a foreign branch of a U.S. swap dealer or with
guaranteed affiliates that are swap dealers should generally be
excluded from the de minimis calculations of non-U.S. persons that
are not guaranteed or conduit affiliates”).
    61 See id.
—————————————————————————

    13. The Commission currently does not require non-U.S. customers
clearing foreign futures or swaps at registered non-U.S. DCOs to clear
through FCMs. In addition, the Commission is proposing in this release
to permit U.S. customers to clear swaps through non-FCMs at exempt
DCOs. In light of this, should the Commission consider permitting non-
U.S. customers to clear futures and swaps through non-FCMs at U.S.
registered DCOs? In other words, should the Commission give non-U.S.
customers the option of choosing to clear futures and swaps through
local intermediaries that are clearing members of U.S. registered DCOs,
instead of requiring them to clear, directly or indirectly, through
FCMs at U.S. registered DCOs?
    14. Until now, it has been the Commission’s policy to allow U.S.
customers’ swap positions to be cleared only through registered FCMs at
registered DCOs. However, the Commission understands that an FCM may be
reluctant to participate as a direct member of a registered non-U.S.
DCO if the FCM’s affiliate is also a member of the DCO, due to
duplicative requirements that would be borne by the two affiliates. The
Commission requests comment as to alternatives to address concerns with
this approach.
    For example, where consistent with the rules of a registered DCO,
an FCM could potentially participate as a “special” member whose
obligations to the DCO could be guaranteed by its non-FCM affiliate
acting as a “traditional” member of the DCO. All customer funds would
flow directly from the FCM to the registered DCO, i.e., they would not
pass through the non-FCM affiliate.

[[Page 35466]]

Similarly, in the event of the default of a customer of the FCM, the
FCM would, nonetheless, be responsible in the first instance for making
prompt payment in full of all obligations under contracts cleared
through the FCM at the registered DCO. The guarantor affiliate’s
responsibility to perform on the guarantee would only be activated in
the event that the FCM fails promptly to perform in full with respect
to the positions it clears. In guaranteeing the FCM’s obligations, the
non-FCM affiliate would need a (subordinated) security interest in the
collateral held at the registered DCO to enable it to protect its own
interests if it is called upon to perform under that guarantee.62
Such a security interest with respect to customer collateral generally,
and, in the case of cleared swaps collateral specifically, would
necessarily be subject to the limitation that the guarantor could
access no more of the collateral than the registered DCO could use
under section 4d of the CEA and the Commissions regulations thereunder
(including, with respect to cleared swaps customer collateral, Part
22).
—————————————————————————

    62 It would arguably be consistent with such a model for other
responsibilities–e.g., payments under a mutualized guaranty fund,
assessments, participation in end-of-day closing price determination
exercises, and/or participation in default management activities–to
be performed by the guarantor affiliate.
—————————————————————————

    The Commission requests comment as to whether this approach is
viable, and the extent to which there would need to be protections in
place for the FCM, the non-FCM affiliate, FCM customers, and the
registered DCO, and, if so, what protections would be appropriate.
    In particular, the Commission further requests comment as to
whether there would need to be modifications to Sec.  22.2(d)(2), which
provides that an FCM may not impose or permit the imposition of a lien
on cleared swaps customer collateral, to accommodate this approach,
and, if so, what modifications would be most appropriate (including
providing appropriate protection for customer funds).
    15. Considering the increased demand for swap clearing and the
declining number of FCMs, are there other operational structures that
the Commission should consider to better ensure availability of swap
clearing services at both registered and exempt DCOs without
jeopardizing U.S. customer protections? If so, please describe in
detail.

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.63 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.64 The Commission has previously determined
that clearing organizations are not small entities for the purpose of
the RFA.65 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.
—————————————————————————

    63 5 U.S.C. 601 et seq.
    64 47 FR 18618 (Apr. 30, 1982).
    65 See 66 FR 45604, 45609 (Aug. 29, 2001).
—————————————————————————

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) 66 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. The Commission is requesting a new OMB control number for the
collection of information in proposed Sec.  39.6. The responses to the
collection of information would be necessary to obtain exemption from
DCO registration.
—————————————————————————

    66 44 U.S.C. 3501 et seq.
—————————————————————————

1. Application for Exemption from DCO Registration Under Proposed Sec. 
39.6
    Based on its experience in addressing petitions for exemption, the
Commission anticipates receiving one application for exemption per
year, and one request for termination of an exemption every three
years.67 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
Commission has estimated the burden hours for this proposed collection
of information as follows:
—————————————————————————

    67 The Commission has determined that one termination every
three years is a more appropriate estimate than one per year, which
was used in the information burden estimate for the 2018 Proposal.
—————————————————————————

 Application for Exemption, Including All Exhibits, Supplements
and Amendments
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 40.
    Estimated gross annual reporting burden: 40.
 Termination of Exemption
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 0.33.
    Average number of hours per report: 2.
    Estimated gross annual reporting burden: 0.66.
 Notice to Clearing Members of Termination of Exemption
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 10.33.
    Average number of hours per report: 0.1.
    Estimated gross annual reporting burden: 1.033.
2. Reporting by Exempt DCOs
    The number of 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 (4) and
one application for exemption each year. Reporting of specific events
is expected to occur infrequently. The burden is estimated
conservatively at four per year for event-specific reporting:
 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: 1.
    Estimated gross annual reporting burden: 28.
 Event-Specific Reporting
    Estimated number of respondents: 4.
    Estimated number of reports per respondent: 1.

[[Page 35467]]

    Average number of hours per report: 0.5.
    Estimated gross annual reporting burden: 2.
 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: 10.5.
3. Third-Party Reporting by Clearing Members Clearing for Unaffiliated
U.S. Persons Through Exempt DCOs
    Proposed Sec.  39.6(b)(2) would require an exempt DCO to have rules
that require any clearing member seeking to clear for an unaffiliated
U.S. person to provide written notice to, and obtain acknowledgement
from, the U.S. person prior to clearing that the clearing member is not
a registered FCM, the exempt DCO is exempt from registration with the
Commission, and the protections of the Bankruptcy Code, as defined in
Sec.  190.01 of this chapter, do not apply to the U.S. person’s funds.
The notice must explicitly compare the protections available to the
U.S. person under U.S. law and the exempt DCO’s home country regulatory
regime. The estimated burden for this requirement is based on the
average number of clearing members at four existing exempt DCOs and
three potential exempt DCOs (estimated at one applicant per year over
the next three years), clearing for an average of 10 unaffiliated U.S.
persons:
 Clearing Members Providing Written Notice to, and Obtaining
Acknowledgement From, Unaffiliated U.S. Persons
    Estimated number of respondents: 217.
    Estimated number of reports per respondent: 10.
    Average number of hours per report: 0.2.
    Estimated gross annual reporting burden: 430.
4. Reporting by Exempt DCOs in Accordance With Part 45
    Proposed Sec.  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.68 Consequently, the burden hours for the proposed collection
of information in this rulemaking have been estimated as follows:
—————————————————————————

    68 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: 1987.
    Average number of hours per report: 0.1.
    Estimated gross annual reporting burden: 1393.
    The proposed exemption for foreign intermediaries from registration
as an FCM in Sec.  3.10(c)(7) will not impose any new recordkeeping or
information collection requirements, or other collections of
information that require approval of the OMB under the PRA.

C. Cost-Benefit Considerations

1. 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.69 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.
—————————————————————————

    69 7 U.S.C. 19(a).
—————————————————————————

    The baseline for the Commission’s consideration of the costs and
benefits of this proposed rulemaking are: (1) The current status, where
the Commission has implemented a set of conditions and procedures for
granting exemptions from DCO registration, and has proposed, but not
yet codified, those conditions and procedures under Commission
regulations; 70 (2) the core principles applicable to registered DCOs
set forth in the CEA; 71 (3) the general provisions applicable to
registered DCOs under subparts A and B of Part 39; (4) Form DCO in
Appendix A to Part 39; (5) Parts 1, 22, and 40 of the Commission’s
regulations; and (6) Sec.  3.10.
—————————————————————————

    70 The Commission notes that the costs and benefits of the
proposed changes in the 2018 Proposal were discussed within that
release. Only the costs and benefits of the changes proposed in this
release are discussed in this release.
    71 7 U.S.C. 7a-1(c)(2)(A).
—————————————————————————

    The Commission notes that this consideration is based on its
understanding that the swaps market functions internationally with (1)
transactions that involve U.S. firms occurring across different
international jurisdictions; (2) some entities organized outside of the
United States that are prospective Commission registrants; and (3) some
entities that typically operate both within and outside the United
States and that follow substantially similar business practices
wherever located. Where the Commission does not specifically refer to
matters of location, the discussion of costs and benefits below refers
to the effects of the proposed regulations on all relevant swaps
activity, whether based on their actual occurrence in the United States
or on their connection with activities in, or effect on, U.S. commerce
pursuant to section 2(i) of the CEA.72
—————————————————————————

    72 Pursuant to section 2(i) of the CEA, activities outside of
the United States are not subject to the swap provisions of the CEA,
including any rules prescribed or regulations promulgated
thereunder, unless those activities either have a direct and
significant connection with activities in, or effect on, commerce of
the United States; or contravene any rule or regulation established
to prevent evasion of a CEA provision enacted under the Dodd-Frank
Act, Public Law 111-203, 124 Stat. 1376. 7 U.S.C. 2(i).
—————————————————————————

    The Commission recognizes that the proposed rules may impose costs.
The Commission has endeavored to assess the expected costs and benefits
of the proposed rulemaking in quantitative terms, including PRA-related
costs, where possible. In situations where the Commission is unable to
quantify the costs and benefits, the Commission identifies and
considers the costs and benefits of the applicable proposed rules in
qualitative terms. The lack of data and information to estimate those
costs is attributable in part to the nature of the proposed rules.
Additionally, the initial and recurring compliance costs for any
particular exempt DCO will depend on the size, existing infrastructure,
level of clearing activity, practices, and cost structure of the DCO.
    Finally, the costs and benefits of this proposal may be affected by
the Commission’s proposal to adopt a registration regime with
alternative

[[Page 35468]]

compliance 73 under which an already registered non-U.S. DCOs would
have the option of seeking an exemption from registration or applying
for registration under registration procedures with alternative
compliance. These clearing organizations would need to compare the
costs and benefits of an exemption with the costs and benefits of
registration with alternative compliance.
—————————————————————————

    73 Registration with Alternative Compliance for Non-U.S.
Derivatives Clearing Organizations, approved on July 11, 2019.
—————————————————————————

2. Proposed Amendments to Part 39
a. Summary
    Section 5b(h) of the CEA permits the Commission to exempt a non-
U.S. 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. An exempt DCO is
currently permitted to clear only proprietary positions of U.S. persons
and FCMs, and not customer positions. The proposed regulations,
however, would permit an exempt DCO to clear U.S. customer positions
under certain conditions, thereby providing more clearing options for
swaps customers.
b. Benefits and Costs
    The proposed amendments to Sec.  39.6 would allow U.S. customer
positions to be cleared at an exempt DCO, provided that they are not
cleared through a clearing member that is registered as an FCM. The
Commission believes this would increase the number of non-U.S. clearing
organizations available to clear swaps for U.S. customers and would
afford clearing members and their customers more clearing options.
Access to more clearing organizations may encourage more clearing of
swaps, while reducing the concentration risk among registered and
exempt DCOs. With this proposal and the proposal to adopt an
alternative compliance regime, U.S. persons could have even more
choices for interacting with non-U.S. clearing organizations.
    A U.S. customer clearing at an exempt DCO under proposed Sec.  39.6
would not be protected under the provisions of the Bankruptcy Code.
However, this cost is potentially mitigated by two factors. First, the
exempt DCO’s home country may have a bankruptcy regime that would
provide similar protections and be applicable in that situation.
Second, because proposed Sec.  39.6(b)(2) would require an exempt DCO
to have rules that require any clearing member seeking to clear for an
unaffiliated U.S. person to provide written notice to, and obtain
acknowledgement from, the U.S. person prior to clearing that the
protections of the Bankruptcy Code would not apply to the U.S. person’s
funds, a U.S. person seeking to clear through an exempt DCO would know
in advance that it is not protected by the Bankruptcy Code. The notice
would be required to explicitly compare the protections available to
the U.S. person under U.S. law and the exempt DCO’s home country
regulatory regime. This would allow the U.S. person to consider the
pros and cons of that bankruptcy regime prior to making a decision to
clear at a given exempt DCO.
    The possibility of U.S. customer business at exempt DCOs may
encourage non-U.S. clearing organizations that are not currently
registered or exempt DCOs to apply to become an exempt DCO. Although
there are costs involved with preparing an application for an exemption
from DCO registration as well as ongoing compliance costs for exempt
DCOs, such costs are significantly lower than the corresponding costs
applicable to registered DCOs. Because proposed Sec.  39.6 would allow
an exempt DCO to clear for U.S. customers who are currently permitted
to clear only through registered DCOs (provided that U.S. customers do
not clear through a registered FCM), the Commission anticipates that
some non-U.S. clearing organizations that are currently registered
DCOs, or that would otherwise apply to register in the future, may
choose to apply to become an exempt DCO, thus lowering their ongoing
compliance costs. Some of these cost savings may be passed on to
clearing members and customers.
    The Commission notes that, if this proposal and the proposal to
adopt an alternative compliance regime are adopted as proposed,
eligible non-U.S. clearing organizations would have a choice between
seeking an exemption from registration and registering under the
alternative compliance regime. They would also retain the option of
registering under the traditional registration procedures. Each
clearing organization would need to compare the costs and benefits of
an exemption with the costs and benefits of registration. Both
alternative compliance and exemption from registration are
significantly less costly than traditional registration. The Commission
expects that alternative compliance would be somewhat more costly than
an exemption from registration. In the PRA analyses of the two
proposals, the Commission estimated that it would take about 100 hours
to register under the alternative procedures as compared to 40 hours to
apply for an exemption. The daily, quarterly, and event-specific
reporting requirements are estimated to impose the same hourly burden
for both categories with the exception of swap data reporting under
part 45. Registered DCOs subject to alternative compliance would be
subject to the same part 45 reporting requirements as other registered
DCOs, while exempt DCOs would only have to report data regarding the
two swaps resulting from the novation of an original swap previously
reported to an SDR. In the PRA section for this release, the Commission
estimates that the part 45 reporting burden for an exempt DCO would be
about one quarter as much as the burden on a registered DCO. Both
exempt DCOs and registered DCOs subject to alternative compliance would
primarily be subject to their home country regulatory regimes, but
registered DCOs subject to alternative compliance would also be held to
certain requirements set forth in the CEA and Commission regulations,
including, for example, subpart A of part 39 and Sec.  39.15. The
extent to which these additional requirements would increase costs on
registered DCOs subject to alternative compliance would depend on the
extent to which these requirements would exceed the legal requirements
of their home countries and the extent to which registered DCOs subject
to alternative compliance would have to change their practices.
    While the alternative compliance regime is more costly than an
exemption, it would provide benefits that are not currently available
to exempt DCOs or those that clear through an exempt DCO. For example,
a DCO subject to alternative compliance would be permitted to clear for
U.S. persons clearing through an FCM, and such U.S. persons would have
the benefit of U.S. bankruptcy protection. Therefore, unlike exempt
DCOs, DCOs subject to alternative compliance and their clearing members
would not incur the costs associated with proposed Sec.  39.6(b)(2)
under which exempt DCOs would be required to have rules requiring their
clearing members to provide written notice of the bankruptcy
protections available to U.S. persons. An eligible clearing
organization may choose to register under the alternative compliance
regime over seeking an exemption if it determines that the

[[Page 35469]]

benefits of FCM customer clearing would justify the extra costs of
alternative compliance relative to an exemption.
    Registered DCOs may face a competitive disadvantage as a result of
this proposal (as is the case with the proposal to adopt an alternative
compliance regime). A registered DCO subject to full Commission
regulation and oversight may have higher ongoing compliance costs than
an exempt DCO. This competitive disadvantage is mitigated by the fact
that exempt DCOs would, as a precondition of such exemption, be
required to be subject to comparable, comprehensive supervision and
regulation by a home country regulator that is likely to impose costs
similar to those associated with Commission regulation. Such exempt
DCOs, then, may have compliance costs in their home countries that
registered DCOs might not.
    FCMs may also face a competitive disadvantage as a result of this
proposal, as they would not be permitted to clear customer trades at an
exempt DCO. To the extent that their customers shift their clearing
activity from registered DCOs to exempt DCOs, or otherwise reduce their
clearing activity at registered DCOs as a result of this proposal, FCMs
would lose business. As discussed above, however, the Commission
believes there may be costs to customers if they were permitted to
clear through an FCM at an exempt DCO, due to the uncertainty as to the
bankruptcy protection customers would receive. The Commission believes
that the exempt DCO framework would provide U.S. persons with
additional options regarding the trading and clearing of swap
transactions. The ability of U.S. persons to use foreign intermediaries
to carry their accounts for clearing at exempt DCOs under proposed
Sec.  3.10(c)(7) would potentially expand the number of intermediaries
that currently clear swaps for U.S. persons. The expansion of the
exempt DCO framework to include foreign intermediaries clearing for
customers has the potential for increasing the number of market
intermediaries clearing for U.S. persons and reducing the concentration
of U.S. customer funds in a small number of FCMs.
    The proposal would also provide U.S. customers with access to swaps
that are cleared in foreign jurisdictions that the U.S. customers
otherwise would not be able to access. As discussed above, U.S.
customers’ access to foreign cleared swaps markets is restricted to
foreign swaps cleared by registered DCOs.
    The Commission does not anticipate that the proposal would impose
costs on non-FCM clearing members or customers. The proposal could
increase the number of exempt DCOs 74 and permit some registered DCOs
that wish to clear for U.S. customers to seek an exemption from
registration, which may allow them to pass on cost savings to clearing
members and customers. Therefore, the Commission believes that non-FCM
clearing members and customers may face reduced costs as a result of
this proposal. To the extent that exempt DCOs do not save costs
relative to registered DCOs, or do not pass cost savings to their
clearing members or customers, the Commission notes that clearing
members and customers could simply continue clearing through
traditionally registered DCOs, likely without any change in costs.
—————————————————————————

    74 Any increase in the number of exempt DCOs would depend in
part on the extent to which eligible clearing organizations choose
to seek an exemption over registering under the alternative
compliance regime (assuming both proposals are adopted).
—————————————————————————

    The Commission does not believe that the proposal would materially
increase the risk to the U.S. financial system. Registered DCOs that
pose substantial risk to the U.S. financial system would not be
eligible for an exemption from registration.75 Furthermore, a non-
U.S. clearing organization cannot obtain an exemption from registration
unless the Commission determines that it is subject to comparable,
comprehensive supervision and regulation by its home country regulator,
meaning that the non-U.S. clearing organization would be subject to
regulation comparable to that imposed on registered DCOs. An MOU or
similar arrangement must be in effect between the Commission and the
exempt DCO’s home country regulator, allowing the Commission to receive
information from the home country regulator to help monitor the exempt
DCO’s continuing compliance with its legal obligations. The Commission
also notes that foreign regulators have a strong incentive to ensure
the safety and soundness of the clearing organizations that they
regulate, and their oversight, combined with the DCO exemption regime,
will enable the Commission to more efficiently allocate its own
resources to the oversight of traditionally registered DCOs.
—————————————————————————

    75 It may also be possible that the Commission’s proposed test
for “substantial risk to the U.S. financial system” may not be
properly calibrated, allowing certain exempt DCOs to operate in U.S.
markets when they may pose sufficient risk to the U.S. financial
system to warrant greater oversight by the Commission. However, the
Commission believes that even if these exempt DCOs are permitted to
clear for U.S. customers, this risk will be mitigated by the
Commission’s determination that the exempt DCO is subject to
comparable, comprehensive supervision and regulation by its home
country regulator, as discussed above, and the Commission’s access
to certain daily and periodic reports regarding the exempt DCO.
—————————————————————————

    Finally, the proposed regulations would promote and perhaps
encourage international comity by showing deference to non-U.S.
regulators in the oversight of non-U.S. clearing organizations that
clear for U.S. customers. If regulators in other countries similarly
defer to U.S. oversight of U.S. registered DCOs active in overseas
markets, the reduced registration and compliance burdens on such DCOs
would be an additional benefit of the proposed regulations.
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
    The proposed regulations would not materially reduce the
protections available to market participants and the public because
they would, among other things: (i) Require that an exempt DCO not pose
substantial risk to the U.S. financial system; (ii) require that an
exempt DCO’s clearing members provide written notice to, and obtain
acknowledgement from, their U.S. customers prior to clearing that the
protections of the Bankruptcy Code do not apply to the U.S. customer’s
funds; and (iii) explicitly authorize the Commission to modify or
terminate an order of exemption on its own initiative if it determines
that there are changes to or omissions in material facts or
circumstances pursuant to which the order of exemption was issued, or
that any of the terms and conditions of the order of exemption have not
been met. Collectively, these provisions, along with previously
proposed regulations, would protect market participants and the public
by ensuring that exempt DCOs would be subject to the internationally-
recognized PFMI standards and do not pose substantial risk to the U.S.
financial system. Although U.S. persons clearing through an exempt DCO
would not have the protections of the Bankruptcy Code, such persons
would be required to acknowledge this in advance, allowing them to
conduct the necessary due diligence to determine whether it is worth
giving up such protections in exchange for those that may be offered
under the applicable foreign bankruptcy regime. Although the Commission
acknowledges the possibility that some foreign regulatory regimes may
ultimately prove to be less effective than that of the United States,
the Commission believes that this risk is mitigated for the reasons
discussed above.

[[Page 35470]]

b. Efficiency, Competitiveness, and Financial Integrity
    The proposed regulations would promote operational efficiency by
permitting exempt DCOs to clear swaps for U.S. customers without having
to prepare and submit an application for DCO registration, which
involves the submission of extensive documentation to the Commission.
In addition, adopting the proposed regulations might prompt other
regulators to adopt similar rules that would defer to the Commission in
the regulation of U.S. registered DCOs operating outside the United
States, which could increase competitiveness by reducing the regulatory
burdens on such DCOs.
    The proposed regulations may also promote competition among non-
U.S. clearing organizations because they would hold exempt DCOs to the
internationally-recognized standards set forth in the PFMIs. This would
allow such clearing organizations to compete with each other under
comparable regulatory regimes. Furthermore, by allowing exempt DCOs to
clear for U.S. customers, the proposed regulations would promote
competition by increasing the number of DCOs available to clear for
U.S. customers. As noted above, however, the proposed regulations may
reduce competition among intermediaries that would otherwise clear for
U.S. customers, as FCMs would be prohibited from clearing customer
trades at an exempt DCO.
    The proposed regulations would be expected to maintain the
financial integrity of swap transactions cleared by exempt DCOs because
such DCOs would be subject to supervision and regulation by their home
country regulator within a legal framework that is comparable to that
applicable to registered DCOs under the CEA and Commission regulations
and that is comprehensive. In addition, the proposed regulations may
contribute to the financial integrity of the broader financial system
by spreading the potential risk of particular swaps among a greater
number of registered and exempt DCOs, thus reducing concentration risk.
However, the Commission acknowledges that foreign intermediaries
clearing for customers at an exempt DCO may not be subject to the same
level of effective supervision as an FCM.
c. Price Discovery
    Price discovery is the process of determining the price level for
an asset through the interaction of buyers and sellers and based on
supply and demand conditions. The Commission has not identified any
impact that the proposed regulations would have on price discovery.
This is because price discovery occurs before a transaction is
submitted for clearing through the interaction of bids and offers on a
trading system or platform, or in the over-the-counter market. The
proposed rule would not impact requirements under the CEA or Commission
regulations regarding price discovery.
d. Sound Risk Management Practices
    The proposed regulations would continue to encourage sound risk
management practices because exempt DCOs would be subject to the risk
management standards set forth in the PFMIs. In addition, a non-U.S.
clearing organization that poses substantial risk to the U.S. financial
system would not be eligible for an exemption from registration.
e. Other Public Interest Considerations
    The Commission notes the public interest in access to clearing
organizations outside of the United States in light of the
international nature of many swap transactions. The proposed
regulations might encourage international comity by deferring, under
certain conditions, to the regulators of other countries in the
oversight of home country clearing organizations. The Commission
expects that such regulators will defer to the Commission in the
supervision and regulation of registered DCOs domiciled in the United
States, thereby reducing the regulatory and compliance burdens to which
such DCOs are subject.
4. Consideration of Alternatives
    The Commission considered alternatives suggested by commenters on
the 2018 Proposal for allowing U.S. customers to clear through exempt
DCOs. One commenter suggested that the Commission amend the definition
of “clearing organization” under part 190 of the Commission’s
regulations to provide that it has the same meaning as that set forth
in section 761(2) of the Bankruptcy Code, but “registered under the
CEA” in that statute should be read to mean “registered or exempt
from registration under the CEA.” 76 In the alternative, the
commenter also suggested that the Commission assert by regulation that
an exempt DCO counts as a class or type of registered DCO for purposes
of bankruptcy law.77 Other commenters 78 proposed a regime for
swaps similar to that for futures, including “a clearing structure in
which a U.S. customer clears through a U.S. FCM that maintains the U.S.
customer’s positions and margin in a customer omnibus account held by a
non-U.S. clearing member that is not registered as an FCM.” 79
—————————————————————————

    76 International Swaps and Derivatives Association, Inc.
comment letter at 3 (Oct. 12, 2018).
    77 Id. at 4.
    78 FIA/SIFMA comment letter (Oct. 12, 2018); ASX Clear
(Futures) Pty comment letter (Oct. 11, 2018); and Japan Securities
Clearing Corporation comment letter (Oct. 10, 2018).
    79 FIA/SIFMA comment letter at 4 (Oct. 12, 2018).
—————————————————————————

    As discussed above, the Commission, at this time, is not proposing
these alternatives given uncertainty as to the extent to which U.S.
customers would be protected under the Bankruptcy Code in the event of
an FCM bankruptcy proceeding.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.80
—————————————————————————

    80 7 U.S.C. 19(b).
—————————————————————————

    The Commission believes that the public interest to be protected by
the antitrust laws is the promotion of competition. The Commission
requests comment on whether the proposed rulemaking implicates any
other specific public interest to be protected by the antitrust laws.
The Commission has considered the proposed rulemaking to determine
whether it is anticompetitive. The Commission believes that the
proposed rulemaking may promote greater competition in swap clearing
because it would permit exempt DCOs to clear swaps for U.S. customers
under certain circumstances, which would provide greater access to
clearing and might encourage more non-U.S. clearing organizations to
seek an exemption from registration to clear the same types of swaps
for U.S. customers that are currently cleared by registered DCOs. The
Commission is mindful of the potential competitive disadvantage for
FCMs, however, as customers would not be permitted to clear through
FCMs at exempt DCOs, but this is due to uncertainty of bankruptcy
protection for customer funds held at an FCM. The Commission further
notes that the proposal may increase the number of market
intermediaries clearing for U.S. persons and reduce the concentration
of U.S. customer funds in a small number of FCMs.
    The Commission has not identified any less anticompetitive means of

[[Page 35471]]

achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting the
proposed rules.

List of Subjects

17 CFR Part 3

    Definitions, Consumer protection, Foreign futures, Foreign options,
Registration requirements.

17 CFR Part 39

    Clearing, Customer protection, Derivatives clearing organization,
Exemption, Procedures, Registration, Swaps.

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 3–REGISTRATION

0
1. The authority citation for part 3 continues to read as follows:

    Authority:  5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1,
6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12,
12a, 13b, 13c, 16a, 18, 19, 21, 23.

0
2. Amend Sec.  3.10 by reserving paragraph (c)(6) and adding paragraph
(c)(7) to read as follows:

Sec.  3.10   Registration of futures commission merchants, retail
foreign exchange dealers, introducing brokers, commodity trading
advisors, commodity pool operators, swap dealers, major swap
participants and leverage transaction merchants.

* * * * *
    (c) * * *
    (6) [Reserved].
    (7)(i) A person located outside the United States, its territories
or possessions is not required to register as a futures commission
merchant if it accepts funds from a U.S. person to margin, guarantee,
or secure swap transactions that are cleared by a derivatives clearing
organization that is exempt from registration pursuant to section 5b(h)
of the Act and Sec.  39.6 of this chapter.
    (ii) A person exempt from registering as a futures commission
merchant in accordance with paragraph (c)(7)(i) of this section is not
required to comply with those provisions of the Act and of the rules,
regulations, or orders thereunder applicable solely to any registered
futures commission merchant or any person required to be so registered.
    (iii) A person exempt from registering as a futures commission
merchant in accordance with paragraph (c)(7)(i) of this section may not
engage in other activities requiring registration as a futures
commission merchant or voluntarily register as a futures commission
merchant.
    (iv) A person exempt from registering as a futures commission
merchant in accordance with paragraph (c)(7)(i) of this section must be
a clearing member of an exempt derivatives clearing organization and
must directly clear the swap transactions of the U.S. person at an
exempt derivatives clearing organization.
    (v) A person exempt from registering as a futures commission
merchant in accordance with paragraph (c)(7)(i) of this section may
provide commodity trading advice to U.S. persons without registering as
a commodity trading advisor, provided that, the commodity trading
advice is provided solely with respect to swap transactions that are
cleared by an exempt derivatives clearing organization.
* * * * *

PART 39–DERIVATIVES CLEARING ORGANIZATIONS

0
3. The authority citation for part 39 is revised to read as follows:

    Authority: 7 U.S.C. 2, 7a-1, and 12a(5); 12 U.S.C. 5464; 15
U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, title VII, Sec.  752, July
21, 2010, 124 Stat. 1749.

0
4. 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
5. In Sec.  39.2, add the definitions of “Exempt derivatives clearing
organization,” “Good regulatory standing,” “Home country,” “Home
country regulator,” “Principles for Financial Market
Infrastructures,” and “Substantial risk to the U.S. financial
system” 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 of this chapter.
* * * * *
    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:
    (1) In the case of an exempt derivatives clearing organization,
either 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
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; or
    (2) In the case of a derivatives clearing organization registered
through the process described in Sec.  39.3(a)(3) of this part, either
there has been no finding by the home country regulator of material
non-observance of the relevant home country legal requirements, or
there has been a finding by the home country regulator of material non-
observance of the 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.
* * * * *
    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

[[Page 35472]]

Payments and Market Infrastructures and the Technical Committee of the
International Organization of Securities Commissions in April 2012.
* * * * *
    Substantial risk to the U.S. financial system means, with respect
to a derivatives clearing organization organized outside of the United
States, that (1) the derivatives clearing organization holds 20% or
more of the required initial margin of U.S. clearing members for swaps
across all registered and exempt derivatives clearing organizations;
and (2) 20% or more of the initial margin requirements for swaps at
that derivatives clearing organization is attributable to U.S. clearing
members; provided, however, where one or both of these thresholds are
close to 20%, the Commission may exercise discretion in determining
whether the derivatives clearing organization poses substantial risk to
the U.S. financial system. For purposes of this definition and
Sec. Sec.  39.6 and 39.51 of this chapter, U.S. clearing member means a
clearing member organized in the United States, a clearing member whose
parent company is organized in the United States, or a futures
commission merchant.
* * * * *
0
6. 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 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;
    (2) The derivatives clearing organization does not pose substantial
risk to the U.S. financial system, as determined by the Commission; and
    (3) 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 for U.S. persons. The exempt derivatives clearing
organization shall have rules providing that:
    (i) An intermediary that clears swaps for a U.S. person may not be
registered with the Commission as a futures commission merchant; and
    (ii) 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) Notice of protections available to U.S. persons. The exempt
derivatives clearing organization shall have rules that require any
clearing member seeking to clear for an unaffiliated U.S. person to
provide written notice to, and obtain acknowledgement from, the U.S.
person prior to clearing that the clearing member is not a registered
futures commission merchant, the exempt derivatives clearing
organization is exempt from registration with the Commission, and the
protections of the Bankruptcy Code, as defined in Sec.  190.01(c) of
this chapter, do not apply to the U.S. person’s funds. The notice must
explicitly compare the protections available to the U.S. person under
U.S. law and the exempt derivatives clearing organization’s home
country regulatory regime.
    (3) Open access. The exempt derivatives clearing organization shall
have rules with respect to swaps to which one or more of the
counterparties is a U.S. person that 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.
    (4) 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 a clearing member, of the exempt derivatives clearing
organization; and
    (iii) Promptly inform the Commission of any change in its
designated and authorized agent.
    (5) Compliance. The exempt derivatives clearing organization shall
comply, and shall demonstrate compliance as requested by the
Commission, with any condition of its exemption.
    (6) 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

[[Page 35473]]

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.
    (7) 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. To the extent the exempt derivatives clearing organization is
unable to provide to the Commission an unconditional certification, it
must identify the underlying material non-observance of the Principles
for Financial Market Infrastructures and identify whether and how such
non-observance has been or is being resolved by means of corrective
action taken by the exempt derivatives clearing organization.
    (8) Representation of good regulatory standing. On an annual basis,
within 60 days following the end of its fiscal year, an exempt
derivatives clearing organization shall request and the Commission must
receive from a home country regulator a written representation that the
exempt derivatives clearing organization is in good regulatory
standing.
    (9) Other conditions. The Commission may condition an exemption on
any other facts and circumstances it deems relevant.
    (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) of this
chapter.
    (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 with respect to swaps:
    (A) Total initial margin requirements for all clearing members;
    (B) Initial margin requirements and initial margin on deposit for
each U.S. clearing member, by house origin and by each customer origin,
and by each individual customer account;
    (C) With respect to an intermediary that clears swaps for a U.S.
person, initial margin requirements and initial margin on deposit for
each individual customer account of each U.S. person; and
    (D) Daily variation margin, separately listing the mark-to-market
amount collected from or paid to each U.S. clearing member, by house
origin and by each customer origin, and by each individual customer
account; 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 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.
    (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 compliance 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 clearing member 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 amount of the clearing member’s financial
obligation; provided, however, if the defaulting clearing member is a
U.S. clearing member, or clears for a U.S. person, the notice shall
also include the name of the defaulting clearing member and, as
applicable, the name(s) of the U.S. person(s) for whom the clearing
member clears, and a list of the positions held by the defaulting
clearing member and, as applicable, the positions held by the U.S.
person(s) for whom the clearing member clears; and
    (viii) Notice of action taken against a U.S. clearing member 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

[[Page 35474]]

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:
    (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 the 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 draft of the applicant’s rules that meet the requirements
of paragraphs (b)(1), (b)(2), (b)(3), and (d) of this section, and a
draft of the notice that meets the requirements of paragraph (b)(2) 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)(4) 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; draft rules that meet the requirements of
paragraphs (b)(1), (b)(2), (b)(3), and (d) of this section, as
applicable; the draft notice that meets the requirements of paragraph
(b)(2) 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 or termination of exemption upon Commission
initiative. (1) The Commission may, in its discretion and upon its own
initiative, terminate or modify the terms and conditions of an order of
exemption from derivatives clearing organization registration if the
Commission determines that there are changes to or omissions in
material facts or circumstances pursuant to which the order of
exemption was issued, or that any of the terms and conditions of its
order of exemption have not been met, including, but not limited to,
the requirement that:
    (i) The exempt derivatives clearing organization observes the
Principles for Financial Market Infrastructures in all material
respects;
    (ii) The exempt derivatives clearing organization is subject to
comparable, comprehensive supervision and regulation by its home
country regulator; or
    (iii) The exempt derivatives clearing organization does not pose
substantial risk to the U.S. financial system.
    (2) The Commission shall provide written notification to an exempt
derivatives clearing organization that it is considering whether to
terminate or modify an exemption pursuant to this paragraph and the
basis for that consideration.
    (3) The exempt derivatives clearing organization may respond to the
notification in writing no later than 30 business days following
receipt of the notification, or at such later time as the Commission
permits in writing.
    (4) Following receipt of a response from the exempt derivatives
clearing organization, or after expiration of the time permitted for a
response, the Commission may:
    (i) Issue an order of termination, effective as of a date to be
specified therein. Such specified date shall be intended to provide the
exempt derivatives clearing organization with a reasonable amount of
time to wind

[[Page 35475]]

down its swap clearing services for U.S. persons;
    (ii) Issue an amended order of exemption that modifies the terms
and conditions of the exemption; or
    (iii) Provide written notification to the exempt derivatives
clearing organization that the exemption will remain in effect without
modification to the terms and conditions of the exemption.
    (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 an application for registration in
accordance with Sec.  39.3(a)(2) or Sec.  39.3(a)(3), as applicable, 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.

PART 140–ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0
7. 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
8. Amend Sec.  140.94 by:
0
a. Revising the introductory text of paragraph (c);
0
b. Redesignating paragraphs (c)(4) through (c)(13) as paragraphs (c)(5)
through (c)(14); and
0
c. Adding 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 or terminate an exemption under Sec.  39.6(f)(4) of
this chapter; and
    (iv) Terminate an exemption under Sec.  39.6(g)(3) of this chapter.
* * * * *

    Issued in Washington, DC, on July 12, 2019, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

    Note: The following appendices will not appear in the Code of
Federal Regulations.

Appendicies to Exemption From Derivatives Clearing Organization
Registration–Commission Voting Summary, Chairman’s Statement, and
Commissioners’ Statements

Appendix 1–Commission Voting Summary

    On this matter, Chairman Giancarlo, and Commissioners Quintenz
and Stump voted in the affirmative. Commissioners Behnam and
Berkovitz voted in the negative.

Appendix 2–Statement of Chairman J. Christopher Giancarlo

    The proposal would provide a non-U.S. DCO that does not pose a
substantial risk to the United States, and that is subject to
“comparable, comprehensive supervision and regulation” by
appropriate regulators in the DCO’s home jurisdiction, the option to
be an exempt DCO. This proposal supplements regulations proposed by
the Commission in August 2018 that would codify the policies and
procedures that the Commission is currently following with respect
to granting exemptions from registration as a DCO.1 The proposal
is grounded in section 5b(h) of the Commodity Exchange Act,2 which
provides that non-U.S. clearing organizations that are subject to
“comparable, comprehensive supervision and regulation” by a home
country regulator are eligible for an exemption from DCO
registration.3
—————————————————————————

    1 Exemption From Derivatives Clearing Organization
Registration, 83 FR 39923 (Aug. 13, 2018).
    2 7 U.S.C. 7a-1(h).
    3 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. Further, the Commission
has deemed a supervisory and regulatory framework that conforms to
the Principles for Financial Market Infrastructures to be comparable
to, and as comprehensive as, the supervisory and regulatory
requirements applicable to registered DCOs.
—————————————————————————

    Unlike the current CFTC approach to exempt DCOs, the proposal
would permit exempt DCOs to offer customer clearing to U.S. eligible
contract participants–i.e., non-retail customers–through foreign
clearing members that are not registered as FCMs. To be eligible for
this exemption, the DCO and the FCM would be required, among other
things, to provide clear and succinct disclosure to U.S. eligible
contract participants on the bankruptcy protections that would be
afforded to them under relevant non-U.S. law. To facilitate this
proposal, the Commission also is proposing to allow persons located
outside of the United States to accept funds from U.S. persons to
margin swaps cleared at an exempt DCO, without registering as FCMs.
    This proposal is similar to the CFTC’s long-standing approach to
foreign futures clearing, which provides U.S. customers, including
retail customers, with the ability to opt out of the bankruptcy
protections offered under U.S. law to foreign futures funds. I
believe it is wholly appropriate to permit U.S. eligible contract
participants that are institutional, not retail, investors to
exercise business judgment in this area. In other words, I believe
it is appropriate to afford these institutional investors the
opportunity to weigh the potential economic benefits of accessing
products cleared at a non-U.S. CCP through a non-U.S. intermediary
that would otherwise not be available to them, with the attendant
potential risks relating to the use of a non-FCM intermediary. These
are risks that institutional–and potentially retail–investors in
those non-U.S. markets take every day when they choose to clear
swaps

[[Page 35476]]

through those non-U.S. intermediaries at non-U.S. CCPs.
    Some non-U.S. DCOs that are currently exempt from registration
may elect to remain exempt or register under the full registration
regime with alternative compliance, discussed earlier. In either
case, they would be able to offer customer clearing, but in
different ways. Exempt DCOs would be able to offer customer clearing
to U.S. eligible contract participants through non-U.S.
intermediaries operating in their markets, while fully registered
DCOs subject to alternative compliance would be able to permit
customer clearing through U.S. FCMs. In both cases, in terms of
regulatory oversight of the DCO, the CFTC would defer to the primary
regulator or regulators of the DCO.
    I thank CFTC staff for their fine work that resulted in today’s
proposal. I look forward to reviewing comments from the public.

Appendix 3–Statement of Commissioner Brian Quintenz

    Today’s supplemental proposal to permit exempt DCOs to clear
swaps for U.S. customers will provide greater choice and flexibility
to market participants. Currently, an exempt DCO is only authorized
to clear the proprietary positions of its U.S. clearing members.
Today’s proposal will provide U.S. customers, like U.S. asset
managers, insurance companies, and others, with increased access to
foreign markets and an enhanced ability to hedge their risk.
    I strongly support this proposal’s inclusion of specific
criteria that the Commission will use to determine whether a foreign
DCO poses a “substantial risk to the U.S. financial system,” and
would therefore be ineligible for an exemption from registration.
Today’s rulemaking also appropriately streamlines exempt DCO
reporting requirements to focus solely on the information necessary
to evaluate “substantial risk” and to assess the extent to which
the foreign DCO is clearing U.S. business.
    I look forward to receiving comments on additional possibilities
for U.S. customers to clear on exempt DCOs. In particular, I am
interested to hear from commenters about whether U.S. futures
commission merchants (FCMs) should be permitted to provide their
U.S. customers with access to exempt DCOs, and, if so, how the
protection of U.S. customer funds should be addressed. I also
welcome comment about whether a foreign DCO, neither registered with
the CFTC nor exempted from CFTC registration, should be permitted to
clear for a foreign branch of a U.S. bank that is registered with
the CFTC as a swap dealer. Finally, I look forward to hearing from
market participants about whether a foreign clearing member of a
foreign DCO should be permitted to sponsor a U.S. FCM’s membership
to the foreign DCO in order to facilitate access by U.S. customers.

Appendix 4–Dissenting Statement of Commissioner Rostin Behnam

Introduction

    I respectfully dissent from the Commodity Futures Trading
Commission’s (the “Commission” or “CFTC”) supplemental notice of
proposed rulemaking addressing the granting of exemptions from
registration as a derivatives clearing organization (“DCO”) to
non-U.S. clearing organizations and further permitting such “exempt
DCOs” to clear swaps for U.S. customers through intermediaries that
would be wholly outside the Commission’s direct regulation and
oversight (the “Supplemental Proposal”). While I supported the
Commission’s 2018 proposal to codify its current policies and
procedures for granting exemptions from DCO registration 1 as a
positive step towards increased cross-border cooperation and
deference to our foreign regulatory counterparts, I cannot support
it in its “supplemental” form. The Supplemental Proposal is not
the product of internal consensus and its brief history and
questionable timeline signal a lack of appropriate scrutiny and
evaluation of the potential consequences of taking these first steps
towards diverging from the customer protection model provided by the
Commodity Exchange Act (“CEA” or “the Act”) and U.S. Bankruptcy
Code.2
—————————————————————————

    1 Exemption from Derivatives Clearing Organization
Registration, 83 FR 39923 (proposed Aug. 13, 2018) (the “2018
Proposal”).
    2 The Supplemental Proposal was drafted ad hoc in a rash
attempt to launch a conception of how U.S. swaps customers may fare
outside the protections offered through operation of the U.S
Bankruptcy Code. The critical financial, market, consumer
protection, and systemic risk issues raised by the Supplemental
Proposal should be considered in the context of a more fulsome and
informed discussion.
—————————————————————————

    I support the Commission’s endeavor to explore ways to adapt
and–if appropriate–seek to alter the current intermediary
structure established under the CEA and Commission regulations to
better accommodate both U.S. customer demand for increased access to
clearing in foreign jurisdictions and evolving global swaps market
structures. However, I cannot support the Commission’s proposed use
of its limited public interest exemptive authority to create a
regulatory easement as a short cut to legal certainty in furtherance
of such efforts and to the detriment of U.S. customers, market
participants, and the financial system.
    If the Commission believes it is appropriate at this time to
provide U.S. customers with greater access to non-U.S. swap markets,
then we can and should engage in a more careful analysis of options,
assessment of alternatives, and evaluation of consequences. Policy
decisions made in haste amid ongoing uncertainty undermine the
regulatory process and our accountability. As I have said before,
when evaluating our regulatory landscape and making critical
determinations as to which parts to revisit, which to complete, and
how we can guide legislation and develop regulations to address
market evolution and developments–regardless of the underlying
impetus, we must hold one another accountable, adhere to appropriate
process, be wary of false progress, and engage in genuine dialog.3
Today’s Supplemental Proposal in its timing, in its limitations, and
in its uncertainty, is at best, false progress and, at worst, the
false promise of benefits that will never be realized.
—————————————————————————

    3 See, e.g., Rostin Behnam, Accountability & Moving Forward,
Remarks of Commissioner Rostin Behnam at the FIA Boca 2018
International Futures Industry 43rd Annual Conference, Boca Raton,
Florida (Mar. 15, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam4.
—————————————————————————

    The substantial revisions to the Supplemental Proposal
throughout these last several weeks with their various additions and
carefully crafted excerpts do little to bolster the justifications
and rationales put forth in advocacy of the proposed change in
policy and attendant exemptive relief that would permit U.S.
customer positions to be cleared at an exempt DCO through a foreign
intermediary that is not registered as a futures commission merchant
(“FCM”). Nowhere is this clearer than in the Request for
Comments.4
—————————————————————————

    4 Supplemental Proposal at Section V.
—————————————————————————

    The Supplemental Proposal utilizes its Request for Comments
primarily to explore why this proposal represents the regulatory
route that will cause the least amount of harm by soliciting the
public for their best arguments as to the operation of the U.S.
Bankruptcy Code (and relevant laws), and to solicit feedback on
eligibility elements and several conditions of the exemption for
DCOs. However, it also introduces and requests comment on
alternatives to the Commission’s longstanding policy (consistent
with longstanding interpretation of the CEA) of allowing U.S.
customers’ swap positions to be cleared only through registered FCMs
at registered DCOs. While this is an entirely appropriate issue to
raise in the context of a proposed rulemaking (or other formal
request for public comment such as an advance notice of proposed
rulemaking, request for input, or concept release), the
effectiveness of any comments received will be largely lost in this
“supplement” since the line of questioning fails to accentuate–or
itself propose–a rule from which any final Commission action could
be taken as a logical outgrowth.5 A line of questioning that seeks
to introduce potentially new policy considerations for future
consideration by a Commission in the midst of changing leadership is
ill-fated, detracts commenters from the critical issues at hand, and
undermines the integrity of the 2018 Proposal and the Supplemental
Proposal.6
—————————————————————————

    5 See, e.g. CSX Transportation, Inc. v. Surface Transportation
Board, 584 F.3d 1076, 1079-81 (DC Cir. 2009) (“A final rule
qualifies as a logical outgrowth `if interested parties `should have
anticipated’ that the change was possible, and thus reasonably
should have filed their comments on the subject during the notice-
and-comment period”).
    6 It seems particularly unfortunate in this instance where
some extra time and staff attention may have permitted the
Commission to deliberate and vote to issue an entirely separate
proposal aimed at addressing timely and emerging concerns in the FCM
community.
—————————————————————————

When You Are Boxed in by Uncertainty

    Though I have many concerns with the Supplemental Proposal, I am
most concerned with the Commission’s contorted plan to permit DCOs
that it would exempt from registration to clear swaps for U.S.
customers through unregistered foreign intermediaries. This
juggernaut of a proposal gained momentum from the ongoing
uncertainty

[[Page 35477]]

regarding the extent to which U.S. customers’ funds would be
protected under the U.S. Bankruptcy Code when clearing swaps at an
unregistered DCO. While the Commission’s decision to put a premium
on legal certainty is laudable, it is not clear to me that the
Commission ought to do so if it undermines key components of the
CEA’s customer protection regime aimed at protecting both U.S.
customers and the stability of our markets and misaligns the
Commission’s already questionable use of its public interest
exemptive authority with the purposes of the Act.7 It appears that
in attempting to deliver on the concept of permitting exempt DCOs to
clear swaps for FCM customers–introduced just months ago by the
Commission as a single question in the 2018 Proposal 8–the
Commission found itself boxed in by uncertainty. The only way out
would be to remove any and all doubt that a U.S. customer who seeks
to clear swaps on an exempt DCO will have to do so through a foreign
intermediary not subject to CFTC regulation or oversight and outside
the protections of the U.S Bankruptcy Code.9
—————————————————————————

    7 See H.R. Rep. No. 102-978, 102d Cong. 2d Sess. 80 (1992).
    8 2018 Proposal, 83 FR at 39930.
    9 Indeed, the Commission succinctly dismisses the
consideration of proposed alternatives suggested by commenters on
the 2018 Proposal “given the uncertainty as to extent to which U.S.
customers would be protected under the Bankruptcy Code . . .”
Supplemental Proposal at VI.C.4.
—————————————————————————

Ongoing Uncertainty

    The Supplemental Proposal would permit U.S. customers to clear
at an exempt DCO only through a foreign intermediary and not through
an FCM due to uncertainty regarding the protection of U.S. customer
funds in the event of an insolvency of the FCM. The Commission is
continuing to consider and evaluate this issue, consider alternative
approaches, and identify possible risks to customers that may result
from that uncertainty. While this approach was selected as a means
to provide the greatest clarity with regard to the Commission’s
current understanding of the U.S. Bankruptcy Code, given that it
necessitates the Commission’s exercise of exemptive authority to
permit foreign intermediaries to accept U.S. customer funds to clear
swaps without having to register as FCMs (or having to comply with
Commission rules and regulations applicable solely to registered
FCMs), it would seem, on its face, to be inconsistent with the
customer protection regime established under the CEA and Commission
regulations.10 This should give the Commission ample reason to
pause its consideration of moving forward on the Supplemental
Proposal at this time. Inexplicably, it does not. And instead, the
Commission is soliciting comments from the public on a number of
issues involving the interpretation and applicability of the U.S.
Bankruptcy Code (or other relevant laws) and the clearing of swaps
customer funds deposited at an exempt DCO by an FCM directly or
through a foreign member of the exempt DCO.11
—————————————————————————

    10 See Supplemental Proposal at III.C.2.
    11 See Supplemental Proposal at V. I appreciate that asking
these direct questions encourages interested parties and perhaps
even bankruptcy scholars to provide their best interpretations and
arguments. However, it is not clear to me that the U.S. Bankruptcy
Court would be obliged to defer to such interpretations–even if
accepted by the Commission. And that, unless the Commission aims to
seek a legislative solution to alleviate the uncertainty presented
by U.S. customer clearing on exempt DCOs–which it has not presented
as a viable alternative in this Supplemental Proposal, I cannot
appreciate the value of this exercise at this time when our
immediate goal should be to codify policies and procedures for
granting exemptions from DCO registration.
—————————————————————————

Misuse and Abuse of Authority

    In order to permit foreign intermediaries to clear swaps for
U.S. persons, and to ensure that only foreign intermediaries that
are not FCMs will clear U.S. customer positions on exempt DCOs, the
Commission is proposing to exercise its authority under section 4(c)
of the CEA to exempt foreign intermediaries from the prohibition in
section 4d(f) of the CEA against accepting customer funds to clear
swaps at a registered or exempting DCO without registering as FCMs.
Even assuming that the Commission’s exemptive authority extends to
the non-U.S. clearing organizations and intermediaries that are the
subject of the Supplemental Proposal,12 the Commission’s proposed
justifications for the use of such authority do not align with the
very purpose of the authority to promote innovation and competition
without sacrificing key components of the Commission’s regulatory
and oversight structure.
—————————————————————————

    12 Section 4(c) of the CEA, 7 U.S.C. 6(c), provides the
Commission may exempt any agreement, contract, or transaction
(including any persons offering, entering into, rendering advice or
rendering other services with respect thereto) from the exchange
trading requirements of section 4(a), or any other provision of the
Act (subject to express limitations identified in section
4(c)(1)(A)) if such transaction–or person–is subject to section
4(a). Section 4(a) includes a parenthetical indicating that it does
not apply to contracts “made on or subject to the rules of a board
of trade, exchange, or market located outside the United States . .
.” The Supplemental Proposal does address this potential limitation
on its exemptive authority in its reading of section 4(c) (see
Supplemental Proposal at Section II, n. 14). However, the CFTC’s
General Counsel confirmed that the Commission’s use of section 4(c)
exemptive authority is within the Commission’s authority in this
instance during the open public meeting at which the Supplemental
Proposal was deliberated. See Press Release Number 7967-19, CFTC,
CFTC Voted on Open Meeting Agenda Items (July 11, 2019), https://www.cftc.gov/PressRoom/PressReleases/7967-19.
—————————————————————————

    Section 4(c) of the CEA, commonly referred to as the public
interest exemption, authorizes the Commission, in order to promote
responsible innovation and fair competition, by rule, regulation, or
order, to exempt, among other things, any person or class of persons
offering, entering into, rendering advice, or rendering other
services with respect to transactions from any of the provisions of
the CEA other than certain enumerated provisions.13 When enacting
section 4(c), Congress noted that the purpose of the provision is
“to give the Commission a means of providing certainty and
stability to existing and emerging markets so that financial
innovation and market development can proceed in an effective and
competitive manner . . . . with due regard for the continued
viability of the marketplace and considerations related to systemic
risk in financial markets.” 14 Indeed, in exercising its
exemptive authority under section 4(c) of the CEA, the Commission
has long understood that it was Congress’s intention and expectation
that “the Commission will assess the impact of a proposed exemption
on the maintenance of the integrity and soundness of markets and
market participants.” 15 As well, Congress, in requiring the
Commission to consider any material adverse effect on regulatory or
self-regulatory responsibilities, indicated that the Commission is
to consider such regulatory concerns as “market surveillance,
financial integrity of participants, protection of customers, and
trade practice enforcement.” 16
—————————————————————————

    13 7 U.S.C. 6(c)(1). Section 4(c)(2) of the CEA further
provides that the Commission may not grant exemptive relief unless
it determines that: (1) The exemption would be consistent with the
public interest and the purposes of the CEA; (2) the transaction
will be entered into solely between “appropriate persons” as that
term is defined in section 4(c); and (3) the exemption will not have
a material adverse effect on the ability of the Commission or any
contract market to discharge its regulatory or self-regulatory
responsibilities under the CEA. 7 U.S.C. 6(c)(2).
    14 H.R. Rep. No. 102-978, 102d Cong. 2d Sess. 80 (1992).
    15 See Exemption for Certain Swap Agreements, 58 FR 5587, 5592
(Jan. 22, 1993), citing H.R. Rep. No. 102-978, 102d Cong. 2d Sess.
80 (1992).
    16 See Exemption for Certain Swap Agreements, 58 FR 5587, 5592
(Jan. 22, 1993), citing H.R. Rep. No. 102-978, 102d Cong. 2d Sess.
79 (1992).
—————————————————————————

    The Commission’s section 4(c) proposal, which would be codified
in Sec.  3.10(c)(7) of the Commission regulations, purports to be
consistent with the exempt DCO framework being proposed in that it
is based on deference to the regulation and supervision of foreign
intermediary’s home country regulator. To qualify for the exemption,
the foreign intermediary: (1) Must accept funds from a U.S. person
to margin, guarantee, or secure swap transactions that are cleared
by an exempt DCO; (2) may not engage in other activities requiring
registration as an FCM or voluntarily register as an FCM; and (3)
must be a clearing member of an exempt DCO and must directly clear
the swap transactions of the U.S. person at an exempt DCO. A foreign
intermediary that is exempt from registering as an FCM pursuant to
the foregoing requirements is not required to comply with those
provisions of the Act and of the rules, regulations, or orders
thereunder applicable solely to any registered FCM and may provide
commodity trading advice to U.S. persons without registering as a
commodity trading advisor (“CTA”), provided that the advice is
provided solely with respect to swaps that are cleared by an exempt
DCO.17
—————————————————————————

    17 See Supplemental Proposal at Section II.
—————————————————————————

    The Commission believes the proposed exemption for foreign
intermediaries promotes responsible financial innovation and fair
competition, and is consistent with

[[Page 35478]]

the public interest and purposes of the CEA. In support of these
beliefs, the Commission focuses on: (1) The provision allowing U.S.
persons additional options for trading and clearing swap
transactions and the concomitant expansion of available
intermediaries, which has the potential to reduce the current
concentration of U.S. customer funds in a small number of FCMs and
(2) increased access for U.S. persons to swaps that are cleared in
foreign jurisdictions, which may provide for greater hedging
opportunities and increased liquidity in more standardized, cleared
contracts.18 However, these rationales ignore that this approach
removes U.S. customers from the protections of the U.S. Bankruptcy
Code and puts both FCMs and registered DCOs at a competitive
disadvantage and with respect to clearing in non-U.S. swaps markets.
While the Commission puts forth mitigating factors in response to
the loss of U.S. Bankruptcy Code protections, as discussed below,
its solution can only be said to promote “responsible” innovation
if we assume that individual U.S. Customers need nothing more than
notice of their lack of protections to engage responsibly in foreign
financial markets to prevent harm to themselves and to the larger
financial system. It is my belief that history has not demonstrated
that this is the case. Regarding the competitive disadvantage to
FCMs and registered DCOs, the Commission admits that this is a cost
of its proposal,19 but makes no arguments regarding fairness
beyond briefly discussing the economics of being regulated as a
clearing organization in any jurisdiction.
—————————————————————————

    18 Id.
    19 Supplemental Proposal at Section VI.C.2.b.
—————————————————————————

    The Commission also concludes that the proposed exemption will
be limited to appropriate persons, “as only U.S. persons that are
eligible contract participants (“ECPs”) would be permitted to
maintain accounts with a foreign intermediary for swaps cleared at
an exempt DCO” and cites CEA section 2(e) which makes it unlawful
for any person, other than an ECP, to enter into a swap unless the
swap is entered on or subject to the rules of a designated contract
market.20 Of note, the Commission makes no reference to whether or
how the foreign intermediary will comply with this limitation and
the proposed conditions of exemption for DCOs do not require the DCO
to have rules that would limit a foreign intermediary’s ability to
solicit and accept U.S. customers that are not ECPs. Similarly, it
is unclear as to whether the Exempt DCO or the foreign
intermediary’s home regulator will ensure that the foreign
intermediary does not solicit or provide trading advice to U.S.
customers warranting CTA registration beyond the trading advice
permitted by the exemption. It is difficult to even evaluate whether
the Commission considered the adverse effect on its regulatory
responsibilities, in terms of market surveillance, financial
integrity of participants, protection of customers, and trade
practice enforcement.
—————————————————————————

    20 Id.
—————————————————————————

    The Commission acknowledges that (1) some foreign regulatory
regimes may prove to be less effective than the United States and
(2) that foreign intermediaries clearing for customers at an exempt
DCO may not be subject to the same level of effective supervision as
an FCM.21 However, it does not elaborate on the obvious concerns
that ought to be raised by these assertions. Rather, the Commission
maintains that any risks to U.S. customers from clearing swaps
traded on exempt DCOs through foreign intermediaries that are not
registered as FCMs would be mitigated under the Supplemental
Proposal’s requirements for exempt DCOs in two key ways.22 First,
the exempt DCOs must be in good regulatory standing in their home
country jurisdictions, and subject to comparable, comprehensive
supervision and regulation that includes a regulatory structure
consistent with the PFMIs. Second, an exempt DCO must require a
foreign intermediary to provide written notice to, and obtain
acknowledgement from, a U.S. person in advance of engaging in any
clearing on their behalf that: (1) The clearing member is not a
registered FCM; (2) that the exempt DCO is not registered with the
CFTC; and (3) that the protections of the U.S. Bankruptcy Code do
not apply to the U.S. person’s funds. The notice must also
explicitly compare the protections available to the U.S. person
under U.S. law and the laws of the exempt DCO’s home country
regulatory regime.
—————————————————————————

    21 Supplemental Proposal at Section VI.C.3.a.
    22 Supplemental Proposal at Section II.
—————————————————————————

    There is much to be said for the views of the Commission in this
regard, but in the interest of brevity, this approach favors what
amounts to wholesale deregulation in the interest of deference
absent any analysis of the potential individual customer and
systemic consequences. Congress did not intend for the Commission to
use its section 4(c) exemptive authority to engage in “wide scale
deregulation of markets falling within the ambit of the Act,” 23
so it seems even more egregious that it would attempt to reach
beyond the Act to empower U.S. customers to act outside of the
Commission’s jurisdiction as conduits of risk. Indeed, given the
Commission’s own struggles with the application of the U.S.
Bankruptcy Code, I am especially curious to hear from U.S customers
seeking to hedge risk or access non-U.S. swaps markets as to whether
the Commission’s proposed “caveat emptor” notice model would
satisfy the rigors of internal risk management.
—————————————————————————

    23 H.R. Rep. No. 102-978, 102d Cong. 2d Sess. 80 (1992).
—————————————————————————

Conclusion

    In issuing this dissent, I have only touched upon the many
issues of concern raised by the Supplemental Proposal. With each
reading, I find myself questioning how the 2018 Proposal morphed
from a “Project Kiss” initiative 24 to codify the policies and
procedures currently followed by the Commission with respect to
granting exemptions from DCO registration–which we have
historically used sparingly–into a quest to capture a concept of
how U.S. swaps customers may fare outside the protections offered
through operation of the U.S Bankruptcy Code and protections offered
by the CEA and Commission regulations. I believe that the Commission
has acted in haste, without due consideration of the risks to
individuals and the financial system, and outside its authority. I
remain hopeful that the public comment period will provide ample
time and opportunity for thoughtful consideration and response to
the critical questions posed directly and issues raised by the
Supplemental Proposal.
—————————————————————————

    24 See 2018 Proposal, 83 FR at 39923.
—————————————————————————

    Despite today’s dissent, and as I have said many times
before,25 I look forward to working with my colleagues on cross-
border policies that will meet our core responsibilities of
promoting safe, transparent and fair markets, while supporting
global market access through responsible rule-makings that further
harmonize our rules with international partners.
—————————————————————————

    25 See, e.g., Rostin Behnam, Sowing the Seeds of Success in
2020, Remarks of CFTC Commissioner Rostin Behnam at the ISDA 34th
Annual General Meeting, Grand Hyatt Hong Kong, Hong Kong (Apr. 10,
2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam13.
—————————————————————————

Appendix 5–Statement of Commissioner Dawn D. Stump

Overview

    In responding to the financial crisis, both the Group of 20
Nations (G-20) and the U.S. Congress recognized that the derivatives
markets are global and in doing so provided for international
coordination and a practical application of regulatory deference. I
want to commend the Chairman for his leadership in reminding us of
the global commitments made in 2009 and the subsequent efforts
Congress made to encourage global regulatory harmonization.
Specifically, the G-20 leaders stated the clear responsibility we
have “to take action at the national and international level to
raise standards together so that our national authorities implement
global standards consistently in a way that ensures a level playing
field and avoids fragmentation of markets, protectionism, and
regulatory arbitrage.” 1 More directly related to the subjects
before us today, Congress, in the Dodd-Frank Act, amended the
Commodity Exchange Act to provide: “The Commission may exempt,
conditionally or unconditionally, a derivatives clearing
organization from registration . . . for the clearing of swaps if
the Commission determines that the derivatives clearing organization
is subject to comparable, comprehensive supervision and regulation
by . . . the appropriate government authorities in the home country
of the organization.” 2
—————————————————————————

    1 Leaders’ Statement from the 2009 G-20 Summit in Pittsburgh,
Pa. 7 (Sept. 24-25, 2009), http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
    2 7 U.S.C. 7a-1(h) (2012).
—————————————————————————

    I believe deference to comparable regulatory regimes is
essential. Historically, such deference has been the guiding
principle of the CFTC’s approach to regulating cross-border
derivatives. We cannot effectively supervise central

[[Page 35479]]

counterparties (CCPs) in every corner of the world. We can, however,
evaluate the regulatory requirements in a CCP’s home country to
determine if they are sufficiently commensurate to our own. We will
never have the exact same rules around the globe. We should rather
strive to minimize the frequency and impact of duplicative
regulatory oversight while also demanding high comparable standards,
just as Congress intended.
    Had we previously established a more comprehensive structure for
those comparably-regulated, foreign CCPs seeking to offer swaps
clearing to U.S. customers, then CCPs wishing to seek an exemption
would have been able to do so under a regime that Congress provided
for in the Dodd-Frank Act. Alternatively, those that wanted to
register as a DCO would have done so voluntarily in response to a
business rationale demanded by their clearing members and customers.
However, by not having previously established an exemption process,
the CFTC left only one path for customer clearing on non-U.S. DCOs,
which resulted in compelling several non-U.S. CCPs to become dually
registered with both their home country regulator and the CFTC.
    As a result, relationships with our global regulatory
counterparts became strained, and there have been many unfortunate
consequences such that now we must provide new ground rules. So
today, we are advancing an overdue conversation on applying
international regulatory deference through the establishment of a
test to identify non-U.S. CCPs that pose substantial risk to the
U.S. financial system. To be clear, neither of the proposals we are
considering today would be available to DCOs that pose such risk. I
fear that this point may be lost or confused by the fact that we are
presenting these as two separate rulemakings. While I would have
preferred a single rulemaking to alleviate any confusion, I want to
make clear that we are simply proposing two regulatory options, each
of which is only available to those DCOs that do NOT pose
substantial risk to the U.S. financial system under the proposed
test. I encourage commenters to provide input on the proposals as if
they are a single package, particularly where the request for
comments in one proposal may be relevant or more applicable to
consideration of the other proposal.
    These proposals are a step towards achieving the goals
established in 2009–an effort I wholeheartedly support. However, I
have concerns that these proposals may be a bit too rigid to
pragmatically facilitate increased swaps clearing by U.S. customers,
as we are committed to do by the original G-20 and Congressional
directives. Under the Alternative Compliance proposal, non-U.S. DCOs
can permit customer access only if a futures commission merchant
(FCM) is directly facilitating the clearing while the other
available option–provided for in the Exempt DCO proposal–
completely disallows the FCM from being involved in customer
clearing. While I recognize that the blunt nature of these bright
line distinctions makes it easier to regulate, I worry that it may
not be workable in practice. I support putting these proposals out
for public comment in hopes that those who participate in these
markets and who are expected to apply the new swap clearing mandates
will be able to lend their voices to the discussion. However, I
anticipate that the elements left unaddressed in these proposals,
which are detailed in the requests for comments, may require a re-
proposal at some future date. Nonetheless, if that is to occur we
will be well served to have that discussion with the benefit of
public comments.

Exemption From DCO Registration

    The CFTC implemented the clearing elements of the G-20
principles before other regulatory jurisdictions, and in that
context determined that any non-U.S. CCP wishing to clear swap
products for U.S. customers must become a fully registered DCO.
Today, we can re-assess based on fellow international regulatory
authorities having now implemented their own comparable reforms,
thus aligning many of our regulatory principles, just as the G-20
envisioned. Notably, in authorizing the CFTC to implement these G-20
principles, Congress recognized that consistency, not duplication,
is the goal and therefore provided authority in the Dodd-Frank Act
to exempt, conditionally or unconditionally, a non-U.S. CCP from
registration as a DCO if the CFTC determines that the entity is
subject to comparable, comprehensive supervision and regulation by
its home country authorities. Certainly, individual CCPs around the
world should be able to seek registration with the CFTC to clear
swaps for U.S. customers if they determine that is appropriate based
on their individual commercial interests and the demands of their
clearing members and end users; but, it is time to revisit the
policy rationale of compelled DCO registration for comparably and
comprehensively regulated non-U.S. CCPs.
    Under this proposal, non-U.S. CCPs that do not pose substantial
risk to the U.S. financial system will have another option for
offering swap clearing services to U.S. customers in that they may
request an exemption from registration, as provided by the Dodd-
Frank Act. I appreciate that this may raise concerns by some, and I
welcome public input on how best to address any such concerns.
However, I would be remiss if I failed to point out that the G-20
leaders recognized in 2009 that we should not ignore the global
nature of derivatives markets, a fact even more relevant today as
U.S. persons increasingly need access to clearinghouses around the
world. Contributing to this increased demand is the fact that during
the past decade international regulatory bodies, including the CFTC
and pursuant to the G-20 principles, have expanded the obligations
for market participants to utilize clearing. It is not fair that we
mandate and encourage the adoption of derivatives clearing and then
limit access to, or severely hamper efficient operation of, such
clearing services.
    While I am therefore pleased to see this exemption process
advancing, I maintain reservations about the lack of optionality for
registered FCMs to engage in clearing services for their customers
at an Exempt DCO. Once our agency has determined that an Exempt DCO
is subject to regulation that is comprehensive and comparable to our
own, then the arrangement by which a U.S. person may access the
Exempt DCO should be a business decision between the customer and
their preferred clearing member, which may well be an FCM. I very
much want to hear from commenters on how we might accomplish this
going forward. We have extensive history in allowing such
arrangements for U.S. futures clients of CFTC-registered FCMs to
access non-U.S. DCOs. I am certain that the public input will assist
us in determining how a clearing structure that works for futures
customers might sensibly be extended to swaps customers.
    I would remind commenters that only sophisticated market
participants qualify as eligible contract participants able to enter
into swaps (other than on a designated contract market). We need to
assist these qualified U.S. market participants and their clearing
members not only by providing access, but by pragmatically
preserving their ability to enter into prudent business arrangements
that they deem most appropriate for their operations and business
needs. While prohibiting FCM participation on Exempt DCOs, as we are
proposing today, is designed for simplicity, the realities of
clearing arrangements and the bankruptcy treatment that applies to
them are complex. I fear that ignoring that fact may render the
Exempt DCO option with less appeal than I believe it is due and that
Congress contemplated. I am confident that the tremendous
institutional knowledge at this agency, coupled with public input,
will enable us to design a workable solution, but it may not be the
bright line test envisioned by this proposal.

Closing

    At the beginning of this year I penned an opinion piece in the
Financial Times 3 in which I attempted to appeal to our
international regulatory partners to recommit to a coordinated
approach, ensuring that our alliance remains strong rather than
fractured. Regulatory conflicts are at odds with our shared mission
and do a disservice to global market participants. I am committed to
advancing a coordinated approach, and I believe the proposals we are
putting forward today are a first step in that process. There is,
however, more work to be done both in the way of the CFTC extending
deference to other jurisdictions and vice versa. I hope our
international regulatory partners will also take the opportunity to
reset and recognize that our shared interest of advancing
derivatives clearing is best achieved by respecting each
jurisdiction’s successful implementation of the principles agreed to
ten years ago. Otherwise, it might unfortunately become challenging
to advance the concept of deference under consideration today to the
next stage of the process.
—————————————————————————

    3 Dawn DeBerry Stump, Opinion, We Must Rethink Our
Clearinghouse Rules, Fin. Times (Jan. 24, 2019).
—————————————————————————

Appendix 6–Dissenting Statement of Commissioner Dan M. Berkovitz

    I dissent from the proposal to exempt certain foreign
clearinghouses from the

[[Page 35480]]

derivatives clearing organization (“DCO”) registration
requirements. The proposal would jeopardize U.S. customers, create
systemic risks to the U.S. financial system, promote the use of
foreign intermediaries at the expense of U.S. firms, and exceed this
agency’s limited exemptive authority.1
—————————————————————————

    1 See Commodity Exchange Act (“CEA”) section 4(c), 7 U.S.C.
6(c) (2018).
—————————————————————————

    The Commodity Futures Trading Commission (“Commission”)
previously has permitted the clearing of proprietary swap positions
at a limited number of foreign clearinghouses that it has exempted
from the DCO registration requirement.2 The proposed rule before
us today (“Exempt DCO Proposal” or “Proposal”) would permit, for
the first time, exempt DCOs to clear positions of U.S. customers.3
To accomplish this, the Proposal disregards key protections for U.S.
customers and the U.S. financial system provided by the U.S.
Bankruptcy Code, the CEA, and CFTC regulations.
—————————————————————————

    2 Id. Section 5b(h), 7 U.S.C. 7a-1(h), which permits the
Commission to exempt a DCO from registration if the Commission
determines that it is subject to “comparable, comprehensive
supervision and regulation” by its home country regulator. The
Exempt DCO Proposal would add an additional requirement that the DCO
not pose a “substantial risk to the U.S. financial system.” See
Exempt DCO Proposal, section III.A. To date, the Commission has
exempted four foreign clearinghouses from the requirement to
register as DCOs for the clearing of proprietary swap positions.
    3 See Exempt DCO Proposal, section III.C.
—————————————————————————

    The Exempt DCO Proposal would permit U.S. customers to clear
swaps at exempt non-U.S. DCOs without the protections afforded to
swap customers under the Bankruptcy Code or CFTC regulations. It
would enable U.S. customers to trade at these exempt DCOs through
non-registered foreign intermediaries who would not be covered by
the U.S. Bankruptcy Code or subject to the CFTC’s customer
protection requirements. Enabling U.S. customers to trade swaps and
amass large positions in non-U.S. markets without these protections
not only poses risks to those customers, but also presents systemic
risks to the U.S. financial system.
    The Exempt DCO Proposal also would prohibit U.S. FCMs that are
registered with the CFTC from providing clearing services at exempt
DCOs. The Exempt DCO Proposal thus requires that which the CEA
prohibits (clearing by a non-registered intermediary), and prohibits
that which the CEA requires (clearing by a registered FCM). The
Proposal creates a Bizarro World 4 for U.S. swaps customers in
which the CFTC does not regulate derivative clearing organizations,
only unregistered foreign firms are allowed to serve U.S. customers,
and U.S. customers get none of the protections provided by U.S. law.
—————————————————————————

    4 “In popular culture, `Bizarro World’ has come to mean a
situation or setting which is weirdly inverted or opposite to
expectations.” See Bizarro World, Wikipedia (July 10, 2019),
https://en.wikipedia.org/wiki/Bizarro_World.
—————————————————————————

    The CFTC does not have the superpowers to fashion its own de-
regulatory planet. It must stay within the orbit of the laws
prescribed by the Congress. It cannot bypass any provision of the
CEA that it considers an impediment to a global swaps market.
Congress has not provided the CFTC’s with unlimited exemptive
authority. In particular, the CFTC’s limited exemptive authority
under CEA section 4(c) does not extend to instruments that are not
subject to the exchange-trading requirement of section 4(a), such as
non-U.S. swaps traded in markets located outside the United
States.5 By seeking to exempt non-U.S. intermediaries who provide
clearing services to U.S. swap customers in overseas markets from
the registration requirement for FCMs,6 the Proposal exceeds the
Commission’s authority.
—————————————————————————

    5 See Commodity Exchange Act section 4(c), 7 U.S.C. 6(c).
    6 The FCM registration requirement is at Commodity Exchange
Act section 4d(f), 7 U.S.C. 6d(f).
—————————————————————————

No Customer Protections

    The Exempt DCO Proposal would eliminate the important
protections afforded to U.S. swaps customers provided by Congress
and the CFTC’s regulations.7 Many of these protections result from
the provisions in the Bankruptcy Code applicable to FCMs and the
regulatory requirements imposed on the FCMs regarding the handling
of customer funds. Section 4d(f) of the Act, which was added by the
Dodd-Frank Act, provides that only registered FCMs may accept
customer monies to margin cleared swaps. It also requires FCMs to
segregate customer cleared swaps funds, and prohibits the comingling
of customer and proprietary funds.8 In addition, all FCMs must
implement systems and procedures to address conflicts of interest,
and they must each designate a chief compliance officer to fulfill
specified duties and responsibilities.
—————————————————————————

    7 In lieu of the Act’s and Commission regulation’s extensive
customer protection provisions, the Exempt DCO Proposal would
require that each foreign intermediary provide its U.S. customers
with notice that the intermediary is not an FCM, that the
clearinghouse is not a registered DCO, and that the protections of
the U.S Bankruptcy Code do not apply. See Exempt DCO Proposal, Sec. 
39.6(b)(2).
    8 See Commodity Exchange Act section 4d(f)(1)-(2), 7 U.S.C.
6d(f)(1)-(2).
—————————————————————————

    In the event that a registered FCM becomes insolvent, swaps
customers are protected if their funds reside in segregated accounts
as required by the Act and Commission regulations,9 are carried by
an FCM, and are deposited with a registered DCO. Segregation helps
to ensure that swaps customer funds are not comingled with an FCM’s
proprietary funds, while registration helps ensure that they meet
applicable definitions in the Bankruptcy Code to fall under its
protections.
—————————————————————————

    9 Id. section 4d(f)(2), 7 U.S.C. 6d(f)(2); 17 CFR 22 (2019).
—————————————————————————

    Customer protections under the Bankruptcy Code include safe
harbors for certain derivatives contracts that allow non-defaulting
counterparties in a bankruptcy proceeding to quickly terminate and
net their swaps. The safe harbors override the Bankruptcy Code’s
automatic stays that would otherwise foreclose any action to
liquidate collateral and collect debts from a defaulting party.10
Swap customer funds are given priority treatment and not included in
the bankruptcy estate that is subject to other creditors of the
bankrupt firm. These protections facilitate the prompt transfer of
customer positions away from an insolvent FCM, which can avoid a
forced liquidation at potentially depressed valuations. In the event
that an FCM becomes insolvent, the Bankruptcy Code also entitles the
FCM’s customers to a pro rata distribution of customer assets ahead
of any other creditors of the FCM.
—————————————————————————

    10 See Stephen Adams, Derivatives Safe Harbors in Bankruptcy
and Dodd-Frank: A Structural Analysis (Apr. 30, 2013), http://nrs.harvard.edu/urn-3:HUL.InstRepos:10985175.
—————————————————————————

    The Exempt DCO Proposal would circumvent these fundamental swaps
customer protections by permitting foreign intermediaries to accept
U.S. customer funds to margin cleared swaps at exempt DCOs without
registering as an FCM. It would free foreign intermediaries from all
of the regulatory requirements that apply to U.S. FCMs, including
requirements providing for the protection of customer funds,
financial safeguards, and operational soundness. At the same time,
it would prohibit CFTC-registered FCMs–the entities which are
subject to these customer protection requirements–from acting as
FCMs for U.S. customers at exempt DCOs. The Proposal thus legally
ensures that U.S. customers will not receive the customer
protections required by the CEA, CFTC regulations for swap
transactions, and the Bankruptcy Code.
    Absent these protections, U.S. swaps customers potentially face
a range of financial and market risks. U.S. customers may find that
foreign bankruptcy laws fail to provide priority treatment for
derivatives and could include their funds in the general bankruptcy
estate for all creditors of the insolvent firm. Uncertainty over the
treatment of customer funds held at an exempt DCO or a foreign
intermediary, as well as over the portability of open positions at
the DCO could also lead counterparties to quickly terminate their
swaps. The cascading effects on market prices, liquidity, the value
of open positions, and perceived counterparty credit risk could
quickly become a systemic event.

Systemic Risks

    In the U.S., the segregation requirements for margin funds held
at an FCM protect the funds of the customer in the event that the
FCM becomes insolvent. If there are no similar segregation
requirements, then the failure of the clearing intermediary could
result in significant losses to the intermediary’s customers. These
losses could impair one or more customers’ ability to maintain its
trades with its other counterparties, not just those at the affected
non-U.S. DCO. Such other counterparties may seek to terminate their
trades with the affected U.S. persons to avoid potential losses that
could arise in these circumstances. The losses of one or more U.S.
entities due to the bankruptcy of another entity or intermediary in
a non-U.S. jurisdiction without equivalent bankruptcy laws thus
could rapidly escalate into a more widespread market event involving
numerous other persons within the U.S.11
—————————————————————————

    11 The Report of the President’s Working Group on Financial
Markets on Hedge Funds, Leverage, and the Long-Term Capital
Management (1999), which followed the near collapse and industry
bailout of the Long-Term Capital Management (LTCM) hedge fund,
identifies the benefits to market stability of the provisions of the
U.S. bankruptcy code and highlights the systemic issues that may
arise when significant transactions of U.S. entities are subject to
non-U.S. regulatory regimes that do not provide equivalent
protections. LTCM was a large, U.S.-based hedge fund that at one
point had gross notional amounts of over $500 billion in futures,
more than $750 billion in swaps, and over $150 billion in options
and other derivatives in multiple jurisdictions around the world.
The LTCM Report described how the application of bankruptcy laws in
these other jurisdictions to LTCM would present “substantial
uncertainty . . . for counterparties and other creditors of the Fund
because bankruptcy proceedings may very well have been initiated
both in the U.S. and abroad and involved resolution of complicated
and novel international bankruptcy issues.” Dept. of the Treasury,
Bd. of Governors of the Federal Reserve System, Securities and
Exchange Commission, Commodity Futures Trading Commission, Hedge
Funds, Leverage, and the Lessons of Long-Term Capital Management,
Report of the President’s Working Group on Financial Markets (Apr.
1999), at E-1. The LTCM Report cautioned, “While cross-border
insolvencies have been characterized by growing cooperation,
reliance on a case-by-case judicial approach can create
unpredictability–particularly in emergency situations.” Id. at E-
3. Much of the discussion around LTCM occurred in the context of
bilateral, OTC swaps rather than the cleared swaps that are the
subject of this Proposal. However, LTCM’s lessons on the protections
offered by the Bankruptcy Code, and on the importance of legal
certainty regarding how derivatives will be treated in an insolvency
proceeding, remain current to this day.

—————————————————————————

[[Page 35481]]

    The Proposal contains no discussion or analysis of the potential
systemic consequences if a foreign intermediary holding significant
assets from large U.S. swaps customers were to fail. Similarly, it
fails to examine the impact to the U.S. financial system if the
overseas assets of large U.S. swaps customers were to become
entangled–or potentially entangled–in foreign bankruptcy
proceedings.

Exclusion of U.S. FCMs

    The Exempt DCO Proposal would prohibit U.S. FCMs from providing
clearing services to U.S. swaps customers at exempt DCOs.12 By
itself, this prohibition would not be problematic, as it is
consistent with the Commission’s interpretation of the CEA and
longstanding policy. The Proposal veers off course by coupling this
prohibition with permitting non-registered foreign intermediaries to
provide those same services without any protections for U.S.
customers.
—————————————————————————

    12 See Exempt DCO Proposal at Sec.  39.6(b)(1)(i).
—————————————————————————

    In last year’s initial proposal to establish a framework for
exempt DCOs, the Commission proposed to prohibit FCMs from clearing
customer swaps at exempt DCOs. At that time, the Commission
explained:

    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. Any swaps customer funds held by a DCO are
also subject to the segregation requirements of section 4df(2) of
the CEA, and in order for a 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. Absent
that chain of registration, the swaps customer’s funds may not be
treated as customer property under the U.S. Bankruptcy Code 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.13
—————————————————————————

    13 Exemption from Derivatives Clearing Organization
Registration, 83 FR 39,923, 39,926 (proposed Aug. 13, 2018).

    In its zeal to enable U.S. customers to access non-U.S. swap
markets, the Commission seeks to sidestep these issues with the
Bankruptcy Code by jettisoning the entire bankruptcy regime as it
applies to U.S. swaps. It would accomplish this by permitting non-
registered, non-U.S. intermediaries to clear swaps through exempt
DCOs. But this approach leaves U.S. customers without any bankruptcy
protection and competitively disadvantages U.S. FCMs with respect to
clearing in non-U.S. swaps markets. In the cost/benefit
considerations, the Commission acknowledges, “FCMs may . . . face a
competitive disadvantage as a result of this proposal, as they would
not be permitted to clear customer trades at an exempt DCO. To the
extent that their customers shift their clearing activity at
registered DCOs to exempt DCOs, or otherwise reduce their clearing
activity at registered DCOs as a result of this proposal, FCMs would
lose business.” 14
—————————————————————————

    14 Exempt DCO Proposal, section VI.C.2.b.
—————————————————————————

    Not only would the Proposal place FCMs at a competitive
disadvantage, the Proposal recognizes that this also would place
registered DCOs at a competitive disadvantage. The Commission states
in the cost/benefit considerations that it “anticipates that some
non-U.S. clearing organizations that are currently registered DCOs,
or that would otherwise apply to register in the future, may choose
to apply to become exempt an DCO, thus lowering their ongoing
compliance costs.” 15
—————————————————————————

    15 Id.
—————————————————————————

    A better approach would be to prohibit exempt DCOs from
providing clearing services to U.S. customers–as the Commission
proposed last year–and permit customer clearing only at registered
DCOs, through registered FCMs. This would preserve the
competitiveness of U.S. FCMs in the global swaps markets and
maintain the bankruptcy and other protections for U.S. customers.
Today’s companion proposed rule, providing for registration with
alternative compliance for DCOs that would be eligible for an
exemption, would provide a second mechanism–in addition to full DCO
registration–for non-U.S. DCOs to provide for clearing services to
U.S. customers. The Commission does not explain why either the
existing option for full registration, or the proposed alternative
compliance mechanism, are insufficient to enable U.S. customers to
access clearing services as non-U.S. DCOs.16
—————————————————————————

    16 To the extent that U.S. customers are not able to access
clearing at non-U.S. registered DCOs due to the absence of U.S.-
registered FCM services at such DCOs, the Commission should work
with such non-U.S. DCOs and FCMs to identify the impediments to the
provision of such FCM services.
—————————————————————————

    The Commission asserts that by expanding the pool of available
intermediaries and clearinghouses to include unregistered or exempt
non-U.S. entities, the Proposal may “reduc[e] the concentration of
U.S. customer funds in a small number of FCMs,” 17 and may also
“reduc[e] the concentration risk among registered and exempt
DCOs.” 18 The exclusion of registered FCMs from non-U.S. swap
markets, however, will in no way reduce the currently high levels of
concentration amongst registered FCMs at registered DCOs serving the
U.S. market. It is the high levels of concentration of registered
FCMs at registered DCOs that pose potentially systemic risks to the
U.S. financial system. The Commission should be working to enable
greater FCM competition in U.S. swap markets, not precluding U.S.
FCMs from competing in non-U.S. markets.
—————————————————————————

    17 Id.
    18 Id.
—————————————————————————

    I strongly support efforts to increase competition and reduce
concentration amongst registered, U.S. FCMs in the U.S. swaps
markets. It is a topsy-turvy argument that this is best accomplished
by prohibiting U.S. FCMs from participating in non-U.S. markets and
enabling non-registered non-U.S. FCMs to take this business away
from those U.S. FCMs.

Absence of Exemptive Authority

    The Proposal relies on CEA Section 4(c) for authority to exempt
non-U.S. intermediaries that provide customer clearing at exempt
DCOs from the FCM registration requirement and the regulations
applicable to registered FCMs.19 Section 4(c), however, provides
the Commission with limited exemptive authority, applicable to
specified classes of instruments and markets. It does not provide
the Commission with the ability to waive any provision of the CEA
that it deems inconvenient.20 The Commission’s limited authority
does not extend to the non-U.S. cleared swaps markets that are the
subject of this rulemaking.
—————————————————————————

    19 The Proposal also relies on Section 4(c) to exempt these
foreign intermediaries from the CTA registration requirements.
    20 The Conference Report for the Futures Trading Practices Act
of 1992, which codified section 4(c), stated the conferees
expectation that “the Commission generally use this [4(c)]
authority sparingly . . . .” The conferees further explained that
“[t]he goal of providing the Commission with broad exemptive powers
is not to prompt a wide-scale deregulation of markets falling within
the ambit of the Act. See H.R. Conf. Rep. 102-978, 102d Cong. (2d
Sess. 1992).
—————————————————————————

    Section 4(c) provides that the Commission may exempt any
agreement, contract, or transaction from the requirements of section
4(a) (which requires that contracts for future delivery be traded on
a designated contract market) or any other provision of the Act if
such agreement, contract, or transaction is, in the first instance,
subject to section 4(a).21 Notably, however, section 4(a) does not
apply to contracts “made on or subject to the rules

[[Page 35482]]

of a board of trade, exchange, or market located outside the United
States . . .” 22 Swaps traded on a non-U.S. trading facility and
cleared at a non-U.S. DCO appear to fall into the category of
contracts “made on or subject to the rules of a board of trade,
exchange, or market located outside the United States.” The
Commission provides no justification or analysis for asserting that
section 4(c) provides exemptive authority for transactions in non-
U.S. markets involving these contracts.
—————————————————————————

    21 Commodity Exchange Act section 4(c), 7 U.S.C. 6(c).
    22 Id. section 4(a), 7 U.S.C. 6(a) (emphasis added).
—————————————————————————

Conclusion

    The Exempt DCO Proposal deprives U.S. customers of bankruptcy
protection under U.S. law, creates systemic risks for the U.S.
financial system, and promotes the use of foreign intermediaries at
the expense of U.S. FCMs. It also exceeds the Commission’s exemptive
authority under section 4(c) of the Act. If the Commission desires
to facilitate greater access by U.S. persons to foreign cleared
swaps markets, it should do so within the framework of registered
DCOs, registered FCMs, and the customer protections provided by the
U.S. bankruptcy laws and CFTC regulations. It should not do so at
the expense of protections for U.S. customers and the U.S. financial
system. Accordingly, I dissent.

[FR Doc. 2019-15258 Filed 7-22-19; 8:45 am]
 BILLING CODE 6351-01-P