August 21, 2018

August 21, 2018

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August 20, 2018

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CFTC Proposes Rules to Simplify Process for Foreign Clearing Organizations to Obtain DCO Registration Exemptions

On August 8, the Commodity Futures Trading Commission announced that it has proposed rules pursuant to which a clearing organization located outside of the United States may obtain an exemption from registration as a derivatives clearing organization (DCO) in order to provide swaps clearing services to certain US persons. The proposed rules codify the CFTC’s existing policies and procedures for granting such exemptions. To date, the CFTC has exempted four non-US clearing organizations from registration: ASX Clear (Futures) Pty Limited, Japan Securities Clearing Corporation, Korea Exchange, Inc., and OTC Clearing Hong Kong.

The CFTC is permitted to exempt a non-US clearing organization from registration as a DCO for clearing swaps to the extent the CFTC determines the clearing organization is subject to comparable, comprehensive supervision and regulation by its home country authorities. The CFTC is proposing to use a clearing organization’s compliance with the Principles for Financial Market Infrastructure (PFMIs) as the standard for making such determination as it finds the PFMIs to be comparable to the core principles set forth for DCOs in the Commodity Exchange Act and CFTC regulations.

In order to qualify for an exemption, a non-US clearing organization must be subject to regulation in its home country consistent with the PFMIs, observe the PFMIs in all material respects, and be in good standing with its home regulator. The CFTC and a clearing organization’s home regulator also must have entered into a memorandum of understanding pursuant to which the home regulator agrees to provide the CFTC relevant information, and the clearing organization must consent to jurisdiction in the United States and appoint an agent in the United States. On an annual basis, within 60 days following the end of its fiscal year, the clearing organization must provide the CFTC a certification of its material compliance with the PFMIs as well as report on various metrics, including margin, volume, open interest and the clearance of swaps.

As is the case under the existing policies and procedures, a clearing member of a clearing organization that qualifies for an exemption as a DCO would be permitted to clear swaps only for itself and any affiliate that meets the definition of a “proprietary account” in CFTC Rule 1.3; the clearing member could not clear for “cleared swaps customers” as defined in CFTC Rule 22.1.

The proposed rules are available here. Comments with respect to the proposed rules are due 60 days after the proposed rules are published in the Federal Register.

©2018 Katten Muchin Rosenman LLP

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About this Author

Sarah Adams, New York Financial Services Attorney, Katten Law Firm
Associate

Sarah R. Adams concentrates her practice in financial services matters.

While in law school, Sarah was on the staff of the Georgetown Immigration Law Journal. She received her JD from the Georgetown University Law Center and her BA from Johns Hopkins University, with honors. Sarah is admitted to the bar in New York.

212-940-6350
Kevin M. Foley, Finance Lawyer, Katten Llaw Firm
Partner

Kevin M. Foley has extensive experience in commodities law and advises a wide range of clients, both in the United States and abroad, on compliance with the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (CFTC) affecting traditional exchange-traded products, as well as the over-the-counter markets involving swaps and other derivative instruments. His clients include futures commission merchants, derivatives clearing organizations, designated contract markets, foreign boards of trade and an industry trade association.

Kevin has served as counsel to the Futures Industry Association (FIA) for more than 20 years. In 2012 he was recognized for his exemplary efforts on behalf of the association and the industry, in particular for his guidance in navigating the challenges confronting FIA member firms in complying with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

312-902-5372