CFTC Proposes Alternative Compliance for Non-US Clearing Organizations

The CEA requires a DCO to comply with the DCO core principles and any requirement that CFTC imposes by rule or regulation. The CEA further provides that, subject to any rule or regulation prescribed by CFTC, a DCO has “reasonable discretion” in establishing the manner by which DCO complies with each DCO core principle. Currently, a DCO is required to comply with all CFTC regulations that were adopted to implement the DCO core principles. CFTC is proposing regulations that would allow a non-U.S. clearing organization that seeks to clear swaps for U.S. persons, including futures commission merchants (FCM) customers, to register as a DCO and, in most instances, comply with the applicable legal requirements in its home country as an alternative means of complying with the DCO core principles. A non-U.S. clearing organization would be eligible for this alternative compliance regime if:

• CFTC determines that the clearing organization's compliance with its home country regulatory regime would satisfy the DCO core principles
• The clearing organization is in good regulatory standing in its home country
• CFTC determines that the clearing organization does not pose substantial risk to the U.S. financial system
• A memorandum of understanding or similar arrangement satisfactory to CFTC is in effect between the Commission and the clearing organization's home country regulator

An applicant for alternative compliance would be required to file only certain exhibits of Form DCO, including a regulatory compliance chart in which the applicant would identify the applicable legal requirements in its home country that correspond with each DCO core principle and explain how the applicant satisfies those requirements. Under the current registration regime, an applicant must demonstrate compliance with the DCO core principles and Part 39 of the CFTC regulations. Under the alternative compliance regime, an applicant must demonstrate that compliance with its home country requirements would satisfy the DCO core principles and compliance with those requirements. If the application is approved by CFTC, the DCO would be permitted to comply with its home country regulatory regime rather than Part 39. Because the DCO would clear swaps for customers through registered FCMs, the DCO would be required to fully comply with the customer protection requirements of CFTC as well as with the swap data reporting requirements in part 45 of the CFTC regulations. The DCO would also be held to certain ongoing and event-specific reporting requirements that are more limited in scope than the reporting requirements for existing DCOs. The proposed eligibility criteria, conditions, and reporting requirements would be set forth in proposed subpart D of Part 39.

Related Link: Federal Register Notice

Comment Due Date: September 17, 2019

Keywords: Americas, US, Banking, Securities, Derivatives Clearing Organization, DCO Core Principles, Commodity Exchange Act, Non-US Clearing Organization, CFTC