2019 Exemption from DCO Registration SNPRM (84 FR 35456)

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

COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 3, 39 and 140
RIN 3038–AE65

Exemption From Derivatives Clearing
Organization Registration
Commodity Futures Trading
Commission.
ACTION: Supplemental notice of
proposed rulemaking.
AGENCY:

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://

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SUMMARY:

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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 § 145.9
of the Commission’s regulations.1
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, edonovan@cftc.gov;
Parisa Abadi, Associate Director, 202–
418–6620, pabadi@cftc.gov; Eileen R.
Chotiner, Senior Compliance Analyst,
202–418–5467, echotiner@cftc.gov;
Brian Baum, Special Counsel, 202–418–
5654, bbaum@cftc.gov; August A.
Imholtz III, Special Counsel, 202–418–
5140, aimholtz@cftc.gov; Abigail S.
Knauff, Special Counsel, 202–418–5123,
aknauff@cftc.gov; Division of Clearing
and Risk; Thomas J. Smith, Deputy
Director, 202–418–5495, tsmith@
cftc.gov; 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
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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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
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 § 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.

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proprietary swaps for U.S. persons and
FCMs.5
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
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/asxclearamdorderd
coexemption.pdf; Korea Exchange, Inc. Order of
Exemption from Registration (Oct. 26, 2015),
available at http://www.cftc.gov/idc/groups/public/
@otherif/documents/ifdocs/krxdcoexemptorder1026-15.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/jsccd
coexemptorder10-26-15.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.
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
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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.
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.
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.’’).
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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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
§ 3.10(c), which addresses, among other
things, exemption from FCM
registration provisions for certain
persons. Proposed § 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
The Commission is further proposing
§ 3.10(c)(7)(ii) to provide that a foreign
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
§ 3.10(c) by adding a new paragraph (7). The
Commission previously proposed a new paragraph
(6) to § 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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intermediary exempt from registering as
an FCM under § 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
§ 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.
Proposed § 3.10(c)(7)(iii) would
prohibit a foreign intermediary exempt
from registering as an FCM under
§ 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 § 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.
Proposed § 3.10(c)(7)(iv) would
require a foreign intermediary exempt
from registering as an FCM under
§ 3.10(c)(7)(i) to directly clear the swaps
of U.S. persons at the exempt DCO. A
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.
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
§ 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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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 § 3.10(c)(7)(v) would
provide that a foreign intermediary
exempt from registering as an FCM
under § 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
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
19 A CTA is defined in § 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 § 3.10(c)(7)(iv).
21 National Futures Association is the selfregulatory organization with oversight
responsibility for CTAs.

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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
The Commission believes the
proposed exemption in § 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.
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
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).
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 § 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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Federal Register / Vol. 84, No. 141 / Tuesday, July 23, 2019 / Proposed Rules
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.
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
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
25 See Financial Data for FCMs (as of March 31,
2019), available at https://www.cftc.gov/
MarketReports/financialfcmdata/index.htm.
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.

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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 nonU.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.
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
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.

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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

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previously proposed in § 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
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.
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
28 See

2018 Proposal, 83 FR at 39925.
at 33934.
30 Id. at n.14.
31 See Derivatives Clearing Organizations and
International Standards, 78 FR 72476 (Dec. 2, 2013).
29 Id.

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definition and proposed §§ 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
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 riskrelated 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
32 On July 11, 2019, the Commission approved a
separate notice of proposed rulemaking entitled
‘‘Registration with Alternative Compliance for NonU.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.’’
33 In general, initial margin requirements are riskbased 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

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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 § 39.6 as previously
proposed to effectuate this approach.
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.

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1. Regulation 39.6(a)—Eligibility for
Exemption
As previously proposed, § 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
§ 39.6(a) are met, and that the clearing
organization satisfies the conditions set
forth in § 39.6(b).36 As an additional
eligibility requirement, the Commission
is proposing to require in § 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).
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
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
§ 39.6(a) and the conditions set forth in proposed
§ 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 § 39.6(a)(2) as § 39.6(a)(3).

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Commission may find that it does not
qualify for an exemption from DCO
registration.
2. Regulation 39.6(b)—Conditions of
Exemption
Proposed § 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
§ 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 § 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
§ 1.3 of the Commission’s regulations.38
The proposed modifications to the
conditions in § 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
38 The text of proposed § 39.6(b)(1)(ii), previously
proposed as § 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.
39 See 17 CFR 22.2(f) (setting forth requirements
for FCM treatment of cleared swaps and associated
cleared swaps customer collateral).

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

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‘‘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.
The Commission is proposing to
require in § 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
Furthermore, § 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 § 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 nonobservance 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
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).
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 § 30.6(a). 17 CFR 30.6(a).

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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 § 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
3. Regulation 39.6(c)—General
Reporting Requirements
As previously proposed, § 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
§ 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.
Specifically, proposed § 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)
48 In order to promote effective and consistent
global regulation of swaps, section 752 of the DoddFrank 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.
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 § 39.6(c)(2)(i).

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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-tomarket 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-tomarket 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
Proposed § 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
50 The Commission is proposing to define ‘‘U.S.
clearing member,’’ for purposes of proposed § 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 § 39.19(c)(1)(i)(A) and (B) that
apply to registered DCOs and similar to reporting
requirements in proposed § 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).
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.

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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.
As previously proposed,
§ 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 § 39.6(e) sets forth the
application procedures for a clearing
organization that seeks to be exempt
from DCO registration. As previously
proposed, § 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 § 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 § 39.6(b)(2) (proposed to be
renumbered as § 39.6(b)(3)); meet the
swap data reporting requirements in
§ 39.6(d); and provide written notice of
protections available to U.S. persons
(per newly proposed § 39.6(b)(2)). The
Commission is proposing to
additionally require a draft of the notice
that meets the requirements of newly
proposed § 39.6(b)(2), as applicable, as
part of the application.
As previously proposed, § 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

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release to add the draft rules proposed
to be included in § 39.6(e)(2)(vii), as
discussed above.
5. Regulation 39.6(f)—Modification or
Termination of Exemption Upon
Commission Initiative
As previously proposed, § 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
§ 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 § 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

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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.
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 §§ 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 § 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 § 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 § 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
53 Section

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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 § 39.6(g),
which relates to a termination of
exemption upon request by an exempt
DCO. Specifically, as previously
proposed, § 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 § 39.3(a)(3),54 the Commission
is proposing in this release to instead
refer to an application for registration in
accordance with § 39.3(a)(2) or
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IV. Proposed Amendments to Part 140
The Commission previously proposed
amendments to § 140.94 to delegate
authority to the Division of Clearing and
Risk (DCR) for all functions reserved to
the Commission in proposed § 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
§ 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:
54 Registration with Alternative Compliance for
Non-U.S. Derivatives Clearing Organizations,
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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 § 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

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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.
3. As proposed, § 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
55 FIA/SIFMA

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

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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 § 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 nonU.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,
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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 nonobservance 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’’ nonobservance of the PFMIs or other
relevant home country legal
requirements, the Commission requests
comment as to whether it should
instead require all instances of nonobservance.
12. Commenters suggested the
Commission should clarify that a nonU.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 nonU.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
2018 Proposal, 83 FR at 39924–39925.
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’’).

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59 See

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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.
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 nonFCMs 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 nonFCM 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.
61 See

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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).
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
§ 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.
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
§ 39.6. The responses to the collection of
information would be necessary to
obtain exemption from DCO
registration.
1. Application for Exemption from DCO
Registration Under Proposed § 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
63 5

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.

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U.S.C. 601 et seq.
FR 18618 (Apr. 30, 1982).
65 See 66 FR 45604, 45609 (Aug. 29, 2001).
66 44 U.S.C. 3501 et seq.
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.

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Commission has estimated the burden
hours for this proposed collection of
information as follows:
• 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.

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

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4. Reporting by Exempt DCOs in
Accordance With Part 45
Proposed § 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

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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:
• 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 § 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.
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
68 Details of the estimated burden related to nonrecurring 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.
69 7 U.S.C. 19(a).
70 The Commission notes that the costs and
benefits of the proposed changes in the 2018

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35467

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)
§ 3.10.
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
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
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).
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).

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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.
2. Proposed Amendments to Part 39

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

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be applicable in that situation. Second,
because proposed § 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
§ 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

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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 § 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
§ 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

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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 § 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

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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.
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 nonU.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
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).
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.

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35469

more efficiently allocate its own
resources to the oversight of
traditionally registered DCOs.
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.

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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.

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

c. Price Discovery

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

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

76 International Swaps and Derivatives
Association, Inc. comment letter at 3 (Oct. 12,
2018).
77 Id. at 4.

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

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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
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.

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

■

§ 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.

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*

*
*
*
*
(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 § 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

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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
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, § 752, July 21, 2010, 124 Stat. 1749.
■

4. Revise § 39.1 to read as follows:

§ 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 § 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.
■ 5. In § 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:
§ 39.2

Definitions.

*

*
*
*
*
Exempt derivatives clearing
organization means a derivatives

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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 § 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 nonobservance 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 § 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

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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 §§ 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.
*
*
*
*
*
■ 6. Add § 39.6 to read as follows:

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§ 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

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(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 § 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
§ 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

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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 nondiscriminatory 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

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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 nonobservance of the Principles for
Financial Market Infrastructures and
identify whether and how such nonobservance 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
§ 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

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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

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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

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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

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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.

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(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 § 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

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Federal Register / Vol. 84, No. 141 / Tuesday, July 23, 2019 / Proposed Rules
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
§ 39.3(a)(2) or § 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.

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PART 140—ORGANIZATION,
FUNCTIONS, AND PROCEDURES OF
THE COMMISSION
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).

8. Amend § 140.94 by:
a. Revising the introductory text of
paragraph (c);
■ b. Redesignating paragraphs (c)(4)
through (c)(13) as paragraphs (c)(5)
through (c)(14); and
■ c. Adding new paragraph (c)(4).
The revisions and additions read as
follows:
■
■

§ 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 § 39.6 of this chapter,
except for the authority to:
(i) Grant an exemption under § 39.6(a)
of this chapter;
(ii) Prescribe conditions to an
exemption under § 39.6(b) of this
chapter;
(iii) Modify or terminate an
exemption under § 39.6(f)(4) of this
chapter; and
(iv) Terminate an exemption under
§ 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.

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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
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., nonretail 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 longstanding 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
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.

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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.

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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

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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
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
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.
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.

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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.
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
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
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
4 Supplemental

Proposal at Section V.
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.
5 See,

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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
Ongoing Uncertainty

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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
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.
10 See Supplemental Proposal at III.C.2.

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directly or through a foreign member of the
exempt DCO.11
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.
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
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.
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.
13 7 U.S.C. 6(c)(1). Section 4(c)(2) of the CEA
further provides that the Commission may not grant

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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 selfregulatory 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
The Commission’s section 4(c) proposal,
which would be codified in § 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
The Commission believes the proposed
exemption for foreign intermediaries
promotes responsible financial innovation
and fair competition, and is consistent with
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).
17 See Supplemental Proposal at Section II.

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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.
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.
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.
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.
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
21 Supplemental

Proposal at Section VI.C.3.a.
Proposal at Section II.
23 H.R. Rep. No. 102–978, 102d Cong. 2d Sess. 80
(1992).
24 See 2018 Proposal, 83 FR at 39923.
22 Supplemental

18 Id.
19 Supplemental

Proposal at Section VI.C.2.b.

20 Id.

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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.
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.

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
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
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.
1 Leaders’ Statement from the 2009 G–20 Summit
in Pittsburgh, Pa. 7 (Sept. 24–25, 2009), http://
www.treasury.gov/resource-center/international/g7g20/Documents/pittsburgh_summit_leaders_
statement_250909.pdf.
2 7 U.S.C. 7a–1(h) (2012).

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

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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

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35479

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.

Appendix 6—Dissenting Statement of
Commissioner Dan M. Berkovitz
I dissent from the proposal to exempt
certain foreign clearinghouses from the
3 Dawn DeBerry Stump, Opinion, We Must
Rethink Our Clearinghouse Rules, Fin. Times (Jan.
24, 2019).

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

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
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.
The Exempt DCO Proposal would permit
U.S. customers to clear swaps at exempt nonU.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.
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

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1 See

Commodity Exchange Act (‘‘CEA’’) section
4(c), 7 U.S.C. 6(c) (2018).
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.
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.

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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.
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 DoddFrank 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.
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.
Customer protections under the
Bankruptcy Code include safe harbors for
certain derivatives contracts that allow nondefaulting 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
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).
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, § 39.6(b)(2).
8 See Commodity Exchange Act section 4d(f)(1)–
(2), 7 U.S.C. 6d(f)(1)–(2).
9 Id. section 4d(f)(2), 7 U.S.C. 6d(f)(2); 17 CFR 22
(2019).
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.

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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.
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 CFTCregistered 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,

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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.

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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.
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
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 crossborder 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.
12 See Exempt DCO Proposal at § 39.6(b)(1)(i).

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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
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
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
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
13 Exemption from Derivatives Clearing
Organization Registration, 83 FR 39,923, 39,926
(proposed Aug. 13, 2018).
14 Exempt DCO Proposal, section VI.C.2.b.
15 Id.
16 To the extent that U.S. customers are not able
to access clearing at non-U.S. registered DCOs due

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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.
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 nonU.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.
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
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.
17 Id.
18 Id.
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 widescale deregulation of markets falling within the
ambit of the Act. See H.R. Conf. Rep. 102–978, 102d
Cong. (2d Sess. 1992).
21 Commodity Exchange Act section 4(c), 7 U.S.C.
6(c).

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

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

jspears on DSK30JT082PROD with PROPOSAL10

22 Id.

section 4(a), 7 U.S.C. 6(a) (emphasis added).

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transactions in non-U.S. markets involving
these contracts.
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

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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

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