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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations with previous Commission determinations.14 Under exempt DCO
orders granted to date, an exempt DCO
is required to observe the PFMIs in all material respects and be in good regulatory standing in its home country, as evidenced by an annual written representation by its home country regulator. A memorandum of understanding MOU must be in effect between the Commission and the home country regulator.
The existing exempt DCO orders also require the exempt DCO to supply the Commission with certain reports and information, some on a periodic basis and others based on the occurrence of specified events. For example, exempt DCOs are required to provide daily and quarterly reporting of certain information regarding the clearing activity of U.S. persons and FCMs. An exempt DCO also is required to report to the Commission if there is any change in its licensure, registration or authorization to act as a clearing organization in its home country; if the exempt DCO takes action against a U.S.
person or FCM; if there is a default by a U.S. person or FCM; or if there is any change in the home country regulatory regime that is material to the exempt DCOs continuing observance of the PFMIs or compliance with the requirements of the Commissions order.
In addition, existing exempt DCO orders require the exempt DCO to make its books and records available for inspection by the Commission and, where a clearing member has reported information regarding a swap to a swap data repository SDR, to also report information regarding that swap to the SDR.
Because the regulations being adopted herein are consistent with existing exempt DCO orders, the Commission does not anticipate amending any of the exempt DCO orders it has issued to date.
II. Amendments to Part 39

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A. Regulation 39.1Scope The Commission proposed to amend 39.1 to expand the scope of subpart A
of part 39 to include a clearing organization applying for an exemption from DCO registration. This change was meant to address the inclusion in fully consistent with the PFMIs. See 17 CFR 39.30, 39.40.
14 See, e.g., 50.52b4iE, 17 CFR
50.52b4iE permitting eligible affiliate counterparties that are located in certain jurisdictions to satisfy a condition to electing the exemption by clearing the swap through a DCO or a clearing organization that is subject to supervision by appropriate government authorities in the clearing organizations home country and that has been assessed to be in compliance with the PFMIs.

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subpart A of new 39.6 discussed below, which sets forth the requirements for an exemption from DCO registration. The Commission did not receive any comments on this provision and is adopting it as proposed.
B. Regulation 39.2Definitions In connection with the proposed regulations, the Commission proposed to add five definitions to 39.2, which apply only for purposes of part 39.
1. Exempt Derivatives Clearing Organization The Commission proposed to define exempt derivatives clearing organization to mean a clearing organization that the Commission has exempted from registration under section 5ba of the CEA, pursuant to section 5bh of the CEA and 39.6. The Commission did not receive any comments on this proposed definition and is adopting it as proposed.
2. Good Regulatory Standing The Commission proposed that, to be eligible for an exemption from registration, a clearing organization would have to be in good regulatory standing in its home country. The Commission proposed to define good regulatory standing to mean 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 clearing organization.
Although the Commission proposed to reference material non-observance of the PFMIs or other relevant home country legal requirements, the Commission requested comment in the 2018 Proposal as to whether the definition should instead refer to all instances of non-observance. In their responses to the 2019 Proposal, ASX, JSCC, and CCP12 supported the proposed definition of good regulatory standing. CCP12 and JSCC commented that the proposed definition is appropriate, as individual regulators have taken differing approaches to how they apply the PFMIs in the context of the markets that they regulate and supervise. CCP12 and JSCC did not recommend extending the definition to all instances of non-observance of the PFMIs. JSCC further stated that regulatory changes in the home country of an exempt DCO affecting the exempt DCOs continuing observance of the
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PFMIs occur infrequently and are easily identifiable, due to the familiarity of exempt DCOs with the legal and regulatory framework in their home countries. ASX added that an exempt DCO is best placed to determine whether a change is material and advise the Commission accordingly.
The Commission is adopting the definition of good regulatory standing largely as proposed.15 The Commissions supervisory experience with registered and exempt DCOs has shown that even well-functioning DCOs will experience instances of nonobservance of applicable requirements both material and immaterial. The Commission therefore seeks to refrain from adopting a mechanical or hypertechnical approach whereby isolated instances of non-observance would be disqualifying.16 The Commission further believes that the definition provides adequate assurance of observance of the PFMIs or compliance with other relevant home country requirements, because any material nonobservance must be resolved to the satisfaction of the home country regulator in order for the exempt DCO
to be deemed to be in good standing.
3. Home Country The Commission proposed to define home country to mean, with respect to a non-U.S. clearing organization, the jurisdiction in which the clearing organization is organized. The Commission did not receive any comments on this proposed definition and is adopting it as proposed.
15 In the 2018 Proposal, the Commission had proposed to define good regulatory standing in a way that would apply only to exempt DCOs. See Exemption From Derivatives Clearing Organization Registration, 83 FR at 39933. In a separate, subsequent proposal, the Commission proposed a definition of good regulatory standing that retained the previously proposed definition for exempt DCOs but added a separate provision that would apply only to DCOs subject to alternative compliance. See Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 34819, 34831 July 19, 2019;
see also Exemption From Derivatives Clearing Organization Registration, 84 FR at 35471. The Commission has adopted the definition as it relates to DCOs subject to alternative compliance see Registration with Alternative Compliance for NonU.S. Derivatives Clearing Organizations, 85 FR
67160, 67186 Oct. 21, 2020; therefore, the Commission is adopting here only that portion of the definition that applies to exempt DCOs.
16 While the Commission expects, in almost all cases, to defer to the home country regulators determination of whether an instance of noncompliance is or is not material, it does retain the discretion, in the context of the application of these rules of the Commission, to make that determination itself, and, in order to make such a determination, to obtain information from the home country regulator pursuant to the relevant memorandum of understanding.

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