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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations
I. Background
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A. Introduction Section 5ba of the Commodity Exchange Act CEA provides that a clearing organization 1 may not perform the functions of a clearing organization with respect to swaps 2
unless the clearing organization is a DCO registered with the Commission.3
However, the CEA also permits the Commission to conditionally or unconditionally exempt a clearing organization from DCO 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 The Commission issued the 1 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 DCO 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 1a15 of the CEA, 7 U.S.C. 1a15, and clearing organization or derivatives clearing organization under 1.3 of the Commissions regulations, 17 CFR 1.3.
2 Section 5ba also provides that a clearing organization may not perform the functions of a clearing organization with respect to futures unless it is a registered DCO. This, however, is limited to futures executed on a designated contract market.
Regulation 48.7 provides that a foreign board of trade registered with the Commission may clear its contracts through a registered DCO or a clearing organization that observes the Recommendations for Central Counterparties RCCPs or successor standards and is in good regulatory standing in its home country jurisdiction. 17 CFR 48.7. The Principles for Financial Market Infrastructures PFMIs are the successor standards to the RCCPs.
See Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions, Principles for financial market infrastructures Apr. 2012, available at http www.iosco.org/library/pubdocs/
pdf/IOSCOPD377-PFMI.pdf. Because an exempt DCO is required to observe the PFMIs and be in good regulatory standing it its home country, it is eligible to clear contracts executed on a foreign board of trade.
3 7 U.S.C. 7a1a. Under section 2i of the CEA, 7 U.S.C. 2i, 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, Public Law 111203, 124 Stat. 1376 Dodd-Frank Act. Therefore, pursuant to section 2i, 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 5bh of the CEA, 7 U.S.C. 7a1h.
Section 5bh also permits the Commission to
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first exemption from DCO registration in 2015 and, to date, has exempted four clearing organizations organized outside of the United States hereinafter referred to as non-U.S. clearing organizations from DCO registration.5
In August 2018, the Commission proposed to codify the policies and procedures it implemented in 2015 with respect to granting exemptions from DCO registration, including permitting exempt DCOs to clear only proprietary swap positions of U.S. persons and futures commission merchants FCMs, and not customer positions 2018
Proposal.6 The Commission received four substantive comment letters on the 2018 Proposal.7
In response to a specific request for comment as to whether the Commission should consider permitting an exempt DCO to clear swaps for U.S. customers,8
three commenters expressed support.9
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.
5 See ASX Clear Futures Pty Amended Order of Exemption from Registration Jan. 28, 2016, available at http www.cftc.gov/idc/groups/public/
@otherif/documents/ifdocs/
asxclearamdorderdcoexemption.pdf; Korea Exchange, Inc. Order of Exemption from Registration Oct. 26, 2015, available at http
www.cftc.gov/idc/groups/public/@otherif/
documents/ifdocs/krxdcoexemptorder10-26-15.pdf;
Japan Securities Clearing Corporation Order of Exemption from Registration Oct. 26, 2015, available at http www.cftc.gov/idc/groups/public/
@otherif/documents/ifdocs/jsccdcoexemptorder1026-15.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 The Commission received comment letters from the following in 2018: Japan Securities Clearing Corporation JSCC; ASX Clear Futures Pty ASX;
Futures Industry Association FIA and Securities and Financial Markets Association SIFMA; and International Swaps and Derivatives Association, Inc. ISDA.
8 2018 Proposal, 83 FR at 39930.
9 See ASX Clear Futures Pty comment letter at 1 stating that ASXCF supports the CFTC
permitting exempt DCOs to clear swaps for U.S.
person customers. ASXCF believes it would be beneficial to allow U.S. person customers to access the broadest possible range of central clearing facilities CCPs as this would provide U.S.
person customers with flexibility and choice in accessing the best commercial solutions for the products that they use subject to those CCPs meeting global QCCP standards under the CPMI
IOSCO Principles for Financial Market Infrastructures PFMIs.; JSCC comment letter at 5 stating that JSCC would like the CFTC to consider the potential benefits of allowing U.S.
customers to access exempt DCOs, using a similar approach to the correspondent clearing structure adopted for foreign futures markets, by permitting . . . non-U.S. clearing members in an exempt DCO
to clear for U.S. customers, without the necessity to register as a FCM, as long as those non-U.S.

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In light of these comments, the Commission further proposed in July 2019 to permit foreign intermediaries to clear swaps for U.S. customers at exempt DCOs 2019 Proposal.10
After considering the comments received in response to the 2019
Proposal,11 the Commission is adopting the 2018 Proposal and, with limited exceptions,12 declining to adopt the 2019 Proposal at this time. The Commission may consider permitting U.S. customer clearing at exempt DCOs or establishing a substantial risk test for exempt DCOs at a later time.
B. Existing Exempt DCO Orders As previously noted, a clearing organization must be subject to comparable, comprehensive supervision and regulation by appropriate government authorities in the clearing organizations home country to be eligible for an exemption from registration as a DCO for the clearing of swaps. To date, the Commission has issued four exempt DCO orders, subject to conditions, consistent with the statute. In granting these exemptions, the Commission determined that a supervisory and regulatory framework that conforms to the PFMIs is comparable to, and as comprehensive as, the supervisory and regulatory requirements applicable to registered DCOs.13 This conclusion is consistent 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 in response to the Commissions question about customer clearing, ISDA strongly believes that the CFTC should permit exempt DCOs to clear swaps for customers..
10 See Exemption From Derivatives Clearing Organization Registration, 84 FR 35456 Jul. 23, 2019.
11 The Commission received comment letters from the following in 2019: ASX; Americans for Financial Reform Education Fund AFR Ed Fund;
Better Markets, Inc. Better Markets; CCP12;
Citadel; CME Group, Inc. CME; FIA; OTC Clearing Hong Kong Limited OTC Clear; Intercontinental Exchange, Inc. ICE; International Bankers Association of Japan IBA Japan and Japan Financial Markets Council JFMC; ISDA; JSCC;
LCH Group LCH; Milbank LLP Milbank; SIFMA;
and World Federation of Exchanges WFE.
12 As discussed further below, the Commission is adopting 39.6b6, as modified in the 2019
Proposal, 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; 39.6b9 renumbered as 39.6b8, which provides that the Commission may condition an exemption from DCO registration on any other facts and circumstances it deems relevant; and 39.6f, which establishes a process for modification or termination of an exemption from DCO registration upon Commission initiative.
13 The Commission holds systemically important DCOs and subpart C DCOs to requirements that are
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