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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations the Commission and the Department of Justice in protecting market participants and the public and will impose on exempt DCOs the minor costs associated with retaining a U.S. agent.
New 39.6b4 and 39.6b8 are general provisions that require an exempt DCO to comply, and demonstrate compliance as requested by the Commission, with any condition of the exempt DCOs order of exemption and to provide that the Commission may condition an exemption from DCO
registration on any other facts and circumstances it deems relevant. These provisions do not provide any costs and benefits in and of themselves. The costs and benefits of any additional conditions that may be imposed pursuant to 39.6b8 can only be considered when such additional conditions are imposed.
New 39.6b5 requires an exempt DCO to promptly make all books and records related to its operation as an exempt DCO available to any Commission representative upon request. This provision will facilitate the Commissions mission, including the protection of market participants and the public. While the Commission does not anticipate making routine requests for books and records, providing or making available books and records pursuant to any such request will impose modest costs on exempt DCOs.
New 39.6b7 requires an exempt DCOs home country regulator to provide an annual certification that the exempt DCO is in good regulatory standing. That rule, along with 39.6a2 which requires an MOU or similar arrangement to be in effect between the Commission and the home country regulator, will assist the Commission in protecting market participants and the public, but will not impose any direct costs on exempt DCOs or market participants. Where no MOU between the Commission and a home country regulator is in effect, a clearing organization in that country wanting an exemption may incur costs associated with facilitating such an MOU, or it could incur the costs of either registering with the Commission or forgoing U.S. participation. The requirements regarding an MOU also exist in current procedures, so the costs and benefits of those requirements are currently being realized by exempt DCOs and U.S. persons who currently clear proprietary swaps on exempt DCOs.
Finally, new 39.6d requires an exempt DCO to report swap data for the two cleared swaps that result from the novation of an original swap cleared
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through the exempt DCO. An exempt DCO would also need to report the termination of the original swap to the SDR that received the swap data for the original swap. To avoid duplicative reporting, the exempt DCO is also required to have rules that prohibit the part 45 reporting of the two new swaps by the counterparties to the original swap. CCP12 commented that transparency in the swaps markets, which is supported by SDR reporting, provides a number of benefits. However, CCP12 argued that the SDR reporting requirements would post significant operational challenges, such as onboarding with an SDR that has a different reporting format than that of the exempt DCOs home country. CCP12
also commented that SDR reporting fees would be a burden based on the number of reported transactions. The Commission agrees that SDR reporting enhances market transparency and thus provides benefits to the market. The Commission notes that SDR reporting costs would otherwise be borne by the counterparties to the swap, and because there are far more swap counterparties than exempt DCOs, it would be more efficient to require the relatively few exempt DCOs to bear the operational burdens of setting up and following reporting processes and procedures with the various SDRs. The costs and benefits of the reporting requirements are currently being realized to the extent that similar requirements are contained in existing orders of exemption for DCOs.
3. Section 15a Factors a. Protection of Market Participants and the Public For the most part, the final rule does not materially reduce the protections available to market participants and the public because, among other things, it:
i Only permits exempt DCOs to clear swaps for U.S. persons for their proprietary accounts, and not for customers; ii requires that an exempt DCO be subject to comparable, comprehensive supervision and regulation by a home country regulator as provided by the PFMIs; iii requires an MOU or similar arrangement with the home country regulator that would enable the Commission to obtain any information that the Commission deems necessary to evaluate the initial and continued eligibility of the DCO for exemption from registration or to review its compliance with any conditions of such exemption; iv provides additional protections with the conditions of exemption set out in 39.6b, including open access and
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data reporting requirements; and v explicitly authorizes 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 protect market participants and the public by ensuring that exempt DCOs are subject to the internationally recognized PFMIs.
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.
b. Efficiency, Competitiveness, and Financial Integrity The final rule promotes operational efficiency by permitting exempt DCOs to clear swaps for U.S. persons without having to apply for DCO registration, which involves the submission of extensive documentation to the Commission. The final rule also mitigates duplicative compliance requirements by not requiring exempt DCOs to comply with the Commissions part 39 regulations with the exception of 39.6 in addition to the requirements of their home country regulator. In addition, adopting these 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 exempt DCO framework may also promote competition for U.S.
proprietary business among non-U.S.
clearing organizations because it holds exempt DCOs to the internationally recognized standards set forth in the PFMIs. This will allow such clearing organizations to compete with each other for the proprietary business of U.S. clearing members under their own comparable regulatory regimes, which may potentially increase the number of DCOs available to clear for U.S. persons.
The final rule is expected to maintain the financial integrity of swap transactions cleared by exempt DCOs because such DCOs are 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 as
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