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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations demand for strict compliance with U.S.
regulation that would subject CCPs to a patchwork of U.S. and foreign regulations. In summary, the PFMIfocused comparability framework strikes the proper balance by showing an appropriate level of deference to the legal and supervisory regime of the home country jurisdiction, while fulfilling the Commissions supervisory duty to ensure that foreign DCOs clearing for U.S. market participants are subject to a sound regulatory framework.
CME, ISDA, IBA Japan, and JFMC
supported the Commissions reliance on the PFMIs as the standard for determining whether a non-U.S.
clearing organizations home country regulatory regime is comparable and comprehensive. IBA Japan and JFMC
believe this approach strikes the correct balance between addressing risk to the United States and promoting crossborder harmonization. ISDA encouraged the Commission to continue its dialogue with foreign regulators in the EU and other jurisdictions to ensure that supervision in each jurisdiction is based on deference to home country regulations and compliance with the PFMIs. ISDA argued that applying inconsistent and duplicative regulatory frameworks to clearing organizations will lead to the fragmentation of global cleared derivatives markets.
AFR Ed Fund, Citadel, and Better Markets opposed using the PFMIs to determine whether a clearing organization is subject to comparable, comprehensive supervision and regulation by its home country regulator. These commenters argued that section 5bh of the CEA requires that the Commission compare the CEA
with the clearing organizations home country regime and that the Commission cannot use the fact that the foreign regulatory regime conforms to the PFMIs as a substitute for determining whether the regulatory regimes are comparable, as required by section 5bh.
AFR Ed Fund argued that the Commissions decision to deem compliance with any foreign regulatory regime that conforms to the PFMIs as fulfilling the statutory requirements for exempting a clearing organization from registration under U.S. law means that a foreign clearing organization can be exempted from registration without any determination that it is subject to supervision and regulation that is in any way comparable to the relevant U.S. laws or regulations. AFR Ed Fund further argued that the Commission cannot substitute its judgement as to whether a foreign regime conforms to
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the PFMIs, a set of broad principles with no standing under U.S. law, for the statutory mandate to ensure that a DCO
is subject to a regime comparable to U.S.
regulation and supervision.
Similarly, Better Markets argued that the proposal unlawfully treats the PFMIs as being the equivalent of U.S.
law for purposes of making a comparability determination under section 5bh. Better Markets also argued that the U.S. statutory and regulatory requirements for DCOs are not the equivalent of the PFMIs because the PFMIs do not have the force of law until they are incorporated into the home jurisdictions laws or regulations, and because, even when the PFMIs are implemented, material differences may exist between the PFMI-compliant regulatory regime and the PFMI
principles. Better Markets further argued that because section 5bh is only implicated if the non-U.S. clearing organization is subject to the DCO
registration requirement of section 5ba in the first instance, Congress limited the Commissions comparability inquiry to determining whether the non-U.S.
regime is comparable to the U.S.
regulatory requirements that would otherwise apply to the clearing organization. Better Markets claimed that the 2018 Proposal and the four existing exemptive orders suffer from the same legal deficiencies alleged in its comment.
Citadel believes the Commission should directly compare its regulatory regime with that of the clearing organizations home country. Citadel pointed out that the PFMIs do not address a number of important elements of the Commissions regulatory framework for DCOs, including nondiscriminatory access, straight-through processing, gross margining, public disclosure of rule filings, and public information. Lastly, Citadel stated that U.S. customer access should be considered as a part of the overall comparability assessment.
The Commission notes that section 5bh provides that the Commission may exempt a clearing organization from DCO registration if the Commission determines that the clearing organization is subject to comparable, comprehensive supervision and regulation . . . . Accordingly, the Commission may, and does, determine that a foreign regulatory regime that conforms to the PFMIs constitutes comparable, comprehensive supervision and regulation by . . . the appropriate government authorities in the home country of the organization, and therefore that a clearing organization subject to such a regime
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may be exempted from the DCO
registration requirements.25 As mentioned previously, the PFMIs are comparable to the DCO Core Principles and the implementing Commission regulations in purpose and scope. Both address major elements critical to the safe and efficient operations of clearing organizations, such as risk management, adequacy of financial resources, default management, margin, settlement, and participation requirements.26 Regulation 39.40 expressly states that subpart C of part 39 of the Commissions regulations is intended to establish standards which, together with subparts A and B
of part 39, are consistent with section 5bc of the CEA and the PFMIs and should be interpreted in that context.
Regarding Citadels comment, the Commission acknowledges that the PFMIs are not identical to, nor as detailed as, part 39. However, comparable and comprehensive does not mean identical. The Commission adopted the part 39 requirements for registered DCOs, which may generally clear futures, swaps, and other instruments for various U.S. persons to the extent permissible under the CEA.
Here, in light of the scope of an exempt DCOs clearing activities, the PFMIs are sufficiently comparable and comprehensive to provide the appropriate framework for the supervision and regulation of exempt DCOs permitted to clear in accordance with this final rule and other relevant conditions contained within any exemptive order granted by the Commission. Application of the PFMIs in the context of U.S. customer clearing, which is not part of the final rule, can be considered if the Commission takes up the issue of customer clearing at exempt DCOs.
The Commission is adopting 39.6a1 as proposed.
b. Memorandum of Understanding The Commission proposed 39.6a2
to require that, in order for a clearing organization to be eligible for an exemption from registration, an MOU or similar arrangement satisfactory to the Commission must be in effect between 25 As stated previously, this conclusion is consistent with other previous Commission determinations. See, e.g., Regulation 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.
26 See, e.g., Derivatives Clearing Organizations and International Standards, 78 FR 72476 Dec. 2, 2013 adopting final rules.

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