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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations
DCOs or persons that clear through an exempt DCO. For example, a registered DCO is permitted to clear for U.S.
customers. An eligible clearing organization may choose to register, particularly under the Alternative Compliance framework, over seeking an exemption if it determines that the benefits of customer clearing including an enhanced ability to attract U.S.
business would justify the extra costs of registration relative to an exemption.
Based on data submitted by registered DCOs to the Commission pursuant to 39.19c, customer clearing typically accounts for a majority of the initial margin at a DCO about 70 percent on average, and this is likely true for other clearing organizations as well. Thus, the inability of exempt DCOs to clear for U.S. customers may create a significant disincentive to seeking exemption in lieu of registration.
Registered DCOs may face a competitive disadvantage as a result of the final rule. A registered DCO may have to compete with an exempt DCO
for U.S. proprietary swap business, yet may have higher ongoing compliance costs than an exempt DCO. This competitive disadvantage is mitigated by the fact that exempt DCOs are, as a precondition of such exemption, 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.
The Commission is codifying in 39.6a1 the statutory authority in section 5bh of the CEA that the Commission may exempt a clearing organization from DCO registration for the clearing of swaps provided that the Commission determines that the clearing organization is subject to comparable, comprehensive supervision and regulation by a home country regulator. To satisfy this standard, the clearing organization will need to demonstrate, among other things, that:
i It is organized in a jurisdiction in which a home country regulator applies to the clearing organization, on an ongoing basis, statutes, rules, regulations, and/or policies that, taken together, are consistent with the PFMIs;
and ii it observes the PFMIs in all material respects. New 39.6b6
requires an annual certification that an exempt DCO continues to observe the PFMIs in all material respects.
The Commission believes that the PFMIs provide numerous regulatory benefits and promote the protection of market participants and the public, the financial integrity of derivatives markets, and sound risk management
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practices. In this regard, the PFMIs include provisions that address DCOs establishing requirements and/or procedures designed to ensure that clearing members meet their obligations to DCOs and safeguard customer funds.
For example, the PFMIs provide that DCOs should establish risk-related participation requirements adequate to ensure that participants meet operational, financial, and legal requirements to allow them to fulfill their obligations to DCOs. Financial requirements may include reasonable risk-related capital requirements for participants and appropriate indicators of participant creditworthiness.56 In addition, the PFMIs provide that a DCO
should monitor compliance with its participation requirements on an ongoing basis through the receipt of timely and accurate information.57 The PFMIs further provide that collateral belonging to customers of clearing members should be segregated from the assets of the clearing member through which the customers clear.58 Moreover, using the PFMIs may promote regulatory comity, since the PFMIs represent standards that have been agreed to by the G20 and are widely used in the regulation of clearing organizations. Although the PFMIs are already used to determine eligibility for receiving an exemption from DCO
registration, the Commission believes that codifying the use of the PFMIs is beneficial from the perspectives of transparency and consistency.
The Commission acknowledges, as discussed in the preamble above, that the PFMIs are not identical to, nor as detailed as, part 39. Thus, market participants choosing to clear swaps through exempt DCOs may incur costs associated with forgoing certain regulatory protections that are not included in the PFMIs. However, these costs are mitigated by some of the conditions of exemption set out in 39.6b, as discussed below, as well as other Commission regulations applicable to exempt DCOs. These conditions including, for example, the open access provision of 39.6b2, provide additional regulatory protections beyond those required by the PFMIs. Additionally, the costs of using the PFMIs as compared to some other means of determining that a clearing organization is subject to comparable, comprehensive supervision and regulation by a home country regulator will vary depending on the home country regulatory regime.
56 PFMIs
at Principle 18, Explanatory Note 3.18.5.
at Principle 18, Explanatory Note 3.18.8.
58 Id. at Principle 14, Explanatory Note 3.14.1.

Finally, since the PFMIs are already used to determine eligibility for receiving an exemption from DCO
registration, these costs are currently being realized by exempt DCOs and U.S.
persons who currently clear proprietary swaps on exempt DCOs.
New 39.6b contain various conditions that the Commission is imposing for the granting of exemptions from DCO registration. These conditions are consistent with those that the Commission has been imposing on exempt DCOs prior to the adoption of this rule. Therefore, the costs and benefits of these conditions are currently being incurred by exempt DCOs and U.S. persons who currently clear proprietary swaps on such DCOs.
New 39.6b2 codifies the open access requirements of section 2h1B of the CEA with respect to swaps cleared by an exempt DCO to which one or more of the counterparties is a U.S. person.59 Under 39.6b2, an exempt DCO is required to maintain rules providing that all such swaps with the same terms and conditions submitted to the exempt DCO for clearing are economically equivalent and may be offset with each other, to the extent that offsetting is permitted by the exempt DCOs rules. An exempt DCO is also required to maintain rules providing for non-discriminatory clearing whether a swap is executed bilaterally or is executed on or subject to the rules of an unaffiliated electronic matching platform or trade execution facility, e.g., a swap execution facility.
This should benefit market participants by ensuring that they are able to offset their positions to the extent that it is feasible and consistent with DCO rules and that they are not subject to discrimination based on whether or not they execute on a trading platform. The Commission believes that most or all non-U.S. clearing organizations have open access rules that comply with 39.6b2 and has received no comments suggesting otherwise.
However, to the extent that a clearing organization seeking an exemption from DCO registration needs to change its rules to comply with this requirement, that clearing organization could incur costs.
New 39.6b3 requires an exempt DCO to consent to jurisdiction in the United States and designate an agent in the United States to receive notice or service of various documents issued by or on behalf of the Commission or the U.S. Department of Justice in connection with investigations or for certain other purposes. This will assist
57 Id.

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