[Federal Register Volume 83, Number 156 (Monday, August 13, 2018)]
[Proposed Rules]
[Pages 39923-39937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17335]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 140

RIN 3038-AE65


Exemption From Derivatives Clearing Organization Registration

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
proposing amendments to its regulations to establish a regulatory 
framework within which the Commission may exempt a clearing 
organization that is organized outside of the United States 
(hereinafter referred to as ``non-U.S. clearing organization'') from 
registration as a derivatives clearing organization (DCO) in connection 
with the clearing organization's clearing of swaps. In addition, the 
Commission is proposing certain amendments to its delegation provisions 
in its regulations.

DATES: Comments must be received on or before October 12, 2018.

ADDRESSES: You may submit comments, identified by ``Exemption from 
Derivatives Clearing Organization Registration'' and RIN number 3038-
AE65, by any of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (FOIA), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I (2018), and are accessible on the 
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, [email protected]; Parisa Abadi, Associate Director, 202-
418-6620, [email protected]; Eileen R. Chotiner, Senior Compliance 
Analyst, 202-418-5467, [email protected]; Abigail S. Knauff, Special 
Counsel, 202-418-5123, [email protected]; Division of Clearing and Risk, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Project KISS
    B. Statutory and Regulatory Framework for Swaps Execution and 
Clearing
    C. Statutory and Regulatory Requirements for Registration and 
Operation of DCOs
II. Proposed Amendments to Part 39
    A. Regulation 39.1--Scope
    B. Regulation 39.2--Definitions
    C. Regulation 39.6--Exemption Provisions
    D. Regulation 39.9--Scope
III. Proposed Amendments to Part 140--Delegations of Authority
IV. Request for Comments
V. Consideration of Costs and Benefits
    A. Introduction
    B. Proposed Regulation 39.6
    C. Section 15(a) Factors
VI. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act

I. Background

A. Project KISS

    The Commission is engaging in an agency-wide review of its rules, 
regulations, and practices to make them simpler, less burdensome, and 
less costly, and to make progress on G-20 regulatory reforms. This 
initiative is called Project KISS, which stands for ``Keep It Simple, 
Stupid.'' \2\ The Commission is proposing to adopt regulations that 
would codify the policies and procedures that the Commission is 
currently following with respect to granting exemptions from DCO 
registration in order to make such policies and procedures transparent 
to all potential applicants.
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    \2\ See Remarks of Acting Chairman J. Christopher Giancarlo 
before the 42nd Annual International Futures Industry Conference in 
Boca Raton, FL, Mar. 15, 2017, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20. On February 24, 2017, 
President Donald J. Trump issued Executive Order 13777: Enforcing 
the Regulatory Reform Agenda (E.O. 13777). E.O. 13777 directs 
federal agencies, among other things, to designate a Regulatory 
Reform Officer and establish a Regulatory Reform Task Force. 
Although the CFTC, as an independent federal agency, is not bound by 
E.O. 13777, the Commission is nevertheless engaging in an agency-
wide review of its rules, regulations, and practices to make them 
simpler, less burdensome, and less costly. See Request for 
Information, 82 FR 23756 (May 24, 2017).
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B. Statutory and Regulatory Framework for Swaps Execution and Clearing

    The Commodity Exchange Act (CEA) \3\ provides that a clearing 
organization may not ``perform the functions of a [DCO]'' \4\ with 
respect to swaps unless

[[Page 39924]]

the clearing organization is registered with the Commission.\5\ 
However, the CEA also permits the Commission to conditionally or 
unconditionally exempt a clearing organization from registration for 
the clearing of swaps if the Commission determines that the clearing 
organization is subject to ``comparable, comprehensive supervision and 
regulation'' by appropriate government authorities in the clearing 
organization's home country.\6\
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    \3\ 7 U.S.C. 1 et seq.
    \4\ The term ``derivatives clearing organization'' is 
statutorily defined to mean a clearing organization in general. 
However, for purposes of the discussion herein, the term ``DCO'' 
refers to a Commission-registered DCO, the term ``exempt DCO'' 
refers to a derivatives clearing organization 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 1a(15) of the CEA, 7 U.S.C. 1a(15), and ``clearing 
organization or derivatives clearing organization'' under Regulation 
1.3, 17 CFR 1.3.
    \5\ Section 5b(a) of the CEA, 7 U.S.C. 7a-1(a).
    \6\ Section 5b(h) of the CEA, 7 U.S.C. 7a-1(h). Section 5b(h) 
also permits the Commission to exempt from DCO registration a 
securities clearing agency registered with the Securities and 
Exchange Commission; however, the Commission is not proposing to 
exempt securities clearing agencies at this time.
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    To date, the Commission has exempted four non-U.S. clearing 
organizations from DCO registration. The Commission is proposing to 
adopt regulations that would codify the policies and procedures that 
the Commission is currently following with respect to granting 
exemptions from DCO registration and would make such policies and 
procedures transparent to all potential applicants.

C. Statutory and Regulatory Requirements for Registration and Operation 
of DCOs

    As previously noted, the CEA requires a clearing organization that 
clears swaps to be registered with the Commission as a DCO. However, in 
order to be registered and maintain registration as a DCO, a clearing 
organization must comply with the core principles for DCOs set forth in 
the CEA (DCO Core Principles) \7\ and all applicable Commission 
regulations.\8\
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    \7\ 7 U.S.C. 7a-1(c)(2)(A).
    \8\ See 17 CFR parts 1--190 including, in particular, part 39, 
which implements the DCO Core Principles.
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    The Commission may conditionally or unconditionally exempt a 
clearing organization from registration for the clearing of swaps if 
the Commission determines that the clearing organization is subject to 
``comparable, comprehensive supervision and regulation'' by the 
clearing organization's home country regulator(s). The Commission has 
construed ``comparable, comprehensive supervision and regulation'' to 
mean that the home country's supervisory and regulatory framework 
should be consistent with, and achieve the same outcome as, the 
statutory and regulatory requirements applicable to registered DCOs. 
This outcomes-based approach reflects the Commission's recognition that 
a foreign jurisdiction's supervisory and regulatory scheme applicable 
to its clearing organizations may differ from the Commission's in 
certain respects, but nevertheless may achieve the same underlying 
goals. This approach also supports the Commission's effort to strike an 
appropriate balance by focusing on the risk implications to the United 
States, while promoting global harmonization.
    Further, the Commission has deemed a supervisory and regulatory 
framework that conforms to the Principles for Financial Market 
Infrastructures (PFMIs) \9\ to be comparable to, and as comprehensive 
as, the supervisory and regulatory requirements applicable to 
registered DCOs.\10\ Notably, the Commission was a key contributor to 
the joint efforts of the Committee on Payments and Market 
Infrastructures (CPMI) \11\ and the Technical Committee of the 
International Organization of Securities Commissions (IOSCO) to develop 
the PFMIs, which apply to clearing organizations.\12\ In addition to 
contributing to the development of the PFMIs, the Commission serves as 
a member of the CPMI-IOSCO task force that monitors implementation of 
the PFMIs. The PFMIs are comparable to the DCO Core Principles and 
applicable 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.\13\ In light of the foregoing, the Commission believes 
that a supervisory and regulatory framework that adheres to the 
framework under the PFMIs achieves outcomes that are comparable to that 
of the supervisory and regulatory requirements applicable to registered 
DCOs. Accordingly, the Commission proposes to continue to use the PFMI 
framework as the benchmark for making a comparability determination 
with respect to a foreign jurisdiction's supervisory and regulatory 
scheme.
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    \9\ See CPMI-IOSCO, Principles for financial market 
infrastructures (Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf. The PFMIs define a 
``financial market infrastructure'' as a ``multilateral system among 
participating institutions, including the operator of the system, 
used for the purposes of clearing, settling, or recording payments, 
securities, derivatives, or other financial transactions.'' See 
PFMIs, paragraph 1.8. Additionally, the PFMIs are ``broadly designed 
to apply to all systemically important [financial market 
infrastructures].'' See PFMIs, paragraph 1.20.
    \10\ This conclusion is consistent with previous Commission 
determinations. See, e.g., Regulation 50.52(b)(4)(i)(E), 17 CFR 
50.52(b)(4)(i)(E) (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 organization's home country 
and that has been assessed to be in compliance with the PFMIs).
    \11\ CPMI was formerly the Committee on Payment and Settlement 
Systems; it was renamed effective September 1, 2014. See http://www.bis.org/press/p140901.htm.
    \12\ In order to promote effective and consistent global 
regulation of swaps, section 752 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act) directs the 
Commission to consult and coordinate with foreign regulatory 
authorities on the establishment of consistent international 
standards with respect to the regulation of swaps, among other 
things. Section 752 of the Dodd-Frank Act, Public Law 111-203, 124 
Stat. 1376 (2010), codified at 15 U.S.C. 8325.
    \13\ See, e.g., Derivatives Clearing Organizations and 
International Standards, 78 FR 72476 (Dec. 2, 2013) (adopting final 
rules).
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II. Proposed Amendments to Part 39

A. Regulation 39.1--Scope

    The Commission is proposing to amend Regulation 39.1 to state that 
the provisions of subpart A of part 39 apply to any registered DCO or, 
as applicable, any entity applying to be registered as a DCO or 
applying to be exempt from DCO registration. Regulation 39.3, which is 
contained in subpart A and is not proposed to be amended, sets forth 
procedures for DCO registration. Proposed Regulation 39.6, which also 
would be contained in subpart A, would set forth the requirements for 
an exemption from DCO registration, as discussed below.

B. Regulation 39.2--Definitions

    In connection with the proposed exemption regulations, the 
Commission is proposing to add five definitions to Regulation 39.2, for 
purposes of part 39 only.
    The Commission proposes to define the term ``exempt derivatives 
clearing organization'' to mean a derivatives clearing organization 
that the Commission has exempted from registration under section 5b(a) 
of the CEA, pursuant to section 5b(h) of the CEA and Regulation 39.6.
    The Commission proposes to define the term ``good regulatory 
standing'' to mean, with respect to a non-U.S. clearing organization 
that is authorized to act as a clearing organization in its home 
country, that either there has been no finding by the home country

[[Page 39925]]

regulator of material non-observance 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. The Commission believes that 
this is a workable definition from the standpoint of both the 
Commission and the home country regulator in that it establishes a 
basis for providing the Commission with a high degree of assurance as 
to the clearing organization's observance of the PFMIs, while only 
seeking from the home country regulator a representation that it can 
reasonably make.
    The Commission proposes to define the term ``home country'' to 
mean, with respect to a non-U.S. clearing organization, the 
jurisdiction in which the clearing organization is organized.
    The Commission proposes to define the term ``home country 
regulator,'' with respect to a non-U.S. clearing organization, as an 
appropriate government authority which licenses, regulates, supervises, 
or oversees the clearing organization's clearing activities in the home 
country. The proposed definition is consistent with section 5b(h) of 
the CEA, which provides, in relevant part, that the Commission may 
exempt a clearing organization from registration for the clearing of 
swaps if the Commission determines that the clearing organization is 
subject to comparable, comprehensive supervision and regulation by the 
appropriate government authorities in the home country of the clearing 
organization. Use of the term ``an appropriate government authority'' 
rather than ``the appropriate government authority'' is intended to 
recognize that in some foreign jurisdictions there may be more than one 
government authority that supervises and regulates a clearing 
organization.
    The Commission proposes to define the term ``Principles for 
Financial Market Infrastructures'' as the PFMIs published by CPMI-IOSCO 
in April 2012, as updated, revised, or otherwise amended.\14\
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    \14\ The Commission proposes to include this language to 
recognize that CPMI-IOSCO could offer further interpretation of or 
guidance on the PFMIs. See, e.g., CPMI-IOSCO, Resilience of central 
counterparties: Further guidance on the PFMI (July 2017), available 
at https://www.bis.org/cpmi/publ/d163.pdf.
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C. Regulation 39.6--Exemption Provisions

    Proposed Regulation 39.6 would implement section 5b(h) of the CEA 
by setting forth the regulatory framework within which the Commission 
may exempt a clearing organization from DCO registration in connection 
with the clearing of swaps. After section 5b(h) was enacted in 2010, 
clearing organizations outside the United States began inquiring as to 
how they could go about obtaining an exemption. Because the Commission 
had not yet developed a framework for granting exemptions, the 
Commission's Division of Clearing and Risk (DCR) began granting time-
limited no-action relief to these clearing organizations which permit 
them to engage in swap clearing activity that would otherwise require 
registration as a DCO.\15\ After careful consideration of the issues 
involved, DCR staff presented initial thoughts on granting exemptions 
at a May 2014 meeting of the Commission's Global Markets Advisory 
Committee. Finally, in November 2014, DCR sent a letter to those 
clearing organizations that had received no-action relief, advising 
them on how to petition the Commission for an exemption. In response to 
petitions submitted in accordance with the terms of the letter, the 
Commission issued orders of exemption from DCO registration to ASX 
Clear (Futures) Pty Limited (ASX), Korea Exchange, Inc. (KRX), Japan 
Securities Clearing Corporation (JSCC), and OTC Clearing Hong Kong 
Limited (OTC Clear).\16\ Proposed Regulation 39.6 would codify the 
policies and procedures that the Commission is currently following with 
respect to granting exemptions from DCO registration and would make 
such policies and procedures transparent to all potential applicants 
for an exemption.
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    \15\ See, e.g., CFTC Letter No. 16-56 (May 31, 2016) (granting 
no-action relief to Shanghai Clearing House); CFTC Letter No. 14-107 
(Aug. 18, 2014) (granting no-action relief to Clearing Corporation 
of India Ltd.); CFTC Letter No. 14-87 (June 26, 2014) (granting no-
action relief to Korea Exchange, Inc.); CFTC Letter No. 14-68 (May 
7, 2014) (granting no-action relief to OTC Clearing Hong Kong 
Limited and certain of its clearing members); CFTC Letter No. 14-07 
(Feb. 6, 2014) (granting no-action relief to ASX Clear (Futures) Pty 
Limited); and CFTC Letter No. 12-56 (Dec. 17, 2012) (granting no-
action relief to Japan Securities Clearing Corporation and certain 
of its clearing participants).
    \16\ See ASX Amended Order of Exemption from Registration (Jan. 
28, 2016), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexemption.pdf; KRX 
Order of Exemption from Registration (Oct. 26, 2015), available at 
http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-15.pdf; JSCC Order of Exemption from 
Registration (Oct. 26, 2015), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf; OTC Clear Order of Exemption from Registration (Dec. 21, 
2015), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf.
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1. Eligibility for Exemption
    Proposed Regulation 39.6(a) would provide that the Commission may 
exempt, conditionally or unconditionally, a non-U.S. clearing 
organization from registration as a DCO for the clearing of swaps for 
certain U.S. persons,\17\ and thereby exempt such clearing organization 
from compliance with the provisions of the CEA and Commission 
regulations applicable to DCOs, if the Commission determines that all 
of the eligibility requirements listed in proposed Regulation 
39.6(a)(1) and (a)(2) are met, and the clearing organization satisfies 
the conditions set forth in Regulation 39.6(b).\18\ Each of these 
requirements is described below.
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    \17\ The Commission proposes to use the definition of ``U.S. 
person'' as set forth in the Commission's Interpretive Guidance and 
Policy Statement Regarding Compliance With Certain Swap Regulations, 
78 FR 45292, 45316-45317 (July 26, 2013), as such definition may be 
amended or superseded by a definition of the term ``U.S. person'' 
that is adopted by the Commission and applicable to this proposed 
regulation.
    \18\ The eligibility requirements listed in proposed Regulation 
39.6(a)(1) and (a)(2) and the conditions set forth in proposed 
Regulation 39.6(b) would be pre-conditions to the Commission's 
issuance of any order exempting a clearing organization from the DCO 
registration requirements of the CEA and Commission regulations. 
Additional conditions that are unique to the facts and circumstances 
specific to a particular clearing organization could be imposed upon 
that clearing organization in the Commission's order of exemption, 
as permitted by section 5b(h) of the CEA.
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    Proposed Regulation 39.6(a)(1) would codify the statutory 
requirement that the Commission may only 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. Proposed Regulation 
39.6(a)(1)(i) would require that, in order to be eligible for an 
exemption from DCO registration, a clearing organization must be 
organized in a jurisdiction in which a home country regulator applies 
to the clearing organization, on an ongoing basis, statutes, rules, 
regulations, policies, or a combination thereof that, taken together, 
are consistent with the PFMIs.\19\ Under proposed Regulation 
39.6(a)(1)(ii) and

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(iii), a clearing organization would be required to observe the PFMIs 
in all material respects and be in good regulatory standing in its home 
country. As previously noted, the Commission believes that operating 
within a regulatory framework consistent with the PFMIs would meet the 
CEA's requirement in section 5b(h) that, in order to qualify for an 
exemption, a clearing organization must be subject to comparable, 
comprehensive supervision and regulation by the appropriate government 
authorities in its home country.\20\
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    \19\ The Commission notes that the regulatory framework of a 
particular jurisdiction may consist of one or multiple sources of 
authority. In particular, the inclusion of ``policies'' is intended 
to accommodate a jurisdiction in which a policy has the force of 
law, and a set of policies may, on its own, represent the 
jurisdiction's regulatory framework that is consistent with the 
PFMIs.
    \20\ In addition to the principles applicable to central 
counterparties and other FMIs, the PFMIs provide that central banks, 
market regulators, and other relevant authorities should observe 
five responsibilities. Consistent with this, the Commission expects 
that, in order to meet the standard of being subject to comparable, 
comprehensive supervision and regulation, a clearing organization's 
home country regulator will observe these responsibilities. In 
particular, Responsibility D Explanatory Note 4.4.1 provides that 
the home country regulator should adopt the PFMIs, and, ``[w]hile 
the precise means through which the principles are applied may vary 
from jurisdiction to jurisdiction, all [CPMI] and IOSCO members are 
expected to apply the principles to the relevant FMIs in their 
jurisdictions to the fullest extent allowed by the legal framework 
in their jurisdiction.'' PFMIs, paragraph 4.4.1. Therefore, the 
Commission would not find a home country regulator's statement that 
it requires a clearing organization to observe the PFMIs to be 
sufficient to meet the above standard for exemption, if the home 
country regulator has not itself adopted a regulatory framework that 
is consistent with the PFMIs.
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    Proposed Regulation 39.6(a)(2) would provide that, in order for a 
clearing organization to be eligible for an exemption from DCO 
registration, a memorandum of understanding (MOU) or similar 
arrangement satisfactory to the Commission must be in effect between 
the Commission and the clearing organization's home country 
regulator,\21\ pursuant to which, among other things, the home country 
regulator agrees to provide to the Commission any information that the 
Commission deems necessary to evaluate the clearing organization's 
initial and continued eligibility for exemption or to review compliance 
with any conditions of such exemption. The Commission has customarily 
entered into MOUs or similar arrangements in connection with the 
supervision of non-U.S. clearing organizations that are registered as 
DCOs. In the context of exempt DCOs, satisfactory MOUs or similar 
arrangements with the home country regulator would include provisions 
for information sharing and cooperation, as well as for notification 
upon the occurrence of certain events, but the Commission would not 
expect to conduct routine site visits to exempt DCOs.
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    \21\ In foreign jurisdictions where more than one regulator 
supervises and regulates a clearing organization, the Commission 
would expect to enter into an MOU or similar arrangement with more 
than one regulator.
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2. Conditions of Exemption
    Proposed Regulation 39.6(b) sets forth conditions to which an 
exempt DCO would be subject. These conditions are consistent with the 
conditions that the Commission has imposed on each of the clearing 
organizations to which it has previously issued orders of exemption.
    Under proposed Regulation 39.6(b)(1)(i), a U.S. person that is a 
clearing member of an exempt DCO would be permitted to clear swaps for 
itself and those persons identified in the definition of ``proprietary 
account'' set forth in Regulation 1.3. This provision is intended to 
permit a U.S. clearing member to clear for affiliates (including a 
parent or subsidiary) that are either U.S. or non-U.S. persons. The 
Commission recognizes that in some foreign jurisdictions, affiliates 
are considered to be ``customers'' and their positions are held in 
customer accounts. Clearing for affiliates under these circumstances 
would be permissible even if the affiliate positions are not held in an 
account that is an analogue to a proprietary account under the 
Commission's regulations.
    Similarly, proposed Regulation 39.6(b)(1)(ii) would provide that a 
non-U.S. person that is a clearing member of an exempt DCO may clear 
swaps for any affiliated U.S. person identified in the definition of 
``proprietary account'' in Regulation 1.3. This complements the 
standard in paragraph (b)(1)(i) by clarifying that an exempt DCO may 
clear for affiliated entities when one or more of those entities is a 
U.S. person, even if the clearing member itself is not a U.S. person.
    Proposed Regulation 39.6(b)(1)(iii) would provide that a futures 
commission merchant (FCM) may be a clearing member of an exempt DCO, or 
maintain an account with an affiliated broker that is a clearing 
member, for the purpose of clearing swaps for the FCM itself and those 
persons identified in the definition of ``proprietary account'' in 
Regulation 1.3. Again, this provision is intended to permit what would 
be considered clearing of ``proprietary'' positions under the 
Commission's regulations, even if the positions would qualify as 
``customer'' positions under the laws and regulations of an exempt 
DCO's home country. This provision would clarify that an exempt DCO may 
clear positions for FCMs if the positions are not ``customer'' 
positions under the Commission's regulations.
    The effect of proposed Regulation 39.6(b)(1) is to prohibit the 
clearing of FCM customer positions at an exempt DCO. Section 4d(f)(1) 
of the CEA makes it unlawful for any person to accept money, 
securities, or property (i.e., funds) from a swaps customer to margin a 
swap cleared through a DCO unless the person is registered as an 
FCM.\22\ Any swaps customer funds held by a DCO are also subject to the 
segregation requirements of section 4d(f)(2) of the CEA, and in order 
for a swaps customer to receive protection under this regime, 
particularly in an insolvency context, its funds must be carried by an 
FCM and deposited with a registered DCO.\23\ Absent that chain of 
registration, the swaps customer's funds may not be treated as customer 
property under the U.S. Bankruptcy Code \24\ and the Commission's 
regulations. Because of this, it has been the Commission's policy to 
allow exempt DCOs to clear only proprietary positions of U.S. persons 
and FCMs. The proposed regulations would codify this approach.
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    \22\ 7 U.S.C. 6d(f)(1). This provision establishes a customer 
protection regime for swaps customers that is broadly similar to the 
regime for futures customers and options on futures customers under 
sections 4d(a) and (b) of the CEA. 7 U.S.C. 6d(a) and (b).
    \23\ See Section 761(2) of the Bankruptcy Code, 11 U.S.C. 761(2) 
(defining a ``clearing organization'' as a derivatives clearing 
organization registered under the CEA), and Regulation 190.01(f), 17 
CFR 190.01(f) (stating that for purposes of the part 190 bankruptcy 
rules, ``clearing organization'' has the same meaning as that set 
forth in section 761(2) of the Bankruptcy Code).
    \24\ 11 U.S.C. 761-767.
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    Proposed Regulation 39.6(b)(2) would codify the ``open access'' 
requirements of section 2(h)(1)(B) 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.\25\ Paragraph (b)(2)(i) would require an exempt DCO to 
maintain rules providing that all such swaps with the same terms and 
conditions (as defined by product specifications established under the 
exempt DCO's rules) 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 DCO's rules. 
Paragraph (b)(2)(ii) would require an exempt DCO to maintain rules 
providing for non-discriminatory clearing of such a swap executed 
either bilaterally or on or subject to the rules of an unaffiliated 
electronic matching platform or trade execution facility, e.g., a swap 
execution facility.
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    \25\ 7 U.S.C. 2(h)(1)(B).
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    Proposed Regulation 39.6(b)(3) would provide that an exempt DCO 
must

[[Page 39927]]

consent to jurisdiction in the United States and designate an agent in 
the United States, for notice or service of process, pleadings, or 
other documents issued by or on behalf of the Commission or the U.S. 
Department of Justice in connection with any actions or proceedings 
against, or any investigations relating to, the exempt DCO or any U.S. 
person or FCM that is a clearing member or that clears swaps through an 
affiliated clearing member. The name of the designated agent would be 
submitted as part of the clearing organization's application for 
exemption. If an exempt DCO appoints another agent to accept such 
notice or service of process, the exempt DCO would be required to 
promptly inform the Commission of this change. This is consistent with 
requirements currently imposed in the registration orders of DCOs that 
are organized outside of the United States as well as in each of the 
orders of exemption that the Commission has issued.
    Proposed Regulation 39.6(b)(4) is a general provision that would 
require an exempt DCO to comply, and demonstrate compliance as 
requested by the Commission, with any condition of the exempt DCO's 
order of exemption.
    Proposed Regulation 39.6(b)(5) would require an exempt DCO to make 
all documents, books, records, reports, and other information related 
to its operation as an exempt DCO (books and records) open to 
inspection and copying by any Commission representative, and to 
promptly make its books and records available and provide them directly 
to Commission representatives, upon the request of a Commission 
representative. This condition of exemption is consistent with section 
5b(h) of the CEA, which provides that the Commission may exempt a DCO 
from registration with conditions that may include requiring that the 
DCO be available for inspection by the Commission and make available 
all information requested by the Commission.\26\ The Commission notes 
that it does not anticipate conducting routine site visits to exempt 
DCOs. However, the Commission may request an exempt DCO to provide 
books and records related to its operation as an exempt DCO in order 
for the Commission to ensure that, among other things, the exempt DCO 
continues to meet the eligibility requirements for an exemption as well 
as the conditions of its exemption.\27\
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    \26\ See also Regulation 1.31, 17 CFR 1.31 (requiring, among 
other things, that books and records of DCOs and other registered 
entities be made available for inspection by Commission 
representatives).
    \27\ Although an MOU or similar arrangement would provide for 
information sharing whereby the home country regulator agrees to 
provide to the Commission any information that the Commission deems 
necessary to evaluate the clearing organization's initial and 
continued eligibility for exemption or to review compliance with any 
conditions of such exemption, the Commission would retain the 
authority to access books and records directly from an exempt DCO.
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    Proposed Regulation 39.6(b)(6) would require that the exempt DCO 
provide an annual certification that it continues to observe the PFMIs 
in all material respects, within 60 days following the end of its 
fiscal year. Proposed Regulation 39.6(b)(7) would require that the 
Commission receive an annual written representation from a home country 
regulator that the exempt DCO is in good regulatory standing, within 60 
days following the end of the exempt DCO's fiscal year. These 
requirements would help the Commission to assess an exempt DCO's 
continued eligibility for an exemption.
3. Reporting Requirements
    Proposed Regulation 39.6(c) and (d) would require an exempt DCO to 
meet certain reporting requirements, which are consistent with the 
reporting requirements exempt DCOs currently meet.
a. General Reporting Requirements
    Proposed Regulation 39.6(c)(1) sets forth general reporting 
requirements pursuant to which an exempt DCO must provide certain 
information directly to the Commission: (1) On a periodic basis (daily 
or quarterly); and (2) after the occurrence of a specified event, each 
in accordance with the submission requirements of Regulation 
39.19(b).\28\ Such information may be used by the Commission, among 
other things, for the purposes of the Commission evaluating the 
continued eligibility of the exempt DCO for exemption, reviewing the 
exempt DCO's compliance with any conditions of its exemption, or 
conducting oversight of U.S. persons and their affiliates, and the 
swaps that they clear through the exempt DCO.
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    \28\ Regulation 39.19(b), 17 CFR 39.19(b), requires that a DCO 
submit reports electronically and in a format and manner specified 
by the Commission, defines the term ``business day,'' and 
establishes the relevant time zone for any stated time, unless 
otherwise specified by the Commission. The Commission has specified 
that U.S. Central time will apply with respect to the daily reports 
that must be filed by exempt DCOs pursuant to proposed Regulation 
39.6(c)(2)(i).
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    Proposed Regulation 39.6(c)(2)(i) would require an exempt DCO to 
compile a report as of the end of each trading day, and submit it to 
the Commission by 10:00 a.m. U.S. Central time on the following 
business day, containing with respect to swaps: (A) Initial margin 
requirements and initial margin on deposit for each U.S. person; and 
(B) daily variation margin, separately listing the mark-to-market 
amount collected from or paid to each U.S. person. However, if a 
clearing member margins on a portfolio basis its own positions and the 
positions of its affiliates, and either the clearing member or any of 
its affiliates is a U.S. person, the exempt DCO would be required to 
report initial margin requirements and initial margin on deposit for 
all such positions on a combined basis for each such clearing member 
and to separately list the mark-to-market amount collected from or paid 
to each such clearing member, on a combined basis. These requirements 
are similar to certain reporting requirements in Regulation 39.19(c)(1) 
that apply to registered DCOs.\29\ These reports would provide the 
Commission with information regarding the cash flows associated with 
U.S. persons clearing swaps through exempt DCOs in order to analyze the 
risks presented by such U.S. persons and to assess the extent to which 
U.S. business is being cleared by each exempt DCO.
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    \29\ Specifically, Regulation 39.19(c)(1) requires registered 
DCOs to submit daily reports to the Commission, by 10:00 a.m. on the 
following business day, which contain, among other things, initial 
margin requirements, initial margin on deposit, and daily variation 
margin for each clearing member. See Regulation 39.19(c)(1)(i)(A) 
and (c)(1)(i)(B), 17 CFR 39.19(c)(1)(i)(A) and (c)(1)(i)(B). These 
provisions require such information to be provided for each clearing 
member by house origin and by each customer origin. This distinction 
would not apply to an exempt DCO, which will only be permitted to 
clear transactions that the Commission would treat as 
``proprietary.'' See discussion of proprietary and customer clearing 
supra section II.C.2.
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    Proposed Regulation 39.6(c)(2)(ii) would require an exempt DCO to 
compile a report as of the last day of each fiscal quarter, and submit 
the report to the Commission no later than 17 business days after the 
end of the fiscal quarter, containing: (A) The aggregate clearing 
volume of U.S. persons during the fiscal quarter, and (B) the average 
open interest of U.S. persons during the fiscal quarter. If a clearing 
member is a U.S. person, this data would include the transactions and 
positions of the clearing member and all affiliates for which the 
clearing member clears; if a clearing member is not a U.S. person, the 
data would only have to include the transactions and positions of 
affiliates that are U.S. persons. Paragraph (C) of proposed Regulation 
39.6(c)(2)(ii) would require that an exempt DCO's quarterly report to 
the Commission contain a list of U.S.

[[Page 39928]]

persons and FCMs \30\ that are either clearing members or affiliates of 
any clearing member, with respect to the clearing of swaps, as of the 
last day of the fiscal quarter. This information would enable the 
Commission, in conducting risk surveillance of U.S. persons and swaps 
markets more broadly, to better understand and evaluate the nature and 
extent of the cleared swaps activity of U.S. persons.
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    \30\ Such FCMs may or may not be U.S. persons. The Commission is 
not proposing to require that exempt DCOs provide daily information 
regarding initial margin requirements, initial margin on deposit, 
and daily variation margin, or quarterly aggregate clearing volume 
or average open interest, with respect to swaps, for FCMs that are 
not U.S. persons (unless reporting would otherwise be required 
because such FCMs are affiliates of U.S. persons). However, the 
Commission has a supervisory interest in receiving information 
regarding which of its registered FCMs are clearing members or 
affiliates of clearing members, with respect to the clearing of 
swaps on an exempt DCO.
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    Paragraphs (c)(2)(iii) through (c)(2)(viii) of proposed Regulation 
39.6 each would require an exempt DCO to provide information to the 
Commission upon the occurrence of certain specified events. Several of 
the proposed required notifications are intended to provide the 
Commission with information relevant to the exempt DCO's continued 
eligibility for an exemption or its compliance with the conditions of 
its exemption. Proposed Regulation 39.6(c)(2)(iii) would require an 
exempt DCO to provide prompt notice to the Commission regarding any 
change in its home country regulatory regime that is material to the 
exempt DCO's continuing observance of the PFMIs, any requirements set 
forth in proposed Regulation 39.6, or the order of exemption issued by 
the Commission. In this regard, the Commission requests comment on 
whether an exempt DCO should make the determination of whether a change 
to the home country regulatory regime constitutes a ``material'' change 
to the exempt DCO's continuing observance of the PFMIs, any 
requirements set forth in proposed Regulation 39.6, or the Commission's 
order of exemption. Alternatively, the Commission requests comment on 
whether the Commission should require an exempt DCO to provide prompt 
notice of any change in its home country regulatory regime thereby 
allowing the Commission to determine whether a change is ``material'' 
to the exempt DCO's continuing observance of the PFMIs, any 
requirements set forth in proposed Regulation 39.6, or the Commission's 
order of exemption. Proposed Regulation 39.6(c)(2)(iv) would require an 
exempt DCO to provide to the Commission, to the extent that it is 
available to the exempt DCO, any assessment of the exempt DCO's 
observance (or the home country regulator's observance) of any of the 
PFMIs by a home country regulator or other national authority, or an 
international financial institution or international organization.\31\ 
Proposed Regulation 39.6(c)(2)(v) would require an exempt DCO to 
provide to the Commission, to the extent that it is available to the 
exempt DCO, any examination report, examination findings, or 
notification of the commencement of any enforcement or disciplinary 
action by a home country regulator. Proposed Regulation 39.6(c)(2)(vi) 
would require an exempt DCO to provide immediate notice to the 
Commission of any change with respect to its licensure, registration, 
or other authorization to act as a clearing organization in its home 
country.
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    \31\ Such an international organization may include the 
International Monetary Fund or World Bank. See PFMIs, paragraph 
1.33.
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    Two of the event-specific required notifications would assist the 
Commission in its oversight of U.S. persons and FCMs clearing swaps. 
Proposed Regulation 39.6(c)(2)(vii) would require an exempt DCO to 
provide immediate notice to the Commission in the event of a default 
(as defined by the exempt DCO in its rules) by a U.S. person or FCM 
clearing swaps, including the name of the U.S. person or FCM, a list of 
the positions held by the U.S. person or FCM, and the amount of the 
U.S. person's or FCM's financial obligation. Proposed Regulation 
39.6(c)(2)(viii) would require an exempt DCO to provide notice of any 
action that it has taken against a U.S. person or FCM, no later than 
two business days after the exempt DCO takes such action against a U.S. 
person or FCM. In particular, these provisions would require such 
reporting with respect to a default of, or an action taken against, an 
FCM, which may or may not be a U.S. person, in furtherance of the 
Commission's supervisory responsibilities with respect to registered 
FCMs. Proposed paragraphs (c)(2)(vii) and (c)(2)(viii) of Regulation 
39.6 are similar to paragraphs (c)(4)(vii) and (c)(4)(xi) of Regulation 
39.19, which apply to registered DCOs, respectively.
b. Swap Data Reporting Requirements
    Proposed Regulation 39.6(d) would require that if a clearing member 
clears through an exempt DCO a swap that has been reported to a 
registered swap data repository (SDR) pursuant to part 45 of the 
Commission's regulations, the exempt DCO must report to an SDR data 
regarding the two swaps resulting from the novation of the original 
swap that had been submitted to the exempt DCO for clearing. In 
addition, an exempt DCO would be required to report the termination of 
the original swap accepted for clearing by the exempt DCO to the SDR to 
which the original swap was reported. Further, in order to avoid 
duplicative reporting for such transactions, an exempt DCO would be 
required to have rules that prohibit the part 45 reporting of the two 
new swaps by the counterparties to the original swap.\32\
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    \32\ While the Commission recognizes that the counterparties to 
the original swap would otherwise be required to report the two new 
swaps under part 45 of the Commission's regulations, because an 
exempt DCO would be required to implement rules to the contrary at 
the direction of the Commission, such counterparties would be 
expected to comply with the rules of the exempt DCO in this case.
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4. Application Procedures
    Proposed Regulation 39.6(e) would describe the relevant application 
procedures for a clearing organization that seeks to be exempt from DCO 
registration, which are consistent with the application procedures the 
Commission has been using to evaluate petitions for exemption. 
Specifically, under proposed Regulation 39.6(e)(1), a clearing 
organization would be required to file an application for exemption 
with the Secretary of the Commission in the format and manner specified 
by the Commission. After reviewing the application, the Commission 
could: (1) Grant the exemption without conditions; (2) grant the 
exemption with conditions; or (3) deny the application for 
exemption.\33\ This provision mirrors language in Regulation 
39.3(a)(1), which addresses the application procedures for registration 
as a DCO.
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    \33\ As noted above, proposed Regulation 39.6(b) sets forth the 
pre-conditions that would apply to any exemption from registration 
as a DCO.
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    Proposed Regulation 39.6(e)(2) would require an applicant to submit 
a complete application, including all applicable information and 
documentation as detailed in proposed Regulation 39.6(e)(2) and 
discussed below. It would provide that the Commission will not commence 
processing an application unless the application is complete. Proposed 
Regulation 39.6(e)(2) would further provide that an applicant may file 
with its completed application additional information that may be 
necessary or helpful to the Commission in processing the application. 
This provision is similar to certain provisions of Regulation 
39.3(a)(2), which sets forth requirements with respect to applications 
for registration as a DCO.

[[Page 39929]]

    Under proposed Regulation 39.6(e)(2)(i), an applicant would be 
required to submit a cover letter providing general information 
identifying the applicant, its regulatory licenses or registrations, 
and relevant contact information. Proposed Regulation 39.6(e)(2)(ii)-
(viii) would require an applicant for exemption to submit documents 
that would establish the applicant's eligibility for exemption under 
proposed Regulation 39.6(a), and would contain representations that the 
applicant would comply with the conditions of exemption, the general 
reporting requirements, and the swap data reporting requirements set 
forth in proposed Regulation 39.6(b), (c), and (d), respectively, and 
the terms and conditions of its order of exemption as issued by the 
Commission.
    Additionally, proposed Regulation 39.6(e)(2)(v) would require an 
applicant to submit to the Commission copies of its most recent 
disclosures necessary to observe the PFMIs, including the financial 
market infrastructure (FMI) disclosure template set forth in Annex A to 
the Disclosure Framework and Assessment Methodology (Disclosure 
Framework) for the PFMIs.\34\ The FMI disclosure template requires a 
clearing organization to provide a general description of itself and 
the markets it serves, a description of its general organization, an 
overview of the relevant legal and regulatory framework, a description 
of how it processes a transaction, and a summary narrative detailing 
its approach to observing each of the PFMIs. The Commission expects 
that the FMI disclosure template provided to the Commission would have 
been reviewed and updated within the previous two years.\35\ The FMI 
disclosure template is generally required by home country regulators 
that enforce the PFMIs and is necessary to achieve status as a 
qualified central counterparty (QCCP).\36\
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    \34\ See CPMI-IOSCO, Principles for financial market 
infrastructures: Disclosure framework and Assessment methodology 
(Dec. 2012), at 82 et seq., available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
    \35\ PFMI Explanatory Note 3.23.7 provides that the Principle 
23, Key Consideration 5 standard that responses to the Disclosure 
Framework should be completed ``regularly'' means that an FMI should 
review its responses ``[a]t a minimum . . . every two years to 
ensure continued accuracy and usefulness.'' PFMIs, paragraph 3.23.7.
    \36\ A QCCP is defined as an entity that (i) is licensed to 
operate as a central counterparty (CCP) and is permitted by the 
appropriate regulator to operate as such, and (ii) is prudentially 
supervised in a jurisdiction where the relevant regulator has 
established and publicly indicated that it applies to the CCP, on an 
ongoing basis, domestic rules and regulations that are consistent 
with the PFMIs. The failure of a CCP to achieve QCCP status could 
result in significant costs to its bank customers due to certain 
financial incentives for banks, including their subsidiaries and 
affiliates, to clear financial derivatives through QCCPs. See Basel 
Committee on Banking Supervision, Capital Requirements for Bank 
Exposures to Central Counterparties (Apr. 10, 2014), available at 
https://www.bis.org/publ/bcbs282.htm.
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    Proposed Regulation 39.6(e)(3) would provide that, at any time 
during the Commission's review of an application for exemption from 
registration as a DCO, the Commission may request that the applicant 
submit supplemental information in order for the Commission to process 
the application, and would require that the applicant file such 
supplemental information in the format and manner specified by the 
Commission. A similar provision is contained in Regulation 39.3(a)(3), 
which applies to applications for DCO registration.
    Proposed Regulation 39.6(e)(4) would state that an applicant for 
exemption from registration as a DCO must promptly amend its 
application if it discovers a material omission or error, or if there 
is a material change in the information provided to the Commission in 
the application or other information provided in connection with the 
application. This provision is virtually identical to Regulation 
39.3(a)(4), which addresses amendments to applications for DCO 
registration.
    Proposed Regulation 39.6(e)(5) would identify those sections of an 
application for exemption from registration that will be made public, 
including the cover letter required in proposed Regulation 
39.6(e)(2)(i); documents demonstrating that the applicant is organized 
in a jurisdiction in which its home country regulator applies to the 
applicant statutes, rules, regulations, and/or policies that are 
consistent with the PFMIs; disclosures necessary to observe the PFMIs; 
\37\ rules that meet the requirements of proposed Regulation 39.6(b)(2) 
and (d), as applicable; and any other part of the application not 
covered by a request for confidential treatment, subject to Regulation 
145.9. This provision is similar to Regulation 39.3(a)(5), which 
identifies those portions of an application for registration as a DCO 
that are made public.
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    \37\ The Disclosure Framework contemplates that central 
counterparties will make public disclosures pursuant to the 
Disclosure Framework. See CPMI-IOSCO, Principles for financial 
market infrastructures: Disclosure framework and Assessment 
methodology (Dec. 2012), at 1, available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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5. Modification of an Exemption
    Proposed Regulation 39.6(f) would provide that the Commission may 
modify the terms and conditions of an order of exemption, either at the 
request of the exempt DCO or on the Commission's own initiative, based 
on changes to or omissions in material facts or circumstances pursuant 
to which the order of exemption was issued, or for any reason in the 
Commission's discretion. This is a further expression of the 
Commission's discretionary authority under section 5b(h) of the CEA to 
exempt a clearing organization from registration ``conditionally or 
unconditionally,'' and it reflects the Commission's authority to act 
with flexibility in responding to changed circumstances affecting an 
exempt DCO.
6. Termination of Exemption Upon Request by an Exempt DCO
    Proposed Regulation 39.6(g) would set forth the framework under 
which an exempt DCO may petition the Commission to terminate its 
exemption and the applicable procedures. Specifically, pursuant to 
proposed Regulation 39.6(g)(1), an exempt DCO may request that the 
Commission terminate its exemption if the exempt DCO: (i) No longer 
qualifies for an exemption as a result of changed circumstances; (ii) 
intends to cease clearing swaps for U.S. persons; or (iii) submits a 
completed Form DCO in order to become a registered DCO in conjunction 
with its petition. Proposed Regulation 39.6(g)(2) would provide that 
the petition for termination must include an explanation for the 
request and describe the exempt DCO's plans for liquidation or transfer 
of the positions and related collateral of U.S. persons, if applicable. 
Pursuant to proposed Regulation 39.6(g)(3), the Commission would issue 
an order of termination within a reasonable time appropriate to the 
circumstances or in conjunction with the issuance of an order of 
registration, if applicable.

D. Regulation 39.9--Scope

    The Commission is proposing to revise Regulation 39.9 to make it 
clear that the provisions of subpart B apply to any DCO, as defined 
under section 1a(15) of the CEA and Regulation 1.3, that is registered 
with the Commission as a DCO pursuant to section 5b of the CEA, but do 
not apply to any exempt DCO. This revision would clarify that the 
subpart B regulations that address compliance with the DCO Core 
Principles applicable to registered DCOs do not impose any obligations 
upon exempt DCOs.

III. Proposed Amendments to Part 140--Delegations of Authority

    The proposed amendments to Regulation 140.94(c)(4) would delegate

[[Page 39930]]

to the Director of DCR all functions reserved to the Commission under 
proposed Regulation 39.6 except for the following: (i) Granting an 
exemption under paragraph (a); (ii) prescribing any conditions to an 
exemption under paragraph (b); (iii) modifying an exemption under 
paragraph (f); and (iv) terminating an exemption under paragraph 
(g)(3). Such delegation would expedite consideration of exemption 
requests by permitting DCR to more efficiently carry out tasks 
associated with the processing of an exemption application. Certain 
technical amendments have also been proposed to Regulation 140.94 in 
order to adjust the paragraph numbering to accommodate the proposed 
amendments to Regulation 140.94(c)(4).

IV. Request for Comments

    The Commission generally requests comments on all aspects of the 
proposed rules. Additionally, the Commission requests comments on the 
following specific issues:
     Exempt DCOs are permitted to clear only proprietary 
positions of U.S. persons and FCMs. The proposed regulations would 
codify this approach. Should the Commission consider permitting an 
exempt DCO to clear swaps for FCM customers?
     Should the Commission impose any additional conditions on 
an exempt DCO or modify any of the existing conditions?
     Should any of the conditions imposed on an exempt DCO lead 
to an automatic termination of the exemption if the condition is not 
met?

V. Consideration of Costs and Benefits

A. Introduction

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\38\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
Section 15(a) factors.
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    \38\ 7 U.S.C. 19(a).
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B. Proposed Regulation 39.6

1. Summary
    Section 5b(a) of the CEA requires a clearing organization that 
clears swaps to be registered with the Commission as a DCO. Section 
5b(h) of the CEA, however, permits the Commission to exempt a clearing 
organization from DCO registration for the clearing of swaps to the 
extent that the Commission determines that such clearing organization 
is subject to comparable, comprehensive supervision by appropriate 
government authorities in the clearing organization's home country. 
Pursuant to this authority, the Commission has exempted four non-U.S. 
clearing organizations from DCO registration to clear proprietary swap 
positions of U.S. persons and FCMs. The proposed regulation would 
codify the policies and procedures that the Commission is currently 
following with respect to granting exemptions from DCO registration. 
Accordingly, the baseline for this consideration of costs and benefits 
is the current status, where the Commission has implemented a set of 
conditions and procedures for granting exemptions from DCO 
registration, but has not codified those conditions and procedures 
under Commission regulations.
    Specifically, the proposed regulation would set forth the process 
by which a non-U.S. clearing organization could obtain an exemption 
from DCO registration for the clearing of swaps provided that it meets 
the specified eligibility standards and can meet the conditions of an 
exemption. The eligibility standards require, among other things, that 
a clearing organization applying for exemption must be organized in a 
jurisdiction in which a home country regulator applies to the clearing 
organization, on an ongoing basis, statutes, rules, regulations, 
policies, or a combination thereof that, taken together, are consistent 
with the PFMIs, and the clearing organization must observe the PFMIs in 
all material respects. The conditions of exemption describe, among 
other things, the circumstances in which an exempt DCO would be 
permitted to clear swaps for U.S. persons. An exempt DCO is and would 
be permitted to clear only ``proprietary'' positions as defined in 
Regulation 1.3, and it is not and would not be permitted to clear 
``customer'' positions subject to section 4d(f) of the CEA.
2. Benefits
    Proposed Regulation 39.6 would provide several benefits. First, an 
exempt DCO may clear proprietary swap positions for U.S. persons 
without having to prepare and submit an application for DCO 
registration, which involves the submission of extensive documentation 
to the Commission. Similarly, an exempt DCO is not required to comply 
with Commission regulations applicable to registered DCOs, except as 
required under Regulation 39.6 or the exempt DCO's order of exemption. 
Thus, the significantly reduced application and ongoing compliance 
requirements for exempt DCOs may encourage clearing organizations to 
seek an exemption from registration. This mitigation of registration-
related requirements may also benefit market participants and the 
public more generally. That is, non-U.S. clearing organizations that 
are exempt from registration may incur lower compliance costs, which 
may, in turn, result in lower costs to their clearing members. In 
addition, U.S. persons (as clearing members or affiliates of clearing 
members) would likely have access to more clearing organizations in 
order to clear their proprietary swaps. Access to more clearing 
organizations may also encourage voluntary clearing of swaps that are 
not required to be cleared, as certain swaps may not be cleared by any 
registered DCOs. This may, in turn, serve to diversify the potential 
risk of cleared swaps, because any such risk would become less 
concentrated if a larger number of registered and exempt DCOs were 
clearing swaps for U.S. persons, and the volume of those swaps could 
become more evenly distributed among those registered and exempt DCOs.
    Finally, the proposed regulation may also promote competition among 
registered and exempt DCOs by encouraging more clearing organizations 
to seek an exemption, and it would permit exempt DCOs to clear the same 
types of swap transactions for the proprietary accounts of U.S. persons 
that may be cleared by registered DCOs.
    The Commission requests comment on the potential benefits of 
proposed Regulation 39.6, including, where possible, quantitative data. 
More specifically, the Commission requests comment on the potential 
benefits to clearing organizations that are eligible to become exempt 
DCOs and thereby clear swaps for U.S. persons and their affiliates, and 
the potential benefits to other market participants or the financial 
system as a whole. The Commission further requests comment on any 
alternative proposals that might achieve the objectives of the proposed 
regulation, and the benefits associated with any such alternatives.

[[Page 39931]]

3. Costs
    A clearing organization seeking an exemption incurs some costs in 
preparing an application for exemption. If a clearing organization were 
not able to seek an exemption, however, it would be required to 
register with the Commission and to submit a Form DCO.\39\ While the 
Form DCO and the FMI disclosure template set forth in Annex A to the 
Disclosure Framework require certain similar types of information to be 
provided to the Commission, the Form DCO would require the clearing 
organization to provide additional documentation that is not required 
pursuant to the Disclosure Framework. Moreover, a clearing organization 
is likely to have already prepared the FMI disclosure template in order 
to comply with the requirements of its home country regulator, which 
must be consistent with the PFMIs, and to achieve QCCP status.\40\ 
Therefore, the costs involved in applying for an exemption are less 
than the costs involved in applying for registration, and the proposed 
regulation would not change this. Based on the Commission's Paperwork 
Reduction Act estimates, the cost burden to submit Form DCO is 
approximately $100,000 per entity,\41\ while that for submitting an 
application for exemption is approximately $10,500 per entity.\42\ 
Thus, there is an estimated cost savings associated with submitting an 
application for exemption rather than Form DCO of approximately $89,500 
per entity, and the proposed regulation would codify the procedures for 
submitting an application for exemption. The Commission seeks comment 
about whether these cost estimates are reasonable.
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    \39\ For purposes of this analysis, it is assumed that any 
clearing organization that is not granted an exemption will be 
required to register as a DCO if it clears swaps for any U.S. 
person. This assumption, however, is not intended to be a legal 
conclusion that, with respect to the particular facts and 
circumstances of any particular clearing organization, the CEA would 
require registration with the Commission as a DCO.
    \40\ See supra section II.C.4 for more detail.
    \41\ See Derivatives Clearing Organization General Provisions 
and Core Principles, 76 FR 69334, 69410 (Nov. 8, 2011).
    \42\ See infra section VI.B for more detail.
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    Other potential administrative costs associated with maintaining an 
exemption from DCO registration are minimal. For example, an exempt DCO 
would be required to make its books and records relating to its 
operation as an exempt DCO available for inspection by Commission staff 
upon request. This condition of exemption is consistent with section 
5b(h) of the CEA, which provides that the Commission may exempt a DCO 
from registration with conditions that may include requiring that the 
DCO be available for inspection by the Commission and make available 
all information requested by the Commission. In addition, this 
requirement is imposed on registered DCOs; as a result, an exempt DCO 
would be held to this requirement even if it were to choose to register 
as a DCO. The Commission notes that there would be no costs imposed on 
an exempt DCO in connection with this condition unless and until the 
Commission requests to inspect its books and records. Furthermore, an 
exempt DCO's home country regulator is and would be required to provide 
to the Commission an annual written representation that the exempt DCO 
is in good regulatory standing. The Commission believes that the costs 
associated with this requirement are minimal, as home country 
regulators typically provide a standard letter and are required to 
provide it only once a year.
    Lastly, exempt DCOs would be held to certain reporting 
requirements, the costs of which are limited to providing them to the 
Commission on either a regular or event-specific basis. The Commission 
has previously considered the costs of regular and event-specific 
reporting requirements when adopting Regulation 39.19(c) for registered 
DCOs.\43\ The reporting requirements for exempt DCOs are substantially 
less extensive than those specified in Regulation 39.19(c). The 
Commission believes the costs of the exempt DCO reporting requirements 
are not significant but welcomes comment on such costs, particularly 
from existing exempt DCOs.
---------------------------------------------------------------------------

    \43\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69426.
---------------------------------------------------------------------------

    An exempt DCO may incur costs related to establishing and 
maintaining connections to an SDR in order to report the swap data that 
would be required by proposed Regulation 39.6(d). In connection with 
the analysis required by the Paperwork Reduction Act, the Commission 
has estimated an initial cost of $85,478 per exempt DCO to establish an 
SDR connection, and an annual cost of $93,750 to maintain this 
connection.
    As discussed in section VI.B below, an exempt DCO would likely 
realize some administrative cost savings with respect to its ongoing 
compliance obligations with the Commission. The Commission acknowledges 
that it is difficult to differentiate the ongoing costs of complying 
with a home country's regulatory requirements from those of complying 
with the CEA and Commission regulations given that there may be costs 
common to both. Furthermore, the Commission lacks reliable data upon 
which to base many of these cost estimates, which it acknowledges could 
vary greatly among clearing organizations. Thus, the Commission seeks 
comment about such costs.

C. Section 15(a) Factors

1. Protection of Market Participants and the Public
    The proposed amendments to Part 39 would protect market 
participants and the public by requiring, among other things, that an 
exempt DCO: (i) May only clear swaps for U.S. persons for their 
proprietary accounts, and not for ``swaps customers'' within the 
meaning of the CEA and Commission regulations; (ii) must be organized 
in a jurisdiction in which it is subject to supervision and regulation 
by a government authority that applies to the clearing organization 
statutes, rules, regulations, policies, or a combination thereof that, 
taken together, are consistent with the PFMIs; (iii) must submit to the 
Commission the FMI disclosure template set forth in Annex A to the 
Disclosure Framework required to observe the PFMIs establishing that it 
does observe the PFMIs, and must provide information to the Commission, 
upon request, that the Commission deems necessary to evaluate its 
continued eligibility for exemption or to review its compliance with 
any conditions of exemption; and (iv) must be licensed, registered, or 
otherwise authorized to act as a clearing organization in its home 
country, and its home country regulator must not have made any findings 
of material non-observance of the PFMIs or other relevant home country 
legal requirements that have not resulted in corrective action. 
Furthermore, the proposed amendments to part 39 would provide 
additional market safeguards through requiring an MOU or other 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.
    These requirements would protect market participants and the public 
by ensuring that U.S. ``swaps customers'' would remain subject to the 
customer protection regime established in the CEA and Commission 
regulations, and that exempt DCOs would be subject to the 
internationally recognized PFMI standards.

[[Page 39932]]

2. Efficiency, Competitiveness, and Financial Integrity
    Proposed Regulation 39.6 would promote efficiency in the design of 
an exempt DCO's settlement and clearing arrangements, operating 
structure and procedures, scope of products cleared, and use of 
technology because it would permit an exempt DCO to clear proprietary 
transactions for U.S. persons through observance of the PFMIs, subject 
to supervision and regulation by a home country regulator. Moreover, 
the use of a single set of standards to determine eligibility, namely 
the internationally recognized PFMIs, would promote operational 
efficiency because it would (i) permit a non-U.S. clearing organization 
to obtain an exemption from registration that would mitigate 
duplicative compliance requirements and (ii) facilitate uniformity in 
supervision and regulation of both registered and exempt DCOs.
    Proposed Regulation 39.6 may also promote competition among 
registered and exempt DCOs because it would permit exempt DCOs to clear 
the same types of swap transactions for the proprietary accounts of 
U.S. persons that may be cleared by registered DCOs. Unlike their 
foreign counterparts, U.S.-based DCOs would still be required to 
register with the Commission in order to clear proprietary swap 
positions for U.S. persons and would not be eligible for an exemption 
under the proposed regulation (or under section 5b(h) of the CEA). 
Potentially, this different treatment may create a competitive 
disadvantage for U.S.-based DCOs, which would be subject to the 
requirements of the CEA and Commission regulations. However, exempt 
DCOs would be subject to a foreign supervisory and regulatory framework 
that is consistent with the internationally recognized standards set 
forth in the PFMIs.
    Proposed Regulation 39.6 would be expected to maintain the 
financial integrity of clearing organizations that clear proprietary 
transactions for U.S. persons because exempt clearing organizations 
would be subject to supervision and regulation by a home country 
regulator within a legal framework that is consistent with the PFMIs. 
Such supervision and regulation is comparable to that applicable to 
DCOs under the CEA and Commission regulations, and is sufficiently 
comprehensive. In addition, the proposed regulation may contribute to 
the financial integrity of the broader financial system by spreading 
the potential risk of particular cleared swaps among a greater number 
of registered and exempt DCOs.
3. Price Discovery
    Price discovery is the process by which prices for underlying 
instruments may be determined by, or inferred from, prices of 
derivative contracts. The Commission has not identified any impact that 
proposed Regulation 39.6 would have on price discovery.
4. Sound Risk Management Practices
    Proposed Regulation 39.6 would contribute to the sound risk 
management practices of clearing organizations that provide clearing 
services to U.S. persons for their proprietary transactions because 
exempt DCOs would be subject to the risk management standards that are 
included in the PFMIs. Although the risk management requirements of the 
CEA and the Commission regulations applicable to registered DCOs would 
not be binding upon exempt DCOs, the risk management standards in the 
PFMIs are substantially similar.
5. Other Public Interest Considerations
    The Commission notes the public interest in access to clearing 
organizations outside the United States in light of the international 
nature of many swap transactions. The proposed amendments to part 39 
would codify the exemption process for non-U.S. clearing organizations 
that would permit them to clear proprietary swap transactions for 
certain U.S. persons, when such clearing organizations meet the 
eligibility requirements and conditions of the proposed rule. Having a 
more open and transparent process for obtaining an exemption from 
registration may encourage more non-U.S. clearing organizations to seek 
an exemption, providing greater harmonization of the U.S. and global 
financial markets.

VI. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.\44\ The 
regulations proposed by the Commission will affect only clearing 
organizations. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its regulations on small entities in 
accordance with the RFA.\45\ The Commission has previously determined 
that clearing organizations are not small entities for the purpose of 
the RFA.\46\ Accordingly, the Chairman, on behalf of the Commission, 
hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \44\ 5 U.S.C. 601 et seq.
    \45\ 47 FR 18618 (Apr. 30, 1982).
    \46\ See 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \47\ provides that Federal 
agencies, including the Commission, may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a valid control number from the Office of Management 
and Budget (OMB). This proposed rulemaking contains reporting 
requirements that are collections of information within the meaning of 
the PRA. Although the Commission anticipates that fewer than ten 
persons will be subject to these requirements, which is below the ``ten 
or more persons'' threshold for PRA compliance, the PRA applies to any 
recordkeeping, reporting, or disclosure requirement contained in a rule 
of general applicability.\48\ The Commission is proposing to revise 
Information Collection 3038-0076, which contains the requirements for 
applications for registration as a DCO, and Information Collection 
3038-0096, which contains swap data reporting requirements, to include 
the collection of information in proposed Regulation 39.6. The 
responses to the collection of information would be necessary to obtain 
the requested exemption from DCO registration.
---------------------------------------------------------------------------

    \47\ 44 U.S.C. 3501 et seq.
    \48\ 5 CFR 1320.3(c)(4)(i).
---------------------------------------------------------------------------

1. Application for Exemption and Ongoing Reporting Obligations Under 
Proposed Regulation 39.6
    The number of potential respondents was estimated based on the 
number of non-U.S. clearing organizations that have already applied 
for, or been granted, an exemption from DCO registration by the 
Commission. Based on its experience in addressing petitions for 
exemption, the Commission anticipates receiving one or two applications 
for exemption per year. Burden hours and costs were estimated based on 
existing information collections for DCO registration and reporting, 
adjusted to reflect the significantly lower burden of the proposed 
regulations. The number of

[[Page 39933]]

respondents for the daily and quarterly reporting and annual 
certification requirements is conservatively estimated at a maximum of 
seven, based on the number of existing exempt DCOs and the number of 
pending petitions. Reporting of specific events and termination of an 
exemption are expected to occur infrequently. The burden is estimated 
conservatively at two per year for event-specific reporting and at one 
per year for reporting of an exemption termination. The Commission has 
estimated the burden hours for this proposed collection of information 
as follows:

Application for exemption
    Estimated number of respondents: 2
    Estimated number of reports per respondent: 1
    Average number of hours per report: 32
    Estimated gross annual reporting burden: 64
Information requested by the Commission
    Estimated number of respondents: 2
    Estimated number of reports per respondent: 1
    Average number of hours per report: 3
    Estimated gross annual reporting burden: 6
Daily reporting
    Estimated number of respondents: 7
    Estimated number of reports per respondent: 250
    Average number of hours per report: 0.1
    Estimated gross annual reporting burden: 175
Quarterly reporting
    Estimated number of respondents: 7
    Estimated number of reports per respondent: 4
    Average number of hours per report: 2
    Estimated gross annual reporting burden: 56
Event-specific reporting
    Estimated number of respondents: 2
    Estimated number of reports per respondent: 1
    Average number of hours per report: 0.5
    Estimated gross annual reporting burden: 1
Annual certification
    Estimated number of respondents: 7
    Estimated number of reports per respondent: 1
    Average number of hours per report: 1.5
    Estimated gross annual reporting burden: 21
Termination of exemption by request of clearing organization
    Estimated number of respondents: 1
    Estimated number of reports per respondent: 1
    Average number of hours per report: 2
    Estimated gross annual reporting burden: 2
Notice to clearing members of termination of exemption
    Estimated number of respondents: 1
    Estimated number of reports per respondent: 22
    Average number of hours per report: 0.1
    Estimated gross annual reporting burden: 2.2
2. Reporting by Exempt DCOs in Accordance With Part 45
    Proposed Regulation 39.6(d) would require an exempt DCO to report 
data regarding the two swaps resulting from the novation of an original 
swap to a registered SDR, if the original swap had been reported to a 
registered SDR pursuant to part 45 of the Commission's regulations. The 
Commission is proposing to revise the information collection for part 
45 to add exempt DCOs as an additional category of reporting entity. 
The burden for exempt DCOs reporting in accordance with part 45 is 
estimated to be approximately one-quarter of the burden for registered 
DCOs with respect to both non-recurring and recurring costs because 
exempt DCOs will not be required to report all swaps, only those that 
result from the novation of original swaps that have been reported to 
an SDR.\49\ Consequently, the burden hours for the proposed collection 
of information in this rulemaking have been estimated as follows:
---------------------------------------------------------------------------

    \49\ Details of the estimated burden related to non-recurring 
and recurring costs under part 45 are discussed in the part 45 
adopting release. See Swap Data Recordkeeping and Reporting 
Requirements, 77 FR at 2171-2176.

Reporting in accordance with part 45
    Estimated number of respondents: 7
    Estimated number of reports per respondent: 1,987
    Average number of hours per report: 0.1
    Estimated gross annual reporting burden: 1,393

List of Subjects

17 CFR Part 39

    Commodity futures, Default rules and procedures, Exemption, Risk 
management, Settlement procedures, System safeguards.

17 CFR Part 140

    Authority delegations (Government agencies), Organization and 
functions (Government agencies).

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
1. The authority citation for part 39 continues to read as follows:

    Authority:  7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C. 
8325.

0
2. Revise Sec.  39.1 to read as follows:


Sec.  39.1   Scope.

    The provisions of this subpart A apply to any derivatives clearing 
organization, as defined under section 1a(15) of the Act and Sec.  1.3 
of this chapter, that is registered or is required to register with the 
Commission as a derivatives clearing organization pursuant to section 
5b(a) of the Act, or that is applying for an exemption from 
registration pursuant to section 5b(h) of the Act.
0
3. In Sec.  39.2, add the following definitions in alphabetical order 
to read as follows:


Sec.  39.2   Definitions.

* * * * *
    Exempt derivatives clearing organization means a derivatives 
clearing organization that the Commission has exempted from 
registration under section 5b(a) of the Act, pursuant to section 5b(h) 
of the Act and Sec.  39.6.
    Good regulatory standing means, with respect to a derivatives 
clearing organization that is organized outside of the United States, 
and is licensed, registered, or otherwise authorized to act as a 
clearing organization in its home country, that either:
    (1) There has been no finding by the home country regulator of 
material non-observance of the Principles for Financial Market 
Infrastructures or other relevant home country legal requirements, or
    (2) There has been a finding by the home country regulator of 
material non-observance of the Principles for Financial Market 
Infrastructures or other relevant home country legal requirements but 
any such finding has been or is being resolved to the satisfaction of 
the home country regulator by means of corrective action taken by the 
derivatives clearing organization.
    Home country means, with respect to a derivatives clearing 
organization that is organized outside of the United States, the 
jurisdiction in which the derivatives clearing organization is 
organized.

[[Page 39934]]

    Home country regulator means, with respect to a derivatives 
clearing organization that is organized outside of the United States, 
an appropriate government authority which licenses, regulates, 
supervises, or oversees the derivatives clearing organization's 
clearing activities in the home country.
* * * * *
    Principles for Financial Market Infrastructures means the 
Principles for Financial Market Infrastructures jointly published by 
the Committee on Payments and Market Infrastructures and the Technical 
Committee of the International Organization of Securities Commissions 
in April 2012, as updated, revised, or otherwise amended.
* * * * *
0
4. Add Sec.  39.6 to read as follows:


Sec.  39.6   Exemption from derivatives clearing organization 
registration.

    (a) Eligibility for exemption. The Commission may exempt, 
conditionally or unconditionally, a derivatives clearing organization 
that is organized outside of the United States, from registration as a 
derivatives clearing organization for the clearing of swaps for U.S. 
persons, and thereby exempt such derivatives clearing organization from 
compliance with provisions of the Act and Commission regulations 
applicable to derivatives clearing organizations, if:
    (1) The derivatives clearing organization is subject to comparable, 
comprehensive supervision and regulation by a home country regulator as 
demonstrated by the following:
    (i) The derivatives clearing organization is organized in a 
jurisdiction in which a home country regulator applies to the 
derivatives clearing organization, on an ongoing basis, statutes, 
rules, regulations, policies, or a combination thereof that, taken 
together, are consistent with the Principles for Financial Market 
Infrastructures;
    (ii) The derivatives clearing organization observes the Principles 
for Financial Market Infrastructures in all material respects; and
    (iii) The derivatives clearing organization is in good regulatory 
standing in its home country; and
    (2) A memorandum of understanding or similar arrangement 
satisfactory to the Commission is in effect between the Commission and 
the derivatives clearing organization's home country regulator, 
pursuant to which, among other things, the home country regulator 
agrees to provide to the Commission any information that the Commission 
deems necessary to evaluate the initial and continued eligibility of 
the derivatives clearing organization for exemption from registration 
or to review its compliance with any conditions of such exemption.
    (b) Conditions of exemption. An exemption from registration as a 
derivatives clearing organization shall be subject to any conditions 
the Commission may prescribe including, but not limited to:
    (1) Clearing by or for U.S. persons and futures commission 
merchants. The exempt derivatives clearing organization shall maintain 
rules that limit swaps clearing services for U.S. persons and futures 
commission merchants to the following circumstances:
    (i) A U.S. person that is a clearing member of the exempt 
derivatives clearing organization may clear swaps for itself and those 
persons identified in the definition of ``proprietary account'' set 
forth in Sec.  1.3 of this chapter;
    (ii) A non-U.S. person that is a clearing member of the exempt 
derivatives clearing organization may clear swaps for any affiliated 
U.S. person identified in the definition of ``proprietary account'' set 
forth in Sec.  1.3 of this chapter; and
    (iii) An entity that is registered with the Commission as a futures 
commission merchant may be a clearing member of the exempt derivatives 
clearing organization, or otherwise maintain an account with an 
affiliated broker that is a clearing member, for the purpose of 
clearing swaps for itself and those persons identified in the 
definition of ``proprietary account'' set forth in Sec.  1.3 of this 
chapter.
    (2) Open access. The exempt derivatives clearing organization shall 
maintain rules with respect to swaps to which one or more of the 
counterparties is a U.S. person. Such rules shall:
    (i) Provide that all swaps with the same terms and conditions, as 
defined by product specifications established under the exempt 
derivatives clearing organization's rules, submitted to the exempt 
derivatives clearing organization for clearing are economically 
equivalent within the exempt derivatives clearing organization and may 
be offset with each other within the exempt derivatives clearing 
organization, to the extent offsetting is permitted by the exempt 
derivatives clearing organization's rules; and
    (ii) Provide that there shall be non-discriminatory clearing of a 
swap executed bilaterally or on or subject to the rules of an 
unaffiliated electronic matching platform or trade execution facility.
    (3) Consent to jurisdiction; designation of agent for service of 
process. The exempt derivatives clearing organization shall:
    (i) Consent to jurisdiction in the United States;
    (ii) Designate, authorize, and identify to the Commission, an agent 
in the United States who shall accept any notice or service of process, 
pleadings, or other documents, including any summons, complaint, order, 
subpoena, request for information, or any other written or electronic 
documentation or correspondence issued by or on behalf of the 
Commission or the United States Department of Justice to the exempt 
derivatives clearing organization, in connection with any actions or 
proceedings brought against, or investigations relating to, the exempt 
derivatives clearing organization or any U.S. person or futures 
commission merchant that is a clearing member, or that clears swaps 
through an affiliated clearing member, of the exempt derivatives 
clearing organization; and
    (iii) Promptly inform the Commission of any change in its 
designated and authorized agent.
    (4) Compliance. The exempt derivatives clearing organization shall 
comply, and shall demonstrate compliance as requested by the 
Commission, with any condition of its exemption.
    (5) Inspection of books and records. The exempt derivatives 
clearing organization shall make all documents, books, records, 
reports, and other information related to its operation as an exempt 
derivatives clearing organization open to inspection and copying by any 
representative of the Commission; and in response to a request by any 
representative of the Commission, the exempt derivatives clearing 
organization shall, promptly and in the form specified, make the 
requested books and records available and provide them directly to 
Commission representatives.
    (6) Observance of the Principles for Financial Market 
Infrastructures. On an annual basis, within 60 days following the end 
of its fiscal year, the exempt derivatives clearing organization shall 
provide to the Commission a certification that it continues to observe 
the Principles for Financial Market Infrastructures in all material 
respects.
    (7) Representation of good regulatory standing. On an annual basis, 
within 60 days following the end of its fiscal year, the Commission 
shall receive from a home country regulator, at the request of the 
exempt derivatives clearing organization, a written representation that 
the exempt derivatives clearing organization is in good regulatory 
standing.

[[Page 39935]]

    (c) General reporting requirements. (1) An exempt derivatives 
clearing organization shall provide to the Commission the information 
specified in this paragraph and any other information that the 
Commission deems necessary, including, but not limited to, information 
for the purpose of the Commission evaluating the continued eligibility 
of the exempt derivatives clearing organization for exemption from 
registration, reviewing compliance by the exempt derivatives clearing 
organization with any conditions of the exemption, or conducting 
oversight of U.S. persons and their affiliates, and the swaps that are 
cleared by such persons through the exempt derivatives clearing 
organization. Information provided to the Commission under this 
paragraph shall be submitted in accordance with Sec.  39.19(b).
    (2) Each exempt derivatives clearing organization shall provide to 
the Commission the following information:
    (i) A report compiled as of the end of each trading day and 
submitted to the Commission by 10:00 a.m. U.S. Central time on the 
following business day, containing:
    (A) Initial margin requirements and initial margin on deposit for 
each U.S. person, with respect to swaps; provided, however, if a 
clearing member margins on a portfolio basis its own positions and the 
positions of its affiliates, and either the clearing member or any of 
its affiliates is a U.S. person, the exempt derivatives clearing 
organization shall report initial margin requirements and initial 
margin on deposit for all such positions on a combined basis for each 
such clearing member; and
    (B) Daily variation margin, separately listing the mark-to-market 
amount collected from or paid to each U.S. person, with respect to 
swaps; provided, however, if a clearing member margins on a portfolio 
basis its own positions and the positions of its affiliates, and either 
the clearing member or any of its affiliates is a U.S. person, the 
exempt derivatives clearing organization shall separately list the 
mark-to-market amount collected from or paid to each such clearing 
member, on a combined basis.
    (ii) A report compiled as of the last day of each fiscal quarter of 
the exempt derivatives clearing organization and submitted to the 
Commission no later than 17 business days after the end of the exempt 
derivatives clearing organization's fiscal quarter, containing the 
following information:
    (A) The aggregate clearing volume of U.S. persons during the fiscal 
quarter, with respect to swaps. If a clearing member is a U.S. person, 
the volume figure shall include the transactions of the clearing member 
and all affiliates. If a clearing member is not a U.S. person, the 
volume figure shall include only transactions of affiliates that are 
U.S. persons.
    (B) The average open interest of U.S. persons during the fiscal 
quarter, with respect to swaps. If a clearing member is a U.S. person, 
the open interest figure shall include the positions of the clearing 
member and all affiliates. If a clearing member is not a U.S. person, 
the open interest figure shall include only positions of affiliates 
that are U.S. persons.
    (C) A list of U.S. persons and futures commission merchants that 
are either clearing members or affiliates of any clearing member, with 
respect to the clearing of swaps, as of the last day of the fiscal 
quarter.
    (iii) Prompt notice regarding any change in the home country 
regulatory regime that is material to the exempt derivatives clearing 
organization's continuing observance of the Principles for Financial 
Market Infrastructures or with any of the requirements set forth in 
this section or in the order of exemption issued by the Commission;
    (iv) As available to the exempt derivatives clearing organization, 
any assessment of the exempt derivatives clearing organization's or the 
home country regulator's observance of the Principles for Financial 
Market Infrastructures, or any portion thereof, by a home country 
regulator or other national authority, or an international financial 
institution or international organization;
    (v) As available to the exempt derivatives clearing organization, 
any examination report, examination findings, or notification of the 
commencement of any enforcement or disciplinary action by a home 
country regulator;
    (vi) Immediate notice of any change with respect to the exempt 
derivatives clearing organization's licensure, registration, or other 
authorization to act as a derivatives clearing organization in its home 
country;
    (vii) In the event of a default by a U.S. person or futures 
commission merchant clearing swaps, with such event of default 
determined in accordance with the rules of the exempt derivatives 
clearing organization, immediate notice of the default including the 
name of the U.S. person or futures commission merchant, a list of the 
positions held by the U.S. person or futures commission merchant, and 
the amount of the U.S. person's or futures commission merchant's 
financial obligation; and
    (viii) Notice of action taken against a U.S. person or futures 
commission merchant by an exempt derivatives clearing organization, no 
later than two business days after the exempt derivatives clearing 
organization takes such action against a U.S. person or futures 
commission merchant.
    (d) Swap data reporting requirements. If a clearing member clears 
through an exempt derivatives clearing organization a swap that has 
been reported to a registered swap data repository pursuant to part 45 
of this chapter, the exempt derivatives clearing organization shall 
report to a registered swap data repository data regarding the two 
swaps resulting from the novation of the original swap that had been 
submitted to the exempt derivatives clearing organization for clearing. 
The exempt derivatives clearing organization shall also report the 
termination of the original swap accepted for clearing by the exempt 
derivatives clearing organization, to the swap data repository to which 
the original swap was reported. In order to avoid duplicative reporting 
for such transactions, the exempt derivatives clearing organization 
shall have rules that prohibit the reporting, pursuant to part 45 of 
this chapter, of the two new swaps by the original counterparties to 
the original swap.
    (e) Application procedures. (1) An entity seeking to be exempt from 
registration as a derivatives clearing organization shall file an 
application for exemption with the Secretary of the Commission in the 
format and manner specified by the Commission. The Commission will 
review the application for exemption and may approve or deny the 
application or, if deemed appropriate, exempt the applicant from 
registration as a derivatives clearing organization subject to 
conditions in addition to those set forth in paragraph (b) of this 
section.
    (2) Application. An applicant for exemption from registration as a 
derivatives clearing organization shall submit to the Commission the 
information and documentation described in this section. Such 
information and documentation shall be clearly labeled as outlined in 
this section. The Commission will not commence processing an 
application unless the applicant has filed a complete application. Upon 
its own initiative, an applicant may file with its completed 
application for exemption additional information that may be necessary 
or helpful to the Commission in processing the application. The 
application shall include:

[[Page 39936]]

    (i) A cover letter containing the following information:
    (A) Exact name of applicant as specified in its charter, and the 
name under which business will be conducted (including acronyms);
    (B) Address of applicant's principal office;
    (C) List of principal office(s) and address(es) where clearing 
activities are/will be conducted;
    (D) A list of all regulatory licenses or registrations of the 
applicant (or exemptions from any licensing requirement) and the 
regulator granting such license or registration;
    (E) Date of the applicant's fiscal year end;
    (F) Contact information for the person or persons to whom the 
Commission should address questions and correspondence regarding the 
application; and
    (G) A signature and date by a duly authorized representative of the 
applicant.
    (ii) A description of the applicant's business plan for providing 
clearing services as an exempt derivatives clearing organization, 
including information as to the classes of swaps that will be cleared 
and whether the swaps are subject to a clearing requirement issued by 
the Commission or the applicant's home country regulator;
    (iii) Documents that demonstrate that applicant is organized in a 
jurisdiction in which its home country regulator applies to the 
applicant, on an ongoing basis, statutes, rules, regulations, policies, 
or a combination thereof that, taken together, are consistent with the 
Principles for Financial Market Infrastructures;
    (iv) A written representation from the applicant's home country 
regulator that the applicant is in good regulatory standing;
    (v) Copies of the applicant's most recent disclosures that are 
necessary to observe the Principles for Financial Market 
Infrastructures, including the financial market infrastructure 
disclosure template set forth in Annex A to the Disclosure Framework 
and Assessment Methodology for the Principles for Financial Market 
Infrastructures, any other such disclosure framework issued under the 
authority of the International Organization of Securities Commissions 
that is required for observance of the Principles for Financial Market 
Infrastructures, and the URL to the specific page(s) on the applicant's 
website where such disclosures may be found;
    (vi) A representation that the applicant will comply with each of 
the requirements and conditions of exemption set forth in paragraphs 
(b), (c), and (d) of this section, and the terms and conditions of its 
order of exemption as issued by the Commission;
    (vii) A copy of the applicant's rules that meet the requirements of 
paragraphs (b)(2) and (d) of this section, as applicable; and
    (viii) The applicant's consent to jurisdiction in the United 
States, and the name and address of the applicant's designated agent in 
the United States, pursuant to paragraph (b)(3) of this section.
    (3) Submission of supplemental information. At any time during its 
review of the application for exemption from registration as a 
derivatives clearing organization, the Commission may request that the 
applicant submit supplemental information in order for the Commission 
to process the application, and the applicant shall file such 
supplemental information in the format and manner specified by the 
Commission.
    (4) Amendments to pending application. An applicant for exemption 
from registration as a derivatives clearing organization shall promptly 
amend its application if it discovers a material omission or error, or 
if there is a material change in the information provided to the 
Commission in the application or other information provided in 
connection with the application.
    (5) Public information. The following sections of an application 
for exemption from registration as a derivatives clearing organization 
will be public: The cover letter set forth in paragraph (e)(2)(i) of 
this section; the documentation required in paragraphs (e)(2)(iii) and 
(e)(2)(v) of this section; rules that meet the requirements of 
paragraphs (b)(2) and (d) of this section, as applicable; and any other 
part of the application not covered by a request for confidential 
treatment, subject to Sec.  145.9 of this chapter.
    (f) Modification of an exemption. The Commission may, either at the 
request of the exempt derivatives clearing organization or on its own 
initiative, modify the terms and conditions of an order of exemption, 
based on changes to or omissions in material facts or circumstances 
pursuant to which the order of exemption was issued, or for any reason 
in its discretion.
    (g) Termination of exemption upon request by an exempt derivatives 
clearing organization. (1) An exempt derivatives clearing organization 
may petition the Commission to terminate its exemption if:
    (i) Changed circumstances result in the exempt derivatives clearing 
organization no longer qualifying for an exemption;
    (ii) The exempt derivatives clearing organization intends to cease 
clearing swaps for U.S. persons; or
    (iii) In conjunction with the petition, the exempt derivatives 
clearing organization submits a completed Form DCO to become a 
registered derivatives clearing organization pursuant to section 5b(a) 
of the Act.
    (2) The petition for termination of exemption shall include a 
detailed explanation of the facts and circumstances supporting the 
request and the exempt derivatives clearing organization's plans for, 
as may be applicable, the liquidation or transfer of the swaps 
positions and related collateral of U.S. persons.
    (3) The Commission shall issue an order of termination within a 
reasonable time appropriate to the circumstances or, as applicable, in 
conjunction with the issuance of an order of registration.
    (h) Notice to clearing members of termination of exemption. 
Following the Commission's issuance of an order of termination (unless 
issued in conjunction with the issuance of an order of registration), 
the exempt derivatives clearing organization shall provide immediate 
notice of such termination to its clearing members. Such notice shall 
include:
    (1) A copy of the Commission's order of termination;
    (2) A description of the procedures for orderly disposition of any 
open swaps positions that were cleared for U.S. persons; and
    (3) An instruction to clearing members, requiring that they provide 
the exempt derivatives clearing organization's notice of such 
termination to all U.S. persons clearing swaps through such clearing 
members.
0
5. Revise Sec.  39.9 to read as follows:


Sec.  39.9   Scope.

    The provisions of this subpart B apply to any derivatives clearing 
organization, as defined under section 1a(15) of the Act and Sec.  1.3 
of this chapter, that is registered with the Commission as a 
derivatives clearing organization pursuant to section 5b of the Act. 
The provisions of this subpart B do not apply to any exempt derivatives 
clearing organization, as defined under Sec.  39.2.

[[Page 39937]]

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0
6. The authority citation for part 140 continues to read as follows:

    Authority:  7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and 
16(b).

0
7. Amend Sec.  140.94 as follows:
0
a. Revise the introductory text of paragraph (c);
0
b. Redesignate paragraphs (c)(4) through (c)(13) as paragraphs (c)(5) 
through (c)(14); and
0
c. Add new paragraph (c)(4).
    The revisions and additions read as follows:


Sec.  140.94   Delegation of authority to the Director of the Division 
of Swap Dealer and Intermediary Oversight and the Director of the 
Division of Clearing and Risk.

* * * * *
    (c) The Commission hereby delegates, until such time as the 
Commission orders otherwise, the following functions to the Director of 
the Division of Clearing and Risk and to such members of the 
Commission's staff acting under his or her direction as he or she may 
designate from time to time:
* * * * *
    (4) All functions reserved to the Commission in Sec.  39.6 of this 
chapter, except for the authority to:
    (i) Grant an exemption under Sec.  39.6(a) of this chapter;
    (ii) Prescribe conditions to an exemption under Sec.  39.6(b) of 
this chapter;
    (iii) Modify an exemption under Sec.  39.6(f) of this chapter; and
    (iv) Terminate an exemption under Sec.  39.6(g)(3) of this chapter.
* * * * *

    Issued in Washington, DC, on August 8, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Exemption From Derivatives Clearing Organization 
Registration--Commission Voting Summary and Chairman's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz 
and Behnam voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    This proposal is part of Project KISS's simple and 
straightforward efforts to make what has been an internal process 
public and transparent. Under the Commodity Exchange Act (CEA), the 
Commission may conditionally or unconditionally exempt a derivatives 
clearing organization (DCO) from registration for the clearing of 
swaps if the Commission determines that the clearing organization is 
subject to ``comparable, comprehensive supervision and regulation'' 
by appropriate government authorities in the clearing organization's 
home country. Pursuant to this authority, the Commission has 
exempted four non-U.S. clearing organizations from DCO registration.
    The Commission is proposing to adopt regulations that would 
codify the policies and procedures that the Commission is currently 
following with respect to granting exemptions from DCO registration. 
The proposed regulations are consistent with the policies and 
procedures that the Commission is currently following, and with the 
terms and conditions that the Commission has imposed on each of the 
clearing organizations to which it has previously issued orders of 
exemption.
    The exempt DCO process applies a comparable, outcomes-based 
approach to reflect the Commission's recognition that a foreign 
jurisdiction may have different regulations for its central 
counterparties (CCP) but share the same regulatory goals. Under the 
proposal, for CCPs in foreign jurisdictions, a framework that 
conforms to the Committee on Payments and Market Infrastructures 
(CPMI) and the International Organization of Securities Commissions 
(IOSCO) Principles for Financial Market Infrastructures (PFMI) would 
be deemed comparable to the CFTC's requirements for domestic CCPs.
    The proposal is part of the Commission's continued efforts to 
foster cross-border cooperation and show deference to home country 
regulation that is deemed comparable to the Commission's 
regulations. As our regulatory counterparts continue to implement 
swaps reforms in their markets, it is critical that the Commission 
endeavor to ensure that its rules do not unnecessarily conflict and 
fragment the global marketplace. For this reason, the Commission 
should operate on the basis of comity, not uniformity, with non-U.S. 
regulators. This avoids the untenable state of overlapping and 
duplicative regulations. The current proposal reflects this vision.
    I support this proposed rule from the Division of Clearing and 
Risk (DCR). I look forward to hearing comments on the proposal.

[FR Doc. 2018-17335 Filed 8-10-18; 8:45 am]
 BILLING CODE 6351-01-P