[Federal Register Volume 84, Number 141 (Tuesday, July 23, 2019)]
[Proposed Rules]
[Pages 35456-35482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15258]



[[Page 35455]]

Vol. 84

Tuesday,

No. 141

July 23, 2019

Part II





Commodity Futures Trading Commission





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17 CFR Parts 3, 39 et al.





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Exemption From Derivatives Clearing Organization Registration; Proposed 
Rule

  Federal Register / Vol. 84 , No. 141 / Tuesday, July 23, 2019 / 
Proposed Rules  

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3, 39 and 140

RIN 3038-AE65


Exemption From Derivatives Clearing Organization Registration

AGENCY: Commodity Futures Trading Commission.

ACTION: Supplemental notice of proposed rulemaking.

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SUMMARY: In August 2018, the Commodity Futures Trading Commission 
(Commission) proposed regulations that would codify the policies and 
procedures that the Commission is currently following with respect to 
granting exemptions from registration as a derivatives clearing 
organization (registered DCO) (2018 Proposal). The Commission is 
issuing this supplemental notice of proposed rulemaking to further 
propose to permit DCOs that are exempt from registration (exempt DCOs) 
to clear swaps for U.S. customers under certain circumstances. To 
facilitate this, the Commission also is proposing to allow persons 
located outside of the United States to accept funds from U.S. persons 
to margin swaps cleared at an exempt DCO, without registering as 
futures commission merchants (FCMs). In addition, the Commission is 
proposing certain amendments to the delegation provisions in part 140 
of its regulations.

DATES: Comments must be received on or before September 23, 2019.

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 in this 
release 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]; Brian Baum, Special Counsel, 
202-418-5654, [email protected]; August A. Imholtz III, Special Counsel, 
202-418-5140, [email protected]; Abigail S. Knauff, Special Counsel, 
202-418-5123, [email protected]; Division of Clearing and Risk; Thomas 
J. Smith, Deputy Director, 202-418-5495, [email protected]; Division of 
Swap Dealer and Intermediary Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 
20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Proposed Amendments to Part 3
III. Proposed Amendments to Part 39
    A. Overview of Supplements to 2018 Proposal
    B. Regulation 39.2--Definitions
    C. Regulation 39.6--Exemption from DCO Registration
IV. Proposed Amendments to Part 140
V. Request for Comments
VI. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

    Section 5b(a) of the Commodity Exchange Act (CEA) provides that a 
clearing organization may not ``perform the functions of a [registered 
DCO]'' \2\ with respect to swaps unless the clearing organization is 
registered with the Commission.\3\ 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 its home 
country regulator.\4\ To date, the Commission has exempted four 
clearing organizations organized outside of the United States 
(hereinafter referred to as ``non-U.S. clearing organizations'') from 
DCO registration for the clearing of

[[Page 35457]]

proprietary swaps for U.S. persons and FCMs.\5\
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    \2\ The term ``derivatives clearing organization'' is 
statutorily defined to mean a clearing organization in general. 
However, for purposes of the discussion in this release, the term 
``registered DCO'' refers to a Commission-registered DCO, the term 
``exempt DCO'' refers to a 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 Sec.  1.3 
of the Commission's regulations, 17 CFR 1.3.
    \3\ 7 U.S.C. 7a-1(a). Under section 2(i) of the CEA, 7 U.S.C. 
2(i), activities outside of the United States are not subject to the 
swap provisions of the CEA, including any rules prescribed or 
regulations promulgated thereunder, unless those activities either 
have a direct and significant connection with activities in, or 
effect on, commerce of the United States, or contravene any rule or 
regulation established to prevent evasion of a CEA provision enacted 
under the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (Dodd-Frank Act). Therefore, 
pursuant to section 2(i), the DCO registration requirement extends 
to any clearing organization whose clearing activities outside of 
the United States have a direct and significant connection with 
activities in, or effect on, commerce of the United States.
    \4\ Section 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 has not granted, nor 
developed a framework for granting, such exemptions. 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. Further, the Commission has deemed a supervisory 
and regulatory framework that conforms to the Principles for 
Financial Market Infrastructures to be comparable to, and as 
comprehensive as, the supervisory and regulatory requirements 
applicable to registered DCOs. For further background, see 2018 
Proposal, 83 FR at 39924.
    \5\ See ASX Clear (Futures) Pty Amended Order of Exemption from 
Registration (Jan. 28, 2016), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexemption.pdf; Korea Exchange, Inc. Order of 
Exemption from Registration (Oct. 26, 2015), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-15.pdf; Japan Securities Clearing Corporation 
Order of Exemption from Registration (Oct. 26, 2015), available at 
http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf; OTC Clearing Hong Kong Limited Order 
of Exemption from Registration (Dec. 21, 2015), available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf.
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    In the 2018 Proposal,\6\ the Commission proposed regulations that 
would codify the policies and procedures that the Commission currently 
follows with respect to granting exemptions from DCO registration.\7\ 
The Commission has reviewed the comments received on the 2018 Proposal 
\8\ and is proposing these supplemental regulations in light of those 
comments.\9\ Most significantly, the Commission is now proposing to 
permit exempt DCOs to clear swaps for U.S. customers \10\ under certain 
circumstances.\11\
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    \6\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR 39923 (Aug. 13, 2018).
    \7\ 2018 Proposal, 83 FR 39923.
    \8\ The Commission received four substantive comment letters: 
Japan Securities Clearing Corporation (JSCC) comment letter (Oct. 
10, 2018); ASX Clear (Futures) Pty comment letter (Oct. 11, 2018); 
Futures Industry Association (FIA) and Securities and Financial 
Markets Association (SIFMA) comment letter (Oct. 12, 2018); and 
International Swaps and Derivatives Association, Inc. (ISDA) comment 
letter (Oct. 12, 2018).
    \9\ Procedurally, this supplemental proposal is not a 
replacement or withdrawal of the 2018 Proposal. Unless specifically 
amended in this release, all regulatory provisions proposed in the 
2018 Proposal remain under active consideration for adoption as 
final rules. The Commission welcomes comment on both the 2018 
Proposal and this supplemental proposal.
    \10\ See 17 CFR 1.3 for the definition of ``customer.'' In 
accordance with Section 2(e) of the CEA, which requires that swaps 
be transacted on or subject to the rules of a designated contract 
market unless entered into by an eligible contract participant, such 
``U.S. customers'' must be eligible contract participants. 7 U.S.C. 
2(e).
    \11\ In response to the Commission's request for comment in Part 
IV of the 2018 Proposal (83 FR 39923, 39930) as to whether the 
Commission should ``consider permitting an exempt DCO to clear swaps 
for FCM customers,'' three commenters answered in the affirmative. 
See ASX Clear (Futures) Pty comment letter at 1 (stating that 
``ASXCF supports the CFTC permitting exempt DCOs to clear swaps for 
U.S. person customers. ASXCF believes it would be beneficial to 
allow U.S person customers to access the broadest possible range of 
central clearing facilities (``CCPs'') as this would provide U.S 
person customers with flexibility and choice in accessing the best 
commercial solutions for the products that they use subject to those 
CCPs meeting global QCCP standards under the CPMI-IOSCO Principles 
for Financial Market Infrastructures (PFMIs).''); JSCC comment 
letter at 5 (stating that ``JSCC would like the CFTC to consider the 
potential benefits of allowing U.S. customers to access exempt DCOs, 
using a similar approach to the correspondent clearing structure 
adopted for foreign futures markets, by permitting . . . non-U.S. 
clearing members in an exempt DCO to clear for U.S. customers, 
without the necessity to register as a FCM, as long as those non-
U.S. clearing members can demonstrate that they are properly 
supervised, regulated, and licensed to provide customer clearing 
services in their home countries, where the regulatory authority 
maintains appropriate cooperative arrangements with the CFTC.''); 
and ISDA comment letter at 3 (stating ``[i]n response to the 
Commission's question about customer clearing, and ISDA strongly 
believes that the CFTC should permit exempt DCOs to clear swaps for 
customers.'').
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    Specifically, the Commission is proposing to permit U.S. customers 
to clear at an exempt DCO only through a foreign intermediary and not 
through an FCM. As discussed below, the Commission is not currently 
proposing to permit an FCM to clear U.S. customer positions at an 
exempt DCO (either directly or indirectly through a foreign member of 
the exempt DCO) due to uncertainty regarding the protection of U.S. 
customer funds in these circumstances in the event of an insolvency of 
the FCM.\12\ The Commission continues to consider and evaluate this 
issue, including possible approaches to deal with the uncertainty \13\ 
and the possible risks to customers (both those of registered and 
exempt DCOs) that may result from that uncertainty, and requests public 
comment to assist in that regard.
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    \12\ See Appendix A to Futures Industry Association (FIA) and 
Securities and Financial Markets Association (SIFMA) comment letter 
(Oct. 12, 2018), Promoting U.S. Access to Non-U.S. Swaps Markets: A 
Roadmap to Reverse Fragmentation, at 27 (Dec. 14, 2017) (FIA/SIFMA 
White Paper) (``The discrepancy between the [Bankruptcy] Code's 
`clearing organization' definition (which is limited to registered 
DCOs) and the DCO definition in the CEA (which includes any CCP for 
swaps, whether registered or not), as well as the absence of a 
separate prong in the `commodity contract' definition for `foreign 
cleared swaps' like the prong for `foreign futures,' creates 
uncertainty as to whether swaps cleared through a non-U.S. CCP are 
commodity contracts under the Code if the CCP does not register as a 
DCO.'').
    \13\ See, e.g., FIA/SIFMA White Paper at 27-36, attached as 
Appendix A to FIA/SIFMA comment letter (Oct. 12, 2018).
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II. Proposed Amendments to Part 3

    The Commission's current exempt DCO framework permits U.S. persons 
to clear proprietary swap transactions at an exempt DCO, provided that 
the U.S. person is a direct clearing member, or an affiliate of a 
direct clearing member, of the exempt DCO. Thus, a clearing member of 
an exempt DCO at this time may not clear swap transactions for U.S. 
persons that are customers of the clearing member.
    The Commission is proposing in this release to expand the exempt 
DCO framework to permit an exempt DCO to clear swap transactions for 
U.S. persons that are not clearing members, or affiliates of clearing 
members, of the exempt DCO (i.e., U.S. persons that are customers of a 
clearing member).
    This proposal would further require a foreign intermediary that 
clears for customers that are U.S. persons to be a direct clearing 
member of the exempt DCO. As a direct clearing member, the foreign 
intermediary must comply with any regulations of the home country 
regulator applicable to the foreign intermediary's activities as a 
market intermediary, including regulations addressing the holding and 
safeguarding of customer funds.
    In order to permit foreign intermediaries to clear swaps for U.S. 
persons, the Commission is proposing to exercise its authority under 
section 4(c) of the CEA to exempt foreign intermediaries from the 
prohibition in section 4d(f) of the CEA against accepting customer 
funds to clear swaps at a registered or exempt DCO without registering 
as FCMs.\14\ Specifically, the Commission is proposing to amend Sec.  
3.10(c), which addresses, among other things, exemption from FCM 
registration provisions for certain persons. Proposed Sec.  
3.10(c)(7)(i) would provide an exemption to a person located outside of 
the United States, its territories, or possessions (i.e., a foreign 
intermediary) from the requirement to register as an FCM if the foreign 
intermediary accepts funds from U.S. persons to margin, guarantee, or 
secure swap transactions cleared by an exempt DCO.\15\
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    \14\ 7 U.S.C. 6(c). Section 4(c) of the CEA provides that, in 
order to promote responsible economic or financial innovation and 
fair competition, the Commission, by rule, regulation, or order, 
after notice and opportunity for hearing, may exempt any agreement, 
contract, or transaction, or class thereof, including any person or 
class of persons offering, entering into, rendering advice, or 
rendering other services with respect to, the agreement, contract, 
or transaction, from the contract market designation requirements of 
section 4(a) of the CEA, or any other provision of the CEA other 
than certain enumerated provisions, if the Commission determines 
that the exemption would be consistent with the public interest and 
the purposes of the CEA, and that the agreement, contract, or 
transaction will be entered into solely between appropriate persons 
and will not have a material adverse effect on the ability of the 
Commission or any designated contract market (DCM) to discharge its 
regulatory or self-regulatory duties.
    \15\ The Commission is proposing to amend Sec.  3.10(c) by 
adding a new paragraph (7). The Commission previously proposed a new 
paragraph (6) to Sec.  3.10(c) which has not been finalized. See 
Exemption from Registration for Certain Foreign Persons, 81 FR 51824 
(Aug. 5, 2016).
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    The Commission is further proposing Sec.  3.10(c)(7)(ii) to provide 
that a foreign

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intermediary exempt from registering as an FCM under Sec.  
3.10(c)(7)(i) is not required to comply with provisions of the CEA and 
of the rules, regulations, or orders issued by the Commission that are 
applicable solely to a registered FCM. Proposed paragraph (c)(7)(ii) 
would provide that a foreign intermediary that is exempt from 
registering as an FCM under Sec.  3.10(c)(7)(i) would not be required 
to comply with the Commission's regulations applicable to FCMs, 
including minimum capital, segregation of customer funds, and financial 
reporting requirements.\16\ The purpose of this proposed provision is 
to clarify that the foreign intermediary would be exempt not only from 
the registration requirement of section 4d(f) of the CEA, but also from 
all other provisions and regulations applicable to FCMs, including 
regulations regarding the holding of customer segregated funds and FCM 
capital and financial reporting requirements.
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    \16\ See 17 CFR 1.17 for FCM capital requirements; 17 CFR parts 
1 and 22 for treatment of customer funds, and requirements for 
cleared swaps, respectively); and 17 CFR 1.10, 1.12, 1.16, and 1.32 
for certain financial and operational reporting requirements.
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    Proposed Sec.  3.10(c)(7)(iii) would prohibit a foreign 
intermediary exempt from registering as an FCM under Sec.  
3.10(c)(7)(i) from engaging in any other activities that would require 
the foreign intermediary to register as an FCM, and from voluntarily 
registering as an FCM.\17\ This provision is consistent with proposed 
Sec.  39.6(b)(1)(i) discussed below, which provides as a condition of 
the exempt DCO's exemption that only a foreign intermediary that is not 
an FCM may clear U.S. customers' positions.\18\ The proposed FCM 
registration exemption for foreign intermediaries is also consistent 
with the exempt DCO framework being proposed by the Commission. As 
noted above, the proposed exempt DCO framework is based on deference to 
the regulation and supervision of the exempt DCO by its home country 
regulator.
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    \17\ The Commission is proposing to prohibit a foreign 
intermediary from voluntarily registering as an FCM due to the 
uncertainty of how customer funds held by the FCM to margin swaps 
cleared at an exempt DCO would be treated under a bankruptcy 
proceeding. See section III.C.2. below for further discussion of 
potential issues associated with an FCM insolvency proceeding. 
Proposed Sec.  3.10(c)(7)(i), however, would not prohibit an FCM 
from clearing proprietary swaps at an exempt DCO.
    \18\ See the discussion at notes 47-55, below.
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    Proposed Sec.  3.10(c)(7)(iv) would require a foreign intermediary 
exempt from registering as an FCM under Sec.  3.10(c)(7)(i) to directly 
clear the swaps of U.S. persons at the exempt DCO. A foreign 
intermediary may not use another intermediary to clear U.S. persons' 
swap transactions. The purpose of this provision is to ensure that the 
foreign intermediary, as a direct clearing member of the exempt DCO, is 
subject to the rules and supervision of the exempt DCO. If a foreign 
intermediary is not a direct clearing member, an exempt DCO may not be 
in a position to directly monitor the foreign intermediary's activities 
and ensure that the exempt DCO complies with the conditions of its 
exemption.
    Proposed Sec.  3.10(c)(7)(v) would provide that a foreign 
intermediary exempt from registering as an FCM under Sec.  
3.10(c)(7)(i) may provide trading advice to U.S. persons with respect 
to swaps cleared by an exempt DCO without registering as a commodity 
trading advisor (CTA), provided that the foreign intermediary does not 
engage in any other activity requiring registration as a CTA. The 
Commission recognizes that a foreign intermediary, in soliciting and 
accepting orders from U.S. persons for swaps cleared at an exempt DCO, 
may provide advice regarding those swap transactions, which generally 
would require the foreign intermediary to register with the Commission 
as a CTA.\19\ The proposed CTA registration exemption for foreign 
intermediaries is consistent, however, with the exempt DCO framework 
being proposed by the Commission. As noted above, the proposed exempt 
DCO framework is based on deference to the regulation and supervision 
of the exempt DCO by its home country regulator, which would include 
regulations governing the providing of trading advice.\20\
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    \19\ A CTA is defined in Sec.  1.3 of the Commission's 
regulations, 17 CFR 1.3, in relevant part, as any person who, for 
compensation or profit, engages in the business of advising others, 
either directly or through publications, writings or electronic 
media, as to the value of or the advisability of trading in any 
contract of sale of a commodity for future delivery, security 
futures product, or swap. See also 7 U.S.C. 1a(12).
    \20\ See proposed Sec.  3.10(c)(7)(iv).
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    In proposing the CTA registration exemption, the Commission is 
removing a potential impediment or disincentive for foreign 
intermediaries to accept U.S. persons as customers, which would provide 
U.S. persons with greater access to swap markets while also focusing 
the Commission's and National Futures Association's resources on 
markets and registrants that have a greater connection to the U.S. 
marketplace.\21\ In addition, the proposal would limit the availability 
of the CTA registration exemption to instances where the foreign 
intermediary is providing trading advice solely to U.S. persons with 
respect to its solicitation for, and acceptance of, swap transactions 
that are cleared by an exempt DCO.\22\ A foreign intermediary that 
engages in any activity that requires CTA registration beyond providing 
trading advice to U.S. persons solely with respect to swap transactions 
cleared by an exempt DCO would still be required to register as a CTA, 
absent another available registration exemption.\23\
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    \21\ National Futures Association is the self-regulatory 
organization with oversight responsibility for CTAs.
    \22\ The Commission notes that the proposed CTA registration 
exemption for a foreign intermediary is analogous to the exclusion 
of an FCM from the definition of a CTA contained in section 1(a)(12) 
of the CEA.
    \23\ See, e.g., 17 CFR 4.14(a)(10) (providing an exemption from 
registration for CTAs that advise 15 or fewer persons within the 
preceding 12 months and that do not hold themselves out to the 
public as CTAs).
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    The Commission believes the proposed exemption in Sec.  3.10(c)(7) 
promotes responsible financial innovation and fair competition, while 
also being consistent with the public interest and the purposes of the 
CEA. The Commission further believes that the proposal is limited to 
appropriate persons, as only U.S. persons that are eligible contract 
participants would be permitted to maintain accounts with a foreign 
intermediary for swaps cleared at an exempt DCO.\24\ Eligible contract 
participants are generally required to meet certain financial or other 
standards that are intended to distinguish them from less sophisticated 
retail investors.
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    \24\ Section 2(e) of the CEA makes it unlawful for any person, 
other than an eligible contract participant, to enter into a swap 
unless the swap is entered into on, or subject to the rules of, a 
DCM. 7 U.S.C. 2(e). ``Eligible contract participant'' is defined in 
section 1a(18) of the CEA and Sec.  1.3. 7 U.S.C. 1a(18); 17 CFR 
1.3. The Commission's regulations require any transaction executed 
on or through a DCM to be cleared at a registered DCO. See 17 CFR 
38.601.
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    As noted above, the exemption is necessary to effectuate the 
proposed exempt DCO framework; absent such an exemption, foreign 
intermediaries would be prohibited from accepting U.S. customer funds 
to clear swaps at an exempt DCO without registering as FCMs. In this 
connection, the Commission believes that the proposed exemption is 
consistent with the purposes of the CEA in that the proposal would 
provide U.S. persons with additional options regarding the trading and 
clearing of swap transactions. The ability of U.S. customers (i.e., 
U.S. persons that are not direct members of exempt DCOs, or the 
affiliates of such members) to use foreign intermediaries to carry 
their accounts for clearing at exempt DCOs would potentially expand the 
number of intermediaries that

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currently clear swaps for U.S. persons. Currently, only 17 FCMs clear 
swaps for customers, with a substantial concentration in a small number 
of entities (the top five and the top ten FCMs carry 76 percent and 98 
percent of the total cleared swaps customer funds, respectively).\25\ 
The expansion of the exempt DCO framework to include foreign 
intermediaries clearing for U.S. customers has the potential for 
increasing the number of market intermediaries clearing for U.S. 
persons and reducing the concentration of U.S. customer funds in a 
small number of FCMs.
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    \25\ See Financial Data for FCMs (as of March 31, 2019), 
available at https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
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    The proposal also furthers the public interest and purposes of the 
CEA by providing U.S. customers (i.e., U.S. persons that are not direct 
members of exempt DCOs, or the affiliates of such members) with access 
to swaps that are cleared in foreign jurisdictions that U.S. customers 
otherwise would not be able to access. As noted above, U.S. customers 
are not currently permitted to clear swaps at non-U.S. clearing 
organizations that are not registered with the Commission, which may 
impact their ability to effectively hedge certain exposures. This 
limited access may become a more acute issue as margin rules for non-
cleared swap transactions come fully into effect. Full implementation 
of the non-cleared margin rules may incentivize market participants not 
currently subject to them to engage in more cleared swap transactions 
and fewer non-cleared swap transactions. This would reduce liquidity in 
the non-cleared markets and provide for greater liquidity in more 
standardized, cleared contracts. To the extent that liquidity develops 
in contracts cleared at non-U.S. clearing organizations that are not 
registered DCOs, U.S. customers would not have access to those cleared 
markets absent the proposed exempt DCO framework.\26\
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    \26\ Further, the possible reduction in liquidity in the non-
cleared markets for similar contracts could potentially impact 
execution quality for U.S. customers in the non-cleared markets.
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    The risks to U.S. swaps customers from clearing swaps traded on 
exempt DCOs through foreign intermediaries that are not registered as 
FCMs would be mitigated under the proposal by requiring exempt DCOs to 
be in in good regulatory standing in their home country jurisdictions, 
and subject to comparable, comprehensive supervision and regulation by 
their home country regulators that includes a regulatory structure that 
is consistent with the PFMIs. Furthermore, as discussed below, the 
proposal would provide that an exempt DCO must require a foreign 
intermediary to provide written notice to, and obtain acknowledgement 
from, a U.S. person prior to clearing any swaps for such person that 
the clearing member is not a registered FCM, that the exempt DCO is not 
registered with the Commission, and that the protections of the U.S. 
Bankruptcy Code (Bankruptcy Code) do not apply to the U.S. person's 
funds. The notice also must explicitly compare the protections 
available to the U.S. person under U.S. law and the laws of the exempt 
DCO's home country regulatory regime.
    The Commission also does not believe that exempting foreign 
intermediaries from FCM registration to clear swap transactions for 
U.S. persons at exempt DCOs will have a material adverse effect on the 
ability of the Commission to discharge its regulatory duties. As 
discussed in section III below, a non-U.S. clearing organization must 
not pose substantial risk to the U.S. financial system in order to 
qualify for an exemption from DCO registration. In addition, the 
proposed exempt DCO framework is based on deference to the regulation 
and supervision of an exempt DCO by its home country regulator, 
including the regulation and supervision of the foreign intermediaries 
that are clearing members of the exempt DCO. The exempt DCO must be 
organized in a jurisdiction in which it is subject, on an ongoing 
basis, to statutes, rules, regulations, policies, or a combination 
thereof that, taken together, are consistent with the PFMIs, including 
principles related to the segregation of customer funds.\27\ An exempt 
DCO also must agree to provide the Commission with information 
necessary to evaluate its initial and continued eligibility for 
exemption and its compliance with any conditions of exemption. 
Accordingly, the Commission believes that the exempt DCO framework 
provides an effective balancing of regulatory protections with 
financial innovation to provide U.S. customers with access to cleared 
swap markets that are otherwise not available to them.
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    \27\ See Principle 14, Segregation and portability, PFMIs, 
issued by the Committee on Payment and Settlement Systems and the 
Technical Committee of the International Organizations of Securities 
Commissions, April 2012.
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III. Proposed Amendments to Part 39

A. Overview of Supplements to 2018 Proposal

    In addition to certain technical revisions, the Commission is 
proposing certain supplements to its 2018 Proposal. As noted above, the 
2018 Proposal would codify existing requirements that exempt DCOs 
report to the Commission certain information regarding swap clearing by 
U.S. persons. The Commission proposed these requirements because it 
recognized that U.S. swap clearing activity at an exempt DCO could grow 
such that the exempt DCO poses substantial risk to the U.S. financial 
system. The Commission believes that when the amount of U.S. clearing 
activity at an exempt DCO reaches that point, the DCO should be 
registered with, and be subject to oversight by, the Commission. The 
Commission is issuing this supplemental proposal to require that, for a 
clearing organization to be eligible for an exemption from 
registration, the Commission must determine that the clearing 
organization does not pose substantial risk to the U.S. financial 
system. The Commission is proposing a test the Commission would use in 
making this determination, as discussed below. The Commission also is 
proposing in this release to reduce the daily and quarterly reporting 
requirements for exempt DCOs to include only information necessary for 
the Commission to evaluate the continued eligibility of the exempt DCO 
for exemption under the ``substantial risk'' test and assess the DCO's 
U.S. clearing activity.
    In addition, the supplemental conditions of exemption would require 
an exempt DCO to have rules that prohibit the clearing of customer 
positions, including U.S. customer positions, by FCMs. Furthermore, an 
exempt DCO would be required to have rules requiring any clearing 
member seeking to clear for a U.S. customer to provide written notice 
to, and obtain acknowledgement from, the customer prior to clearing, 
among other things, that the protections of the Bankruptcy Code do not 
apply to the U.S. customer's funds and comparing the protections 
available to the U.S. customer under U.S. law and the exempt DCO's home 
country regime.
    Lastly, the Commission is proposing to add a process and conditions 
under which the Commission may modify or terminate an exemption upon 
its own initiative.

B. Regulation 39.2--Definitions

1. Principles for Financial Market Infrastructures
    The Commission is proposing to modify the definition of 
``Principles for Financial Market Infrastructures'' as

[[Page 35460]]

previously proposed in Sec.  39.2.\28\ The Commission previously 
proposed to define this term to mean the ``[PFMIs] jointly published by 
the Committee on Payments and Market Infrastructures and the Technical 
Committee of the International Organization of Securities and 
Commissions in April 2012, as updated, revised or otherwise amended.'' 
\29\ The Commission proposed the ``as updated, revised or otherwise 
amended'' qualifying language to recognize that CPMI-IOSCO could offer 
further interpretation of or guidance on the PFMIs.\30\
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    \28\ See 2018 Proposal, 83 FR at 39925.
    \29\ Id. at 33934.
    \30\ Id. at n.14.
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    The Commission is proposing in this release to strike the 
qualifying language from the definition. The Commission notes that, in 
adopting regulations under subpart C of part 39,\31\ the Commission 
looked to the Principles and Key Considerations in the PFMIs, but it 
has not adopted subsequent guidance on the PFMIs. While an exempt DCO's 
home country regulator may voluntarily adopt or amend its statutes, 
rules, regulations, policies, or combination thereof to incorporate 
subsequent interpretations and guidance, the home country regulator is 
not required to do so to maintain a regulatory regime that is 
comparable to and as comprehensive as the PFMIs. The Commission 
believes that striking that portion of the proposed definition would 
provide exempt DCOs with greater regulatory certainty, as a DCO's 
eligibility to remain exempt from registration would not be contingent 
on whether a home country regulator has adopted CPMI-IOSCO's latest 
interpretations or guidance.
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    \31\ See Derivatives Clearing Organizations and International 
Standards, 78 FR 72476 (Dec. 2, 2013).
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2. Substantial Risk to the U.S. Financial System
    For purposes of this rulemaking, the Commission is proposing to 
define ``substantial risk to the U.S. financial system'' to mean, with 
respect to an exempt or registered non-U.S. DCO, that (1) the DCO holds 
20 percent or more of the required initial margin of U.S. clearing 
members for swaps across all registered and exempt DCOs; and (2) 20 
percent or more of the initial margin requirements for swaps at that 
DCO is attributable to U.S. clearing members; provided, however, where 
one or both of these thresholds are close to 20 percent, the Commission 
may exercise discretion in determining whether the DCO poses 
substantial risk to the U.S. financial system. For purposes of this 
definition and proposed Sec. Sec.  39.6 and 39.51, the Commission is 
proposing to clarify that ``U.S. clearing member'' means a clearing 
member organized in the United States or whose ultimate parent company 
is organized in the United States, or an FCM.\32\
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    \32\ On July 11, 2019, the Commission approved a separate notice 
of proposed rulemaking entitled ``Registration with Alternative 
Compliance for Non-U.S. Derivatives Clearing Organizations,'' that 
will be published in the Federal Register. In that release, the 
Commission is proposing an identical definition of ``substantial 
risk to the U.S. financial system.''
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    This definition sets forth the test the Commission would use to 
identify those non-U.S. DCOs that pose substantial risk to the U.S. 
financial system, as these DCOs would not be eligible for an exemption 
from DCO registration. The proposed test consists of two prongs. The 
first prong, which is directly related to systemic risk, is whether the 
DCO holds 20 percent or more of the required initial margin \33\ of 
U.S. clearing members for swaps across all registered and exempt DCOs. 
The Commission notes that its primary systemic risk-related concern is 
the potential for loss of clearing services for a significant part of 
the U.S. swaps market in the event of a catastrophic occurrence 
affecting the DCO. The second prong is whether U.S. clearing members 
account for 20 percent or more of the initial margin requirements for 
swaps at that DCO. This prong of the test, intended to respect 
international comity, would capture a non-U.S. DCO only if a large 
enough proportion of its clearing activity were attributable to U.S. 
clearing members such that the U.S. has a substantial interest 
warranting more active oversight by the Commission.\34\
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    \33\ In general, initial margin requirements are risk-based and 
are meant to cover a registered or exempt DCO's potential future 
exposure to clearing members based on price movements in the 
interval between the last collection of variation margin and the 
time within which the DCO estimates that it would be able to 
liquidate a defaulting clearing member's portfolio. The relative 
risk that a DCO poses to the financial system can be identified by 
the cumulative sum of initial margin collected by the DCO. As a 
result, the Commission has found initial margin to be an appropriate 
measure of risk.
    \34\ In developing this proposal, the Commission is guided by 
principles of international comity, which counsel due regard for the 
important interests of foreign sovereigns. See Restatement (Third) 
of Foreign Relations Law of the United States (the Restatement). The 
Restatement provides that even where a country has a basis for 
jurisdiction, it should not prescribe law with respect to a person 
or activity in another country when the exercise of such 
jurisdiction is unreasonable. See Restatement section 403(1). The 
reasonableness of such an exercise of jurisdiction, in turn, is to 
be determined by evaluating all relevant factors, including certain 
specifically enumerated factors where appropriate: (1) The link of 
the activity to the territory of the regulating state, i.e., the 
extent to which the activity takes place within the territory, or 
has substantial, direct, and foreseeable effect upon or in the 
territory; (2) the connections, such as nationality, residence, or 
economic activity, between the regulating state and the persons 
principally responsible for the activity to be regulated, or between 
that state and those whom the regulation is designed to protect; (3) 
the character of the activity to be regulated, the importance of 
regulation to the regulating state, the extent to which other states 
regulate such activities, and the degree to which the desirability 
of such regulation is generally accepted; (4) the existence of 
justified expectations that might be protected or hurt by the 
regulation; (5) the importance of the regulation to the 
international political, legal, or economic system; (6) the extent 
to which the regulation is consistent with the traditions of the 
international system; (7) the extent to which another state may have 
an interest in regulating the activity; and (8) the likelihood of 
conflict with regulation by another state. See Restatement section 
403(2). Notably, the Restatement does not preclude concurrent 
regulation by multiple jurisdictions. However, where concurrent 
jurisdiction by two or more jurisdictions creates conflict, the 
Restatement recommends that each country evaluate its own interests 
in exercising jurisdiction and those of the other jurisdiction, and 
where possible, to consult with each other.
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    The Commission believes that, in the context of this test, the term 
``substantial'' would reasonably apply to proportions of approximately 
20 percent or greater. The Commission stresses that this is not a 
bright-line test; by offering this figure, the Commission does not 
intend to suggest that, for example, a DCO that holds 20.1 percent of 
the required initial margin of U.S. clearing members would potentially 
pose substantial risk to the U.S. financial system, while a DCO that 
holds 19.9 percent would not. The Commission is instead seeking to 
offer some indication of how it would assess the meaning of the term 
``substantial'' in the test.
    The Commission recognizes that a test based solely on initial 
margin requirements may not fully capture the risk of a given DCO. The 
Commission therefore proposes to retain discretion in determining 
whether a non-U.S. DCO poses substantial risk to the U.S. financial 
system, particularly where the DCO is close to 20 percent on both 
prongs of the test. In these cases, in making its determination, the 
Commission may look at other factors that may reduce or mitigate the 
DCO's risk to the U.S. financial system or provide a better indication 
of the DCO's risk to the U.S. financial system.

C. Regulation 39.6--Exemption From DCO Registration

    As discussed above, the Commission is proposing to expand its 
exempt DCO framework to permit exempt DCOs to clear customer positions 
of U.S. persons through foreign intermediaries that are not registered 
as FCMs. The Commission is therefore proposing certain changes to Sec.  
39.6 as previously proposed to effectuate this approach.

[[Page 35461]]

1. Regulation 39.6(a)--Eligibility for Exemption
    As previously proposed, Sec.  39.6(a) would provide that the 
Commission may exempt a non-U.S. clearing organization from 
registration as a DCO for the clearing of swaps for U.S. persons,\35\ 
and thereby exempt such clearing organization from compliance with the 
provisions of the CEA and Commission regulations applicable to 
registered DCOs, if the Commission determines that all of the 
eligibility requirements listed in proposed Sec.  39.6(a) are met, and 
that the clearing organization satisfies the conditions set forth in 
Sec.  39.6(b).\36\ As an additional eligibility requirement, the 
Commission is proposing to require in Sec.  39.6(a)(2) \37\ that the 
clearing organization does not pose substantial risk to the U.S. 
financial system, as determined by the Commission (as discussed above).
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    \35\ 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) (2013 Cross-Border 
Guidance), 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.
    \36\ The eligibility requirements listed in proposed Sec.  
39.6(a) and the conditions set forth in proposed Sec.  39.6(b) would 
be pre-conditions to the Commission's issuance of any order 
exempting a clearing organization from the DCO registration 
requirement 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.
    \37\ To implement the proposed change, the Commission is 
proposing to renumber previously proposed Sec.  39.6(a)(2) as Sec.  
39.6(a)(3).
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    The Commission has found that the existing reporting requirements 
for exempt DCOs provide the Commission with relevant information in 
order to analyze the risks presented by U.S. persons clearing at an 
exempt DCO and to assess the extent to which U.S. business is being 
cleared by each exempt DCO. As discussed below, the Commission is 
proposing in this release to modify the daily and quarterly reporting 
requirements for exempt DCOs to include only information necessary for 
the Commission to evaluate whether an exempt DCO meets the 
``substantial risk to the U.S. financial system'' definition and to 
assess the extent to which U.S. business is being cleared by each 
exempt DCO. Based on this information, to the extent that an exempt 
DCO's cleared swaps activity for U.S. persons reaches a level such that 
the exempt DCO would pose substantial risk to the U.S. financial 
system, the Commission may find that it does not qualify for an 
exemption from DCO registration.
2. Regulation 39.6(b)--Conditions of Exemption
    Proposed Sec.  39.6(b) sets forth conditions to which an exempt DCO 
would be subject. The Commission is proposing in this release to modify 
these conditions, as discussed below.
    As originally proposed, the effect of Sec.  39.6(b)(1) was to 
prohibit the clearing of all U.S. customer positions at an exempt DCO. 
To effectuate clearing of U.S. customer positions at an exempt DCO as 
set forth in this release, the Commission is proposing to modify the 
conditions set forth in Sec.  39.6(b)(1) to specify that: (i) An 
intermediary that clears swaps for a U.S. person may not be registered 
with the Commission as an FCM; and (ii) an 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 Sec.  1.3 of the Commission's regulations.\38\
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    \38\ The text of proposed Sec.  39.6(b)(1)(ii), previously 
proposed as Sec.  39.6(b)(1)(iii), is unchanged. It 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.
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    The proposed modifications to the conditions in Sec.  39.6(b)(1) 
are due to uncertainty as to whether, in the event of an FCM bankruptcy 
proceeding, swaps customers funds deposited at exempt DCOs, or 
margining swaps cleared at exempt DCOs, would be treated as customer 
property under the Bankruptcy Code to the same extent as if they were 
deposited at a registered DCO. The CEA and Commission regulations 
establish a customer protection regime that is intended to ensure that 
an FCM holds, at all times, a sufficient amount of money, securities, 
and/or property in specially designated customer segregated accounts 
with authorized depositories to satisfy the FCM's total outstanding 
obligation to each customer engaging in cleared swap transactions.\39\ 
Specifically, section 4d(f)(1) of the CEA provides that it is unlawful 
for any person to accept money, securities, or property (i.e., funds) 
from, for, or on behalf of a swaps customer to margin swaps cleared 
through a registered or exempt DCO (including funds accruing to the 
customer as a result of such swaps) unless the person is registered as 
an FCM.\40\ In addition, any swaps customer funds held by a registered 
or exempt DCO are subject to the segregation requirements of section 
4d(f)(2) of the CEA and part 22 of the Commission's regulations, which 
includes a requirement that the DCO must treat and deal with a swaps 
customer's funds as belonging to the swaps customer of the FCM and not 
as the property of other persons, including the FCM.\41\
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    \39\ See 17 CFR 22.2(f) (setting forth requirements for FCM 
treatment of cleared swaps and associated cleared swaps customer 
collateral).
    \40\ 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).
    \41\ See 17 CFR 22.3(a) (setting forth requirements for 
registered DCO treatment of cleared swaps customer collateral).
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    The segregation requirements are intended to ensure that customer 
property in an FCM insolvency proceeding is not subject to the risk of 
the FCM's proprietary business operations and is available for 
distribution to customers. In this regard, section 766 of the 
Bankruptcy Code provides that the trustee in an FCM liquidation 
proceeding ``shall distribute customer property ratably to customers on 
the basis and to the extent of such customers' allowed net equity 
claims,'' except for certain administrative expenses.\42\
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    \42\ See 11 U.S.C. 766(h) (emphasis added).
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    The Bankruptcy Code definitions of ``customer'' and ``customer 
property,'' in turn, are tied to claims based on a ``commodity 
contract.'' \43\ The Commission notes that one prong of the Bankruptcy 
Code's definition of ``commodity contract'' requires that a commodity 
contract be cleared through a ``clearing organization,'' \44\ which the 
Bankruptcy Code defines as a DCO ``registered under the [CEA].'' \45\ 
When the CEA was amended by the Dodd-Frank Act to provide for exempt 
DCOs, the Bankruptcy Code was not similarly amended. Commenters have 
suggested, however, that another prong of the Bankruptcy Code's 
definition of

[[Page 35462]]

``commodity contract'' may be applicable to exempt DCOs.\46\ The 
Commission continues to consider and evaluate this issue, and, as 
discussed below, requests public comment to assist in that regard.
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    \43\ See 11 U.S.C. 766(9)(A).
    \44\ See Section 761(4)(F)(ii) of the Bankruptcy Code (referring 
to, ``with respect to a futures commission merchant or a clearing 
organization,'' a contract ``that is cleared by a clearing 
organization'').
    \45\ 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). See also Sec.  190.01(f) of 
the Commission's regulations, 17 CFR 190.01(f) (stating that, for 
purposes of the Commission's part 190 bankruptcy rules, ``clearing 
organization'' has the same meaning as that set forth in section 
761(2) of the Bankruptcy Code).
    \46\ See FIA/SIFMA White Paper at 27-29, attached as Appendix A 
to FIA/SIFMA comment letter (Oct. 12, 2018) (discussing the fact 
that, in amending the ``commodity contract'' definition in the 
Bankruptcy Code in the Dodd-Frank Act, Congress retained the prong 
covering ``any other contract, option, agreement, or transaction 
that is similar to a contract, option, agreement, or transaction 
referred to in [the definition of commodity contract],'' as well as 
discussing related Dodd-Frank Act amendments to the CEA).
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    The Commission is proposing to require in Sec.  39.6(b)(2) that an 
exempt DCO have rules that require any clearing member proposing to 
clear for a U.S. person to provide written notice to, and obtain 
acknowledgement from, the U.S. person prior to clearing that the 
clearing member is not a registered FCM, the DCO is exempt from 
registration, and the protections of the U.S. Bankruptcy Code do not 
apply to the U.S. person's funds. The notice must explicitly compare 
the protections available to the U.S. person under U.S. law and the 
exempt DCO's home country regulatory regime. This requirement would 
serve as notice to U.S. persons of the standards and risks that would 
apply in the exempt DCO's home country with respect to clearing through 
the non-FCM clearing member and the exempt DCO.\47\
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    \47\ By way of comparison, a registered FCM accepting U.S. 
customer funds for trading foreign futures or options on a 
registered foreign board of trade must provide its customers (which 
may include retail customers, i.e., customers that are not eligible 
contract participants) with a disclosure statement addressing the 
risks of trading in foreign markets under Sec.  30.6(a). 17 CFR 
30.6(a).
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    Furthermore, Sec.  39.6(b)(6) as previously proposed would require 
that an 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. The Commission is proposing in this release 
to modify this condition, proposed to be renumbered as Sec.  
39.6(b)(7), to specify the information that an exempt DCO must provide 
to the Commission if it is unable to provide an unconditional 
certification that it continues to observe the PFMIs in all material 
respects. Specifically, the exempt DCO would be required to identify 
the underlying material non-observance of the PFMIs and explain whether 
and how such non-observance has been or is being resolved by the exempt 
DCO. The Commission has encountered issues with conditional 
certifications and believes this supplemental proposal would provide 
greater regulatory certainty to an exempt DCO that has identified an 
issue with its compliance with the PFMIs, while also providing the 
Commission with the assurance it requires regarding the exempt DCO's 
observance of the PFMIs.
    Lastly, under proposed Sec.  39.6(b)(9), the Commission may 
condition an exemption on any other facts and circumstances it deems 
relevant. In doing so, the Commission would be mindful of principles of 
international comity. For example, the Commission could take into 
account the extent to which the relevant foreign regulatory authorities 
defer to the Commission with respect to oversight of registered DCOs 
organized in the United States. This approach would advance the goal of 
regulatory harmonization, consistent with the express directive of 
Congress that the Commission coordinate and cooperate with foreign 
regulatory authorities on matters related to the regulation of 
swaps.\48\
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    \48\ In order to promote effective and consistent global 
regulation of swaps, section 752 of the 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.
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3. Regulation 39.6(c)--General Reporting Requirements
    As previously proposed, Sec.  39.6(c)(1) sets forth general 
reporting requirements pursuant to which an exempt DCO would have to 
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 
Sec.  39.19(b).\49\ The Commission is proposing in this release to 
modify the daily and quarterly reporting requirements for exempt DCOs 
to include only information necessary for the Commission to evaluate 
the continued eligibility of the exempt DCO for exemption and to assess 
the extent to which U.S. business is being cleared by each exempt DCO.
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    \49\ Regulation 39.19(b), 17 CFR 39.19(b), requires that a 
registered DCO submit reports electronically and in a format and 
manner specified by the Commission 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 Sec.  39.6(c)(2)(i).
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    Specifically, proposed Sec.  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) Total initial 
margin requirements for all clearing members; (B) initial margin 
requirements and initial margin on deposit for each U.S. clearing 
member,\50\ by house origin and by each customer origin, and by each 
individual customer account; (C) with respect to an intermediary that 
clears swaps for a U.S. person, initial margin requirements and initial 
margin on deposit for each individual customer account of each U.S. 
person; and (D) daily variation margin, separately listing the mark-to-
market amount collected from or paid to each U.S. clearing member. 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 
separately list the mark-to-market amount collected from or paid to 
each such clearing member, on a combined basis. These reports would 
provide the Commission with information regarding the margin 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.\51\
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    \50\ The Commission is proposing to define ``U.S. clearing 
member,'' for purposes of proposed Sec.  39.6, to mean a clearing 
member organized in the United States or whose parent company is 
organized in the United States, or an FCM.
    \51\ These requirements are similar to reporting requirements in 
Sec.  39.19(c)(1)(i)(A) and (B) that apply to registered DCOs and 
similar to reporting requirements in proposed Sec.  39.51(c)(2)(i) 
that would apply to registered DCOs subject to alternative 
compliance. See 17 CFR 39.19(c)(1)(i)(A) and (c)(1)(i)(B). See also 
Registration with Alternative Compliance for Non-U.S. Derivatives 
Clearing Organizations, approved on July 11, 2019 (discussing 
similar reporting requirements for registered DCOs subject to 
alternative compliance).
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    Proposed Sec.  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 list of U.S. persons and FCMs 
\52\ 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. The Commission is no

[[Page 35463]]

longer proposing to require exempt DCOs to report the aggregate 
clearing volume of U.S. persons during the fiscal quarter, or the 
average open interest of U.S. persons during the fiscal quarter.
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    \52\ Such FCMs may or may not be U.S. persons. 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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    As previously proposed, Sec.  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. The 
Commission is supplementing this proposal to require immediate notice 
in the event of a default by any clearing member, including the amount 
of the clearing member's financial obligation. The Commission 
recognizes that the default of any clearing member may impact U.S. 
clearing members and U.S. persons clearing at the exempt DCO. If the 
defaulting clearing member is a U.S. clearing member, or clears for a 
U.S. person, the notice must also include the name of the defaulting 
clearing member and, as applicable, the name(s) of the U.S. person(s) 
for whom the clearing member clears and a list of the positions it 
held.
4. Regulation 39.6(e)--Application Procedures
    Proposed Sec.  39.6(e) sets forth the application procedures for a 
clearing organization that seeks to be exempt from DCO registration. As 
previously proposed, Sec.  39.6(e)(2) would require an applicant to 
submit a complete application, including all applicable information and 
documentation as detailed therein. In this supplemental proposal, the 
application procedures and associated materials remain mostly as 
previously proposed. The only changes the Commission is proposing in 
this release relate to Sec.  39.6(e)(2)(vii), which would require that 
an applicant for exemption submit a copy of its rules that: Meet the 
open access requirements in Sec.  39.6(b)(2) (proposed to be renumbered 
as Sec.  39.6(b)(3)); meet the swap data reporting requirements in 
Sec.  39.6(d); and provide written notice of protections available to 
U.S. persons (per newly proposed Sec.  39.6(b)(2)). The Commission is 
proposing to additionally require a draft of the notice that meets the 
requirements of newly proposed Sec.  39.6(b)(2), as applicable, as part 
of the application.
    As previously proposed, Sec.  39.6(e)(5) identifies those sections 
of an application for exemption from registration that would be made 
public. The Commission is proposing in this release to add the draft 
rules proposed to be included in Sec.  39.6(e)(2)(vii), as discussed 
above.
5. Regulation 39.6(f)--Modification or Termination of Exemption Upon 
Commission Initiative
    As previously proposed, Sec.  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. The 
Commission is now proposing to supplement this proposed provision to 
permit the Commission to terminate an exemption upon its own 
initiative, and also to set forth the process by which the Commission 
may issue such a modification or termination. Proposed Sec.  39.6(f) 
would provide that the Commission may modify or terminate an exemption 
from DCO registration, in its discretion and upon its own initiative, 
if the Commission determines that any of the terms and conditions of 
its order of exemption, including compliance with Sec.  39.6, are not 
met.
    For example, the Commission could modify or terminate an exemption 
upon a determination that an exempt DCO has failed to observe the PFMIs 
in any material respect. The Commission may receive information 
regarding the failure of the exempt DCO to comply with any of the terms 
and conditions of its order of exemption from a variety of sources, 
including, but not limited to, assessments conducted by a home country 
regulator or other national authority, or an international financial 
institution or international organization, or information otherwise 
received from a home country (or other) regulator.
    The Commission could also modify or terminate an exemption upon its 
determination that the exempt DCO is no longer subject to ``comparable, 
comprehensive supervision and regulation'' by its home country 
regulator. As the Commission is statutorily required to determine that 
a non-U.S. clearing organization is subject to ``comparable, 
comprehensive supervision and regulation'' by a home country regulator 
to be eligible for an exemption from DCO registration,\53\ the 
Commission would be required to modify or terminate an exemption upon a 
subsequent determination that the home country regulator's supervision 
and regulation no longer meets that standard.
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    \53\ Section 5b(h) of the CEA, 7 U.S.C. 7a-1(h).
---------------------------------------------------------------------------

    Further, the Commission could modify or terminate an exemption upon 
its determination that the exempt DCO poses substantial risk to the U.S 
financial system. The reporting requirements for exempt DCOs would 
provide the Commission with information regarding the margin associated 
with U.S. persons clearing swaps through an exempt DCO in order for the 
Commission to assess the risk exposure of U.S. persons and the extent 
of the exempt DCO's U.S. clearing activity. To the extent that an 
exempt DCO's cleared swaps activity for U.S. persons reaches a level 
such that the exempt DCO would pose substantial risk to the U.S. 
financial system, the Commission may find that it does not qualify for 
an exemption from DCO registration.
    Proposed Sec. Sec.  39.6(f)(2), (f)(3), and (f)(4) would set forth 
the process for modification or termination of an exemption upon the 
Commission's initiative. Proposed Sec.  39.6(f)(2) would require the 
Commission to first provide written notification to an exempt DCO that 
the Commission is considering whether to modify or terminate the DCO's 
exemption and the basis for that consideration.
    Proposed Sec.  39.6(f)(3) would permit an exempt DCO to respond to 
such a notification in writing no later than 30 business days following 
receipt of the Commission's notification, or at such later time as the 
Commission may permit in writing. The Commission believes that a 
minimum 30-business day timeframe would allow the Commission to take 
timely action to protect its regulatory interests while providing the 
exempt DCO with sufficient time to develop its response.
    Proposed Sec.  39.6(f)(4) would provide that, following receipt of 
a response from the exempt DCO, or after expiration of the time 
permitted for a response, the Commission may either: (i) Issue an order 
terminating the exemption as of a date specified in the order; (ii) 
issue an amended order of exemption that modifies the terms and 
conditions of the exemption; or (iii) provide written notification to 
the exempt DCO that the Commission has determined to neither modify nor 
terminate the exemption. The date for termination specified in a 
termination

[[Page 35464]]

order would provide the exempt DCO with a reasonable amount of time to 
wind down its swap clearing services for U.S. persons, including the 
liquidation or transfer of the positions and related collateral of U.S. 
persons, as necessary.
    Lastly, the Commission is proposing a technical change to proposed 
Sec.  39.6(g), which relates to a termination of exemption upon request 
by an exempt DCO. Specifically, as previously proposed, Sec.  
39.6(g)(1)(iii) provides that an exempt DCO may petition the Commission 
to terminate its exemption if, in conjunction with the petition, the 
exempt DCO submits a completed Form DCO to become registered as a DCO 
pursuant to section 5b(a) of the CEA. To provide for the alternative 
compliance process that would be set forth in proposed Sec.  
39.3(a)(3),\54\ the Commission is proposing in this release to instead 
refer to an application for registration in accordance with Sec.  
39.3(a)(2) or Sec.  39.3(a)(3), as applicable.
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    \54\ Registration with Alternative Compliance for Non-U.S. 
Derivatives Clearing Organizations, approved on July 11, 2019.
---------------------------------------------------------------------------

IV. Proposed Amendments to Part 140

    The Commission previously proposed amendments to Sec.  140.94 to 
delegate authority to the Division of Clearing and Risk (DCR) for all 
functions reserved to the Commission in proposed Sec.  39.6, subject to 
certain exceptions. Specifically, the Commission did not propose to 
delegate its authority to grant, modify, or terminate an exemption or 
prescribe conditions to an exemption order. Consistent with that 
proposal, the Commission is proposing in this release to supplement its 
delegation to DCR to include certain functions related to the 
modification or termination of an exemption order upon the Commission's 
initiative. These functions would include, but would not be limited to, 
sending an exempt DCO notice of an intention to modify or terminate its 
exemption order. However, the Commission alone would retain the 
authority to modify or terminate the exemption order. The Commission is 
proposing an additional amendment to Sec.  140.94(c)(4) to reflect this 
change.

V. Request for Comments

    In addition to the specific requests for comment noted elsewhere, 
the Commission generally requests comments on all aspects of the rules 
proposed in the 2018 Proposal and the supplemental rules proposed in 
this release. The Commission also requests comments on the following 
specific issues:
    1. Due to uncertainty regarding the applicability of the Bankruptcy 
Code in the event of an insolvency of an FCM clearing for customers 
directly at, or through a foreign member of, the exempt DCO, the 
proposed regulations would permit U.S. customer positions to be cleared 
at an exempt DCO but only through a foreign intermediary that is not 
registered as an FCM.
    a. Can the Bankruptcy Code be read to permit swaps customer funds 
to be deposited at an exempt DCO by an FCM directly, or through a 
foreign member of the exempt DCO, and still receive the same 
protections as swaps customer funds deposited at a registered DCO? Why 
or why not?
    b. Does the Bankruptcy Code or other relevant laws distinguish 
swaps customer funds of U.S. persons from non-U.S. persons that are 
deposited at an exempt DCO by an FCM for purposes of distribution of 
such funds to the U.S. and non-U.S. persons in the event of the FCM's 
insolvency? If so, please explain which laws are relevant and how such 
laws address the distribution of customer funds of U.S. and non-U.S. 
persons.
    c. Should the Commission permit FCMs to clear swaps for U.S. 
customers that are eligible contract participants at exempt DCOs 
despite uncertainty of bankruptcy protection in such arrangements? Why 
or why not?
    d. Can any concerns regarding uncertainty with respect to U.S. 
customers whose transactions are cleared by an FCM directly or 
indirectly at an exempt DCO be sufficiently addressed by--
    (1) Requiring, similar to the requirement in proposed Sec.  
39.6(b)(2), that an exempt DCO have rules that require an FCM seeking 
to clear swaps for a U.S. customer to provide written notice to, and 
obtain acknowledgement from, the U.S. customer prior to clearing that 
the exempt DCO is exempt from registration with the Commission, and 
that the protections of the Bankruptcy Code may not apply to the U.S. 
customer's funds? Why or why not?
    (2) Limiting clearing of swap positions by U.S. customers at exempt 
DCOs through FCMs to only a specified subset(s) of eligible contract 
participants? Why or why not?
    e. Can any concerns regarding potential uncertainty with respect to 
other U.S. customers (i.e., customers who limit their activities to 
transactions cleared at registered DCOs) of an FCM that clears 
transactions for customers at an exempt DCO be sufficiently addressed 
through disclosure or other means? Why or why not? In this regard, 
please address the potential of (1) a bankruptcy court in an FCM 
bankruptcy proceeding delaying the transfer of all swaps customer 
positions to another FCM to address potential legal challenges to the 
bankruptcy status of customer positions cleared at an exempt DCO, 
resulting in the need to close out customer positions, or (2) a 
shortfall in swaps customer funds affecting all swaps customers of the 
FCM due to the bankruptcy of an affiliated foreign clearing member of 
the FCM through which the FCM clears customer transactions at the 
exempt DCO?
    f. Does the proposal strike the right balance between customer 
protection and providing greater access to swaps clearing? Are there 
additional measures the Commission should take to enhance customer 
protection?
    2. Commenters also suggested a regime for swaps similar to that of 
futures, in which a distinct set of Commission regulations--part 30--
governs ``foreign futures'' traded outside of the United States.\55\ 
The Commission notes that the foreign futures regime is expressly 
contemplated by the CEA. Section 4(b)(2) of the CEA,\56\ for example, 
authorizes the Commission to adopt rules and regulations requiring the 
``safeguarding of customers' funds'' by any person located inside the 
United States who engages in the offer or sale of a futures contract 
made on or subject to the rules of a board of trade, exchange, or 
market located outside the United States. The CEA does not include 
similar provisions for swaps, however. Similarly, the Bankruptcy Code 
establishes separate protections for foreign futures, traded on or 
subject to the rules of, a board of trade outside the United States, 
through a ``foreign futures commission merchant,'' but has no similar 
provisions for swaps.\57\ Although these statutory distinctions do not 
necessarily preclude the Commission from constructing a ``part 30-
type'' regime for swaps, the Commission is not proposing to do so at 
this time. However, the Commission is requesting additional comment on 
constructing a ``part 30-type'' regime for swaps.
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    \55\ FIA/SIFMA comment letter (Oct. 12, 2018).
    \56\ 7 U.S.C. 6(b)(2).
    \57\ 11 U.S.C. 761(4)(a), (11), and (12).
---------------------------------------------------------------------------

    3. As proposed, Sec.  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

[[Page 35465]]

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. The Commission notes that the intention would be to apply this 
requirement to U.S. customer trades cleared at an exempt DCO; however, 
the Commission requests comment as to whether this would pose 
challenges. Furthermore, should the Commission consider removing this 
requirement altogether?
    4. Is the proposed test for ``substantial risk to the U.S. 
financial system'' the best measure of such risk? If not, please 
explain why, and if there is a better measure/metric that the 
Commission should use when implementing the exempt DCO regime, please 
provide a rationale and supporting data, if available.
    5. What is the frequency with which the Commission should reassess 
an exempt DCO's ``risk to the U.S. financial system'' for purposes of 
the test, and across what time period?
    6. With respect to the written notice of protections available to 
U.S. persons required by proposed Sec.  39.6(b)(2), the Commission 
invites comment as to the elements that should be required in any such 
disclosure, and how detailed such a disclosure should be in describing 
the relevant bankruptcy regimes.
    7. The Commission requests that non-U.S. clearing organizations 
provide estimates of the percentage of initial margin deposited with 
the clearing organization that is attributable to clearing members that 
have a U.S. parent company.
    8. The Commission requests that U.S. swaps market participants 
provide examples of swaps that they would like to clear at non-U.S. 
clearing organizations. Relatedly, to the extent that U.S. swaps market 
participants currently are engaging in these swaps on an uncleared 
basis, the Commission requests information about whether counterparties 
to these swaps are predominantly financial entities or commercial end-
users.
    9. The Commission requests information concerning legal, 
operational, or other impediments, if any, to (1) FCMs becoming members 
of exempt DCOs, and (2) exempt DCOs, and non-U.S. clearing 
organizations that may choose to become exempt DCOs, complying with 
cleared swaps customer funds protection and segregation rules set forth 
in parts 1, 22, 39, and 190 of the Commission's regulations.
    10. The Commission requests estimates from swap dealers, FCMs, and 
their affiliates of the percentages of their swap business, measured in 
terms of initial margin, that they estimate is cleared at particular 
non-U.S. DCOs, either registered or exempt.
    11. In the 2018 Proposal, the Commission proposed to define ``good 
regulatory standing'' to mean that either there has been no finding by 
the home country 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 exempt DCO.\58\ Although the Commission 
proposed to limit this to instances of ``material'' non-observance of 
the PFMIs or other relevant home country legal requirements, the 
Commission requests comment as to whether it should instead require all 
instances of non-observance.
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    \58\ See 2018 Proposal, 83 FR at 39924-39925.
---------------------------------------------------------------------------

    12. Commenters suggested the Commission should clarify that a non-
U.S. clearing organization clearing swaps does not trigger registration 
as a DCO solely because it permits participation (direct or indirect) 
by foreign branches of U.S. bank swap dealers (foreign branches).\59\ 
The commenters argued that because such participation takes place 
outside the United States, it does not involve use of U.S. 
jurisdictional means by the non-U.S. clearing organization. The 
commenters noted that the Commission has recognized in other contexts 
that applying the Dodd-Frank Act's registration requirements to parties 
transacting with foreign branches would result in competitive 
disparities that are not necessary to mitigate risk to the United 
States.\60\ The commenters also noted that subjecting non-U.S. clearing 
organizations clearing swaps to registration as DCOs when they permit 
participation by foreign branches discourages those non-U.S. clearing 
organizations from permitting such participation, and that, to access 
those non-U.S. clearing organizations, U.S. banks must incur the costs, 
including the additional regulatory burden, of ``subsidiarizing'' their 
local clearing operations.\61\ To date, the Commission has not 
addressed directly the scope of the DCO registration requirement for 
non-U.S. clearing organizations clearing swaps in the specific context 
of foreign branches, and the Commission declines to do so at this time. 
However, the Commission requests additional comment on whether the 
Commission should address the scope of the registration requirement 
under section 2(i) with respect to foreign branches, as suggested by 
the commenters.
---------------------------------------------------------------------------

    \59\ See FIA/SIFMA White Paper at 36-38, attached as Appendix A 
to FIA/SIFMA comment letter (Oct. 12, 2018).
    \60\ See id. at 37 (citing the 2013 Cross-Border Guidance at 
45,324 (``The Commission understands that commenters are concerned 
that foreign entities, in order to avoid swap dealer status, may 
decrease their swap dealing business with foreign branches of U.S. 
registered swap dealers and guaranteed affiliates that are swap 
dealers. Therefore, the Commission's policy, based on its 
interpretation of Section 2(i) of the CEA, will be that swap dealing 
transactions with a foreign branch of a U.S. swap dealer or with 
guaranteed affiliates that are swap dealers should generally be 
excluded from the de minimis calculations of non-U.S. persons that 
are not guaranteed or conduit affiliates'').
    \61\ See id.
---------------------------------------------------------------------------

    13. The Commission currently does not require non-U.S. customers 
clearing foreign futures or swaps at registered non-U.S. DCOs to clear 
through FCMs. In addition, the Commission is proposing in this release 
to permit U.S. customers to clear swaps through non-FCMs at exempt 
DCOs. In light of this, should the Commission consider permitting non-
U.S. customers to clear futures and swaps through non-FCMs at U.S. 
registered DCOs? In other words, should the Commission give non-U.S. 
customers the option of choosing to clear futures and swaps through 
local intermediaries that are clearing members of U.S. registered DCOs, 
instead of requiring them to clear, directly or indirectly, through 
FCMs at U.S. registered DCOs?
    14. Until now, it has been the Commission's policy to allow U.S. 
customers' swap positions to be cleared only through registered FCMs at 
registered DCOs. However, the Commission understands that an FCM may be 
reluctant to participate as a direct member of a registered non-U.S. 
DCO if the FCM's affiliate is also a member of the DCO, due to 
duplicative requirements that would be borne by the two affiliates. The 
Commission requests comment as to alternatives to address concerns with 
this approach.
    For example, where consistent with the rules of a registered DCO, 
an FCM could potentially participate as a ``special'' member whose 
obligations to the DCO could be guaranteed by its non-FCM affiliate 
acting as a ``traditional'' member of the DCO. All customer funds would 
flow directly from the FCM to the registered DCO, i.e., they would not 
pass through the non-FCM affiliate.

[[Page 35466]]

Similarly, in the event of the default of a customer of the FCM, the 
FCM would, nonetheless, be responsible in the first instance for making 
prompt payment in full of all obligations under contracts cleared 
through the FCM at the registered DCO. The guarantor affiliate's 
responsibility to perform on the guarantee would only be activated in 
the event that the FCM fails promptly to perform in full with respect 
to the positions it clears. In guaranteeing the FCM's obligations, the 
non-FCM affiliate would need a (subordinated) security interest in the 
collateral held at the registered DCO to enable it to protect its own 
interests if it is called upon to perform under that guarantee.\62\ 
Such a security interest with respect to customer collateral generally, 
and, in the case of cleared swaps collateral specifically, would 
necessarily be subject to the limitation that the guarantor could 
access no more of the collateral than the registered DCO could use 
under section 4d of the CEA and the Commissions regulations thereunder 
(including, with respect to cleared swaps customer collateral, Part 
22).
---------------------------------------------------------------------------

    \62\ It would arguably be consistent with such a model for other 
responsibilities--e.g., payments under a mutualized guaranty fund, 
assessments, participation in end-of-day closing price determination 
exercises, and/or participation in default management activities--to 
be performed by the guarantor affiliate.
---------------------------------------------------------------------------

    The Commission requests comment as to whether this approach is 
viable, and the extent to which there would need to be protections in 
place for the FCM, the non-FCM affiliate, FCM customers, and the 
registered DCO, and, if so, what protections would be appropriate.
    In particular, the Commission further requests comment as to 
whether there would need to be modifications to Sec.  22.2(d)(2), which 
provides that an FCM may not impose or permit the imposition of a lien 
on cleared swaps customer collateral, to accommodate this approach, 
and, if so, what modifications would be most appropriate (including 
providing appropriate protection for customer funds).
    15. Considering the increased demand for swap clearing and the 
declining number of FCMs, are there other operational structures that 
the Commission should consider to better ensure availability of swap 
clearing services at both registered and exempt DCOs without 
jeopardizing U.S. customer protections? If so, please describe in 
detail.

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.\63\ 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.\64\ The Commission has previously determined 
that clearing organizations are not small entities for the purpose of 
the RFA.\65\ 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.
---------------------------------------------------------------------------

    \63\ 5 U.S.C. 601 et seq.
    \64\ 47 FR 18618 (Apr. 30, 1982).
    \65\ See 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \66\ 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. The Commission is requesting a new OMB control number for the 
collection of information in proposed Sec.  39.6. The responses to the 
collection of information would be necessary to obtain exemption from 
DCO registration.
---------------------------------------------------------------------------

    \66\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

1. Application for Exemption from DCO Registration Under Proposed Sec.  
39.6
    Based on its experience in addressing petitions for exemption, the 
Commission anticipates receiving one application for exemption per 
year, and one request for termination of an exemption every three 
years.\67\ 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 
Commission has estimated the burden hours for this proposed collection 
of information as follows:
---------------------------------------------------------------------------

    \67\ The Commission has determined that one termination every 
three years is a more appropriate estimate than one per year, which 
was used in the information burden estimate for the 2018 Proposal.
---------------------------------------------------------------------------

 Application for Exemption, Including All Exhibits, Supplements 
and Amendments
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 40.
    Estimated gross annual reporting burden: 40.
 Termination of Exemption
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 0.33.
    Average number of hours per report: 2.
    Estimated gross annual reporting burden: 0.66.
 Notice to Clearing Members of Termination of Exemption
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 10.33.
    Average number of hours per report: 0.1.
    Estimated gross annual reporting burden: 1.033.
2. Reporting by Exempt DCOs
    The number of 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 (4) and 
one application for exemption each year. Reporting of specific events 
is expected to occur infrequently. The burden is estimated 
conservatively at four per year for event-specific reporting:
 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: 1.
    Estimated gross annual reporting burden: 28.
 Event-Specific Reporting
    Estimated number of respondents: 4.
    Estimated number of reports per respondent: 1.

[[Page 35467]]

    Average number of hours per report: 0.5.
    Estimated gross annual reporting burden: 2.
 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: 10.5.
3. Third-Party Reporting by Clearing Members Clearing for Unaffiliated 
U.S. Persons Through Exempt DCOs
    Proposed Sec.  39.6(b)(2) would require an exempt DCO to have rules 
that require any clearing member seeking to clear for an unaffiliated 
U.S. person to provide written notice to, and obtain acknowledgement 
from, the U.S. person prior to clearing that the clearing member is not 
a registered FCM, the exempt DCO is exempt from registration with the 
Commission, and the protections of the Bankruptcy Code, as defined in 
Sec.  190.01 of this chapter, do not apply to the U.S. person's funds. 
The notice must explicitly compare the protections available to the 
U.S. person under U.S. law and the exempt DCO's home country regulatory 
regime. The estimated burden for this requirement is based on the 
average number of clearing members at four existing exempt DCOs and 
three potential exempt DCOs (estimated at one applicant per year over 
the next three years), clearing for an average of 10 unaffiliated U.S. 
persons:
 Clearing Members Providing Written Notice to, and Obtaining 
Acknowledgement From, Unaffiliated U.S. Persons
    Estimated number of respondents: 217.
    Estimated number of reports per respondent: 10.
    Average number of hours per report: 0.2.
    Estimated gross annual reporting burden: 430.
4. Reporting by Exempt DCOs in Accordance With Part 45
    Proposed Sec.  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.\68\ Consequently, the burden hours for the proposed collection 
of information in this rulemaking have been estimated as follows:
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    \68\ 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.
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 Reporting in Accordance With Part 45
    Estimated number of respondents: 7.
    Estimated number of reports per respondent: 1987.
    Average number of hours per report: 0.1.
    Estimated gross annual reporting burden: 1393.
    The proposed exemption for foreign intermediaries from registration 
as an FCM in Sec.  3.10(c)(7) will not impose any new recordkeeping or 
information collection requirements, or other collections of 
information that require approval of the OMB under the PRA.

C. Cost-Benefit Considerations

1. 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.\69\ 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.
---------------------------------------------------------------------------

    \69\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The baseline for the Commission's consideration of the costs and 
benefits of this proposed rulemaking are: (1) The current status, where 
the Commission has implemented a set of conditions and procedures for 
granting exemptions from DCO registration, and has proposed, but not 
yet codified, those conditions and procedures under Commission 
regulations; \70\ (2) the core principles applicable to registered DCOs 
set forth in the CEA; \71\ (3) the general provisions applicable to 
registered DCOs under subparts A and B of Part 39; (4) Form DCO in 
Appendix A to Part 39; (5) Parts 1, 22, and 40 of the Commission's 
regulations; and (6) Sec.  3.10.
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    \70\ The Commission notes that the costs and benefits of the 
proposed changes in the 2018 Proposal were discussed within that 
release. Only the costs and benefits of the changes proposed in this 
release are discussed in this release.
    \71\ 7 U.S.C. 7a-1(c)(2)(A).
---------------------------------------------------------------------------

    The Commission notes that this consideration is based on its 
understanding that the swaps market functions internationally with (1) 
transactions that involve U.S. firms occurring across different 
international jurisdictions; (2) some entities organized outside of the 
United States that are prospective Commission registrants; and (3) some 
entities that typically operate both within and outside the United 
States and that follow substantially similar business practices 
wherever located. Where the Commission does not specifically refer to 
matters of location, the discussion of costs and benefits below refers 
to the effects of the proposed regulations on all relevant swaps 
activity, whether based on their actual occurrence in the United States 
or on their connection with activities in, or effect on, U.S. commerce 
pursuant to section 2(i) of the CEA.\72\
---------------------------------------------------------------------------

    \72\ Pursuant to section 2(i) of the CEA, activities outside of 
the United States are not subject to the swap provisions of the CEA, 
including any rules prescribed or regulations promulgated 
thereunder, unless those activities either have a direct and 
significant connection with activities in, or effect on, commerce of 
the United States; or contravene any rule or regulation established 
to prevent evasion of a CEA provision enacted under the Dodd-Frank 
Act, Public Law 111-203, 124 Stat. 1376. 7 U.S.C. 2(i).
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    The Commission recognizes that the proposed rules may impose costs. 
The Commission has endeavored to assess the expected costs and benefits 
of the proposed rulemaking in quantitative terms, including PRA-related 
costs, where possible. In situations where the Commission is unable to 
quantify the costs and benefits, the Commission identifies and 
considers the costs and benefits of the applicable proposed rules in 
qualitative terms. The lack of data and information to estimate those 
costs is attributable in part to the nature of the proposed rules. 
Additionally, the initial and recurring compliance costs for any 
particular exempt DCO will depend on the size, existing infrastructure, 
level of clearing activity, practices, and cost structure of the DCO.
    Finally, the costs and benefits of this proposal may be affected by 
the Commission's proposal to adopt a registration regime with 
alternative

[[Page 35468]]

compliance \73\ under which an already registered non-U.S. DCOs would 
have the option of seeking an exemption from registration or applying 
for registration under registration procedures with alternative 
compliance. These clearing organizations would need to compare the 
costs and benefits of an exemption with the costs and benefits of 
registration with alternative compliance.
---------------------------------------------------------------------------

    \73\ Registration with Alternative Compliance for Non-U.S. 
Derivatives Clearing Organizations, approved on July 11, 2019.
---------------------------------------------------------------------------

2. Proposed Amendments to Part 39
a. Summary
    Section 5b(h) of the CEA permits the Commission to exempt a non-
U.S. 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. An exempt DCO is 
currently permitted to clear only proprietary positions of U.S. persons 
and FCMs, and not customer positions. The proposed regulations, 
however, would permit an exempt DCO to clear U.S. customer positions 
under certain conditions, thereby providing more clearing options for 
swaps customers.
b. Benefits and Costs
    The proposed amendments to Sec.  39.6 would allow U.S. customer 
positions to be cleared at an exempt DCO, provided that they are not 
cleared through a clearing member that is registered as an FCM. The 
Commission believes this would increase the number of non-U.S. clearing 
organizations available to clear swaps for U.S. customers and would 
afford clearing members and their customers more clearing options. 
Access to more clearing organizations may encourage more clearing of 
swaps, while reducing the concentration risk among registered and 
exempt DCOs. With this proposal and the proposal to adopt an 
alternative compliance regime, U.S. persons could have even more 
choices for interacting with non-U.S. clearing organizations.
    A U.S. customer clearing at an exempt DCO under proposed Sec.  39.6 
would not be protected under the provisions of the Bankruptcy Code. 
However, this cost is potentially mitigated by two factors. First, the 
exempt DCO's home country may have a bankruptcy regime that would 
provide similar protections and be applicable in that situation. 
Second, because proposed Sec.  39.6(b)(2) would require an exempt DCO 
to have rules that require any clearing member seeking to clear for an 
unaffiliated U.S. person to provide written notice to, and obtain 
acknowledgement from, the U.S. person prior to clearing that the 
protections of the Bankruptcy Code would not apply to the U.S. person's 
funds, a U.S. person seeking to clear through an exempt DCO would know 
in advance that it is not protected by the Bankruptcy Code. The notice 
would be required to explicitly compare the protections available to 
the U.S. person under U.S. law and the exempt DCO's home country 
regulatory regime. This would allow the U.S. person to consider the 
pros and cons of that bankruptcy regime prior to making a decision to 
clear at a given exempt DCO.
    The possibility of U.S. customer business at exempt DCOs may 
encourage non-U.S. clearing organizations that are not currently 
registered or exempt DCOs to apply to become an exempt DCO. Although 
there are costs involved with preparing an application for an exemption 
from DCO registration as well as ongoing compliance costs for exempt 
DCOs, such costs are significantly lower than the corresponding costs 
applicable to registered DCOs. Because proposed Sec.  39.6 would allow 
an exempt DCO to clear for U.S. customers who are currently permitted 
to clear only through registered DCOs (provided that U.S. customers do 
not clear through a registered FCM), the Commission anticipates that 
some non-U.S. clearing organizations that are currently registered 
DCOs, or that would otherwise apply to register in the future, may 
choose to apply to become an exempt DCO, thus lowering their ongoing 
compliance costs. Some of these cost savings may be passed on to 
clearing members and customers.
    The Commission notes that, if this proposal and the proposal to 
adopt an alternative compliance regime are adopted as proposed, 
eligible non-U.S. clearing organizations would have a choice between 
seeking an exemption from registration and registering under the 
alternative compliance regime. They would also retain the option of 
registering under the traditional registration procedures. Each 
clearing organization would need to compare the costs and benefits of 
an exemption with the costs and benefits of registration. Both 
alternative compliance and exemption from registration are 
significantly less costly than traditional registration. The Commission 
expects that alternative compliance would be somewhat more costly than 
an exemption from registration. In the PRA analyses of the two 
proposals, the Commission estimated that it would take about 100 hours 
to register under the alternative procedures as compared to 40 hours to 
apply for an exemption. The daily, quarterly, and event-specific 
reporting requirements are estimated to impose the same hourly burden 
for both categories with the exception of swap data reporting under 
part 45. Registered DCOs subject to alternative compliance would be 
subject to the same part 45 reporting requirements as other registered 
DCOs, while exempt DCOs would only have to report data regarding the 
two swaps resulting from the novation of an original swap previously 
reported to an SDR. In the PRA section for this release, the Commission 
estimates that the part 45 reporting burden for an exempt DCO would be 
about one quarter as much as the burden on a registered DCO. Both 
exempt DCOs and registered DCOs subject to alternative compliance would 
primarily be subject to their home country regulatory regimes, but 
registered DCOs subject to alternative compliance would also be held to 
certain requirements set forth in the CEA and Commission regulations, 
including, for example, subpart A of part 39 and Sec.  39.15. The 
extent to which these additional requirements would increase costs on 
registered DCOs subject to alternative compliance would depend on the 
extent to which these requirements would exceed the legal requirements 
of their home countries and the extent to which registered DCOs subject 
to alternative compliance would have to change their practices.
    While the alternative compliance regime is more costly than an 
exemption, it would provide benefits that are not currently available 
to exempt DCOs or those that clear through an exempt DCO. For example, 
a DCO subject to alternative compliance would be permitted to clear for 
U.S. persons clearing through an FCM, and such U.S. persons would have 
the benefit of U.S. bankruptcy protection. Therefore, unlike exempt 
DCOs, DCOs subject to alternative compliance and their clearing members 
would not incur the costs associated with proposed Sec.  39.6(b)(2) 
under which exempt DCOs would be required to have rules requiring their 
clearing members to provide written notice of the bankruptcy 
protections available to U.S. persons. An eligible clearing 
organization may choose to register under the alternative compliance 
regime over seeking an exemption if it determines that the

[[Page 35469]]

benefits of FCM customer clearing would justify the extra costs of 
alternative compliance relative to an exemption.
    Registered DCOs may face a competitive disadvantage as a result of 
this proposal (as is the case with the proposal to adopt an alternative 
compliance regime). A registered DCO subject to full Commission 
regulation and oversight may have higher ongoing compliance costs than 
an exempt DCO. This competitive disadvantage is mitigated by the fact 
that exempt DCOs would, as a precondition of such exemption, be 
required to be subject to comparable, comprehensive supervision and 
regulation by a home country regulator that is likely to impose costs 
similar to those associated with Commission regulation. Such exempt 
DCOs, then, may have compliance costs in their home countries that 
registered DCOs might not.
    FCMs may also face a competitive disadvantage as a result of this 
proposal, as they would not be permitted to clear customer trades at an 
exempt DCO. To the extent that their customers shift their clearing 
activity from registered DCOs to exempt DCOs, or otherwise reduce their 
clearing activity at registered DCOs as a result of this proposal, FCMs 
would lose business. As discussed above, however, the Commission 
believes there may be costs to customers if they were permitted to 
clear through an FCM at an exempt DCO, due to the uncertainty as to the 
bankruptcy protection customers would receive. The Commission believes 
that the exempt DCO framework would provide U.S. persons with 
additional options regarding the trading and clearing of swap 
transactions. The ability of U.S. persons to use foreign intermediaries 
to carry their accounts for clearing at exempt DCOs under proposed 
Sec.  3.10(c)(7) would potentially expand the number of intermediaries 
that currently clear swaps for U.S. persons. The expansion of the 
exempt DCO framework to include foreign intermediaries clearing for 
customers has the potential for increasing the number of market 
intermediaries clearing for U.S. persons and reducing the concentration 
of U.S. customer funds in a small number of FCMs.
    The proposal would also provide U.S. customers with access to swaps 
that are cleared in foreign jurisdictions that the U.S. customers 
otherwise would not be able to access. As discussed above, U.S. 
customers' access to foreign cleared swaps markets is restricted to 
foreign swaps cleared by registered DCOs.
    The Commission does not anticipate that the proposal would impose 
costs on non-FCM clearing members or customers. The proposal could 
increase the number of exempt DCOs \74\ and permit some registered DCOs 
that wish to clear for U.S. customers to seek an exemption from 
registration, which may allow them to pass on cost savings to clearing 
members and customers. Therefore, the Commission believes that non-FCM 
clearing members and customers may face reduced costs as a result of 
this proposal. To the extent that exempt DCOs do not save costs 
relative to registered DCOs, or do not pass cost savings to their 
clearing members or customers, the Commission notes that clearing 
members and customers could simply continue clearing through 
traditionally registered DCOs, likely without any change in costs.
---------------------------------------------------------------------------

    \74\ Any increase in the number of exempt DCOs would depend in 
part on the extent to which eligible clearing organizations choose 
to seek an exemption over registering under the alternative 
compliance regime (assuming both proposals are adopted).
---------------------------------------------------------------------------

    The Commission does not believe that the proposal would materially 
increase the risk to the U.S. financial system. Registered DCOs that 
pose substantial risk to the U.S. financial system would not be 
eligible for an exemption from registration.\75\ Furthermore, a non-
U.S. clearing organization cannot obtain an exemption from registration 
unless the Commission determines that it is subject to comparable, 
comprehensive supervision and regulation by its home country regulator, 
meaning that the non-U.S. clearing organization would be subject to 
regulation comparable to that imposed on registered DCOs. An MOU or 
similar arrangement must be in effect between the Commission and the 
exempt DCO's home country regulator, allowing the Commission to receive 
information from the home country regulator to help monitor the exempt 
DCO's continuing compliance with its legal obligations. The Commission 
also notes that foreign regulators have a strong incentive to ensure 
the safety and soundness of the clearing organizations that they 
regulate, and their oversight, combined with the DCO exemption regime, 
will enable the Commission to more efficiently allocate its own 
resources to the oversight of traditionally registered DCOs.
---------------------------------------------------------------------------

    \75\ It may also be possible that the Commission's proposed test 
for ``substantial risk to the U.S. financial system'' may not be 
properly calibrated, allowing certain exempt DCOs to operate in U.S. 
markets when they may pose sufficient risk to the U.S. financial 
system to warrant greater oversight by the Commission. However, the 
Commission believes that even if these exempt DCOs are permitted to 
clear for U.S. customers, this risk will be mitigated by the 
Commission's determination that the exempt DCO is subject to 
comparable, comprehensive supervision and regulation by its home 
country regulator, as discussed above, and the Commission's access 
to certain daily and periodic reports regarding the exempt DCO.
---------------------------------------------------------------------------

    Finally, the proposed regulations would promote and perhaps 
encourage international comity by showing deference to non-U.S. 
regulators in the oversight of non-U.S. clearing organizations that 
clear for U.S. customers. If regulators in other countries similarly 
defer to U.S. oversight of U.S. registered DCOs active in overseas 
markets, the reduced registration and compliance burdens on such DCOs 
would be an additional benefit of the proposed regulations.
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
    The proposed regulations would not materially reduce the 
protections available to market participants and the public because 
they would, among other things: (i) Require that an exempt DCO not pose 
substantial risk to the U.S. financial system; (ii) require that an 
exempt DCO's clearing members provide written notice to, and obtain 
acknowledgement from, their U.S. customers prior to clearing that the 
protections of the Bankruptcy Code do not apply to the U.S. customer's 
funds; and (iii) explicitly authorize the Commission to modify or 
terminate an order of exemption on its own initiative if it determines 
that there are changes to or omissions in material facts or 
circumstances pursuant to which the order of exemption was issued, or 
that any of the terms and conditions of the order of exemption have not 
been met. Collectively, these provisions, along with previously 
proposed regulations, would protect market participants and the public 
by ensuring that exempt DCOs would be subject to the internationally-
recognized PFMI standards and do not pose substantial risk to the U.S. 
financial system. Although U.S. persons clearing through an exempt DCO 
would not have the protections of the Bankruptcy Code, such persons 
would be required to acknowledge this in advance, allowing them to 
conduct the necessary due diligence to determine whether it is worth 
giving up such protections in exchange for those that may be offered 
under the applicable foreign bankruptcy regime. Although the Commission 
acknowledges the possibility that some foreign regulatory regimes may 
ultimately prove to be less effective than that of the United States, 
the Commission believes that this risk is mitigated for the reasons 
discussed above.

[[Page 35470]]

b. Efficiency, Competitiveness, and Financial Integrity
    The proposed regulations would promote operational efficiency by 
permitting exempt DCOs to clear swaps for U.S. customers without having 
to prepare and submit an application for DCO registration, which 
involves the submission of extensive documentation to the Commission. 
In addition, adopting the proposed regulations might prompt other 
regulators to adopt similar rules that would defer to the Commission in 
the regulation of U.S. registered DCOs operating outside the United 
States, which could increase competitiveness by reducing the regulatory 
burdens on such DCOs.
    The proposed regulations may also promote competition among non-
U.S. clearing organizations because they would hold exempt DCOs to the 
internationally-recognized standards set forth in the PFMIs. This would 
allow such clearing organizations to compete with each other under 
comparable regulatory regimes. Furthermore, by allowing exempt DCOs to 
clear for U.S. customers, the proposed regulations would promote 
competition by increasing the number of DCOs available to clear for 
U.S. customers. As noted above, however, the proposed regulations may 
reduce competition among intermediaries that would otherwise clear for 
U.S. customers, as FCMs would be prohibited from clearing customer 
trades at an exempt DCO.
    The proposed regulations would be expected to maintain the 
financial integrity of swap transactions cleared by exempt DCOs because 
such DCOs would be subject to supervision and regulation by their home 
country regulator within a legal framework that is comparable to that 
applicable to registered DCOs under the CEA and Commission regulations 
and that is comprehensive. In addition, the proposed regulations may 
contribute to the financial integrity of the broader financial system 
by spreading the potential risk of particular swaps among a greater 
number of registered and exempt DCOs, thus reducing concentration risk. 
However, the Commission acknowledges that foreign intermediaries 
clearing for customers at an exempt DCO may not be subject to the same 
level of effective supervision as an FCM.
c. Price Discovery
    Price discovery is the process of determining the price level for 
an asset through the interaction of buyers and sellers and based on 
supply and demand conditions. The Commission has not identified any 
impact that the proposed regulations would have on price discovery. 
This is because price discovery occurs before a transaction is 
submitted for clearing through the interaction of bids and offers on a 
trading system or platform, or in the over-the-counter market. The 
proposed rule would not impact requirements under the CEA or Commission 
regulations regarding price discovery.
d. Sound Risk Management Practices
    The proposed regulations would continue to encourage sound risk 
management practices because exempt DCOs would be subject to the risk 
management standards set forth in the PFMIs. In addition, a non-U.S. 
clearing organization that poses substantial risk to the U.S. financial 
system would not be eligible for an exemption from registration.
e. Other Public Interest Considerations
    The Commission notes the public interest in access to clearing 
organizations outside of the United States in light of the 
international nature of many swap transactions. The proposed 
regulations might encourage international comity by deferring, under 
certain conditions, to the regulators of other countries in the 
oversight of home country clearing organizations. The Commission 
expects that such regulators will defer to the Commission in the 
supervision and regulation of registered DCOs domiciled in the United 
States, thereby reducing the regulatory and compliance burdens to which 
such DCOs are subject.
4. Consideration of Alternatives
    The Commission considered alternatives suggested by commenters on 
the 2018 Proposal for allowing U.S. customers to clear through exempt 
DCOs. One commenter suggested that the Commission amend the definition 
of ``clearing organization'' under part 190 of the Commission's 
regulations to provide that it has the same meaning as that set forth 
in section 761(2) of the Bankruptcy Code, but ``registered under the 
CEA'' in that statute should be read to mean ``registered or exempt 
from registration under the CEA.'' \76\ In the alternative, the 
commenter also suggested that the Commission assert by regulation that 
an exempt DCO counts as a class or type of registered DCO for purposes 
of bankruptcy law.\77\ Other commenters \78\ proposed a regime for 
swaps similar to that for futures, including ``a clearing structure in 
which a U.S. customer clears through a U.S. FCM that maintains the U.S. 
customer's positions and margin in a customer omnibus account held by a 
non-U.S. clearing member that is not registered as an FCM.'' \79\
---------------------------------------------------------------------------

    \76\ International Swaps and Derivatives Association, Inc. 
comment letter at 3 (Oct. 12, 2018).
    \77\ Id. at 4.
    \78\ FIA/SIFMA comment letter (Oct. 12, 2018); ASX Clear 
(Futures) Pty comment letter (Oct. 11, 2018); and Japan Securities 
Clearing Corporation comment letter (Oct. 10, 2018).
    \79\ FIA/SIFMA comment letter at 4 (Oct. 12, 2018).
---------------------------------------------------------------------------

    As discussed above, the Commission, at this time, is not proposing 
these alternatives given uncertainty as to the extent to which U.S. 
customers would be protected under the Bankruptcy Code in the event of 
an FCM bankruptcy proceeding.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\80\
---------------------------------------------------------------------------

    \80\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is the promotion of competition. The Commission 
requests comment on whether the proposed rulemaking implicates any 
other specific public interest to be protected by the antitrust laws. 
The Commission has considered the proposed rulemaking to determine 
whether it is anticompetitive. The Commission believes that the 
proposed rulemaking may promote greater competition in swap clearing 
because it would permit exempt DCOs to clear swaps for U.S. customers 
under certain circumstances, which would provide greater access to 
clearing and might encourage more non-U.S. clearing organizations to 
seek an exemption from registration to clear the same types of swaps 
for U.S. customers that are currently cleared by registered DCOs. The 
Commission is mindful of the potential competitive disadvantage for 
FCMs, however, as customers would not be permitted to clear through 
FCMs at exempt DCOs, but this is due to uncertainty of bankruptcy 
protection for customer funds held at an FCM. The Commission further 
notes that the proposal may increase the number of market 
intermediaries clearing for U.S. persons and reduce the concentration 
of U.S. customer funds in a small number of FCMs.
    The Commission has not identified any less anticompetitive means of

[[Page 35471]]

achieving the purposes of the CEA. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the CEA that would otherwise be served by adopting the 
proposed rules.

List of Subjects

17 CFR Part 3

    Definitions, Consumer protection, Foreign futures, Foreign options, 
Registration requirements.

17 CFR Part 39

    Clearing, Customer protection, Derivatives clearing organization, 
Exemption, Procedures, Registration, Swaps.

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 3--REGISTRATION

0
1. The authority citation for part 3 continues to read as follows:

    Authority:  5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 
6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 
12a, 13b, 13c, 16a, 18, 19, 21, 23.

0
2. Amend Sec.  3.10 by reserving paragraph (c)(6) and adding paragraph 
(c)(7) to read as follows:


Sec.  3.10   Registration of futures commission merchants, retail 
foreign exchange dealers, introducing brokers, commodity trading 
advisors, commodity pool operators, swap dealers, major swap 
participants and leverage transaction merchants.

* * * * *
    (c) * * *
    (6) [Reserved].
    (7)(i) A person located outside the United States, its territories 
or possessions is not required to register as a futures commission 
merchant if it accepts funds from a U.S. person to margin, guarantee, 
or secure swap transactions that are cleared by a derivatives clearing 
organization that is exempt from registration pursuant to section 5b(h) 
of the Act and Sec.  39.6 of this chapter.
    (ii) A person exempt from registering as a futures commission 
merchant in accordance with paragraph (c)(7)(i) of this section is not 
required to comply with those provisions of the Act and of the rules, 
regulations, or orders thereunder applicable solely to any registered 
futures commission merchant or any person required to be so registered.
    (iii) A person exempt from registering as a futures commission 
merchant in accordance with paragraph (c)(7)(i) of this section may not 
engage in other activities requiring registration as a futures 
commission merchant or voluntarily register as a futures commission 
merchant.
    (iv) A person exempt from registering as a futures commission 
merchant in accordance with paragraph (c)(7)(i) of this section must be 
a clearing member of an exempt derivatives clearing organization and 
must directly clear the swap transactions of the U.S. person at an 
exempt derivatives clearing organization.
    (v) A person exempt from registering as a futures commission 
merchant in accordance with paragraph (c)(7)(i) of this section may 
provide commodity trading advice to U.S. persons without registering as 
a commodity trading advisor, provided that, the commodity trading 
advice is provided solely with respect to swap transactions that are 
cleared by an exempt derivatives clearing organization.
* * * * *

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
3. The authority citation for part 39 is revised to read as follows:

    Authority: 7 U.S.C. 2, 7a-1, and 12a(5); 12 U.S.C. 5464; 15 
U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, title VII, Sec.  752, July 
21, 2010, 124 Stat. 1749.

0
4. 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
5. In Sec.  39.2, add the definitions of ``Exempt derivatives clearing 
organization,'' ``Good regulatory standing,'' ``Home country,'' ``Home 
country regulator,'' ``Principles for Financial Market 
Infrastructures,'' and ``Substantial risk to the U.S. financial 
system'' 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 of this chapter.
* * * * *
    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:
    (1) In the case of an exempt derivatives clearing organization, 
either 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 
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; or
    (2) In the case of a derivatives clearing organization registered 
through the process described in Sec.  39.3(a)(3) of this part, either 
there has been no finding by the home country regulator of material 
non-observance of the relevant home country legal requirements, or 
there has been a finding by the home country regulator of material non-
observance of the 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.
* * * * *
    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

[[Page 35472]]

Payments and Market Infrastructures and the Technical Committee of the 
International Organization of Securities Commissions in April 2012.
* * * * *
    Substantial risk to the U.S. financial system means, with respect 
to a derivatives clearing organization organized outside of the United 
States, that (1) the derivatives clearing organization holds 20% or 
more of the required initial margin of U.S. clearing members for swaps 
across all registered and exempt derivatives clearing organizations; 
and (2) 20% or more of the initial margin requirements for swaps at 
that derivatives clearing organization is attributable to U.S. clearing 
members; provided, however, where one or both of these thresholds are 
close to 20%, the Commission may exercise discretion in determining 
whether the derivatives clearing organization poses substantial risk to 
the U.S. financial system. For purposes of this definition and 
Sec. Sec.  39.6 and 39.51 of this chapter, U.S. clearing member means a 
clearing member organized in the United States, a clearing member whose 
parent company is organized in the United States, or a futures 
commission merchant.
* * * * *
0
6. 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 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;
    (2) The derivatives clearing organization does not pose substantial 
risk to the U.S. financial system, as determined by the Commission; and
    (3) 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 for U.S. persons. The exempt derivatives clearing 
organization shall have rules providing that:
    (i) An intermediary that clears swaps for a U.S. person may not be 
registered with the Commission as a futures commission merchant; and
    (ii) 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) Notice of protections available to U.S. persons. The exempt 
derivatives clearing organization shall have rules that require any 
clearing member seeking to clear for an unaffiliated U.S. person to 
provide written notice to, and obtain acknowledgement from, the U.S. 
person prior to clearing that the clearing member is not a registered 
futures commission merchant, the exempt derivatives clearing 
organization is exempt from registration with the Commission, and the 
protections of the Bankruptcy Code, as defined in Sec.  190.01(c) of 
this chapter, do not apply to the U.S. person's funds. The notice must 
explicitly compare the protections available to the U.S. person under 
U.S. law and the exempt derivatives clearing organization's home 
country regulatory regime.
    (3) Open access. The exempt derivatives clearing organization shall 
have rules with respect to swaps to which one or more of the 
counterparties is a U.S. person that 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.
    (4) 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 a clearing member, of the exempt derivatives clearing 
organization; and
    (iii) Promptly inform the Commission of any change in its 
designated and authorized agent.
    (5) Compliance. The exempt derivatives clearing organization shall 
comply, and shall demonstrate compliance as requested by the 
Commission, with any condition of its exemption.
    (6) 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

[[Page 35473]]

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.
    (7) 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. To the extent the exempt derivatives clearing organization is 
unable to provide to the Commission an unconditional certification, it 
must identify the underlying material non-observance of the Principles 
for Financial Market Infrastructures and identify whether and how such 
non-observance has been or is being resolved by means of corrective 
action taken by the exempt derivatives clearing organization.
    (8) Representation of good regulatory standing. On an annual basis, 
within 60 days following the end of its fiscal year, an exempt 
derivatives clearing organization shall request and the Commission must 
receive from a home country regulator a written representation that the 
exempt derivatives clearing organization is in good regulatory 
standing.
    (9) Other conditions. The Commission may condition an exemption on 
any other facts and circumstances it deems relevant.
    (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) of this 
chapter.
    (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 with respect to swaps:
    (A) Total initial margin requirements for all clearing members;
    (B) Initial margin requirements and initial margin on deposit for 
each U.S. clearing member, by house origin and by each customer origin, 
and by each individual customer account;
    (C) With respect to an intermediary that clears swaps for a U.S. 
person, initial margin requirements and initial margin on deposit for 
each individual customer account of each U.S. person; and
    (D) Daily variation margin, separately listing the mark-to-market 
amount collected from or paid to each U.S. clearing member, by house 
origin and by each customer origin, and by each individual customer 
account; 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 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.
    (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 compliance 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 clearing member 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 amount of the clearing member's financial 
obligation; provided, however, if the defaulting clearing member is a 
U.S. clearing member, or clears for a U.S. person, the notice shall 
also include the name of the defaulting clearing member and, as 
applicable, the name(s) of the U.S. person(s) for whom the clearing 
member clears, and a list of the positions held by the defaulting 
clearing member and, as applicable, the positions held by the U.S. 
person(s) for whom the clearing member clears; and
    (viii) Notice of action taken against a U.S. clearing member 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

[[Page 35474]]

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:
    (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 the 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 draft of the applicant's rules that meet the requirements 
of paragraphs (b)(1), (b)(2), (b)(3), and (d) of this section, and a 
draft of the notice that meets the requirements of paragraph (b)(2) 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)(4) 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; draft rules that meet the requirements of 
paragraphs (b)(1), (b)(2), (b)(3), and (d) of this section, as 
applicable; the draft notice that meets the requirements of paragraph 
(b)(2) 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 or termination of exemption upon Commission 
initiative. (1) The Commission may, in its discretion and upon its own 
initiative, terminate or modify the terms and conditions of an order of 
exemption from derivatives clearing organization registration if the 
Commission determines that there are changes to or omissions in 
material facts or circumstances pursuant to which the order of 
exemption was issued, or that any of the terms and conditions of its 
order of exemption have not been met, including, but not limited to, 
the requirement that:
    (i) The exempt derivatives clearing organization observes the 
Principles for Financial Market Infrastructures in all material 
respects;
    (ii) The exempt derivatives clearing organization is subject to 
comparable, comprehensive supervision and regulation by its home 
country regulator; or
    (iii) The exempt derivatives clearing organization does not pose 
substantial risk to the U.S. financial system.
    (2) The Commission shall provide written notification to an exempt 
derivatives clearing organization that it is considering whether to 
terminate or modify an exemption pursuant to this paragraph and the 
basis for that consideration.
    (3) The exempt derivatives clearing organization may respond to the 
notification in writing no later than 30 business days following 
receipt of the notification, or at such later time as the Commission 
permits in writing.
    (4) Following receipt of a response from the exempt derivatives 
clearing organization, or after expiration of the time permitted for a 
response, the Commission may:
    (i) Issue an order of termination, effective as of a date to be 
specified therein. Such specified date shall be intended to provide the 
exempt derivatives clearing organization with a reasonable amount of 
time to wind

[[Page 35475]]

down its swap clearing services for U.S. persons;
    (ii) Issue an amended order of exemption that modifies the terms 
and conditions of the exemption; or
    (iii) Provide written notification to the exempt derivatives 
clearing organization that the exemption will remain in effect without 
modification to the terms and conditions of the exemption.
    (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 an application for registration in 
accordance with Sec.  39.3(a)(2) or Sec.  39.3(a)(3), as applicable, 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.

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

0
7. 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
8. Amend Sec.  140.94 by:
0
a. Revising the introductory text of paragraph (c);
0
b. Redesignating paragraphs (c)(4) through (c)(13) as paragraphs (c)(5) 
through (c)(14); and
0
c. Adding 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 or terminate an exemption under Sec.  39.6(f)(4) of 
this chapter; and
    (iv) Terminate an exemption under Sec.  39.6(g)(3) of this chapter.
* * * * *

    Issued in Washington, DC, on July 12, 2019, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

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

Appendicies to Exemption From Derivatives Clearing Organization 
Registration--Commission Voting Summary, Chairman's Statement, and 
Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo, and Commissioners Quintenz 
and Stump voted in the affirmative. Commissioners Behnam and 
Berkovitz voted in the negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    The proposal would provide a non-U.S. DCO that does not pose a 
substantial risk to the United States, and that is subject to 
``comparable, comprehensive supervision and regulation'' by 
appropriate regulators in the DCO's home jurisdiction, the option to 
be an exempt DCO. This proposal supplements regulations proposed by 
the Commission in August 2018 that would codify the policies and 
procedures that the Commission is currently following with respect 
to granting exemptions from registration as a DCO.\1\ The proposal 
is grounded in section 5b(h) of the Commodity Exchange Act,\2\ which 
provides that non-U.S. clearing organizations that are subject to 
``comparable, comprehensive supervision and regulation'' by a home 
country regulator are eligible for an exemption from DCO 
registration.\3\
---------------------------------------------------------------------------

    \1\ Exemption From Derivatives Clearing Organization 
Registration, 83 FR 39923 (Aug. 13, 2018).
    \2\ 7 U.S.C. 7a-1(h).
    \3\ 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. Further, the Commission 
has deemed a supervisory and regulatory framework that conforms to 
the Principles for Financial Market Infrastructures to be comparable 
to, and as comprehensive as, the supervisory and regulatory 
requirements applicable to registered DCOs.
---------------------------------------------------------------------------

    Unlike the current CFTC approach to exempt DCOs, the proposal 
would permit exempt DCOs to offer customer clearing to U.S. eligible 
contract participants--i.e., non-retail customers--through foreign 
clearing members that are not registered as FCMs. To be eligible for 
this exemption, the DCO and the FCM would be required, among other 
things, to provide clear and succinct disclosure to U.S. eligible 
contract participants on the bankruptcy protections that would be 
afforded to them under relevant non-U.S. law. To facilitate this 
proposal, the Commission also is proposing to allow persons located 
outside of the United States to accept funds from U.S. persons to 
margin swaps cleared at an exempt DCO, without registering as FCMs.
    This proposal is similar to the CFTC's long-standing approach to 
foreign futures clearing, which provides U.S. customers, including 
retail customers, with the ability to opt out of the bankruptcy 
protections offered under U.S. law to foreign futures funds. I 
believe it is wholly appropriate to permit U.S. eligible contract 
participants that are institutional, not retail, investors to 
exercise business judgment in this area. In other words, I believe 
it is appropriate to afford these institutional investors the 
opportunity to weigh the potential economic benefits of accessing 
products cleared at a non-U.S. CCP through a non-U.S. intermediary 
that would otherwise not be available to them, with the attendant 
potential risks relating to the use of a non-FCM intermediary. These 
are risks that institutional--and potentially retail--investors in 
those non-U.S. markets take every day when they choose to clear 
swaps

[[Page 35476]]

through those non-U.S. intermediaries at non-U.S. CCPs.
    Some non-U.S. DCOs that are currently exempt from registration 
may elect to remain exempt or register under the full registration 
regime with alternative compliance, discussed earlier. In either 
case, they would be able to offer customer clearing, but in 
different ways. Exempt DCOs would be able to offer customer clearing 
to U.S. eligible contract participants through non-U.S. 
intermediaries operating in their markets, while fully registered 
DCOs subject to alternative compliance would be able to permit 
customer clearing through U.S. FCMs. In both cases, in terms of 
regulatory oversight of the DCO, the CFTC would defer to the primary 
regulator or regulators of the DCO.
    I thank CFTC staff for their fine work that resulted in today's 
proposal. I look forward to reviewing comments from the public.

Appendix 3--Statement of Commissioner Brian Quintenz

    Today's supplemental proposal to permit exempt DCOs to clear 
swaps for U.S. customers will provide greater choice and flexibility 
to market participants. Currently, an exempt DCO is only authorized 
to clear the proprietary positions of its U.S. clearing members. 
Today's proposal will provide U.S. customers, like U.S. asset 
managers, insurance companies, and others, with increased access to 
foreign markets and an enhanced ability to hedge their risk.
    I strongly support this proposal's inclusion of specific 
criteria that the Commission will use to determine whether a foreign 
DCO poses a ``substantial risk to the U.S. financial system,'' and 
would therefore be ineligible for an exemption from registration. 
Today's rulemaking also appropriately streamlines exempt DCO 
reporting requirements to focus solely on the information necessary 
to evaluate ``substantial risk'' and to assess the extent to which 
the foreign DCO is clearing U.S. business.
    I look forward to receiving comments on additional possibilities 
for U.S. customers to clear on exempt DCOs. In particular, I am 
interested to hear from commenters about whether U.S. futures 
commission merchants (FCMs) should be permitted to provide their 
U.S. customers with access to exempt DCOs, and, if so, how the 
protection of U.S. customer funds should be addressed. I also 
welcome comment about whether a foreign DCO, neither registered with 
the CFTC nor exempted from CFTC registration, should be permitted to 
clear for a foreign branch of a U.S. bank that is registered with 
the CFTC as a swap dealer. Finally, I look forward to hearing from 
market participants about whether a foreign clearing member of a 
foreign DCO should be permitted to sponsor a U.S. FCM's membership 
to the foreign DCO in order to facilitate access by U.S. customers.

Appendix 4--Dissenting Statement of Commissioner Rostin Behnam

Introduction

    I respectfully dissent from the Commodity Futures Trading 
Commission's (the ``Commission'' or ``CFTC'') supplemental notice of 
proposed rulemaking addressing the granting of exemptions from 
registration as a derivatives clearing organization (``DCO'') to 
non-U.S. clearing organizations and further permitting such ``exempt 
DCOs'' to clear swaps for U.S. customers through intermediaries that 
would be wholly outside the Commission's direct regulation and 
oversight (the ``Supplemental Proposal''). While I supported the 
Commission's 2018 proposal to codify its current policies and 
procedures for granting exemptions from DCO registration \1\ as a 
positive step towards increased cross-border cooperation and 
deference to our foreign regulatory counterparts, I cannot support 
it in its ``supplemental'' form. The Supplemental Proposal is not 
the product of internal consensus and its brief history and 
questionable timeline signal a lack of appropriate scrutiny and 
evaluation of the potential consequences of taking these first steps 
towards diverging from the customer protection model provided by the 
Commodity Exchange Act (``CEA'' or ``the Act'') and U.S. Bankruptcy 
Code.\2\
---------------------------------------------------------------------------

    \1\ Exemption from Derivatives Clearing Organization 
Registration, 83 FR 39923 (proposed Aug. 13, 2018) (the ``2018 
Proposal'').
    \2\ The Supplemental Proposal was drafted ad hoc in a rash 
attempt to launch a conception of how U.S. swaps customers may fare 
outside the protections offered through operation of the U.S 
Bankruptcy Code. The critical financial, market, consumer 
protection, and systemic risk issues raised by the Supplemental 
Proposal should be considered in the context of a more fulsome and 
informed discussion.
---------------------------------------------------------------------------

    I support the Commission's endeavor to explore ways to adapt 
and--if appropriate--seek to alter the current intermediary 
structure established under the CEA and Commission regulations to 
better accommodate both U.S. customer demand for increased access to 
clearing in foreign jurisdictions and evolving global swaps market 
structures. However, I cannot support the Commission's proposed use 
of its limited public interest exemptive authority to create a 
regulatory easement as a short cut to legal certainty in furtherance 
of such efforts and to the detriment of U.S. customers, market 
participants, and the financial system.
    If the Commission believes it is appropriate at this time to 
provide U.S. customers with greater access to non-U.S. swap markets, 
then we can and should engage in a more careful analysis of options, 
assessment of alternatives, and evaluation of consequences. Policy 
decisions made in haste amid ongoing uncertainty undermine the 
regulatory process and our accountability. As I have said before, 
when evaluating our regulatory landscape and making critical 
determinations as to which parts to revisit, which to complete, and 
how we can guide legislation and develop regulations to address 
market evolution and developments--regardless of the underlying 
impetus, we must hold one another accountable, adhere to appropriate 
process, be wary of false progress, and engage in genuine dialog.\3\ 
Today's Supplemental Proposal in its timing, in its limitations, and 
in its uncertainty, is at best, false progress and, at worst, the 
false promise of benefits that will never be realized.
---------------------------------------------------------------------------

    \3\ See, e.g., Rostin Behnam, Accountability & Moving Forward, 
Remarks of Commissioner Rostin Behnam at the FIA Boca 2018 
International Futures Industry 43rd Annual Conference, Boca Raton, 
Florida (Mar. 15, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam4.
---------------------------------------------------------------------------

    The substantial revisions to the Supplemental Proposal 
throughout these last several weeks with their various additions and 
carefully crafted excerpts do little to bolster the justifications 
and rationales put forth in advocacy of the proposed change in 
policy and attendant exemptive relief that would permit U.S. 
customer positions to be cleared at an exempt DCO through a foreign 
intermediary that is not registered as a futures commission merchant 
(``FCM''). Nowhere is this clearer than in the Request for 
Comments.\4\
---------------------------------------------------------------------------

    \4\ Supplemental Proposal at Section V.
---------------------------------------------------------------------------

    The Supplemental Proposal utilizes its Request for Comments 
primarily to explore why this proposal represents the regulatory 
route that will cause the least amount of harm by soliciting the 
public for their best arguments as to the operation of the U.S. 
Bankruptcy Code (and relevant laws), and to solicit feedback on 
eligibility elements and several conditions of the exemption for 
DCOs. However, it also introduces and requests comment on 
alternatives to the Commission's longstanding policy (consistent 
with longstanding interpretation of the CEA) of allowing U.S. 
customers' swap positions to be cleared only through registered FCMs 
at registered DCOs. While this is an entirely appropriate issue to 
raise in the context of a proposed rulemaking (or other formal 
request for public comment such as an advance notice of proposed 
rulemaking, request for input, or concept release), the 
effectiveness of any comments received will be largely lost in this 
``supplement'' since the line of questioning fails to accentuate--or 
itself propose--a rule from which any final Commission action could 
be taken as a logical outgrowth.\5\ A line of questioning that seeks 
to introduce potentially new policy considerations for future 
consideration by a Commission in the midst of changing leadership is 
ill-fated, detracts commenters from the critical issues at hand, and 
undermines the integrity of the 2018 Proposal and the Supplemental 
Proposal.\6\
---------------------------------------------------------------------------

    \5\ See, e.g. CSX Transportation, Inc. v. Surface Transportation 
Board, 584 F.3d 1076, 1079-81 (DC Cir. 2009) (``A final rule 
qualifies as a logical outgrowth `if interested parties `should have 
anticipated' that the change was possible, and thus reasonably 
should have filed their comments on the subject during the notice-
and-comment period'').
    \6\ It seems particularly unfortunate in this instance where 
some extra time and staff attention may have permitted the 
Commission to deliberate and vote to issue an entirely separate 
proposal aimed at addressing timely and emerging concerns in the FCM 
community.
---------------------------------------------------------------------------

When You Are Boxed in by Uncertainty

    Though I have many concerns with the Supplemental Proposal, I am 
most concerned with the Commission's contorted plan to permit DCOs 
that it would exempt from registration to clear swaps for U.S. 
customers through unregistered foreign intermediaries. This 
juggernaut of a proposal gained momentum from the ongoing 
uncertainty

[[Page 35477]]

regarding the extent to which U.S. customers' funds would be 
protected under the U.S. Bankruptcy Code when clearing swaps at an 
unregistered DCO. While the Commission's decision to put a premium 
on legal certainty is laudable, it is not clear to me that the 
Commission ought to do so if it undermines key components of the 
CEA's customer protection regime aimed at protecting both U.S. 
customers and the stability of our markets and misaligns the 
Commission's already questionable use of its public interest 
exemptive authority with the purposes of the Act.\7\ It appears that 
in attempting to deliver on the concept of permitting exempt DCOs to 
clear swaps for FCM customers--introduced just months ago by the 
Commission as a single question in the 2018 Proposal \8\--the 
Commission found itself boxed in by uncertainty. The only way out 
would be to remove any and all doubt that a U.S. customer who seeks 
to clear swaps on an exempt DCO will have to do so through a foreign 
intermediary not subject to CFTC regulation or oversight and outside 
the protections of the U.S Bankruptcy Code.\9\
---------------------------------------------------------------------------

    \7\ See H.R. Rep. No. 102-978, 102d Cong. 2d Sess. 80 (1992).
    \8\ 2018 Proposal, 83 FR at 39930.
    \9\ Indeed, the Commission succinctly dismisses the 
consideration of proposed alternatives suggested by commenters on 
the 2018 Proposal ``given the uncertainty as to extent to which U.S. 
customers would be protected under the Bankruptcy Code . . .'' 
Supplemental Proposal at VI.C.4.
---------------------------------------------------------------------------

Ongoing Uncertainty

    The Supplemental Proposal would permit U.S. customers to clear 
at an exempt DCO only through a foreign intermediary and not through 
an FCM due to uncertainty regarding the protection of U.S. customer 
funds in the event of an insolvency of the FCM. The Commission is 
continuing to consider and evaluate this issue, consider alternative 
approaches, and identify possible risks to customers that may result 
from that uncertainty. While this approach was selected as a means 
to provide the greatest clarity with regard to the Commission's 
current understanding of the U.S. Bankruptcy Code, given that it 
necessitates the Commission's exercise of exemptive authority to 
permit foreign intermediaries to accept U.S. customer funds to clear 
swaps without having to register as FCMs (or having to comply with 
Commission rules and regulations applicable solely to registered 
FCMs), it would seem, on its face, to be inconsistent with the 
customer protection regime established under the CEA and Commission 
regulations.\10\ This should give the Commission ample reason to 
pause its consideration of moving forward on the Supplemental 
Proposal at this time. Inexplicably, it does not. And instead, the 
Commission is soliciting comments from the public on a number of 
issues involving the interpretation and applicability of the U.S. 
Bankruptcy Code (or other relevant laws) and the clearing of swaps 
customer funds deposited at an exempt DCO by an FCM directly or 
through a foreign member of the exempt DCO.\11\
---------------------------------------------------------------------------

    \10\ See Supplemental Proposal at III.C.2.
    \11\ See Supplemental Proposal at V. I appreciate that asking 
these direct questions encourages interested parties and perhaps 
even bankruptcy scholars to provide their best interpretations and 
arguments. However, it is not clear to me that the U.S. Bankruptcy 
Court would be obliged to defer to such interpretations--even if 
accepted by the Commission. And that, unless the Commission aims to 
seek a legislative solution to alleviate the uncertainty presented 
by U.S. customer clearing on exempt DCOs--which it has not presented 
as a viable alternative in this Supplemental Proposal, I cannot 
appreciate the value of this exercise at this time when our 
immediate goal should be to codify policies and procedures for 
granting exemptions from DCO registration.
---------------------------------------------------------------------------

Misuse and Abuse of Authority

    In order to permit foreign intermediaries to clear swaps for 
U.S. persons, and to ensure that only foreign intermediaries that 
are not FCMs will clear U.S. customer positions on exempt DCOs, the 
Commission is proposing to exercise its authority under section 4(c) 
of the CEA to exempt foreign intermediaries from the prohibition in 
section 4d(f) of the CEA against accepting customer funds to clear 
swaps at a registered or exempting DCO without registering as FCMs. 
Even assuming that the Commission's exemptive authority extends to 
the non-U.S. clearing organizations and intermediaries that are the 
subject of the Supplemental Proposal,\12\ the Commission's proposed 
justifications for the use of such authority do not align with the 
very purpose of the authority to promote innovation and competition 
without sacrificing key components of the Commission's regulatory 
and oversight structure.
---------------------------------------------------------------------------

    \12\ Section 4(c) of the CEA, 7 U.S.C. 6(c), provides the 
Commission may exempt any agreement, contract, or transaction 
(including any persons offering, entering into, rendering advice or 
rendering other services with respect thereto) from the exchange 
trading requirements of section 4(a), or any other provision of the 
Act (subject to express limitations identified in section 
4(c)(1)(A)) if such transaction--or person--is subject to section 
4(a). Section 4(a) includes a parenthetical indicating that it does 
not apply to contracts ``made on or subject to the rules of a board 
of trade, exchange, or market located outside the United States . . 
.'' The Supplemental Proposal does address this potential limitation 
on its exemptive authority in its reading of section 4(c) (see 
Supplemental Proposal at Section II, n. 14). However, the CFTC's 
General Counsel confirmed that the Commission's use of section 4(c) 
exemptive authority is within the Commission's authority in this 
instance during the open public meeting at which the Supplemental 
Proposal was deliberated. See Press Release Number 7967-19, CFTC, 
CFTC Voted on Open Meeting Agenda Items (July 11, 2019), https://www.cftc.gov/PressRoom/PressReleases/7967-19.
---------------------------------------------------------------------------

    Section 4(c) of the CEA, commonly referred to as the public 
interest exemption, authorizes the Commission, in order to promote 
responsible innovation and fair competition, by rule, regulation, or 
order, to exempt, among other things, any person or class of persons 
offering, entering into, rendering advice, or rendering other 
services with respect to transactions from any of the provisions of 
the CEA other than certain enumerated provisions.\13\ When enacting 
section 4(c), Congress noted that the purpose of the provision is 
``to give the Commission a means of providing certainty and 
stability to existing and emerging markets so that financial 
innovation and market development can proceed in an effective and 
competitive manner . . . . with due regard for the continued 
viability of the marketplace and considerations related to systemic 
risk in financial markets.'' \14\ Indeed, in exercising its 
exemptive authority under section 4(c) of the CEA, the Commission 
has long understood that it was Congress's intention and expectation 
that ``the Commission will assess the impact of a proposed exemption 
on the maintenance of the integrity and soundness of markets and 
market participants.'' \15\ As well, Congress, in requiring the 
Commission to consider any material adverse effect on regulatory or 
self-regulatory responsibilities, indicated that the Commission is 
to consider such regulatory concerns as ``market surveillance, 
financial integrity of participants, protection of customers, and 
trade practice enforcement.'' \16\
---------------------------------------------------------------------------

    \13\ 7 U.S.C. 6(c)(1). Section 4(c)(2) of the CEA further 
provides that the Commission may not grant exemptive relief unless 
it determines that: (1) The exemption would be consistent with the 
public interest and the purposes of the CEA; (2) the transaction 
will be entered into solely between ``appropriate persons'' as that 
term is defined in section 4(c); and (3) the exemption will not have 
a material adverse effect on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory 
responsibilities under the CEA. 7 U.S.C. 6(c)(2).
    \14\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. 80 (1992).
    \15\ See Exemption for Certain Swap Agreements, 58 FR 5587, 5592 
(Jan. 22, 1993), citing H.R. Rep. No. 102-978, 102d Cong. 2d Sess. 
80 (1992).
    \16\ See Exemption for Certain Swap Agreements, 58 FR 5587, 5592 
(Jan. 22, 1993), citing H.R. Rep. No. 102-978, 102d Cong. 2d Sess. 
79 (1992).
---------------------------------------------------------------------------

    The Commission's section 4(c) proposal, which would be codified 
in Sec.  3.10(c)(7) of the Commission regulations, purports to be 
consistent with the exempt DCO framework being proposed in that it 
is based on deference to the regulation and supervision of foreign 
intermediary's home country regulator. To qualify for the exemption, 
the foreign intermediary: (1) Must accept funds from a U.S. person 
to margin, guarantee, or secure swap transactions that are cleared 
by an exempt DCO; (2) may not engage in other activities requiring 
registration as an FCM or voluntarily register as an FCM; and (3) 
must be a clearing member of an exempt DCO and must directly clear 
the swap transactions of the U.S. person at an exempt DCO. A foreign 
intermediary that is exempt from registering as an FCM pursuant to 
the foregoing requirements is not required to comply with those 
provisions of the Act and of the rules, regulations, or orders 
thereunder applicable solely to any registered FCM and may provide 
commodity trading advice to U.S. persons without registering as a 
commodity trading advisor (``CTA''), provided that the advice is 
provided solely with respect to swaps that are cleared by an exempt 
DCO.\17\
---------------------------------------------------------------------------

    \17\ See Supplemental Proposal at Section II.
---------------------------------------------------------------------------

    The Commission believes the proposed exemption for foreign 
intermediaries promotes responsible financial innovation and fair 
competition, and is consistent with

[[Page 35478]]

the public interest and purposes of the CEA. In support of these 
beliefs, the Commission focuses on: (1) The provision allowing U.S. 
persons additional options for trading and clearing swap 
transactions and the concomitant expansion of available 
intermediaries, which has the potential to reduce the current 
concentration of U.S. customer funds in a small number of FCMs and 
(2) increased access for U.S. persons to swaps that are cleared in 
foreign jurisdictions, which may provide for greater hedging 
opportunities and increased liquidity in more standardized, cleared 
contracts.\18\ However, these rationales ignore that this approach 
removes U.S. customers from the protections of the U.S. Bankruptcy 
Code and puts both FCMs and registered DCOs at a competitive 
disadvantage and with respect to clearing in non-U.S. swaps markets. 
While the Commission puts forth mitigating factors in response to 
the loss of U.S. Bankruptcy Code protections, as discussed below, 
its solution can only be said to promote ``responsible'' innovation 
if we assume that individual U.S. Customers need nothing more than 
notice of their lack of protections to engage responsibly in foreign 
financial markets to prevent harm to themselves and to the larger 
financial system. It is my belief that history has not demonstrated 
that this is the case. Regarding the competitive disadvantage to 
FCMs and registered DCOs, the Commission admits that this is a cost 
of its proposal,\19\ but makes no arguments regarding fairness 
beyond briefly discussing the economics of being regulated as a 
clearing organization in any jurisdiction.
---------------------------------------------------------------------------

    \18\ Id.
    \19\ Supplemental Proposal at Section VI.C.2.b.
---------------------------------------------------------------------------

    The Commission also concludes that the proposed exemption will 
be limited to appropriate persons, ``as only U.S. persons that are 
eligible contract participants (``ECPs'') would be permitted to 
maintain accounts with a foreign intermediary for swaps cleared at 
an exempt DCO'' and cites CEA section 2(e) which makes it unlawful 
for any person, other than an ECP, to enter into a swap unless the 
swap is entered on or subject to the rules of a designated contract 
market.\20\ Of note, the Commission makes no reference to whether or 
how the foreign intermediary will comply with this limitation and 
the proposed conditions of exemption for DCOs do not require the DCO 
to have rules that would limit a foreign intermediary's ability to 
solicit and accept U.S. customers that are not ECPs. Similarly, it 
is unclear as to whether the Exempt DCO or the foreign 
intermediary's home regulator will ensure that the foreign 
intermediary does not solicit or provide trading advice to U.S. 
customers warranting CTA registration beyond the trading advice 
permitted by the exemption. It is difficult to even evaluate whether 
the Commission considered the adverse effect on its regulatory 
responsibilities, in terms of market surveillance, financial 
integrity of participants, protection of customers, and trade 
practice enforcement.
---------------------------------------------------------------------------

    \20\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges that (1) some foreign regulatory 
regimes may prove to be less effective than the United States and 
(2) that foreign intermediaries clearing for customers at an exempt 
DCO may not be subject to the same level of effective supervision as 
an FCM.\21\ However, it does not elaborate on the obvious concerns 
that ought to be raised by these assertions. Rather, the Commission 
maintains that any risks to U.S. customers from clearing swaps 
traded on exempt DCOs through foreign intermediaries that are not 
registered as FCMs would be mitigated under the Supplemental 
Proposal's requirements for exempt DCOs in two key ways.\22\ First, 
the exempt DCOs must be in good regulatory standing in their home 
country jurisdictions, and subject to comparable, comprehensive 
supervision and regulation that includes a regulatory structure 
consistent with the PFMIs. Second, an exempt DCO must require a 
foreign intermediary to provide written notice to, and obtain 
acknowledgement from, a U.S. person in advance of engaging in any 
clearing on their behalf that: (1) The clearing member is not a 
registered FCM; (2) that the exempt DCO is not registered with the 
CFTC; and (3) that the protections of the U.S. Bankruptcy Code do 
not apply to the U.S. person's funds. The notice must also 
explicitly compare the protections available to the U.S. person 
under U.S. law and the laws of the exempt DCO's home country 
regulatory regime.
---------------------------------------------------------------------------

    \21\ Supplemental Proposal at Section VI.C.3.a.
    \22\ Supplemental Proposal at Section II.
---------------------------------------------------------------------------

    There is much to be said for the views of the Commission in this 
regard, but in the interest of brevity, this approach favors what 
amounts to wholesale deregulation in the interest of deference 
absent any analysis of the potential individual customer and 
systemic consequences. Congress did not intend for the Commission to 
use its section 4(c) exemptive authority to engage in ``wide scale 
deregulation of markets falling within the ambit of the Act,'' \23\ 
so it seems even more egregious that it would attempt to reach 
beyond the Act to empower U.S. customers to act outside of the 
Commission's jurisdiction as conduits of risk. Indeed, given the 
Commission's own struggles with the application of the U.S. 
Bankruptcy Code, I am especially curious to hear from U.S customers 
seeking to hedge risk or access non-U.S. swaps markets as to whether 
the Commission's proposed ``caveat emptor'' notice model would 
satisfy the rigors of internal risk management.
---------------------------------------------------------------------------

    \23\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. 80 (1992).
---------------------------------------------------------------------------

Conclusion

    In issuing this dissent, I have only touched upon the many 
issues of concern raised by the Supplemental Proposal. With each 
reading, I find myself questioning how the 2018 Proposal morphed 
from a ``Project Kiss'' initiative \24\ to codify the policies and 
procedures currently followed by the Commission with respect to 
granting exemptions from DCO registration--which we have 
historically used sparingly--into a quest to capture a concept of 
how U.S. swaps customers may fare outside the protections offered 
through operation of the U.S Bankruptcy Code and protections offered 
by the CEA and Commission regulations. I believe that the Commission 
has acted in haste, without due consideration of the risks to 
individuals and the financial system, and outside its authority. I 
remain hopeful that the public comment period will provide ample 
time and opportunity for thoughtful consideration and response to 
the critical questions posed directly and issues raised by the 
Supplemental Proposal.
---------------------------------------------------------------------------

    \24\ See 2018 Proposal, 83 FR at 39923.
---------------------------------------------------------------------------

    Despite today's dissent, and as I have said many times 
before,\25\ I look forward to working with my colleagues on cross-
border policies that will meet our core responsibilities of 
promoting safe, transparent and fair markets, while supporting 
global market access through responsible rule-makings that further 
harmonize our rules with international partners.
---------------------------------------------------------------------------

    \25\ See, e.g., Rostin Behnam, Sowing the Seeds of Success in 
2020, Remarks of CFTC Commissioner Rostin Behnam at the ISDA 34th 
Annual General Meeting, Grand Hyatt Hong Kong, Hong Kong (Apr. 10, 
2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam13.
---------------------------------------------------------------------------

Appendix 5--Statement of Commissioner Dawn D. Stump

Overview

    In responding to the financial crisis, both the Group of 20 
Nations (G-20) and the U.S. Congress recognized that the derivatives 
markets are global and in doing so provided for international 
coordination and a practical application of regulatory deference. I 
want to commend the Chairman for his leadership in reminding us of 
the global commitments made in 2009 and the subsequent efforts 
Congress made to encourage global regulatory harmonization. 
Specifically, the G-20 leaders stated the clear responsibility we 
have ``to take action at the national and international level to 
raise standards together so that our national authorities implement 
global standards consistently in a way that ensures a level playing 
field and avoids fragmentation of markets, protectionism, and 
regulatory arbitrage.'' \1\ More directly related to the subjects 
before us today, Congress, in the Dodd-Frank Act, amended the 
Commodity Exchange Act to provide: ``The Commission may exempt, 
conditionally or unconditionally, a derivatives clearing 
organization from registration . . . for the clearing of swaps if 
the Commission determines that the derivatives clearing organization 
is subject to comparable, comprehensive supervision and regulation 
by . . . the appropriate government authorities in the home country 
of the organization.'' \2\
---------------------------------------------------------------------------

    \1\ Leaders' Statement from the 2009 G-20 Summit in Pittsburgh, 
Pa. 7 (Sept. 24-25, 2009), http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
    \2\ 7 U.S.C. 7a-1(h) (2012).
---------------------------------------------------------------------------

    I believe deference to comparable regulatory regimes is 
essential. Historically, such deference has been the guiding 
principle of the CFTC's approach to regulating cross-border 
derivatives. We cannot effectively supervise central

[[Page 35479]]

counterparties (CCPs) in every corner of the world. We can, however, 
evaluate the regulatory requirements in a CCP's home country to 
determine if they are sufficiently commensurate to our own. We will 
never have the exact same rules around the globe. We should rather 
strive to minimize the frequency and impact of duplicative 
regulatory oversight while also demanding high comparable standards, 
just as Congress intended.
    Had we previously established a more comprehensive structure for 
those comparably-regulated, foreign CCPs seeking to offer swaps 
clearing to U.S. customers, then CCPs wishing to seek an exemption 
would have been able to do so under a regime that Congress provided 
for in the Dodd-Frank Act. Alternatively, those that wanted to 
register as a DCO would have done so voluntarily in response to a 
business rationale demanded by their clearing members and customers. 
However, by not having previously established an exemption process, 
the CFTC left only one path for customer clearing on non-U.S. DCOs, 
which resulted in compelling several non-U.S. CCPs to become dually 
registered with both their home country regulator and the CFTC.
    As a result, relationships with our global regulatory 
counterparts became strained, and there have been many unfortunate 
consequences such that now we must provide new ground rules. So 
today, we are advancing an overdue conversation on applying 
international regulatory deference through the establishment of a 
test to identify non-U.S. CCPs that pose substantial risk to the 
U.S. financial system. To be clear, neither of the proposals we are 
considering today would be available to DCOs that pose such risk. I 
fear that this point may be lost or confused by the fact that we are 
presenting these as two separate rulemakings. While I would have 
preferred a single rulemaking to alleviate any confusion, I want to 
make clear that we are simply proposing two regulatory options, each 
of which is only available to those DCOs that do NOT pose 
substantial risk to the U.S. financial system under the proposed 
test. I encourage commenters to provide input on the proposals as if 
they are a single package, particularly where the request for 
comments in one proposal may be relevant or more applicable to 
consideration of the other proposal.
    These proposals are a step towards achieving the goals 
established in 2009--an effort I wholeheartedly support. However, I 
have concerns that these proposals may be a bit too rigid to 
pragmatically facilitate increased swaps clearing by U.S. customers, 
as we are committed to do by the original G-20 and Congressional 
directives. Under the Alternative Compliance proposal, non-U.S. DCOs 
can permit customer access only if a futures commission merchant 
(FCM) is directly facilitating the clearing while the other 
available option--provided for in the Exempt DCO proposal--
completely disallows the FCM from being involved in customer 
clearing. While I recognize that the blunt nature of these bright 
line distinctions makes it easier to regulate, I worry that it may 
not be workable in practice. I support putting these proposals out 
for public comment in hopes that those who participate in these 
markets and who are expected to apply the new swap clearing mandates 
will be able to lend their voices to the discussion. However, I 
anticipate that the elements left unaddressed in these proposals, 
which are detailed in the requests for comments, may require a re-
proposal at some future date. Nonetheless, if that is to occur we 
will be well served to have that discussion with the benefit of 
public comments.

Exemption From DCO Registration

    The CFTC implemented the clearing elements of the G-20 
principles before other regulatory jurisdictions, and in that 
context determined that any non-U.S. CCP wishing to clear swap 
products for U.S. customers must become a fully registered DCO. 
Today, we can re-assess based on fellow international regulatory 
authorities having now implemented their own comparable reforms, 
thus aligning many of our regulatory principles, just as the G-20 
envisioned. Notably, in authorizing the CFTC to implement these G-20 
principles, Congress recognized that consistency, not duplication, 
is the goal and therefore provided authority in the Dodd-Frank Act 
to exempt, conditionally or unconditionally, a non-U.S. CCP from 
registration as a DCO if the CFTC determines that the entity is 
subject to comparable, comprehensive supervision and regulation by 
its home country authorities. Certainly, individual CCPs around the 
world should be able to seek registration with the CFTC to clear 
swaps for U.S. customers if they determine that is appropriate based 
on their individual commercial interests and the demands of their 
clearing members and end users; but, it is time to revisit the 
policy rationale of compelled DCO registration for comparably and 
comprehensively regulated non-U.S. CCPs.
    Under this proposal, non-U.S. CCPs that do not pose substantial 
risk to the U.S. financial system will have another option for 
offering swap clearing services to U.S. customers in that they may 
request an exemption from registration, as provided by the Dodd-
Frank Act. I appreciate that this may raise concerns by some, and I 
welcome public input on how best to address any such concerns. 
However, I would be remiss if I failed to point out that the G-20 
leaders recognized in 2009 that we should not ignore the global 
nature of derivatives markets, a fact even more relevant today as 
U.S. persons increasingly need access to clearinghouses around the 
world. Contributing to this increased demand is the fact that during 
the past decade international regulatory bodies, including the CFTC 
and pursuant to the G-20 principles, have expanded the obligations 
for market participants to utilize clearing. It is not fair that we 
mandate and encourage the adoption of derivatives clearing and then 
limit access to, or severely hamper efficient operation of, such 
clearing services.
    While I am therefore pleased to see this exemption process 
advancing, I maintain reservations about the lack of optionality for 
registered FCMs to engage in clearing services for their customers 
at an Exempt DCO. Once our agency has determined that an Exempt DCO 
is subject to regulation that is comprehensive and comparable to our 
own, then the arrangement by which a U.S. person may access the 
Exempt DCO should be a business decision between the customer and 
their preferred clearing member, which may well be an FCM. I very 
much want to hear from commenters on how we might accomplish this 
going forward. We have extensive history in allowing such 
arrangements for U.S. futures clients of CFTC-registered FCMs to 
access non-U.S. DCOs. I am certain that the public input will assist 
us in determining how a clearing structure that works for futures 
customers might sensibly be extended to swaps customers.
    I would remind commenters that only sophisticated market 
participants qualify as eligible contract participants able to enter 
into swaps (other than on a designated contract market). We need to 
assist these qualified U.S. market participants and their clearing 
members not only by providing access, but by pragmatically 
preserving their ability to enter into prudent business arrangements 
that they deem most appropriate for their operations and business 
needs. While prohibiting FCM participation on Exempt DCOs, as we are 
proposing today, is designed for simplicity, the realities of 
clearing arrangements and the bankruptcy treatment that applies to 
them are complex. I fear that ignoring that fact may render the 
Exempt DCO option with less appeal than I believe it is due and that 
Congress contemplated. I am confident that the tremendous 
institutional knowledge at this agency, coupled with public input, 
will enable us to design a workable solution, but it may not be the 
bright line test envisioned by this proposal.

Closing

    At the beginning of this year I penned an opinion piece in the 
Financial Times \3\ in which I attempted to appeal to our 
international regulatory partners to recommit to a coordinated 
approach, ensuring that our alliance remains strong rather than 
fractured. Regulatory conflicts are at odds with our shared mission 
and do a disservice to global market participants. I am committed to 
advancing a coordinated approach, and I believe the proposals we are 
putting forward today are a first step in that process. There is, 
however, more work to be done both in the way of the CFTC extending 
deference to other jurisdictions and vice versa. I hope our 
international regulatory partners will also take the opportunity to 
reset and recognize that our shared interest of advancing 
derivatives clearing is best achieved by respecting each 
jurisdiction's successful implementation of the principles agreed to 
ten years ago. Otherwise, it might unfortunately become challenging 
to advance the concept of deference under consideration today to the 
next stage of the process.
---------------------------------------------------------------------------

    \3\ Dawn DeBerry Stump, Opinion, We Must Rethink Our 
Clearinghouse Rules, Fin. Times (Jan. 24, 2019).
---------------------------------------------------------------------------

Appendix 6--Dissenting Statement of Commissioner Dan M. Berkovitz

    I dissent from the proposal to exempt certain foreign 
clearinghouses from the

[[Page 35480]]

derivatives clearing organization (``DCO'') registration 
requirements. The proposal would jeopardize U.S. customers, create 
systemic risks to the U.S. financial system, promote the use of 
foreign intermediaries at the expense of U.S. firms, and exceed this 
agency's limited exemptive authority.\1\
---------------------------------------------------------------------------

    \1\ See Commodity Exchange Act (``CEA'') section 4(c), 7 U.S.C. 
6(c) (2018).
---------------------------------------------------------------------------

    The Commodity Futures Trading Commission (``Commission'') 
previously has permitted the clearing of proprietary swap positions 
at a limited number of foreign clearinghouses that it has exempted 
from the DCO registration requirement.\2\ The proposed rule before 
us today (``Exempt DCO Proposal'' or ``Proposal'') would permit, for 
the first time, exempt DCOs to clear positions of U.S. customers.\3\ 
To accomplish this, the Proposal disregards key protections for U.S. 
customers and the U.S. financial system provided by the U.S. 
Bankruptcy Code, the CEA, and CFTC regulations.
---------------------------------------------------------------------------

    \2\ Id. Section 5b(h), 7 U.S.C. 7a-1(h), which permits the 
Commission to exempt a DCO from registration if the Commission 
determines that it is subject to ``comparable, comprehensive 
supervision and regulation'' by its home country regulator. The 
Exempt DCO Proposal would add an additional requirement that the DCO 
not pose a ``substantial risk to the U.S. financial system.'' See 
Exempt DCO Proposal, section III.A. To date, the Commission has 
exempted four foreign clearinghouses from the requirement to 
register as DCOs for the clearing of proprietary swap positions.
    \3\ See Exempt DCO Proposal, section III.C.
---------------------------------------------------------------------------

    The Exempt DCO Proposal would permit U.S. customers to clear 
swaps at exempt non-U.S. DCOs without the protections afforded to 
swap customers under the Bankruptcy Code or CFTC regulations. It 
would enable U.S. customers to trade at these exempt DCOs through 
non-registered foreign intermediaries who would not be covered by 
the U.S. Bankruptcy Code or subject to the CFTC's customer 
protection requirements. Enabling U.S. customers to trade swaps and 
amass large positions in non-U.S. markets without these protections 
not only poses risks to those customers, but also presents systemic 
risks to the U.S. financial system.
    The Exempt DCO Proposal also would prohibit U.S. FCMs that are 
registered with the CFTC from providing clearing services at exempt 
DCOs. The Exempt DCO Proposal thus requires that which the CEA 
prohibits (clearing by a non-registered intermediary), and prohibits 
that which the CEA requires (clearing by a registered FCM). The 
Proposal creates a Bizarro World \4\ for U.S. swaps customers in 
which the CFTC does not regulate derivative clearing organizations, 
only unregistered foreign firms are allowed to serve U.S. customers, 
and U.S. customers get none of the protections provided by U.S. law.
---------------------------------------------------------------------------

    \4\ ``In popular culture, `Bizarro World' has come to mean a 
situation or setting which is weirdly inverted or opposite to 
expectations.'' See Bizarro World, Wikipedia (July 10, 2019), 
https://en.wikipedia.org/wiki/Bizarro_World.
---------------------------------------------------------------------------

    The CFTC does not have the superpowers to fashion its own de-
regulatory planet. It must stay within the orbit of the laws 
prescribed by the Congress. It cannot bypass any provision of the 
CEA that it considers an impediment to a global swaps market. 
Congress has not provided the CFTC's with unlimited exemptive 
authority. In particular, the CFTC's limited exemptive authority 
under CEA section 4(c) does not extend to instruments that are not 
subject to the exchange-trading requirement of section 4(a), such as 
non-U.S. swaps traded in markets located outside the United 
States.\5\ By seeking to exempt non-U.S. intermediaries who provide 
clearing services to U.S. swap customers in overseas markets from 
the registration requirement for FCMs,\6\ the Proposal exceeds the 
Commission's authority.
---------------------------------------------------------------------------

    \5\ See Commodity Exchange Act section 4(c), 7 U.S.C. 6(c).
    \6\ The FCM registration requirement is at Commodity Exchange 
Act section 4d(f), 7 U.S.C. 6d(f).
---------------------------------------------------------------------------

No Customer Protections

    The Exempt DCO Proposal would eliminate the important 
protections afforded to U.S. swaps customers provided by Congress 
and the CFTC's regulations.\7\ Many of these protections result from 
the provisions in the Bankruptcy Code applicable to FCMs and the 
regulatory requirements imposed on the FCMs regarding the handling 
of customer funds. Section 4d(f) of the Act, which was added by the 
Dodd-Frank Act, provides that only registered FCMs may accept 
customer monies to margin cleared swaps. It also requires FCMs to 
segregate customer cleared swaps funds, and prohibits the comingling 
of customer and proprietary funds.\8\ In addition, all FCMs must 
implement systems and procedures to address conflicts of interest, 
and they must each designate a chief compliance officer to fulfill 
specified duties and responsibilities.
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    \7\ In lieu of the Act's and Commission regulation's extensive 
customer protection provisions, the Exempt DCO Proposal would 
require that each foreign intermediary provide its U.S. customers 
with notice that the intermediary is not an FCM, that the 
clearinghouse is not a registered DCO, and that the protections of 
the U.S Bankruptcy Code do not apply. See Exempt DCO Proposal, Sec.  
39.6(b)(2).
    \8\ See Commodity Exchange Act section 4d(f)(1)-(2), 7 U.S.C. 
6d(f)(1)-(2).
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    In the event that a registered FCM becomes insolvent, swaps 
customers are protected if their funds reside in segregated accounts 
as required by the Act and Commission regulations,\9\ are carried by 
an FCM, and are deposited with a registered DCO. Segregation helps 
to ensure that swaps customer funds are not comingled with an FCM's 
proprietary funds, while registration helps ensure that they meet 
applicable definitions in the Bankruptcy Code to fall under its 
protections.
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    \9\ Id. section 4d(f)(2), 7 U.S.C. 6d(f)(2); 17 CFR 22 (2019).
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    Customer protections under the Bankruptcy Code include safe 
harbors for certain derivatives contracts that allow non-defaulting 
counterparties in a bankruptcy proceeding to quickly terminate and 
net their swaps. The safe harbors override the Bankruptcy Code's 
automatic stays that would otherwise foreclose any action to 
liquidate collateral and collect debts from a defaulting party.\10\ 
Swap customer funds are given priority treatment and not included in 
the bankruptcy estate that is subject to other creditors of the 
bankrupt firm. These protections facilitate the prompt transfer of 
customer positions away from an insolvent FCM, which can avoid a 
forced liquidation at potentially depressed valuations. In the event 
that an FCM becomes insolvent, the Bankruptcy Code also entitles the 
FCM's customers to a pro rata distribution of customer assets ahead 
of any other creditors of the FCM.
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    \10\ See Stephen Adams, Derivatives Safe Harbors in Bankruptcy 
and Dodd-Frank: A Structural Analysis (Apr. 30, 2013), http://nrs.harvard.edu/urn-3:HUL.InstRepos:10985175.
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    The Exempt DCO Proposal would circumvent these fundamental swaps 
customer protections by permitting foreign intermediaries to accept 
U.S. customer funds to margin cleared swaps at exempt DCOs without 
registering as an FCM. It would free foreign intermediaries from all 
of the regulatory requirements that apply to U.S. FCMs, including 
requirements providing for the protection of customer funds, 
financial safeguards, and operational soundness. At the same time, 
it would prohibit CFTC-registered FCMs--the entities which are 
subject to these customer protection requirements--from acting as 
FCMs for U.S. customers at exempt DCOs. The Proposal thus legally 
ensures that U.S. customers will not receive the customer 
protections required by the CEA, CFTC regulations for swap 
transactions, and the Bankruptcy Code.
    Absent these protections, U.S. swaps customers potentially face 
a range of financial and market risks. U.S. customers may find that 
foreign bankruptcy laws fail to provide priority treatment for 
derivatives and could include their funds in the general bankruptcy 
estate for all creditors of the insolvent firm. Uncertainty over the 
treatment of customer funds held at an exempt DCO or a foreign 
intermediary, as well as over the portability of open positions at 
the DCO could also lead counterparties to quickly terminate their 
swaps. The cascading effects on market prices, liquidity, the value 
of open positions, and perceived counterparty credit risk could 
quickly become a systemic event.

Systemic Risks

    In the U.S., the segregation requirements for margin funds held 
at an FCM protect the funds of the customer in the event that the 
FCM becomes insolvent. If there are no similar segregation 
requirements, then the failure of the clearing intermediary could 
result in significant losses to the intermediary's customers. These 
losses could impair one or more customers' ability to maintain its 
trades with its other counterparties, not just those at the affected 
non-U.S. DCO. Such other counterparties may seek to terminate their 
trades with the affected U.S. persons to avoid potential losses that 
could arise in these circumstances. The losses of one or more U.S. 
entities due to the bankruptcy of another entity or intermediary in 
a non-U.S. jurisdiction without equivalent bankruptcy laws thus 
could rapidly escalate into a more widespread market event involving 
numerous other persons within the U.S.\11\
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    \11\ The Report of the President's Working Group on Financial 
Markets on Hedge Funds, Leverage, and the Long-Term Capital 
Management (1999), which followed the near collapse and industry 
bailout of the Long-Term Capital Management (LTCM) hedge fund, 
identifies the benefits to market stability of the provisions of the 
U.S. bankruptcy code and highlights the systemic issues that may 
arise when significant transactions of U.S. entities are subject to 
non-U.S. regulatory regimes that do not provide equivalent 
protections. LTCM was a large, U.S.-based hedge fund that at one 
point had gross notional amounts of over $500 billion in futures, 
more than $750 billion in swaps, and over $150 billion in options 
and other derivatives in multiple jurisdictions around the world. 
The LTCM Report described how the application of bankruptcy laws in 
these other jurisdictions to LTCM would present ``substantial 
uncertainty . . . for counterparties and other creditors of the Fund 
because bankruptcy proceedings may very well have been initiated 
both in the U.S. and abroad and involved resolution of complicated 
and novel international bankruptcy issues.'' Dept. of the Treasury, 
Bd. of Governors of the Federal Reserve System, Securities and 
Exchange Commission, Commodity Futures Trading Commission, Hedge 
Funds, Leverage, and the Lessons of Long-Term Capital Management, 
Report of the President's Working Group on Financial Markets (Apr. 
1999), at E-1. The LTCM Report cautioned, ``While cross-border 
insolvencies have been characterized by growing cooperation, 
reliance on a case-by-case judicial approach can create 
unpredictability--particularly in emergency situations.'' Id. at E-
3. Much of the discussion around LTCM occurred in the context of 
bilateral, OTC swaps rather than the cleared swaps that are the 
subject of this Proposal. However, LTCM's lessons on the protections 
offered by the Bankruptcy Code, and on the importance of legal 
certainty regarding how derivatives will be treated in an insolvency 
proceeding, remain current to this day.

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[[Page 35481]]

    The Proposal contains no discussion or analysis of the potential 
systemic consequences if a foreign intermediary holding significant 
assets from large U.S. swaps customers were to fail. Similarly, it 
fails to examine the impact to the U.S. financial system if the 
overseas assets of large U.S. swaps customers were to become 
entangled--or potentially entangled--in foreign bankruptcy 
proceedings.

Exclusion of U.S. FCMs

    The Exempt DCO Proposal would prohibit U.S. FCMs from providing 
clearing services to U.S. swaps customers at exempt DCOs.\12\ By 
itself, this prohibition would not be problematic, as it is 
consistent with the Commission's interpretation of the CEA and 
longstanding policy. The Proposal veers off course by coupling this 
prohibition with permitting non-registered foreign intermediaries to 
provide those same services without any protections for U.S. 
customers.
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    \12\ See Exempt DCO Proposal at Sec.  39.6(b)(1)(i).
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    In last year's initial proposal to establish a framework for 
exempt DCOs, the Commission proposed to prohibit FCMs from clearing 
customer swaps at exempt DCOs. At that time, the Commission 
explained:

    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. Any swaps customer funds held by a DCO are 
also subject to the segregation requirements of section 4df(2) of 
the CEA, and in order for a 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. Absent 
that chain of registration, the swaps customer's funds may not be 
treated as customer property under the U.S. Bankruptcy Code 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.\13\
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    \13\ Exemption from Derivatives Clearing Organization 
Registration, 83 FR 39,923, 39,926 (proposed Aug. 13, 2018).

    In its zeal to enable U.S. customers to access non-U.S. swap 
markets, the Commission seeks to sidestep these issues with the 
Bankruptcy Code by jettisoning the entire bankruptcy regime as it 
applies to U.S. swaps. It would accomplish this by permitting non-
registered, non-U.S. intermediaries to clear swaps through exempt 
DCOs. But this approach leaves U.S. customers without any bankruptcy 
protection and competitively disadvantages U.S. FCMs with respect to 
clearing in non-U.S. swaps markets. In the cost/benefit 
considerations, the Commission acknowledges, ``FCMs may . . . face a 
competitive disadvantage as a result of this proposal, as they would 
not be permitted to clear customer trades at an exempt DCO. To the 
extent that their customers shift their clearing activity at 
registered DCOs to exempt DCOs, or otherwise reduce their clearing 
activity at registered DCOs as a result of this proposal, FCMs would 
lose business.'' \14\
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    \14\ Exempt DCO Proposal, section VI.C.2.b.
---------------------------------------------------------------------------

    Not only would the Proposal place FCMs at a competitive 
disadvantage, the Proposal recognizes that this also would place 
registered DCOs at a competitive disadvantage. The Commission states 
in the cost/benefit considerations that it ``anticipates that some 
non-U.S. clearing organizations that are currently registered DCOs, 
or that would otherwise apply to register in the future, may choose 
to apply to become exempt an DCO, thus lowering their ongoing 
compliance costs.'' \15\
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    \15\ Id.
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    A better approach would be to prohibit exempt DCOs from 
providing clearing services to U.S. customers--as the Commission 
proposed last year--and permit customer clearing only at registered 
DCOs, through registered FCMs. This would preserve the 
competitiveness of U.S. FCMs in the global swaps markets and 
maintain the bankruptcy and other protections for U.S. customers. 
Today's companion proposed rule, providing for registration with 
alternative compliance for DCOs that would be eligible for an 
exemption, would provide a second mechanism--in addition to full DCO 
registration--for non-U.S. DCOs to provide for clearing services to 
U.S. customers. The Commission does not explain why either the 
existing option for full registration, or the proposed alternative 
compliance mechanism, are insufficient to enable U.S. customers to 
access clearing services as non-U.S. DCOs.\16\
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    \16\ To the extent that U.S. customers are not able to access 
clearing at non-U.S. registered DCOs due to the absence of U.S.-
registered FCM services at such DCOs, the Commission should work 
with such non-U.S. DCOs and FCMs to identify the impediments to the 
provision of such FCM services.
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    The Commission asserts that by expanding the pool of available 
intermediaries and clearinghouses to include unregistered or exempt 
non-U.S. entities, the Proposal may ``reduc[e] the concentration of 
U.S. customer funds in a small number of FCMs,'' \17\ and may also 
``reduc[e] the concentration risk among registered and exempt 
DCOs.'' \18\ The exclusion of registered FCMs from non-U.S. swap 
markets, however, will in no way reduce the currently high levels of 
concentration amongst registered FCMs at registered DCOs serving the 
U.S. market. It is the high levels of concentration of registered 
FCMs at registered DCOs that pose potentially systemic risks to the 
U.S. financial system. The Commission should be working to enable 
greater FCM competition in U.S. swap markets, not precluding U.S. 
FCMs from competing in non-U.S. markets.
---------------------------------------------------------------------------

    \17\ Id.
    \18\ Id.
---------------------------------------------------------------------------

    I strongly support efforts to increase competition and reduce 
concentration amongst registered, U.S. FCMs in the U.S. swaps 
markets. It is a topsy-turvy argument that this is best accomplished 
by prohibiting U.S. FCMs from participating in non-U.S. markets and 
enabling non-registered non-U.S. FCMs to take this business away 
from those U.S. FCMs.

Absence of Exemptive Authority

    The Proposal relies on CEA Section 4(c) for authority to exempt 
non-U.S. intermediaries that provide customer clearing at exempt 
DCOs from the FCM registration requirement and the regulations 
applicable to registered FCMs.\19\ Section 4(c), however, provides 
the Commission with limited exemptive authority, applicable to 
specified classes of instruments and markets. It does not provide 
the Commission with the ability to waive any provision of the CEA 
that it deems inconvenient.\20\ The Commission's limited authority 
does not extend to the non-U.S. cleared swaps markets that are the 
subject of this rulemaking.
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    \19\ The Proposal also relies on Section 4(c) to exempt these 
foreign intermediaries from the CTA registration requirements.
    \20\ The Conference Report for the Futures Trading Practices Act 
of 1992, which codified section 4(c), stated the conferees 
expectation that ``the Commission generally use this [4(c)] 
authority sparingly . . . .'' The conferees further explained that 
``[t]he goal of providing the Commission with broad exemptive powers 
is not to prompt a wide-scale deregulation of markets falling within 
the ambit of the Act. See H.R. Conf. Rep. 102-978, 102d Cong. (2d 
Sess. 1992).
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    Section 4(c) provides that the Commission may exempt any 
agreement, contract, or transaction from the requirements of section 
4(a) (which requires that contracts for future delivery be traded on 
a designated contract market) or any other provision of the Act if 
such agreement, contract, or transaction is, in the first instance, 
subject to section 4(a).\21\ Notably, however, section 4(a) does not 
apply to contracts ``made on or subject to the rules

[[Page 35482]]

of a board of trade, exchange, or market located outside the United 
States . . .'' \22\ Swaps traded on a non-U.S. trading facility and 
cleared at a non-U.S. DCO appear to fall into the category of 
contracts ``made on or subject to the rules of a board of trade, 
exchange, or market located outside the United States.'' The 
Commission provides no justification or analysis for asserting that 
section 4(c) provides exemptive authority for transactions in non-
U.S. markets involving these contracts.
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    \21\ Commodity Exchange Act section 4(c), 7 U.S.C. 6(c).
    \22\ Id. section 4(a), 7 U.S.C. 6(a) (emphasis added).
---------------------------------------------------------------------------

Conclusion

    The Exempt DCO Proposal deprives U.S. customers of bankruptcy 
protection under U.S. law, creates systemic risks for the U.S. 
financial system, and promotes the use of foreign intermediaries at 
the expense of U.S. FCMs. It also exceeds the Commission's exemptive 
authority under section 4(c) of the Act. If the Commission desires 
to facilitate greater access by U.S. persons to foreign cleared 
swaps markets, it should do so within the framework of registered 
DCOs, registered FCMs, and the customer protections provided by the 
U.S. bankruptcy laws and CFTC regulations. It should not do so at 
the expense of protections for U.S. customers and the U.S. financial 
system. Accordingly, I dissent.

[FR Doc. 2019-15258 Filed 7-22-19; 8:45 am]
 BILLING CODE 6351-01-P