[Federal Register Volume 86, Number 4 (Thursday, January 7, 2021)]
[Rules and Regulations]
[Pages 949-971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26527]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 140

RIN 3038-AE65


Exemption From Derivatives Clearing Organization Registration

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
adopting policies and procedures that the Commission will follow with 
respect to granting exemptions from registration as a derivatives 
clearing organization (DCO). In addition, the Commission is amending 
certain related delegation provisions in its regulations.

DATES: Effective February 8, 2021.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, [email protected]; Parisa Nouri, 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, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581; Theodore Z. Polley III, Associate 
Director, 312-596-0551, [email protected]; Division of Clearing and 
Risk, Commodity Futures Trading Commission, 525 West Monroe Street, 
Chicago, Illinois 60661.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Introduction
    B. Existing Exempt DCO Orders
II. Amendments to Part 39
    A. Regulation 39.1--Scope
    B. Regulation 39.2--Definitions
    C. Regulation 39.6--Exemption From DCO Registration
    D. Regulation 39.9--Scope
III. Amendments to Part 140
IV. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

[[Page 950]]

I. Background

A. Introduction

    Section 5b(a) of the Commodity Exchange Act (''CEA'') provides that 
a clearing organization \1\ may not ``perform the functions of'' a 
clearing organization with respect to swaps \2\ unless the clearing 
organization is a DCO registered with the Commission.\3\ However, the 
CEA also permits the Commission to conditionally or unconditionally 
exempt a clearing organization from DCO registration for the clearing 
of swaps if the Commission determines that the clearing organization is 
subject to ``comparable, comprehensive supervision and regulation'' by 
its home country regulator.\4\ The Commission issued the first 
exemption from DCO registration in 2015 and, to date, has exempted four 
clearing organizations organized outside of the United States 
(hereinafter referred to as ``non-U.S. clearing organizations'') from 
DCO registration.\5\
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    \1\ 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 DCO 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.
    \2\ Section 5b(a) also provides that a clearing organization may 
not perform the functions of a clearing organization with respect to 
futures unless it is a registered DCO. This, however, is limited to 
futures executed on a designated contract market. Regulation 48.7 
provides that a foreign board of trade registered with the 
Commission may clear its contracts through a registered DCO or a 
clearing organization that observes the Recommendations for Central 
Counterparties (RCCPs) or successor standards and is in good 
regulatory standing in its home country jurisdiction. 17 CFR 48.7. 
The Principles for Financial Market Infrastructures (PFMIs) are the 
successor standards to the RCCPs. See Committee on Payment and 
Settlement Systems and the Technical Committee of the International 
Organization of Securities Commissions, Principles for financial 
market infrastructures (Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf. Because an 
exempt DCO is required to observe the PFMIs and be in good 
regulatory standing it its home country, it is eligible to clear 
contracts executed on a foreign board of trade.
    \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, 
Public Law 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.
    \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 August 2018, the Commission proposed to codify the policies and 
procedures it implemented in 2015 with respect to granting exemptions 
from DCO registration, including permitting exempt DCOs to clear only 
proprietary swap positions of U.S. persons and futures commission 
merchants (FCMs), and not customer positions (2018 Proposal).\6\ The 
Commission received four substantive comment letters on the 2018 
Proposal.\7\
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    \6\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR 39923 (Aug. 13, 2018).
    \7\ The Commission received comment letters from the following 
in 2018: Japan Securities Clearing Corporation (JSCC); ASX Clear 
(Futures) Pty (ASX); Futures Industry Association (FIA) and 
Securities and Financial Markets Association (SIFMA); and 
International Swaps and Derivatives Association, Inc. (ISDA).
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    In response to a specific request for comment as to whether the 
Commission should consider permitting an exempt DCO to clear swaps for 
U.S. customers,\8\ three commenters expressed support.\9\ In light of 
these comments, the Commission further proposed in July 2019 to permit 
foreign intermediaries to clear swaps for U.S. customers at exempt DCOs 
(2019 Proposal).\10\
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    \8\ 2018 Proposal, 83 FR at 39930.
    \9\ 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, ISDA strongly 
believes that the CFTC should permit exempt DCOs to clear swaps for 
customers.'').
    \10\ See Exemption From Derivatives Clearing Organization 
Registration, 84 FR 35456 (Jul. 23, 2019).
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    After considering the comments received in response to the 2019 
Proposal,\11\ the Commission is adopting the 2018 Proposal and, with 
limited exceptions,\12\ declining to adopt the 2019 Proposal at this 
time. The Commission may consider permitting U.S. customer clearing at 
exempt DCOs or establishing a substantial risk test for exempt DCOs at 
a later time.
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    \11\ The Commission received comment letters from the following 
in 2019: ASX; Americans for Financial Reform Education Fund (AFR Ed 
Fund); Better Markets, Inc. (Better Markets); CCP12; Citadel; CME 
Group, Inc. (CME); FIA; OTC Clearing Hong Kong Limited (OTC Clear); 
Intercontinental Exchange, Inc. (ICE); International Bankers 
Association of Japan (IBA Japan) and Japan Financial Markets Council 
(JFMC); ISDA; JSCC; LCH Group (LCH); Milbank LLP (Milbank); SIFMA; 
and World Federation of Exchanges (WFE).
    \12\ As discussed further below, the Commission is adopting 
Sec.  39.6(b)(6), as modified in the 2019 Proposal, 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; Sec.  
39.6(b)(9) (renumbered as Sec.  39.6(b)(8)), which provides that the 
Commission may condition an exemption from DCO registration on any 
other facts and circumstances it deems relevant; and Sec.  39.6(f), 
which establishes a process for modification or termination of an 
exemption from DCO registration upon Commission initiative.
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B. Existing Exempt DCO Orders

    As previously noted, a clearing organization must be subject to 
comparable, comprehensive supervision and regulation by appropriate 
government authorities in the clearing organization's home country to 
be eligible for an exemption from registration as a DCO for the 
clearing of swaps. To date, the Commission has issued four exempt DCO 
orders, subject to conditions, consistent with the statute. In granting 
these exemptions, the Commission determined that a supervisory and 
regulatory framework that conforms to the PFMIs is comparable to, and 
as comprehensive as, the supervisory and regulatory requirements 
applicable to registered DCOs.\13\ This conclusion is consistent

[[Page 951]]

with previous Commission determinations.\14\ Under exempt DCO orders 
granted to date, an exempt DCO is required to observe the PFMIs in all 
material respects and be in good regulatory standing in its home 
country, as evidenced by an annual written representation by its home 
country regulator. A memorandum of understanding (MOU) must be in 
effect between the Commission and the home country regulator.
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    \13\ The Commission holds systemically important DCOs and 
subpart C DCOs to requirements that are fully consistent with the 
PFMIs. See 17 CFR 39.30, 39.40.
    \14\ See, e.g., Sec.  50.52(b)(4)(i)(E), 17 CFR 
50.52(b)(4)(i)(E) (permitting eligible affiliate counterparties that 
are located in certain jurisdictions to satisfy a condition to 
electing the exemption by clearing the swap through a DCO or a 
clearing organization that is subject to supervision by appropriate 
government authorities in the clearing organization's home country 
and that has been assessed to be in compliance with the PFMIs).
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    The existing exempt DCO orders also require the exempt DCO to 
supply the Commission with certain reports and information, some on a 
periodic basis and others based on the occurrence of specified events. 
For example, exempt DCOs are required to provide daily and quarterly 
reporting of certain information regarding the clearing activity of 
U.S. persons and FCMs. An exempt DCO also is required to report to the 
Commission if there is any change in its licensure, registration or 
authorization to act as a clearing organization in its home country; if 
the exempt DCO takes action against a U.S. person or FCM; if there is a 
default by a U.S. person or FCM; or if there is any change in the home 
country regulatory regime that is material to the exempt DCO's 
continuing observance of the PFMIs or compliance with the requirements 
of the Commission's order. In addition, existing exempt DCO orders 
require the exempt DCO to make its books and records available for 
inspection by the Commission and, where a clearing member has reported 
information regarding a swap to a swap data repository (SDR), to also 
report information regarding that swap to the SDR.
    Because the regulations being adopted herein are consistent with 
existing exempt DCO orders, the Commission does not anticipate amending 
any of the exempt DCO orders it has issued to date.

II. Amendments to Part 39

A. Regulation 39.1--Scope

    The Commission proposed to amend Sec.  39.1 to expand the scope of 
subpart A of part 39 to include a clearing organization applying for an 
exemption from DCO registration. This change was meant to address the 
inclusion in subpart A of new Sec.  39.6 (discussed below), which sets 
forth the requirements for an exemption from DCO registration. The 
Commission did not receive any comments on this provision and is 
adopting it as proposed.

B. Regulation 39.2--Definitions

    In connection with the proposed regulations, the Commission 
proposed to add five definitions to Sec.  39.2, which apply only for 
purposes of part 39.
1. Exempt Derivatives Clearing Organization
    The Commission proposed to define ``exempt derivatives clearing 
organization'' to mean a clearing organization that the Commission has 
exempted from registration under section 5b(a) of the CEA, pursuant to 
section 5b(h) of the CEA and Sec.  39.6. The Commission did not receive 
any comments on this proposed definition and is adopting it as 
proposed.
2. Good Regulatory Standing
    The Commission proposed that, to be eligible for an exemption from 
registration, a clearing organization would have to be in good 
regulatory standing in its home country. The Commission proposed to 
define ``good regulatory standing'' to mean 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 clearing organization.
    Although the Commission proposed to reference ``material'' non-
observance of the PFMIs or other relevant home country legal 
requirements, the Commission requested comment in the 2018 Proposal as 
to whether the definition should instead refer to all instances of non-
observance. In their responses to the 2019 Proposal, ASX, JSCC, and 
CCP12 supported the proposed definition of ``good regulatory 
standing.'' CCP12 and JSCC commented that the proposed definition is 
appropriate, as individual regulators have taken differing approaches 
to how they apply the PFMIs in the context of the markets that they 
regulate and supervise. CCP12 and JSCC did not recommend extending the 
definition to all instances of non-observance of the PFMIs. JSCC 
further stated that regulatory changes in the home country of an exempt 
DCO affecting the exempt DCO's continuing observance of the PFMIs 
``occur infrequently and are easily identifiable,'' due to the 
familiarity of exempt DCOs with the legal and regulatory framework in 
their home countries. ASX added that an exempt DCO is best placed to 
determine whether a change is material and advise the Commission 
accordingly.
    The Commission is adopting the definition of ``good regulatory 
standing'' largely as proposed.\15\ The Commission's supervisory 
experience with registered and exempt DCOs has shown that even well-
functioning DCOs will experience instances of non-observance of 
applicable requirements--both material and immaterial. The Commission 
therefore seeks to refrain from adopting a mechanical or hyper-
technical approach whereby isolated instances of non-observance would 
be disqualifying.\16\ The Commission further believes that the 
definition provides adequate assurance of observance of the PFMIs or 
compliance with other relevant home country requirements, because any 
material non-observance must be resolved to the satisfaction of the 
home country regulator in order for the exempt DCO to be deemed to be 
in good standing.
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    \15\ In the 2018 Proposal, the Commission had proposed to define 
``good regulatory standing'' in a way that would apply only to 
exempt DCOs. See Exemption From Derivatives Clearing Organization 
Registration, 83 FR at 39933. In a separate, subsequent proposal, 
the Commission proposed a definition of ``good regulatory standing'' 
that retained the previously proposed definition for exempt DCOs but 
added a separate provision that would apply only to DCOs subject to 
alternative compliance. See Registration With Alternative Compliance 
for Non-U.S. Derivatives Clearing Organizations, 84 FR 34819, 34831 
(July 19, 2019); see also Exemption From Derivatives Clearing 
Organization Registration, 84 FR at 35471. The Commission has 
adopted the definition as it relates to DCOs subject to alternative 
compliance (see Registration with Alternative Compliance for Non-
U.S. Derivatives Clearing Organizations, 85 FR 67160, 67186 (Oct. 
21, 2020)); therefore, the Commission is adopting here only that 
portion of the definition that applies to exempt DCOs.
    \16\ While the Commission expects, in almost all cases, to defer 
to the home country regulator's determination of whether an instance 
of non-compliance is or is not material, it does retain the 
discretion, in the context of the application of these rules of the 
Commission, to make that determination itself, and, in order to make 
such a determination, to obtain information from the home country 
regulator pursuant to the relevant memorandum of understanding.
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3. Home Country
    The Commission proposed to define ``home country'' to mean, with 
respect to a non-U.S. clearing organization, the jurisdiction in which 
the clearing organization is organized. The Commission did not receive 
any comments on this proposed definition and is adopting it as 
proposed.

[[Page 952]]

4. Home Country Regulator
    The Commission proposed to define ``home country regulator'' to 
mean, with respect to a non-U.S. clearing organization, an appropriate 
government authority which licenses, regulates, supervises, or oversees 
the clearing organization's clearing activities in the home country. 
The Commission did not receive any comments on this proposed definition 
and is adopting it as proposed.
5. Principles for Financial Market Infrastructures
    The Commission proposed to define ``Principles for Financial Market 
Infrastructures'' to mean the PFMIs published by the Committee on 
Payment and Settlement Systems (CPSS) and the Technical Committee of 
the International Organization of Securities Commissions (IOSCO) in 
April 2012, as updated, revised, or otherwise amended. The Commission 
proposed the ``as updated, revised, or otherwise amended'' language in 
the 2018 Proposal to recognize that CPMI-IOSCO \17\ could offer further 
interpretation of or guidance on the PFMIs.\18\ As proposed in the 2019 
Proposal,\19\ the Commission is striking ``as updated, revised, or 
otherwise amended'' from the definition to clarify that while a 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. The Commission also does not believe it is appropriate to 
allow any future change to the PFMIs themselves to be incorporated into 
the definition without the Commission and other regulators first having 
the opportunity to consider the change. However, the Commission 
reserves the ability to incorporate future amendments to the PFMIs 
within the definition if the Commission determines that such amendments 
are appropriate. The Commission did not receive any comments on this 
proposed definition and is adopting it as proposed.
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    \17\ The name of CPSS was changed to the Committee on Payment 
and Market Infrastructures (CPMI) in 2014.
    \18\ 2018 Proposal, 83 FR at 39925 n.14.
    \19\ 2019 Proposal, 84 FR at 35459.
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C. Regulation 39.6--Exemption From DCO Registration

    The Commission proposed new Sec.  39.6 to establish a regulatory 
framework for the granting of exemptions from DCO registration 
consistent with the policies and procedures that the Commission has 
been following with respect to granting exemptions from DCO 
registration. The specific provisions of Sec.  39.6 are discussed in 
greater detail below.
1. Regulation 39.6(a)--Eligibility for Exemption
    The Commission proposed Sec.  39.6(a) to 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 \20\ 
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 Sec.  39.6(a) are met, and that the 
clearing organization satisfies the conditions set forth in Sec.  
39.6(b).\21\
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    \20\ The Commission proposed to use the interpretation of ``U.S. 
person'' as set forth in the 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 final rule. See Cross-Border Guidance, 78 FR 45292, 45316-
45317.
    \21\ The eligibility requirements listed in Sec.  39.6(a) and 
the conditions set forth in Sec.  39.6(b) are 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.
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a. Subject to Comparable, Comprehensive Supervision and Regulation
    The Commission proposed to codify in Sec.  39.6(a)(1) the statutory 
authority in section 5b(h) of the CEA that the Commission may exempt a 
clearing organization from DCO registration for the clearing of swaps 
provided that the Commission determines that the clearing organization 
is subject to comparable, comprehensive supervision and regulation by a 
home country regulator. To satisfy this condition, the clearing 
organization would need to demonstrate that: (i) It is organized in a 
jurisdiction in which a home country regulator applies to the clearing 
organization, on an ongoing basis, statutes, rules, regulations, 
policies, or a combination thereof that, taken together, are consistent 
with the PFMIs; (ii) it observes the PFMIs in all material respects; 
(iii) and it is in good regulatory standing in its home country.
    In determining that adherence to the PFMIs \22\ satisfies the 
``comparable, comprehensive supervision and regulation'' standard set 
forth in CEA section 5b(h), the Commission takes a holistic, outcomes-
based approach. That is, the Commission has assessed whether, taken 
together in their entirety, the PFMIs provide a comprehensive framework 
for DCO supervision and regulation that is comparable to the statutory 
and regulatory requirements that comprise the DCO regulatory 
framework--focusing, in particular, on the core principles applicable 
to registered DCOs set forth in CEA section 5b (DCO Core 
Principles).\23\ The use of the PFMIs as the benchmark in this context 
builds upon the global effort to develop an effective and consistent 
set of regulatory and supervisory standards for CCPs. More 
specifically, the PFMIs address major elements critical to the safe and 
efficient operation of CCPs, such as risk management, adequacy of 
financial resources, default management, margin, settlement, and 
participation requirements.\24\
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    \22\ In addition to the principles applicable to central 
counterparties (CCPs) and other financial market infrastructures, 
the PFMIs provide that central banks, market regulators, and other 
relevant authorities should observe five responsibilities. 
Consistent with this, the Commission expects that, in order to meet 
the standard of being subject to comparable, comprehensive 
supervision and regulation, a clearing organization's home country 
regulator will observe these responsibilities. In particular, 
Responsibility D, Explanatory Note 4.4.1 provides that the home 
country regulator should adopt the PFMIs, and, ``[w]hile the precise 
means through which the principles are applied may vary from 
jurisdiction to jurisdiction, all CPSS and IOSCO members are 
expected to apply the principles to the relevant [financial market 
infrastructures] in their jurisdictions to the fullest extent 
allowed by the legal framework in their jurisdiction.'' PFMIs, ] 
4.4.1. Therefore, the Commission would not find a home country 
regulator's statement that it requires a clearing organization to 
observe the PFMIs to be sufficient to meet the above standard for 
exemption, if the home country regulator has not itself adopted a 
regulatory framework that is consistent with the PFMIs.
    \23\ 7 U.S.C. 7a-1(c)(2).
    \24\ See, e.g., Derivatives Clearing Organizations and 
International Standards, 78 FR 72476 (Dec. 2, 2013) (adopting final 
rules).
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    The Commission recognizes that the requirements of the PFMI-
compliant jurisdiction will not be identical to the Commission's 
regulations in every aspect. Nevertheless, a foreign jurisdiction's 
observance of the PFMIs provides assurance that its supervision and 
regulation are sufficiently similar in purpose and effect while 
avoiding a

[[Page 953]]

demand for strict compliance with U.S. regulation that would subject 
CCPs to a patchwork of U.S. and foreign regulations. In summary, the 
PFMI-focused ``comparability'' framework strikes the proper balance by 
showing an appropriate level of deference to the legal and supervisory 
regime of the home country jurisdiction, while fulfilling the 
Commission's supervisory duty to ensure that foreign DCOs clearing for 
U.S. market participants are subject to a sound regulatory framework.
    CME, ISDA, IBA Japan, and JFMC supported the Commission's reliance 
on the PFMIs as the standard for determining whether a non-U.S. 
clearing organization's home country regulatory regime is comparable 
and comprehensive. IBA Japan and JFMC believe this approach strikes the 
correct balance between addressing risk to the United States and 
promoting cross-border harmonization. ISDA encouraged the Commission to 
continue its dialogue with foreign regulators in the EU and other 
jurisdictions to ensure that supervision in each jurisdiction is based 
on deference to home country regulations and compliance with the PFMIs. 
ISDA argued that applying inconsistent and duplicative regulatory 
frameworks to clearing organizations will lead to the fragmentation of 
global cleared derivatives markets.
    AFR Ed Fund, Citadel, and Better Markets opposed using the PFMIs to 
determine whether a clearing organization is subject to comparable, 
comprehensive supervision and regulation by its home country regulator. 
These commenters argued that section 5b(h) of the CEA requires that the 
Commission compare the CEA with the clearing organization's home 
country regime and that the Commission cannot use the fact that the 
foreign regulatory regime conforms to the PFMIs as a substitute for 
determining whether the regulatory regimes are comparable, as required 
by section 5b(h).
    AFR Ed Fund argued that the Commission's decision to deem 
compliance with any foreign regulatory regime that conforms to the 
PFMIs as fulfilling the statutory requirements for exempting a clearing 
organization from registration under U.S. law means that a foreign 
clearing organization can be exempted from registration without any 
determination that it is subject to supervision and regulation that is 
``in any way'' comparable to the relevant U.S. laws or regulations. AFR 
Ed Fund further argued that the Commission ``cannot substitute its 
judgement as to whether a foreign regime conforms to the PFMIs, a set 
of broad principles with no standing under U.S. law, for the statutory 
mandate to ensure that a DCO is subject to a regime comparable to U.S. 
regulation and supervision.''
    Similarly, Better Markets argued that the proposal unlawfully 
treats the PFMIs as being the equivalent of U.S. law for purposes of 
making a comparability determination under section 5b(h). Better 
Markets also argued that the U.S. statutory and regulatory requirements 
for DCOs are not the equivalent of the PFMIs because the PFMIs do not 
have the force of law until they are incorporated into the home 
jurisdiction's laws or regulations, and because, even when the PFMIs 
are implemented, material differences may exist between the PFMI-
compliant regulatory regime and the PFMI principles. Better Markets 
further argued that because section 5b(h) is only implicated if the 
non-U.S. clearing organization is subject to the DCO registration 
requirement of section 5b(a) in the first instance, Congress limited 
the Commission's comparability inquiry to determining whether the non-
U.S. regime is comparable to the U.S. regulatory requirements that 
would otherwise apply to the clearing organization. Better Markets 
claimed that the 2018 Proposal and the four existing exemptive orders 
suffer from the same legal deficiencies alleged in its comment.
    Citadel believes the Commission should directly compare its 
regulatory regime with that of the clearing organization's home 
country. Citadel pointed out that the PFMIs do not address a number of 
important elements of the Commission's regulatory framework for DCOs, 
including non-discriminatory access, straight-through processing, gross 
margining, public disclosure of rule filings, and public information. 
Lastly, Citadel stated that U.S. customer access should be considered 
as a part of the overall comparability assessment.
    The Commission notes that section 5b(h) provides that the 
Commission may exempt a clearing organization from DCO registration 
``if the Commission determines that the [ ] clearing organization is 
subject to comparable, comprehensive supervision and regulation . . . 
.'' Accordingly, the Commission may, and does, determine that a foreign 
regulatory regime that conforms to the PFMIs constitutes ``comparable, 
comprehensive supervision and regulation by . . . the appropriate 
government authorities in the home country of the organization,'' and 
therefore that a clearing organization subject to such a regime may be 
exempted from the DCO registration requirements.\25\ As mentioned 
previously, the PFMIs are comparable to the DCO Core Principles and the 
implementing Commission regulations in purpose and scope. Both address 
major elements critical to the safe and efficient operations of 
clearing organizations, such as risk management, adequacy of financial 
resources, default management, margin, settlement, and participation 
requirements.\26\ Regulation 39.40 expressly states that subpart C of 
part 39 of the Commission's regulations ``is intended to establish 
standards which, together with subparts A and B of [part 39], are 
consistent with'' section 5b(c) of the CEA and the PFMIs and should be 
interpreted in that context.
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    \25\ As stated previously, this conclusion is consistent with 
other previous Commission determinations. See, e.g., Regulation 
50.52(b)(4)(i)(E), 17 CFR 50.52(b)(4)(i)(E) (permitting eligible 
affiliate counterparties that are located in certain jurisdictions 
to satisfy a condition to electing the exemption by clearing the 
swap through a DCO or a clearing organization that is subject to 
supervision by appropriate government authorities in the clearing 
organization's home country and that has been assessed to be in 
compliance with the PFMIs).
    \26\ See, e.g., Derivatives Clearing Organizations and 
International Standards, 78 FR 72476 (Dec. 2, 2013) (adopting final 
rules).
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    Regarding Citadel's comment, the Commission acknowledges that the 
PFMIs are not identical to, nor as detailed as, part 39. However, 
``comparable and comprehensive'' does not mean identical. The 
Commission adopted the part 39 requirements for registered DCOs, which 
may generally clear futures, swaps, and other instruments for various 
U.S. persons to the extent permissible under the CEA. Here, in light of 
the scope of an exempt DCO's clearing activities, the PFMIs are 
sufficiently comparable and comprehensive to provide the appropriate 
framework for the supervision and regulation of exempt DCOs permitted 
to clear in accordance with this final rule and other relevant 
conditions contained within any exemptive order granted by the 
Commission. Application of the PFMIs in the context of U.S. customer 
clearing, which is not part of the final rule, can be considered if the 
Commission takes up the issue of customer clearing at exempt DCOs.
    The Commission is adopting Sec.  39.6(a)(1) as proposed.
b. Memorandum of Understanding
    The Commission proposed Sec.  39.6(a)(2) to require that, in order 
for a clearing organization to be eligible for an exemption from 
registration, an MOU or similar arrangement satisfactory to the 
Commission must be in effect between

[[Page 954]]

the Commission and the 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 clearing organization's initial and 
continued eligibility for exemption or to review compliance with any 
conditions of such exemption.
    ISDA commented that the Commission should identify the types of 
information that it expects to require under the MOU. ISDA argued that 
it is important for the Commission to provide additional clarity 
regarding the specific information it will require to evaluate the 
exempt DCO's initial and continued eligibility for exemption to ensure 
that providing such information would not violate any local laws. ISDA 
believes that doing so would allow the Commission to access necessary 
information while, at the same time, taking into account any 
prohibitions on providing certain types of information under local 
laws.
    In response to ISDA's comment, the Commission notes that Sec.  
39.6(e)(2) sets forth the information that an applicant for exemption 
from DCO registration must provide to the Commission. That information 
would not be specified in an MOU because it must be provided by the 
applicant, not the applicant's home country regulator. However, an MOU 
between the Commission and the home country regulator would allow the 
Commission to seek the home country regulator's assistance in analyzing 
and interpreting the information as necessary to determine the 
applicant's eligibility for an exemption. If the applicant is granted 
an exemption, the MOU would allow the Commission to gather additional 
information from the home country regulator as necessary to determine 
the exempt DCO's continued eligibility. For example, if an exempt DCO 
provides notice to the Commission of a change in its home country 
regulatory regime pursuant to Sec.  39.6(c)(2)(iii), the Commission may 
wish to discuss the change with the home country regulator to 
understand what impact, if any, the change may have on the exempt DCO's 
ability to comply with the conditions of its exemption.
    The Commission notes that it already has several MOUs with other 
regulators in place, and those specific to the oversight of clearing 
organizations are generally similar in content and scope.\27\ To the 
extent that local laws limit a regulator's ability to share information 
with the Commission, the Commission works closely with the regulator to 
resolve any issues.
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    \27\ CFTC Memoranda of Understanding: Cooperation for 
Supervisory, Prudential, and Risk Assessment Purposes, https://www.cftc.gov/International/MemorandaofUnderstanding/mouInfo_Sharing_for_Supervisor.html.
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    The Commission is adopting Sec.  39.6(a)(2) as proposed.
2. Regulation 39.6(b)--Conditions of Exemption
    The Commission proposed Sec.  39.6(b) to set forth the conditions 
to which an exempt DCO would be subject. These are the same conditions 
the Commission has imposed on exempt DCOs through the orders of 
exemption that it has issued to date.
a. Clearing by or for U.S. Persons and Futures Commission Merchants
    The Commission proposed Sec.  39.6(b)(1) to prohibit the clearing 
of U.S. customer positions at an exempt DCO. An FCM would be permitted 
to 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 only for the FCM itself and those persons identified in 
the definition of ``proprietary account'' in Sec.  1.3 of the 
Commission's regulations.
    The Commission requested comment in the 2018 Proposal as to whether 
the Commission should consider permitting an exempt DCO to clear swaps 
for U.S. customers. The Commission received four comments in response 
to that request. As noted above, the Commission responded to these 
comments by issuing the 2019 Proposal, which proposed to permit U.S. 
customers to clear at an exempt DCO, but only through foreign 
intermediaries, not FCMs. However, at this time, the Commission is 
adopting Sec.  39.6(b)(1) largely as proposed in the 2018 Proposal, to 
permit an exempt DCO to clear only proprietary positions of U.S. 
persons and FCMs, and not customer positions. Specifically, Sec.  
39.6(b)(1) provides that an exempt DCO must have rules that limit swaps 
clearing services for U.S. persons and FCMs as follows: (i) A U.S. 
person that is a clearing member of the exempt DCO may clear swaps for 
itself and those persons identified in the definition of ``proprietary 
account'' set forth in Sec.  1.3; \28\ (ii) a non-U.S. person that is a 
clearing member of the exempt DCO may clear swaps for any affiliated 
U.S. person identified in the definition of ``proprietary account'' set 
forth in Sec.  1.3 of this chapter; \29\ and (iii) an FCM may be a 
clearing member of the exempt DCO, or otherwise maintain an account 
with an affiliated broker that is a clearing member, for the purpose of 
clearing only proprietary swaps positions for itself and those persons 
identified in the definition of ``proprietary account'' set forth in 
Sec.  1.3.\30\
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    \28\ The reference to ``those persons identified in the 
definition of `proprietary account' set forth in Sec.  1.3,'' refers 
to those persons associated with the U.S. person that is a clearing 
member in the manner provided in the definition of ``proprietary 
account'' as if the U.S. person is the ``individual, a partnership, 
corporation or other type of association'' that carries the 
proprietary account on its books and records, and not simply to such 
types of persons identified in the definition generally.
    \29\ This provision is intended to permit what would be 
considered clearing of ``proprietary'' positions under the 
Commission's regulations, even if the positions would qualify as 
``customer'' positions under the laws and regulations of an exempt 
DCO's home country. This provision clarifies that an exempt DCO may 
clear positions for FCMs if the positions are not ``customer'' 
positions under the Commission's regulations.
    \30\ The reference to ``those persons identified in the 
definition of `proprietary account' set forth in Sec.  1.3,'' is 
intended to refer to those persons associated with the FCM in the 
manner provided in the definition of ``proprietary account'' as if 
the FCM is the individual, a partnership, corporation or other type 
of association that carries the proprietary account on its books and 
records, and not simply to such types of persons identified in the 
definition generally.
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b. Open Access
    The Commission proposed Sec.  39.6(b)(2) to codify the ``open 
access'' requirements of section 2(h)(1)(B) of the CEA, which applies 
to both registered and exempt DCOs, with respect to swaps cleared by an 
exempt DCO to which one or more of the counterparties is a U.S. 
person.\31\ Paragraph (b)(2)(i) would require an exempt DCO to maintain 
rules providing that all such swaps with the same terms and conditions 
(as defined by product specifications established under the exempt 
DCO's rules) submitted to the exempt DCO for clearing are economically 
equivalent and may be offset with each other, to the extent that 
offsetting is permitted by the exempt DCO's rules. Paragraph (b)(2)(ii) 
would require an exempt DCO to maintain rules providing for non-
discriminatory clearing of such a swap executed either bilaterally or 
on or subject to the rules of an unaffiliated electronic matching 
platform or trade execution facility, e.g., a swap execution facility. 
The Commission did not receive any comments on this provision. The 
Commission is adopting Sec.  39.6(b)(2) as proposed.
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    \31\ 7 U.S.C. 2(h)(1)(B).

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[[Page 955]]

c. Consent to Jurisdiction; Designation of Service of Process
    The Commission proposed Sec.  39.6(b)(3) to require that an exempt 
DCO consent to jurisdiction in the United States and designate an agent 
in the United States, for notice or service of process, pleadings, or 
other documents issued by or on behalf of the Commission or the U.S. 
Department of Justice in connection with any actions or proceedings 
against, or any investigations relating to, the exempt DCO or any U.S. 
person or FCM that is a clearing member or that clears swaps through an 
affiliated clearing member. The name of the designated agent would be 
submitted as part of the clearing organization's application for 
exemption. If an exempt DCO appoints another agent to accept such 
notice or service of process, the exempt DCO would be required to 
promptly inform the Commission of this change. This is consistent with 
requirements currently imposed in the registration orders of DCOs that 
are organized outside of the United States as well as in each of the 
orders of exemption that the Commission has issued thus far. The 
Commission did not receive any comments on this provision. The 
Commission is adopting Sec.  39.6(b)(3) as proposed.
d. Compliance
    The Commission proposed Sec.  39.6(b)(4) as a general provision 
that would require an exempt DCO to comply, and demonstrate compliance 
as requested by the Commission, with any condition of the exempt DCO's 
order of exemption. The Commission did not receive any comments on this 
provision. The Commission is adopting Sec.  39.6(b)(4) as proposed.
e. Inspection of Books and Records
    The Commission proposed Sec.  39.6(b)(5) to require an exempt DCO 
to make all documents, books, records, reports, and other information 
related to its operation as an exempt DCO (books and records) open to 
inspection and copying by any Commission representative, and to 
promptly make its books and records available and provide them to 
Commission representatives upon request. This condition is consistent 
with section 5b(h) of the CEA, which provides that the Commission may 
exempt a DCO from registration with conditions that may include 
requiring that the DCO be available for inspection by the Commission 
and make available all information requested by the Commission.
    ISDA believes that the proposed condition is too broad and that the 
Commission should specify how and when it would undertake inspections 
of exempt DCOs. ISDA also believes, to foster cross-border regulatory 
cooperation, the Commission should consider obtaining consent for 
inspections from an exempt DCO's home country regulator prior to 
conducting onsite inspections. ISDA suggested, at a minimum, the 
Commission should provide prior notice to an exempt DCO's home country 
regulator in connection with any inspection or ask the home country 
regulator for the required information. ISDA argued that, not only 
would this promote comity and coordination, but it would also ensure 
that such inspections are not overly burdensome or in violation of 
local laws. ISDA further suggested that the Commission should consider 
including an exempt DCO's home country regulator during inspections, 
which would assist the Commission in interpreting and analyzing the 
exempt DCO's books and records in the context of the regulatory 
requirements of a particular jurisdiction.
    The Commission is adopting Sec.  39.6(b)(5) as proposed. The 
Commission notes that it does not anticipate conducting routine site 
visits to exempt DCOs. However, the Commission may request a DCO's 
books and records to ensure that, among other things, the exempt DCO 
continues to meet the eligibility requirements for an exemption as well 
as the conditions of its exemption. The Commission further notes that 
it already follows many of ISDA's recommendations in the context of 
examining non-U.S. DCOs, and it would expect to do the same in the 
context of an exempt DCO; such interactions with the home country 
regulator would be addressed in the MOU.
f. Observance of the PFMIs
    In the 2018 Proposal, the Commission proposed Sec.  39.6(b)(6) to 
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. In the 2019 Proposal, the 
Commission proposed to modify (and renumber) this condition 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 
proposed this modification in recognition of the fact that at some 
point an exempt DCO may not be able to certify that it observes the 
PFMIs in all material respects. The exempt DCO must disclose that 
information to the Commission and allow the Commission to consider its 
impact on the exempt DCO's standing.
    The Commission did not receive comments on this provision. The 
Commission is adopting Sec.  39.6(b)(6) as proposed.
g. Representation of Good Regulatory Standing
    The Commission proposed Sec.  39.6(b)(7) to require that the 
Commission receive an annual written representation from a home country 
regulator that an exempt DCO is in good regulatory standing, within 60 
days following the end of the exempt DCO's fiscal year. The Commission 
received comments on the definition of ``good regulatory standing,'' as 
discussed above, but did not receive comments on this provision. The 
Commission is adopting Sec.  39.6(b)(7) as proposed.
h. Other Conditions
    Lastly, the Commission proposed Sec.  39.6(b)(9) in the 2019 
Proposal to provide that the Commission may condition an exemption from 
DCO registration on any other facts and circumstances it deems 
relevant.\32\ The Commission stated that, in doing so, it 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.
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    \32\ See 7 U.S.C. 7a-1(h) (stating, in relevant part, that the 
Commission may exempt, conditionally or unconditionally, a DCO from 
registration under that section for the clearing of swaps).
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    CME strongly supported the Commission's retaining discretion to 
condition an exemption from DCO registration on principles of 
international comity and the extent to which the relevant home country 
regulator defers to the Commission with respect to oversight of 
registered DCOs organized in the United States that are accessed by 
local participants. CME believes the Commission's efforts to support 
mutual deference among regulators across the globe will foster 
efficient markets and cooperative behavior to the benefit of all. As a 
result, CME suggested that the Commission codify its ability to 
condition an

[[Page 956]]

exemption from DCO registration on matters of international comity and 
reciprocity within the regulatory text.
    The Commission is declining to specifically condition an exemption 
from DCO registration on matters of international comity and 
reciprocity, but only because it believes Sec.  39.6(b)(9) as proposed 
is sufficient for those purposes. As noted in the 2019 Proposal, the 
Commission could use its discretion under Sec.  39.6(b)(9) to 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.\33\ The recognition that market participants and market 
facilities in a global swaps market are subject to multiple regulators 
and potentially duplicative regulations, and can therefore benefit from 
regulatory harmonization and mutual deference among regulators, 
underpins the exempt DCO framework. The framework is intended to 
encourage collaboration and coordination among U.S. and foreign 
regulators in establishing comprehensive regulatory standards for swaps 
clearing. In addition, the framework seeks to promote fair competition 
and a level playing field for all DCOs. As a result, the Commission 
will consider the degree of deference that a home country regulator 
extends to the Commission's oversight of U.S. DCOs in determining 
whether to extend the benefits of exemption from registration to DCOs 
in that jurisdiction, both at the point of initially exempting a non-
U.S. DCO, and in determining whether compliance under that framework 
should continue. The Commission is adopting Sec.  39.6(b)(9) as 
proposed (renumbered as Sec.  39.6(b)(8)).
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    \33\ 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
    The Commission proposed Sec.  39.6(c) to require an exempt DCO to 
report certain information that would assist the Commission in 
evaluating the continued eligibility of the exempt DCO for exemption, 
reviewing the exempt DCO's compliance with any conditions of its 
exemption, or monitoring the risk of U.S. persons and their affiliates 
clearing swaps at the exempt DCO.
    Specifically, the Commission proposed Sec.  39.6(c)(2)(i) to 
require that an exempt DCO compile a report as of the end of each 
trading day, and submit it to the Commission by 10:00 a.m. U.S. Central 
time on the following business day, containing with respect to swaps: 
(A) Initial margin requirements and initial margin on deposit for each 
U.S. person; and (B) daily variation margin, separately listing the 
mark-to-market amount collected from or paid to each U.S. person. 
However, if a clearing member margins on a portfolio basis its own 
positions and the positions of its affiliates, and either the clearing 
member or any of its affiliates is a U.S. person, the exempt DCO would 
be required to report initial margin requirements and initial margin on 
deposit for all such positions on a combined basis for each such 
clearing member on a combined basis and separately list the mark-to-
market amount collected from or paid to each such clearing member, on a 
combined basis. These requirements are similar to certain reporting 
requirements applicable to registered DCOs in Sec.  39.19(c)(1). These 
reports will provide the Commission with information regarding the cash 
flows associated with U.S. persons clearing swaps through exempt DCOs 
in order to analyze the risks presented by such U.S. persons and to 
assess the extent to which U.S. business is being cleared by each 
exempt DCO.
    The Commission proposed Sec.  39.6(c)(2)(ii)(A) and (B) to require 
an exempt DCO to compile a report as of the last day of each fiscal 
quarter, and submit it to the Commission no later than 17 business days 
after the end of the fiscal quarter, containing the aggregate clearing 
volume of U.S. persons during the fiscal quarter, and the average open 
interest of U.S. persons during the fiscal quarter, respectively. If a 
clearing member is a U.S. person, this data would include the 
transactions and positions of the clearing member and all affiliates 
for which the clearing member clears; if a clearing member is not a 
U.S. person, the data would only have to include the transactions and 
positions of affiliates that are U.S. persons. The Commission proposed 
Sec.  39.6(c)(2)(ii)(C) to require that an exempt DCO's quarterly 
report to the Commission contain a list of U.S. persons and FCMs \34\ 
that are either clearing members or affiliates of any clearing member, 
with respect to the clearing of swaps, as of the last day of the fiscal 
quarter. This information would enable the Commission, in conducting 
risk surveillance of U.S. persons and swaps markets more broadly, to 
better understand and evaluate the nature and extent of the cleared 
swaps activity of U.S. persons.
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    \34\ Such FCMs may or may not be U.S. persons. The Commission 
will not require that exempt DCOs provide daily information 
regarding initial margin requirements, initial margin on deposit, 
and daily variation margin, or quarterly aggregate clearing volume 
or average open interest, with respect to swaps, for FCMs that are 
not U.S. persons (unless reporting would otherwise be required 
because such FCMs are affiliates of U.S. persons). However, the 
Commission has a supervisory interest in receiving information 
regarding which of its registered FCMs are clearing members or 
affiliates of clearing members, with respect to the clearing of 
swaps at an exempt DCO.
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    The Commission proposed paragraphs (c)(2)(iii) through (viii) of 
Sec.  39.6 to require an exempt DCO to provide information to the 
Commission upon the occurrence of certain specified events. The 
Commission proposed Sec.  39.6(c)(2)(iii) to require an exempt DCO to 
provide prompt notice to the Commission regarding any change in its 
home country regulatory regime that is material to the exempt DCO's 
continuing observance of the PFMIs or with any requirements set forth 
in Sec.  39.6, or the order of exemption issued by the Commission.
    The Commission proposed Sec.  39.6(c)(2)(iv) to require an exempt 
DCO to provide to the Commission, to the extent that it is available to 
the exempt DCO, any assessment of the exempt DCO's or the home country 
regulator's observance of the PFMIs by a home country regulator or 
other national authority, or an international financial institution or 
international organization.\35\
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    \35\ Such an international organization may include the 
International Monetary Fund or World Bank. See PFMIs, ] 1.33.
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    The Commission proposed Sec.  39.6(c)(2)(v) to require an exempt 
DCO to provide to the Commission, to the extent that it is available to 
the exempt DCO, any examination report, examination findings, or 
notification of the commencement of any enforcement or disciplinary 
action by a home country regulator.
    The Commission proposed Sec.  39.6(c)(2)(vi) to require an exempt 
DCO to provide immediate notice to the Commission of any change with 
respect to its licensure, registration, or other authorization to act 
as a clearing organization in its home country.
    The Commission proposed Sec.  39.6(c)(2)(vii) to 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

[[Page 957]]

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.
    Finally, the Commission proposed Sec.  39.6(c)(2)(viii) to require 
an exempt DCO to provide notice to the Commission of any action the 
exempt DCO has taken against a U.S. person or FCM, no later than two 
business days after taking such action.
    The Commission requested comment in the 2018 Proposal, with regard 
to proposed Sec.  39.6(c)(2)(iii), on whether, instead of requiring an 
exempt DCO to provide prompt notice to the Commission regarding any 
change in its home country regulatory regime that is material to the 
exempt DCO's continuing observance of the PFMIs, any requirements set 
forth in Sec.  39.6, or the order of exemption issued by the Commission 
(thereby requiring the exempt DCO to determine whether a change is 
material), the Commission should require an exempt DCO to provide 
prompt notice of any change in its home country regulatory regime.
    ASX and JSCC supported requiring an exempt DCO to determine whether 
a change to its home country regulatory regime constitutes a material 
change. ASX and JSCC believe an exempt DCO is best situated to easily 
identify changes to its home country regulatory regime as well as 
determine whether such changes are material. JSCC also commented that 
having the exempt DCO make this materiality determination would avoid 
redundant reporting and review for an exempt DCO and the Commission of 
any change to the home country regulatory regime.
    The Commission agrees with the commenters that an exempt DCO should 
be required to determine whether a change to its home country 
regulatory regime would constitute a material change, especially as the 
Commission would otherwise need to review changes to home country 
regulatory regimes in multiple jurisdictions.
    The Commission is adopting Sec.  39.6(c) as proposed.
4. Regulation 39.6(d)--Swap Data Reporting Requirements
    The Commission proposed Sec.  39.6(d) to require an exempt DCO, if 
it accepts for clearing a swap that has been reported to an SDR 
pursuant to part 45 of the Commission's regulations, to report to an 
SDR data for the two swaps that result from the novation of the 
original swap. The exempt DCO would also be required to report the 
termination of the original swap to the same SDR that received the 
original swap report. To avoid duplicative reporting for such 
transactions, the Commission also proposed to require an exempt DCO to 
have rules that prohibit the reporting of the two new swaps by the 
counterparties to the original swap.
    Citadel commented that the Commission should ensure that reporting 
requirements pursuant to parts 43 and 45 of the Commission's 
regulations continue to be fulfilled in an accurate manner for in-scope 
transactions, including the ``cleared or uncleared'' field in part 43 
and the ``clearing indicator'' and ``clearing venue'' fields in part 
45. JSCC supported clearly defining an exempt DCO's swap data reporting 
obligations within part 39. However, JSCC was concerned that the 
counterparties to the original swap would still be required to report 
the cleared transaction arising from the novation of the original swap 
at an exempt DCO to an SDR under part 45, which JSCC viewed as in 
conflict with proposed Sec.  39.6(d). JSCC commented that proposed 
Sec.  39.6(d) could create confusion about reporting expectations for 
exempt DCOs and their respective clearing members.\36\ JSCC was hopeful 
that part 45 would be amended to address this issue.
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    \36\ JSCC cited CFTC Letter 18-03: Extension of No-Action Relief 
from Certain Reporting Obligations for Counterparties Clearing Swaps 
through Derivatives Clearing Organizations Acting Under Exemptive 
Orders or No-Action Relief (Feb. 20, 2018).
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    CCP12 acknowledged that transparency in the swaps markets, which it 
believes is supported by SDR reporting, provides a number of benefits. 
However, CCP12 argued that the current SDR reporting requirements 
applied to exempt DCOs pose significant operational challenges, such as 
on-boarding with a U.S. SDR that has a different reporting format than 
that of the exempt DCO's home country. CCP12 also commented that SDR 
reporting fees are a burden based on the number of reported 
transactions. The Commission believes that transparency in the swaps 
market as provided by the swap data reporting requirements, which are 
applicable to all registered DCOs, including non-U.S. DCOs and existing 
exempt DCOs, strongly warrants requiring exempt DCOs to report such 
information pursuant to Sec.  39.6(d).
    In response to JSCC's concern that Sec.  39.6(d) could cause 
confusion given the time-limited no-action relief provided in CFTC 
Letter 18-03, the Commission notes that Sec.  39.6(d) specifically 
requires an exempt DCO to have rules that prohibit the counterparties 
to the original swap from reporting to an SDR pursuant to part 45 the 
two new swaps which result from novation of the original swap. As 
explained in the 2018 Proposal, the exempt DCO's rules prohibiting 
reporting by the counterparties to the original swap are intended to 
avoid duplicative reporting.\37\
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    \37\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR at 39928, n.32.
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    In response to CCP12's concern related to onboarding with an SDR 
that uses a different reporting format than the exempt DCO's home 
country, the Commission notes that it recently adopted revisions to 
part 45 of the Commission's regulations that include standardized data 
fields that accommodate reporting for swaps cleared under either the 
``agency'' clearing model or the ``principal'' clearing model.\38\ In 
regards to SDR fees, the Commission notes that SDRs are required to 
provide their services on a fair, open, and equal basis and an SDR's 
fees must be equitable and applied in a uniform and non-discriminatory 
manner.\39\ As such, the burdens associated with SDR fees for exempt 
DCOs will be no different than the burdens for other DCOs that clear 
swaps that must be reported to SDRs. The Commission is adopting Sec.  
39.6(d) as proposed.
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    \38\ See Swap Data Recordkeeping and Reporting Requirements, 85 
FR 75503, 75567 (Nov. 25, 2020) (appendix 1 to part 45 contains the 
``clearing member'' field, which contains instructions for reporting 
the field under the agency clearing model or the principal clearing 
model). See also Technical Specification Document: Parts 43 and 45 
swap reporting and public dissemination requirements at 1-2, 
available at https://www.cftc.gov/media/3496/DMO_Part43_45TechnicalSpecification022020/download (containing the 
technical specifications for the ``clearing member'' field).
    \39\ See 17 CFR 49.27 (containing the SDR access and fees 
requirements).
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5. Regulation 39.6(e)--Application Procedures
    The Commission proposed Sec.  39.6(e) to codify the procedures a 
non-U.S. clearing organization must follow when applying for an 
exemption from DCO registration.
    Specifically, the Commission proposed Sec.  39.6(e)(1) to require a 
clearing organization to file an application for exemption with the 
Secretary of the Commission in the format and manner specified by the 
Commission. After reviewing the application, the Commission may: (1) 
Grant an exemption without conditions; (2) grant an exemption with 
conditions; or (3) deny the application.
    Proposed Sec.  39.6(e)(2) requires an applicant to submit a 
complete application, including all applicable information and 
documentation as outlined therein, and provide that the Commission will 
not commence processing an application unless the

[[Page 958]]

application is complete. The application must include: (i) A cover 
letter providing general information identifying the applicant, its 
regulatory licenses or registrations, and relevant contact information; 
(ii) a description of the applicant's business plan, including swap 
asset classes that it would clear 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 held to requirements consistent with the PFMIs; (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 necessary to observe the PFMIs, including the 
financial market infrastructure disclosure template set forth in Annex 
A to the Disclosure Framework and Assessment Methodology for the PFMIs; 
\40\ (vi) a representation that the applicant will comply with each of 
the requirements and conditions of its exemption; (vii) a draft of the 
applicant's rules showing compliance with various requirements for an 
exemption; and (viii) the applicant's consent to jurisdiction in the 
United States, with contact information for the applicant's designated 
U.S. agent.
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    \40\ See CPSS-IOSCO, Principles for financial market 
infrastructures: Disclosure framework and Assessment methodology 
(Dec. 2012), at 82 et seq., available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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    Proposed Sec.  39.6(e)(3) provides that, at any time during the 
Commission's review of an application for exemption, the Commission may 
request that the applicant submit supplemental information in order for 
the Commission to process the application, and require an applicant to 
file such supplemental information in the format and manner specified 
by the Commission. Regulation 39.3(a)(4), which applies to applications 
for DCO registration, contains a similar provision.
    Proposed Sec.  39.6(e)(4) requires an applicant to promptly amend 
its application if it discovers a material omission or error, or if 
there is a material change in the information provided to the 
Commission in the application or other information provided in 
connection with the application. This provision is similar to Sec.  
39.3(a)(5), which addresses amendments to applications for DCO 
registration.
    Proposed Sec.  39.6(e)(5) identifies those sections of an 
application for exemption from registration that would be made public, 
including the cover letter required in proposed Sec.  39.6(e)(2)(i); 
documents demonstrating that the applicant is organized in a 
jurisdiction in which its home country regulator applies to the 
applicant statutes, rules, regulations, and/or policies that are 
consistent with the PFMIs as proposed in Sec.  39.6(e)(2)(iii); 
disclosures necessary to observe the PFMIs as proposed in Sec.  
39.6(e)(2)(v); \41\ draft rules that meet the requirements of proposed 
Sec.  39.6(b)(1) (U.S. persons clearing requirements), Sec.  39.6(b)(2) 
(open access requirements); and Sec.  39.6(d) (swap data reporting 
requirements), as applicable; and any other part of the application not 
covered by a request for confidential treatment, subject to Sec.  
145.9. This provision is similar to Sec.  39.3(a)(6), which identifies 
those portions of an application for registration as a DCO that are 
made public.
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    \41\ The Disclosure Framework contemplates that CCPs will make 
public disclosures pursuant to the Disclosure Framework. See id. at 
1.
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    The Commission did not receive comments on this aspect of the 
proposal. The Commission is adopting Sec.  39.6(e) as proposed.
6. Regulation 39.6(f), (g), and (h)--Modification or Termination of 
Exemption; Notice to Clearing Members of Termination of Exemption
    The Commission initially proposed to provide in Sec.  39.6(f) 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. In the 
2019 Proposal, the Commission proposed to also provide for the 
termination of an exemption upon the Commission's initiative, and to 
set forth the process by which the Commission would issue a 
modification or termination.
    Under proposed Sec.  39.6(f)(1), the Commission may modify or 
terminate an exemption from DCO registration, in its discretion and 
upon its own initiative, 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. The Commission may also modify 
or terminate an exemption from DCO registration if any of the terms and 
conditions of the order of exemption are not met, including: (i) The 
exempt DCO observing the PFMIs in all material respects; and (ii) the 
exempt DCO being subject to comparable, comprehensive supervision and 
regulation by its home country regulator.\42\
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    \42\ In the 2019 Proposal, proposed Sec.  39.6(f)(1) included a 
subparagraph (iii) that is not being adopted at this time.
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    The Commission proposed Sec.  39.6(f)(2), (f)(3), and (f)(4) to set 
forth the process for modification or termination of an exemption upon 
the Commission's initiative. Under proposed Sec.  39.6(f)(2), the 
Commission must 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.
    Under proposed Sec.  39.6(f)(3), an exempt DCO may respond to the 
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.
    The Commission proposed Sec.  39.6(f)(4) to 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.
    ASX, JSCC, and ISDA believe that an automatic termination of 
exemptions could result in market disruption and legal uncertainty, 
particularly for U.S. persons clearing through the exempt DCO. However, 
the commenters recognized that the Commission must ensure that exempt 
DCOs continue to operate safe and efficient clearing operations under a 
regime that is consistent with the PFMIs. Therefore, the commenters 
suggested that the Commission should first commit to working with the 
exempt DCO and its home country regulator(s) to resolve any issues with 
compliance with the terms and conditions of the order of exemption. If 
these efforts are not

[[Page 959]]

successful, the commenters suggested that the Commission allow for an 
appropriate transitional period so that affected clearing members and 
customers may migrate to other clearing organizations in an orderly 
manner.
    The Commission agrees with the commenters that sufficient time for 
transition will be needed in the event that it terminates an exemption 
from registration. That is why the Commission proposed in Sec.  
39.6(f)(4)(i) that it would issue an order of termination with an 
effective date intended to 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. The Commission is 
adopting Sec.  39.6(f) as proposed.
    Furthermore, the Commission proposed Sec.  39.6(g) to set forth the 
framework under which an exempt DCO may petition the Commission to 
terminate its exemption and the applicable procedures. Specifically, 
pursuant to proposed Sec.  39.6(g)(1), an exempt DCO may request that 
the Commission terminate its exemption if the exempt DCO: (i) No longer 
qualifies for an exemption as a result of changed circumstances; (ii) 
intends to cease clearing swaps for U.S. persons; or (iii) submits an 
application for registration in accordance with Sec.  39.3(a)(2) or 
Sec.  39.3(a)(3), as applicable. The Commission further proposed in 
Sec.  39.6(g)(2) that the petition for termination must include a 
detailed explanation for the request and describe the exempt DCO's 
plans for liquidation or transfer of the positions and related 
collateral of U.S. persons, if applicable. Under proposed Sec.  
39.6(g)(3), the Commission would issue an order of termination within a 
reasonable time appropriate to the circumstances or in conjunction with 
the issuance of an order of registration, if applicable.
    The Commission did not receive any comments on Sec.  39.6(g). The 
Commission is adopting this provision as proposed.
    Lastly, the Commission proposed Sec.  39.6(h) to provide that, 
following the Commission's issuance of an order of termination (unless 
issued in conjunction with the issuance of an order of registration), 
the exempt DCO must provide immediate notice of such termination to its 
clearing members. The notice must 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 DCO's notice of such termination to all 
U.S. persons clearing swaps through such clearing members. The 
Commission did not receive any comments on this provision. The 
Commission is adopting Sec.  39.6(h) as proposed.

D. Regulation 39.9--Scope

    The Commission proposed to revise Sec.  39.9 to make it clear that 
the provisions of subpart B apply to any DCO, as defined under section 
1a(15) of the CEA and Sec.  1.3, that is registered with the Commission 
as a DCO pursuant to section 5b of the CEA, but do not apply to any 
exempt DCO. This revision was intended to clarify that the subpart B 
regulations that address compliance with the DCO Core Principles 
applicable to registered DCOs do not impose any obligations upon exempt 
DCOs. The Commission did not receive any comments on this proposal. The 
Commission is adopting Sec.  39.9 largely as proposed.\43\
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    \43\ Subsequent to the 2018 Proposal, the Commission amended 
Sec.  39.9 in the Alternative Compliance rulemaking to take into 
account a DCO registered subject to alternative compliance. See 
Registration with Alternative Compliance for Non-U.S. Derivatives 
Clearing Organizations, 85 FR at 67171. The Commission is adding to 
those amendments the changes it had originally proposed in the 2018 
Proposal. See Exemption From Derivatives Clearing Organization 
Registration, 83 FR at 39929.
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III. Amendments to Part 140

    The Commission initially proposed amendments to Sec.  140.94(c) to 
delegate authority to the Director of 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 further proposed 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 
did not receive any comments on this proposal. The Commission is 
adopting the changes to Sec.  140.94(c) as proposed.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.\44\ The 
regulations being adopted by the Commission will affect 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. The Commission has previous determined that 
clearing organizations are not small entities for the purpose of the 
RFA.\45\ Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the regulations adopted 
herein will not have a significant economic impact on a substantial 
number of small entities.
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    \44\ 5 U.S.C. 601 et seq.
    \45\ See 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \46\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring a collection of 
information as defined by the PRA. The regulations adopted herein would 
result in such a collection, as discussed below. A person is not 
required to respond to a collection of information unless it displays a 
currently valid control number issued by the Office of Management and 
Budget (OMB). The Commission requested a new OMB control number for the 
collection of information in connection with the proposal.
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    \46\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Commission received one comment regarding its cost burden 
analysis in the preamble to the Proposal. JSCC stated in its October 
2018 comment letter that the Commission's cost estimate of $10,500 \47\ 
for an application for exemption from DCO registration substantially 
underestimated an applicant's costs, which JSCC stated would require a 
significant amount of resources to understand any legal and/or 
regulatory implications arising from the DCO exemption, as well as to 
identify any potential conflicts with the applicant's

[[Page 960]]

home country regulatory and supervisory frameworks. However, JSCC did 
not provide any estimate of what the expected cost of an application 
would be. As stated in the Proposal, the Commission based its cost 
estimate of $10,500 for the exempt DCO application on the significantly 
reduced requirements as compared to a DCO registration application, 
which the Commission estimated would cost $100,000. The Commission has 
not received any information indicating what the amount of additional 
costs over $10,500 would be, nor has it revised any of the elements of 
the proposal that would affect the cost estimate. Therefore, the 
Commission is retaining the burden estimates it included in the 
proposal.
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    \47\ Due to minor adjustments to the burden estimate for an 
exempt DCO application due to consolidating the burden estimates for 
components of the application, the current estimated cost is $10,000 
per application.
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1. Application for Exemption From DCO Registration Under 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.\48\ 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 collection of 
information as follows:
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    \48\ 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 \49\
---------------------------------------------------------------------------

    \49\ Although the 2018 Proposal included separate burden 
estimates for the application and for information requested by the 
Commission during its review, these estimates were combined in the 
2019 Proposal and in this final rule. The estimated number of 
applications has been revised to one per year from two in the 2018 
Proposal in response to the Commission's adoption of the Alternative 
Compliance framework, which had not been proposed at the time of the 
2018 Proposal, and which provides an alternative that could lead to 
a reduced number of exemption applications. See Registration with 
Alternative Compliance for Non-U.S. Derivatives Clearing 
Organizations, 85 FR 67160 (Oct. 21, 2020). In addition, burden 
estimates for reporting by exempt DCOs have been updated based on 
recent observations of filing frequency by existing exempt DCOs.
---------------------------------------------------------------------------

    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: 8
    Average number of hours per report: 0.1
    Estimated gross annual reporting burden: 0.8
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, and the estimated number of 
respondents reflects that not all exempt DCOs will experience events 
subject to the notification requirement:

 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
    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. Reporting by Exempt DCOs in Accordance With Part 45
    Regulation 39.6(d) requires an exempt DCO to report data regarding 
the two swaps resulting from the novation of an original swap to an 
SDR, if the original swap had been reported to an SDR pursuant to part 
45 of the Commission's regulations. The Commission is revising the 
information collection for part 45 to include a separate information 
collection under OMB Control No. 3038-0096. The burden for exempt DCOs 
reporting in accordance with part 45 is estimated to be approximately 
one-fifth of the burden for registered DCOs 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. 
Consequently, the burden hours for the collection of information in 
this rulemaking have been estimated as follows:

 Reporting in accordance with part 45

    Estimated number of respondents: 7.
    Estimated number of reports per respondent: 8,074 \50\
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    \50\ While updating the number of reports based on recent data, 
the Commission discovered that the estimated number in the NPRM--
1987--inadvertently reflected a quarterly, rather than annual, 
number of reports. The estimate of 8074 reports per respondent 
represents the median number of swaps reported to SDRs by existing 
exempt DCOs during calendar year 2019.
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    Average number of hours per report: 0.1
    Estimated gross annual reporting burden: 5649

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.\51\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
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    \51\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The baseline for the Commission's consideration of the costs and 
benefits of this rulemaking are: (1) The DCO Core Principles; (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; and (5) part 40 of 
the Commission's regulations.
    This rulemaking codifies certain conditions and procedures that the

[[Page 961]]

Commission has been using to grant exemptions from DCO registration, 
with some modifications. To the extent that exemptions from DCO 
registration were already available to non-U.S. clearing organizations 
pursuant to these conditions and procedures, the actual costs and 
benefits of this rulemaking will likely be lower than the costs and 
benefits relative to the baseline.
    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 final rule 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.\52\
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    \52\ 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 final rule may impose costs. The 
Commission has endeavored to assess the expected costs and benefits of 
the final rule 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 regulations in 
qualitative terms. The lack of data and information to estimate those 
costs is attributable in part to the nature of these final regulations. 
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 final rule may be affected 
by the Alternative Compliance framework \53\ under which a non-U.S. 
clearing organization or an already registered non-U.S. DCO would have 
the option of applying for registration with alternative compliance, 
which would allow the DCO to comply with the DCO Core Principles 
through its home country regulatory regime. The Commission has compared 
these costs and benefits below.
---------------------------------------------------------------------------

    \53\ Registration with Alternative Compliance for Non-U.S. 
Derivatives Clearing Organizations, 85 FR 67160 (Oct. 21, 2020).
---------------------------------------------------------------------------

2. 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. The final rule 
generally codifies the policies and procedures that the Commission has 
followed with respect to granting exemptions from DCO registration. 
Specifically, these regulations set forth the process by which a non-
U.S. clearing organization may obtain an exemption from DCO 
registration for the clearing of proprietary swaps for U.S. persons 
provided that it meets the specified eligibility standards and can meet 
the conditions of an exemption.
b. Benefits and Costs
    With the Commission's adoption of this final rule, non-U.S. 
clearing organizations seeking to clear swaps for U.S. persons on a 
proprietary basis will have a choice between seeking an exemption from 
DCO registration and registering as a DCO, either under the 
Commission's original framework or the recently adopted Alternative 
Compliance framework. The Commission expects exemption from 
registration to be the least costly of the three options. The 
Commission estimates that it would take about 421 hours to prepare a 
traditional application for DCO registration \54\ and 100 hours to 
prepare an application under the alternative procedures, as compared to 
40 hours to prepare an application for an exemption.\55\ The daily, 
quarterly, and event-specific reporting requirements are estimated to 
impose the same hourly burden for both registered and exempt DCOs with 
the exception of swap data reporting under part 45. Registered DCOs 
subject to Alternative Compliance will be subject to the same part 45 
reporting requirements as other registered DCOs, while exempt DCOs will 
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 fifth as much as 
the burden on a registered DCO. Both exempt DCOs and registered DCOs 
subject to Alternative Compliance are primarily subject to their home 
country regulatory regimes, but registered DCOs subject to Alternative 
Compliance will 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 will increase costs on registered DCOs subject to 
Alternative Compliance relative to the costs to exempt DCOs will depend 
on the extent to which these requirements exceed the legal requirements 
of their home countries and whether registered DCOs subject to 
Alternative Compliance have to change their practices more than they 
would if they had sought an exemption instead.
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    \54\ See Derivatives Clearing Organization General Provisions 
and Core Principles, 85 FR 4800, 4829 (Jan. 27, 2020).
    \55\ To the extent that current procedures for seeking an 
exemption from DCO registration are similar to the procedures 
adopted in this release, these costs are currently being incurred.
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    Given the lower costs of an exemption as compared to registration, 
and the greater clarity and regulatory certainty resulting from 
codification of the CFTC's existing procedures, the final regulation 
may promote competition among registered and exempt DCOs by encouraging 
more clearing organizations to seek an exemption. Lower costs and 
competition may, in turn, result in clearing members incurring lower 
costs to clear through exempt DCOs. In addition, access to more 
clearing organizations may also encourage voluntary clearing of swaps 
that are not required to be cleared, as certain swaps may not be 
cleared by any registered DCOs. This may, in turn, serve to diversify 
the potential risk of cleared swaps, because any such risk would become 
less concentrated if a larger number of registered and exempt DCOs were 
clearing swaps for U.S. persons, and the volume of those swaps could 
become more evenly distributed among those registered and exempt DCOs.
    While an exemption from DCO registration would be less costly to 
obtain than any form of DCO registration, registration provides 
benefits that are not available to exempt

[[Page 962]]

DCOs or persons that clear through an exempt DCO. For example, a 
registered DCO is permitted to clear for U.S. customers. An eligible 
clearing organization may choose to register, particularly under the 
Alternative Compliance framework, over seeking an exemption if it 
determines that the benefits of customer clearing (including an 
enhanced ability to attract U.S. business) would justify the extra 
costs of registration relative to an exemption. Based on data submitted 
by registered DCOs to the Commission pursuant to Sec.  39.19(c), 
customer clearing typically accounts for a majority of the initial 
margin at a DCO (about 70 percent on average), and this is likely true 
for other clearing organizations as well. Thus, the inability of exempt 
DCOs to clear for U.S. customers may create a significant disincentive 
to seeking exemption in lieu of registration.
    Registered DCOs may face a competitive disadvantage as a result of 
the final rule. A registered DCO may have to compete with an exempt DCO 
for U.S. proprietary swap business, yet may have higher ongoing 
compliance costs than an exempt DCO. This competitive disadvantage is 
mitigated by the fact that exempt DCOs are, as a precondition of such 
exemption, required to be subject to comparable, comprehensive 
supervision and regulation by a home country regulator that is likely 
to impose costs similar to those associated with Commission regulation.
    The Commission is codifying in Sec.  39.6(a)(1) the statutory 
authority in section 5b(h) of the CEA that the Commission may exempt a 
clearing organization from DCO registration for the clearing of swaps 
provided that the Commission determines that the clearing organization 
is subject to comparable, comprehensive supervision and regulation by a 
home country regulator. To satisfy this standard, the clearing 
organization will need to demonstrate, among other things, that: (i) It 
is organized in a jurisdiction in which a home country regulator 
applies to the clearing organization, on an ongoing basis, statutes, 
rules, regulations, and/or policies that, taken together, are 
consistent with the PFMIs; and (ii) it observes the PFMIs in all 
material respects. New Sec.  39.6(b)(6) requires an annual 
certification that an exempt DCO continues to observe the PFMIs in all 
material respects.
    The Commission believes that the PFMIs provide numerous regulatory 
benefits and promote the protection of market participants and the 
public, the financial integrity of derivatives markets, and sound risk 
management practices. In this regard, the PFMIs include provisions that 
address DCOs establishing requirements and/or procedures designed to 
ensure that clearing members meet their obligations to DCOs and 
safeguard customer funds. For example, the PFMIs provide that DCOs 
should establish risk-related participation requirements adequate to 
ensure that participants meet operational, financial, and legal 
requirements to allow them to fulfill their obligations to DCOs. 
Financial requirements may include reasonable risk-related capital 
requirements for participants and appropriate indicators of participant 
creditworthiness.\56\ In addition, the PFMIs provide that a DCO should 
monitor compliance with its participation requirements on an ongoing 
basis through the receipt of timely and accurate information.\57\ The 
PFMIs further provide that collateral belonging to customers of 
clearing members should be segregated from the assets of the clearing 
member through which the customers clear.\58\ Moreover, using the PFMIs 
may promote regulatory comity, since the PFMIs represent standards that 
have been agreed to by the G20 and are widely used in the regulation of 
clearing organizations. Although the PFMIs are already used to 
determine eligibility for receiving an exemption from DCO registration, 
the Commission believes that codifying the use of the PFMIs is 
beneficial from the perspectives of transparency and consistency.
---------------------------------------------------------------------------

    \56\ PFMIs at Principle 18, Explanatory Note 3.18.5.
    \57\ Id. at Principle 18, Explanatory Note 3.18.8.
    \58\ Id. at Principle 14, Explanatory Note 3.14.1.
---------------------------------------------------------------------------

    The Commission acknowledges, as discussed in the preamble above, 
that the PFMIs are not identical to, nor as detailed as, part 39. Thus, 
market participants choosing to clear swaps through exempt DCOs may 
incur costs associated with forgoing certain regulatory protections 
that are not included in the PFMIs. However, these costs are mitigated 
by some of the conditions of exemption set out in Sec.  39.6(b), as 
discussed below, as well as other Commission regulations applicable to 
exempt DCOs. These conditions (including, for example, the open access 
provision of Sec.  39.6(b)(2)), provide additional regulatory 
protections beyond those required by the PFMIs. Additionally, the costs 
of using the PFMIs (as compared to some other means of determining that 
a clearing organization is subject to comparable, comprehensive 
supervision and regulation by a home country regulator) will vary 
depending on the home country regulatory regime. Finally, since the 
PFMIs are already used to determine eligibility for receiving an 
exemption from DCO registration, these costs are currently being 
realized by exempt DCOs and U.S. persons who currently clear 
proprietary swaps on exempt DCOs.
    New Sec.  39.6(b) contain various conditions that the Commission is 
imposing for the granting of exemptions from DCO registration. These 
conditions are consistent with those that the Commission has been 
imposing on exempt DCOs prior to the adoption of this rule. Therefore, 
the costs and benefits of these conditions are currently being incurred 
by exempt DCOs and U.S. persons who currently clear proprietary swaps 
on such DCOs.
    New Sec.  39.6(b)(2) codifies the ``open access'' requirements of 
section 2(h)(1)(B) of the CEA with respect to swaps cleared by an 
exempt DCO to which one or more of the counterparties is a U.S. 
person.\59\ Under Sec.  39.6(b)(2), an exempt DCO is required to 
maintain rules providing that all such swaps with the same terms and 
conditions submitted to the exempt DCO for clearing are economically 
equivalent and may be offset with each other, to the extent that 
offsetting is permitted by the exempt DCO's rules. An exempt DCO is 
also required to maintain rules providing for non-discriminatory 
clearing whether a swap is executed bilaterally or is executed on or 
subject to the rules of an unaffiliated electronic matching platform or 
trade execution facility, e.g., a swap execution facility. This should 
benefit market participants by ensuring that they are able to offset 
their positions to the extent that it is feasible and consistent with 
DCO rules and that they are not subject to discrimination based on 
whether or not they execute on a trading platform. The Commission 
believes that most or all non-U.S. clearing organizations have open 
access rules that comply with Sec.  39.6(b)(2) and has received no 
comments suggesting otherwise. However, to the extent that a clearing 
organization seeking an exemption from DCO registration needs to change 
its rules to comply with this requirement, that clearing organization 
could incur costs.
---------------------------------------------------------------------------

    \59\ 7 U.S.C. 2(h)(1)(B).
---------------------------------------------------------------------------

    New Sec.  39.6(b)(3) requires an exempt DCO to consent to 
jurisdiction in the United States and designate an agent in the United 
States to receive notice or service of various documents issued by or 
on behalf of the Commission or the U.S. Department of Justice in 
connection with investigations or for certain other purposes. This will 
assist

[[Page 963]]

the Commission and the Department of Justice in protecting market 
participants and the public and will impose on exempt DCOs the minor 
costs associated with retaining a U.S. agent.
    New Sec. Sec.  39.6(b)(4) and 39.6(b)(8) are general provisions 
that require an exempt DCO to comply, and demonstrate compliance as 
requested by the Commission, with any condition of the exempt DCO's 
order of exemption and to provide that the Commission may condition an 
exemption from DCO registration on any other facts and circumstances it 
deems relevant. These provisions do not provide any costs and benefits 
in and of themselves. The costs and benefits of any additional 
conditions that may be imposed pursuant to Sec.  39.6(b)(8) can only be 
considered when such additional conditions are imposed.
    New Sec.  39.6(b)(5) requires an exempt DCO to promptly make all 
books and records related to its operation as an exempt DCO available 
to any Commission representative upon request. This provision will 
facilitate the Commission's mission, including the protection of market 
participants and the public. While the Commission does not anticipate 
making routine requests for books and records, providing or making 
available books and records pursuant to any such request will impose 
modest costs on exempt DCOs.
    New Sec.  39.6(b)(7) requires an exempt DCO's home country 
regulator to provide an annual certification that the exempt DCO is in 
good regulatory standing. That rule, along with Sec.  39.6(a)(2) which 
requires an MOU or similar arrangement to be in effect between the 
Commission and the home country regulator, will assist the Commission 
in protecting market participants and the public, but will not impose 
any direct costs on exempt DCOs or market participants. Where no MOU 
between the Commission and a home country regulator is in effect, a 
clearing organization in that country wanting an exemption may incur 
costs associated with facilitating such an MOU, or it could incur the 
costs of either registering with the Commission or forgoing U.S. 
participation. The requirements regarding an MOU also exist in current 
procedures, so the costs and benefits of those requirements are 
currently being realized by exempt DCOs and U.S. persons who currently 
clear proprietary swaps on exempt DCOs.
    Finally, new Sec.  39.6(d) requires an exempt DCO to report swap 
data for the two cleared swaps that result from the novation of an 
original swap cleared through the exempt DCO. An exempt DCO would also 
need to report the termination of the original swap to the SDR that 
received the swap data for the original swap. To avoid duplicative 
reporting, the exempt DCO is also required to have rules that prohibit 
the part 45 reporting of the two new swaps by the counterparties to the 
original swap. CCP12 commented that transparency in the swaps markets, 
which is supported by SDR reporting, provides a number of benefits. 
However, CCP12 argued that the SDR reporting requirements would post 
significant operational challenges, such as onboarding with an SDR that 
has a different reporting format than that of the exempt DCO's home 
country. CCP12 also commented that SDR reporting fees would be a burden 
based on the number of reported transactions. The Commission agrees 
that SDR reporting enhances market transparency and thus provides 
benefits to the market. The Commission notes that SDR reporting costs 
would otherwise be borne by the counterparties to the swap, and because 
there are far more swap counterparties than exempt DCOs, it would be 
more efficient to require the relatively few exempt DCOs to bear the 
operational burdens of setting up and following reporting processes and 
procedures with the various SDRs. The costs and benefits of the 
reporting requirements are currently being realized to the extent that 
similar requirements are contained in existing orders of exemption for 
DCOs.
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
    For the most part, the final rule does not materially reduce the 
protections available to market participants and the public because, 
among other things, it: (i) Only permits exempt DCOs to clear swaps for 
U.S. persons for their proprietary accounts, and not for customers; 
(ii) requires that an exempt DCO be subject to comparable, 
comprehensive supervision and regulation by a home country regulator as 
provided by the PFMIs; (iii) requires an MOU or similar arrangement 
with the home country regulator that would enable the Commission to 
obtain any information that the Commission deems necessary to evaluate 
the initial and continued eligibility of the DCO for exemption from 
registration or to review its compliance with any conditions of such 
exemption; (iv) provides additional protections with the conditions of 
exemption set out in Sec.  39.6(b), including open access and data 
reporting requirements; and (v) explicitly authorizes the Commission to 
modify or terminate an order of exemption on its own initiative if it 
determines that there are changes to or omissions in material facts or 
circumstances pursuant to which the order of exemption was issued, or 
that any of the terms and conditions of the order of exemption have not 
been met. Collectively, these provisions protect market participants 
and the public by ensuring that exempt DCOs are subject to the 
internationally recognized PFMIs. Although the Commission acknowledges 
the possibility that some foreign regulatory regimes may ultimately 
prove to be less effective than that of the United States, the 
Commission believes that this risk is mitigated for the reasons 
discussed above.
b. Efficiency, Competitiveness, and Financial Integrity
    The final rule promotes operational efficiency by permitting exempt 
DCOs to clear swaps for U.S. persons without having to apply for DCO 
registration, which involves the submission of extensive documentation 
to the Commission. The final rule also mitigates duplicative compliance 
requirements by not requiring exempt DCOs to comply with the 
Commission's part 39 regulations (with the exception of Sec.  39.6) in 
addition to the requirements of their home country regulator. In 
addition, adopting these regulations might prompt other regulators to 
adopt similar rules that would defer to the Commission in the 
regulation of U.S. registered DCOs operating outside the United States, 
which could increase competitiveness by reducing the regulatory burdens 
on such DCOs.
    The exempt DCO framework may also promote competition for U.S. 
proprietary business among non-U.S. clearing organizations because it 
holds exempt DCOs to the internationally recognized standards set forth 
in the PFMIs. This will allow such clearing organizations to compete 
with each other for the proprietary business of U.S. clearing members 
under their own comparable regulatory regimes, which may potentially 
increase the number of DCOs available to clear for U.S. persons. The 
final rule is expected to maintain the financial integrity of swap 
transactions cleared by exempt DCOs because such DCOs are subject to 
supervision and regulation by their home country regulator within a 
legal framework that is comparable to that applicable to registered 
DCOs under the CEA and Commission regulations and as

[[Page 964]]

comprehensive. In addition, the final rule 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.
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 of the final rule 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 final rule does not impact 
requirements under the CEA or Commission regulations regarding price 
discovery.
d. Sound Risk Management Practices
    The exempt DCO framework encourages sound risk management practices 
because exempt DCOs are subject to the risk management standards set 
forth in the PFMIs, which are comparable to standards imposed on 
registered DCOs.
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 final rule codifies 
the exemption process for non-U.S. clearing organizations that will 
permit them to clear swap transactions for U.S. persons on a 
proprietary basis when such clearing organizations meet the eligibility 
requirements and conditions included therein, thus promoting 
transparency and consistency. Furthermore, the final rule might 
encourage international comity by deferring, under certain conditions, 
to regulators in other jurisdictions in the oversight of non-U.S. 
clearing organizations. The Commission expects that such regulators 
will defer to the Commission in the supervision and regulation of 
registered DCOs organized in the United States, thereby reducing the 
regulatory and compliance burdens to which such DCOs are subject.
4. Consideration of Alternatives
    The final rule does not permit U.S. customers to clear through 
exempt DCOs. As the Commission noted in the 2018 Proposal, there is 
uncertainty as to how swaps customer funds would be treated under the 
U.S. Bankruptcy Code if the customer's swaps are cleared at an exempt 
DCO.\60\ However, the Commission did request comment as to whether the 
Commission should consider permitting an exempt DCO to clear swaps for 
U.S. customers.\61\
---------------------------------------------------------------------------

    \60\ 2018 Proposal, 83 FR at 39926.
    \61\ 2018 Proposal, 83 FR at 39930.
---------------------------------------------------------------------------

    In response, three commenters expressed support. ISDA stated that 
it ``strongly believes'' that the Commission should permit exempt DCOs 
to clear swaps for customers. ASX argued that it would be beneficial to 
allow U.S. customers to access the broadest possible range of clearing 
organizations, which would provide them with flexibility and choice in 
accessing the best commercial solutions for the products that they use. 
JSCC recommended that the Commission consider allowing U.S. customers 
to access exempt DCOs through non-U.S. clearing members that are not 
required to register as an 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, and if the home regulatory authority maintains appropriate 
cooperative arrangements with the Commission.
    Similarly, in response to the 2019 Proposal, several commenters, 
including ASX, FIA, SIFMA, JSCC, and CCP12, proposed a regime for swaps 
similar to that for futures, including a clearing structure in which a 
U.S. customer clears through an 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. The commenters argued 
that such a regime could potentially provide new business opportunities 
to FCMs while allowing customers to save money and improve efficiency 
by using the same FCMs to clear at both registered and exempt DCOs. 
This would permit customers to avoid the time and expense of executing 
documentation with multiple intermediaries, for example, and to realize 
operational efficiencies such as netting and offsetting within a single 
intermediary, receiving fewer position statements, and managing fewer 
cash transfers. The commenters noted that customers would also benefit 
from the various customer protections required of FCMs, such as those 
pertaining to disclosure, net capital, and reporting.
    The Commission notes that, based on data submitted pursuant to 
Sec.  39.19(c), as of October 2020, approximately 70 percent of initial 
margin at registered DCOs was in customer accounts, with the remainder 
in house (proprietary) accounts. It is likely that the majority of 
initial margin at exempt DCOs or clearing organizations that may seek 
an exemption is also in customer accounts. Thus, limiting clearing by 
U.S. persons at exempt DCOs to proprietary swaps will likely 
significantly reduce the number of U.S. persons who can benefit from 
clearing at exempt DCOs and may reduce the incentive for eligible 
clearing organizations to seek exemption.\62\ However, there is 
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. 
The Commission is not adopting these alternatives at this time, but 
continues to weigh these risks against the potential benefits to U.S. 
customers and FCMs.
---------------------------------------------------------------------------

    \62\ Clearing organizations could be incentivized to seek DCO 
registration instead, either under the Commission's original 
framework or the recently adopted Alternative Compliance framework.
---------------------------------------------------------------------------

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.\63\
---------------------------------------------------------------------------

    \63\ 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 
requested, but did not receive, any comments on whether the proposed 
rulemaking implicated 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 final rule may promote greater competition 
in swap clearing because it might encourage more non-U.S. clearing 
organizations to seek an exemption from registration to clear the same 
types of swaps for U.S. persons that are currently cleared by 
registered DCOs.
    The Commission has not identified any less anticompetitive means of 
achieving the purposes of the CEA. The Commission requested, but did 
not receive, any comments on whether there are less anticompetitive 
means of achieving the relevant purposes of the CEA that would 
otherwise be served by adopting the final rule.

[[Page 965]]

List of Subjects

17 CFR Part 39

    Clearing, 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 amends 17 CFR chapter I as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

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

    Authority:  7 U.S.C. 2, 6(c), 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
2. Revise Sec.  39.1 to read as follows:


Sec.  39.1   Scope.

    The provisions of this subpart A apply to any derivatives clearing 
organization, as defined under section 1a(15) of the Act and Sec.  1.3 
of this chapter, that is registered or is required to register with the 
Commission as a derivatives clearing organization pursuant to section 
5b(a) of the Act, or that is applying for an exemption from 
registration pursuant to section 5b(h) of the Act.

0
3. In Sec.  39.2, add definitions of the terms ``Exempt derivatives 
clearing organization,'' ``Home country,'' ``Home country regulator,'' 
and ``Principles for Financial Market Infrastructures,'' in 
alphabetical order, and amend the definition of ``Good regulatory 
standing,'' to read as follows:


Sec.  39.2   Definitions.

* * * * *
    Exempt derivatives clearing organization means a derivatives 
clearing organization that the Commission has exempted from 
registration under section 5b(a) of the Act, pursuant to section 5b(h) 
of the Act and Sec.  39.6.
* * * * *
    Good regulatory standing means, with respect to a derivatives 
clearing organization that is organized outside of the United States, 
and is licensed, registered, or otherwise authorized to act as a 
clearing organization in its home country, that:
    (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 
subject to compliance with subpart D 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 Payment and Settlement Systems and the Technical 
Committee of the International Organization of Securities Commissions 
in April 2012.
* * * * *

0
4. Add Sec.  39.6 to read as follows:


Sec.  39.6   Exemption from derivatives clearing organization 
registration.

    (a) Eligibility for exemption. A derivatives clearing organization 
that is organized outside of the United States shall be eligible for an 
exemption from registration as a derivatives clearing organization for 
the clearing of swaps for U.S. persons, and thereby exempt from 
compliance with provisions of the Act and Commission regulations 
applicable to derivatives clearing organizations, if:
    (1) The derivatives clearing organization is subject to comparable, 
comprehensive supervision and regulation by a home country regulator as 
demonstrated by the following:
    (i) The derivatives clearing organization is organized in a 
jurisdiction in which a home country regulator applies to the 
derivatives clearing organization, on an ongoing basis, statutes, 
rules, regulations, policies, or a combination thereof that, taken 
together, are consistent with the Principles for Financial Market 
Infrastructures;
    (ii) The derivatives clearing organization observes the Principles 
for Financial Market Infrastructures in all material respects; and
    (iii) The derivatives clearing organization is in good regulatory 
standing in its home country; and
    (2) A memorandum of understanding or similar arrangement 
satisfactory to the Commission is in effect between the Commission and 
the derivatives clearing organization's home country regulator, 
pursuant to which, among other things, the home country regulator 
agrees to provide to the Commission any information that the Commission 
deems necessary to evaluate the initial and continued eligibility of 
the derivatives clearing organization for exemption from registration 
or to review its compliance with any conditions of such exemption.
    (b) Conditions of exemption. An exemption from registration as a 
derivatives clearing organization shall be subject to any conditions 
the Commission may prescribe including, but not limited to:
    (1) Clearing by or for U.S. persons and futures commission 
merchants. The exempt derivatives clearing organization shall have 
rules that limit swaps clearing services for U.S. persons and futures 
commission merchants to the following circumstances:
    (i) A U.S. person that is a clearing member of the exempt 
derivatives clearing organization may clear swaps for itself and those 
persons identified in the definition of ``proprietary account'' set 
forth in Sec.  1.3 of this chapter;
    (ii) A non-U.S. person that is a clearing member of the exempt 
derivatives clearing organization may clear swaps for any affiliated 
U.S. person identified in the definition of ``proprietary'' account set 
forth in Sec.  1.3 of this chapter; and
    (iii) An entity that is registered with the Commission as a futures 
commission merchant may be a clearing member of the exempt derivatives

[[Page 966]]

clearing organization, or otherwise maintain an account with an 
affiliated broker that is a clearing member, for the purpose of 
clearing swaps only for itself and those persons identified in the 
definition of ``proprietary account'' set forth in Sec.  1.3 of this 
chapter; and
    (2) 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.
    (3) Consent to jurisdiction; designation of agent for service of 
process. The exempt derivatives clearing organization shall:
    (i) Consent to jurisdiction in the United States;
    (ii) Designate, authorize, and identify to the Commission, an agent 
in the United States who shall accept any notice or service of process, 
pleadings, or other documents, including any summons, complaint, order, 
subpoena, request for information, or any other written or electronic 
documentation or correspondence issued by or on behalf of the 
Commission or the United States Department of Justice to the exempt 
derivatives clearing organization, in connection with any actions or 
proceedings brought against, or investigations relating to, the exempt 
derivatives clearing organization or any U.S. person or futures 
commission merchant that is a clearing member, or that clears swaps 
through a clearing member, of the exempt derivatives clearing 
organization; and
    (iii) Promptly inform the Commission of any change in its 
designated and authorized agent.
    (4) Compliance. The exempt derivatives clearing organization shall 
comply, and shall demonstrate compliance as requested by the 
Commission, with any condition of its exemption.
    (5) Inspection of books and records. The exempt derivatives 
clearing organization shall make all documents, books, records, 
reports, and other information related to its operation as an exempt 
derivatives clearing organization open to inspection and copying by any 
representative of the Commission; and in response to a request by any 
representative of the Commission, the exempt derivatives clearing 
organization shall, promptly and in the form specified, make the 
requested books and records available and provide them directly to 
Commission representatives.
    (6) Observance of the Principles for Financial Market 
Infrastructures. On an annual basis, within 60 days following the end 
of its fiscal year, the exempt derivatives clearing organization shall 
provide to the Commission a certification that it continues to observe 
the Principles for Financial Market Infrastructures in all material 
respects. 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.
    (7) 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.
    (8) 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).
    (2) Each exempt derivatives clearing organization shall provide to 
the Commission the following information:
    (i) A report compiled as of the end of each trading day and 
submitted to the Commission by 10:00 a.m. U.S. Central time on the 
following business day, containing:
    (A) Initial margin requirements and initial margin on deposit for 
each U.S. person, with respect to swaps, provided however if a clearing 
member margins on a portfolio basis its own positions and the positions 
of its affiliates, and either the clearing member or any of its 
affiliates is a U.S. person, the exempt derivatives clearing 
organization shall report initial margin on deposit for all such 
positions on a combined basis for each such clearing member; and
    (B) Daily variation margin, separately listing the mark-to-market 
amount collected from or paid to each U.S. person, with respect to 
swaps; provided, however, if a clearing member margins on a portfolio 
basis its own positions and the positions of its affiliates, and either 
the clearing member or any of its affiliates is a U.S. person, the 
exempt derivatives clearing organization shall separately list the 
mark-to-market amount collected from or paid to each such clearing 
member, on a combined basis.
    (ii) A report compiled as of the last day of each fiscal quarter of 
the exempt derivatives clearing organization and submitted to the 
Commission no later than 17 business days after the end of the exempt 
derivatives clearing organization's fiscal quarter, containing:
    (A) The aggregate clearing volume of U.S. persons during the fiscal 
quarter, with respect to swaps. If a clearing member is a U.S. person, 
the volume figure shall include the transactions of the clearing member 
and all affiliates. If a clearing member is not a U.S. person, the 
volume figure shall include only transactions of affiliates that are 
U.S. persons.
    (B) The average open interest of U.S. persons during the fiscal 
quarter, with respect to swaps. If a clearing member is a U.S. person, 
the open interest figure shall include the positions of the clearing 
member and all affiliates. If a clearing member is not a U.S. person, 
the open interest figure shall include only positions of affiliates 
that are U.S. persons.
    (C) A list of U.S. persons and futures commission merchants that 
are either clearing members or affiliates of any clearing member, with 
respect to the

[[Page 967]]

clearing of swaps, as of the last day of the fiscal quarter.
    (iii) Prompt notice regarding any change in the home country 
regulatory regime that is material to the exempt derivatives clearing 
organization's continuing observance of the Principles for Financial 
Market Infrastructures or 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 U.S. person or futures 
commission merchant clearing swaps, with such event of default 
determined in accordance with the rules of the exempt derivatives 
clearing organization, immediate notice of the default including the 
name of the U.S. person or futures commission merchant clearing swaps, 
a list of the positions held by the U.S. person or futures commission 
merchant, and the amount of the U.S. person's or futures commission 
merchant's financial obligation; and
    (viii) Notice of action taken against a U.S. person or futures 
commission merchant clearing swaps 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 an exempt derivatives 
clearing organization accepts for clearing a swap that has been 
reported to a swap data repository pursuant to part 45 of this chapter, 
the exempt derivatives clearing organization shall report to a swap 
data repository data regarding the two swaps resulting from the 
novation of the original swap. The exempt derivatives clearing 
organization shall also report the termination of the original swap 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 counterparties to the original swap.
    (e) Application procedures. (1) An entity seeking to be exempt from 
registration as a derivatives clearing organization shall file an 
application for exemption with the Secretary of the Commission in the 
format and manner specified by the Commission. The Commission will 
review the application for exemption and may approve or deny the 
application or, if deemed appropriate, exempt the applicant from 
registration as a derivatives clearing organization subject to 
conditions in addition to those set forth in paragraph (b) of this 
section.
    (2) Application. An applicant for exemption from registration as a 
derivatives clearing organization shall submit to the Commission the 
information and documentation described in this section. Such 
information and documentation shall be clearly labeled as outlined in 
this section. The Commission will not commence processing an 
application unless the applicant has filed a complete application. Upon 
its own initiative, an applicant may file with its completed 
application for exemption additional information that may be necessary 
or helpful to the Commission in processing the application. The 
application shall include:
    (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 copy of the applicant's rules that meet the requirements of 
paragraphs (b)(2) and (d) of this section, as applicable; and
    (viii) The applicant's consent to jurisdiction in the United 
States, and the name and address of the applicant's designated agent in 
the United States, pursuant to paragraph (b)(3) of this section.
    (3) Submission of supplemental information. At any time during its 
review of the application for exemption from registration as a 
derivatives clearing organization, the Commission may request that the 
applicant submit supplemental information in order for the Commission 
to process the application, and the applicant shall file such 
supplemental information in the

[[Page 968]]

format and manner specified by the Commission.
    (4) Amendments to pending application. An applicant for exemption 
from registration as a derivatives clearing organization shall promptly 
amend its application if it discovers a material omission or error, or 
if there is a material change in the information provided to the 
Commission in the application or other information provided in 
connection with the application.
    (5) Public information. The following sections of an application 
for exemption from registration as a derivatives clearing organization 
will be public: The cover letter set forth in paragraph (e)(2)(i) of 
this section; the documentation required in paragraphs (e)(2)(iii) and 
(e)(2)(v) of this section; rules that meet the requirements of 
paragraphs (b)(2) and (d) of this section, as applicable; and any other 
part of the application not covered by a request for confidential 
treatment, subject to Sec.  145.9 of this chapter.
    (f) Modification 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; or
    (ii) The exempt derivatives clearing organization is subject to 
comparable, comprehensive supervision and regulation by its home 
country regulator.
    (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 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.

0
5. Revise Sec.  39.9 to read as follows:


Sec.  39.9   Scope.

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

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

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

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


0
7. Amend Sec.  140.94 by:
0
a. Redesignating paragraphs (c)(4) through (13) as paragraphs (c)(5) 
through (14); and
0
b. Adding new paragraph (c)(4).
    The addition reads 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) * * *
    (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 November 25, 2020, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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


[[Page 969]]



Appendices 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 Tarbert and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Support of Chairman Heath P. Tarbert

    We are voting to approve a rule proposed in 2018 that codifies 
existing staff guidance by which the CFTC exempts derivatives 
clearing organizations (DCOs) from registration for the clearing of 
swaps.\1\ Pursuant to that guidance, we have exempted four 
clearinghouses that we determined are subject to ``comparable, 
comprehensive supervision and regulation'' by the clearing 
organization's home country regulator.\2\ Codifying this framework 
through a notice-and-comment rulemaking is, frankly, good 
government. And doing so is in keeping with my recent directive on 
the use of staff letters and guidance, in which I noted that staff 
guidance and letters should supplement rulemakings, rather than 
themselves function as rules.\3\ This approach has many benefits, 
including providing increased transparency. It also furthers our 
strategic objective of enhancing the regulatory experience for 
market participants at home and abroad.
---------------------------------------------------------------------------

    \1\ See Exemption From Derivatives Clearing Organization 
Registration, 83 FR 39923 (Aug. 13, 2018). The Dodd-Frank Wall 
Street Reform and Consumer Protection Act, Public Law 111-203, 124 
Stat. 1376, amended the Commodity Exchange Act (``CEA'') to permit 
the Commission to exempt conditionally or unconditionally a DCO from 
registration for the clearing of swaps if the Commission determines 
that the clearing organization is subject to ``comparable, 
comprehensive supervision and regulation'' by appropriate government 
authorities in the clearing organization's home country. See Section 
5b(a) of the CEA, 7 U.S.C. 7a-1(a).
    \2\ See Amended Order of Exemption from Registration (Jan. 28, 
2016) (ASX Clear (Futures) Pty Limited), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexemption.pdf; Amended Order of 
Exemption from DCO Registration (May 15, 2017) (Japan Securities 
Clearing Corporation), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf; Order of Exemption from DCO 
Registration (Oct. 26, 2015) (Korea Exchange, Inc.), available at: 
https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-15.pdf; and Order of 
Exemption from DCO Registration (Dec. 21, 2015) (OTC Clearing Hong 
Kong Limited), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf.
    \3\ See Directive of Chairman Heath P. Tarbert on the Use of 
Staff Letters and Guidance (Oct. 27, 2020), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbetstatement102720.
---------------------------------------------------------------------------

    This rulemaking is a modest first step. As is the case in the 
existing staff guidance, the rule does not permit exempt DCOs to 
clear for U.S. customers, but rather only for proprietary swap 
transactions for U.S. clearing members and futures commission 
merchants (FCMs). It reflects the CFTC's continued efforts to foster 
cross-border cooperation and show deference to home country 
regulation that is deemed comparable to our own regulations.
    In 2019, the Commission issued a supplemental proposal that 
would have gone further and permitted exempt DCOs to clear swaps for 
U.S. eligible contract participants (ECPs) through foreign 
intermediaries.\4\ I would have supported finalizing that proposal 
for two reasons. First, the proposal would have provided greater 
flexibility and choice to our most sophisticated U.S. customers--
ECPs--to access swaps cleared at non-U.S. clearinghouses. This would 
have given these sophisticated counterparties access to foreign-
currency denominated instruments traded overseas that would enable 
them to hedge their various risks on a global basis. Second, 
exempting clearinghouses that do not pose a substantial risk to the 
U.S. financial system is consistent with principles of international 
comity.
---------------------------------------------------------------------------

    \4\ See Exemption From Derivatives Clearing Organization 
Registration, 84 FR 35456 (July 23, 2019).
---------------------------------------------------------------------------

    Because we have not worked through all the issues raised by the 
2019 supplemental proposal to the satisfaction of our Commission, 
today we are adopting only the 2018 proposal. Nonetheless, I support 
continued discussion on whether to permit Exempt DCOs additionally 
to clear certain non-U.S.-dollar denominated swaps for U.S. 
customers who are ECPs, either directly through foreign 
intermediaries or through U.S. FCMs. Although registration as a 
DCO--under either our traditional or recently-established 
alternative framework \5\--should be the preferred route for most 
non-U.S. clearinghouses, there are likely circumstances where U.S. 
customers would benefit from access to additional risk-mitigating 
instruments offered overseas.
---------------------------------------------------------------------------

    \5\ See Registration With Alternative Compliance for Non-U.S. 
Derivatives Clearing Organizations, 85 FR 67160 (Oct. 21, 2020).
---------------------------------------------------------------------------

Appendix 3--Supporting Statement of Commissioner Brian D. Quintenz

    I support today's final rule to codify the CFTC's existing 
practice of exempting non-U.S. derivatives clearing organizations 
(DCOs) from registration, pursuant to a provision of the Commodity 
Exchange Act that allows for U.S. swap market participants to access 
comparably regulated foreign DCOs.\1\ That provision authorizes the 
Commission to defer to its counterparts abroad, which I believe 
properly conserves the Commission's resources and enables firms to 
avoid duplicative regulation, while providing U.S. market 
participants with greater choice. I am proud that today's final rule 
provides yet another example of the CFTC deferring to foreign 
regulators that provide comparable regulation and supervision. 
During my tenure as a Commissioner, the CFTC has properly provided 
such deference in many areas, including swap dealer (SD) 
registration,\2\ uncleared swap margin requirements,\3\ swap 
execution facilities (SEFs),\4\ registered DCOs,\5\ and foreign 
futures.\6\ Like these other actions, today's final rule holds 
exempt DCO to a high regulatory standard. Under the final rule, a 
DCO is only eligible for an exemption if its home country regulator 
ensures the clearinghouse complies with rules consistent with the 
internationally accepted ``Principles for Financial Market 
Infrastructures'' (PFMIs) issued by CPMI-IOSCO.\7\ Moreover, the 
exempt DCO must regularly provide the CFTC with margin information 
concerning U.S. clearing members, among other key information.\8\
---------------------------------------------------------------------------

    \1\ Sec. 5b(h) of the Commodity Exchange Act.
    \2\ Cross-Border Application of the Registration Thresholds and 
Certain Requirements Applicable to SDs and Major Swap Participants 
(MSPs), 85 FR 56924 (Sept. 14, 2020).
    \3\ Comparability Determination for Australia: Margin 
Requirements for Uncleared Swaps for SDs and MSPs, 84 FR 12908 (Apr. 
3, 2019); Amendment to Comparability Determination for Japan: Margin 
Requirements for Uncleared Swaps for SDs and MSPs, 84 FR 12074 (Apr. 
1, 2019).
    \4\ Amendment to Order of Exemption from SEF registration for 
Recognized Market Operators authorized in Singapore, Nov. 2, 2020, 
available at: https://www.cftc.gov/PressRoom/PressReleases/8301-20; 
Amendment to Order of Exemption from SEF registration for E.U. 
multilateral trading facilities and organized trading facilities, 
July 23, 2020, available at: https://www.cftc.gov/PressRoom/PressReleases/8211-20; Order of Exemption from SEF registration for 
Japanese derivatives trading facilities, July 11, 2019, available 
at: https://www.cftc.gov/PressRoom/PressReleases/7968-19.
    \5\ Registration with Alternative Compliance for Non-U.S. DCOs, 
85 FR 67160 (Oct. 21, 2020).
    \6\ Regulation 30.10 orders issued to the Bombay Stock Exchange, 
National Stock Exchange Int'l Financial Service Centre Ltd. [India], 
Montreal Exchange, NZX Ltd. [New Zealand], and UBS AG [Switzerland], 
Nov. 2, 2020, available at: https://www.cftc.gov/PressRoom/PressReleases/8300-20.
    \7\ Reg. 39.6(a)(1)(i).
    \8\ Reg. 39.6(c).
---------------------------------------------------------------------------

    I note that under the final rule, an exempt DCO will only be 
authorized to clear the proprietary positions of its U.S. clearing 
members. I had supported and still support the Commission's 2019 
proposal that would have expanded the exempt DCO framework to allow 
for U.S. customers, like asset managers and insurance companies, to 
clear at exempt DCOs directly to better manage and hedge their 
risk.\9\ I continue to believe that all participants meeting the 
Commodity Exchange Act's definition of ``eligible contract 
participant'' \10\ have the resources, sophistication, and 
incentives to adequately assess how customer protections provided by 
an exempt DCO may differ from protections established by CFTC 
regulations for registered DCOs. The CFTC should provide these 
market participants with the choice befitting their status, not only 
as sophisticated market participants, but as complex international 
organizations who

[[Page 970]]

need access to foreign markets, products, and a choice of liquidity 
pools. I hope the Commission will continue to consider the best way 
to expand the exempt DCO framework to allow for U.S. customer 
clearing.
---------------------------------------------------------------------------

    \9\ Exemption from DCO Registration, 84 FR 35456 (July 23, 
2019); Opening Statement of Commissioner Brian Quintenz before the 
Open Commission Meeting on July 11, 2019, available at:
    https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement071119.
    \10\ Sec. 1a(18) of the Commodity Exchange Act.
---------------------------------------------------------------------------

Appendix 4--Concurring Statement of Commissioner Rostin Behnam

    I respectfully concur with the Commodity Futures Trading 
Commission's final rule regarding policies and procedures that it 
will follow with respect to granting exemptions from derivatives 
clearing organization (DCO) registration pursuant to authority under 
section 5b(h) of the Commodity Exchange Act (CEA) \1\ (the ``Final 
Rule''). The Final Rule, with limited exceptions, codifies the 
policies and procedures followed by the Commission in issuing the 
four exempt DCO orders which currently limit clearing organizations 
organized outside of the United States to clearing only proprietary 
swap positions of U.S. persons and futures commission merchants, and 
not customer positions (``exempt DCOs''). Critical to my vote today, 
the Final Rule prohibits the clearing of U.S. customer positions at 
an exempt DCO.\2\
---------------------------------------------------------------------------

    \1\ 7 U.S.C. 7a-1(a).
    \2\ See Final Rule at II.B.2.a. and Sec.  39.6(b)(1).
---------------------------------------------------------------------------

    I supported the Commission's 2018 notice of proposed rulemaking 
\3\ as a means to promote transparency and accountability as well as 
a positive step towards increased cross-border cooperation and 
deference to our foreign regulatory counterparts. However, I was 
unable to support the Commission's 2019 supplement to the 2018 
Proposal,\4\ which proposed permitting exempt DCOs to clear swaps 
for U.S. customers through foreign intermediaries that would be 
wholly outside the Commission's direct regulation and oversight. As 
articulated more fully in my dissent,\5\ the 2019 Supplemental 
Proposal was not the product of internal consensus and its brief 
history and questionable timeline signaled a lack of appropriate 
scrutiny and evaluation of the critical financial, market, consumer 
protection, and systemic risk issues raised by diverging from the 
customer protection model provided by the CEA and U.S. Bankruptcy 
Code. It was and remains my view that if the Commission believes it 
is appropriate 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 consistent with the Administrative Procedure Act.\6\ As 
the Commission is declining to adopt the 2019 Supplemental Proposal 
at this time, I am comfortable with supporting the Final Rule.
---------------------------------------------------------------------------

    \3\ Exemption from Derivatives Clearing Organization 
Registration, 83 FR 39923 (proposed Aug. 13, 2018) (the ``2018 
Proposal'').
    \4\ Exemption from Derivatives Clearing Organization 
Registration, 84 FR 35456 (proposed July 23, 2019) (the ``2019 
Supplemental Proposal'').
    \5\ See Appendix 4--Dissenting Statement of Commissioner Rostin 
Behnam, Supplemental Proposal, 84 FR at 35476-35478.
    \6\ Id. at 35476.
---------------------------------------------------------------------------

    One area in which I will remain vigilant is with regard to the 
Commission's reliance on the Principles for Financial Market 
Infrastructures (PFMI) framework as the benchmark for making the 
comparability determination with respect to a foreign jurisdiction's 
supervisory and regulatory scheme required by CEA section 5b(h). I 
believe that the Commission's reliance on the PFMIs as providing a 
comprehensive framework for DCO supervision that is comparable to 
the statutory and regulatory requirements applicable to registered 
DCOs, with a particular focus on the DCO Core Principles,\7\ is 
within its discretion under CEA section 5b(h). However, I am 
concerned that the Commission's decision to limit its reference to 
the PFMIs as they existed in 2012 may lead to untenable divergence 
in the future should the Commission determine to incorporate 
subsequent amendments or revisions to the PFMIs or related 
interpretations and guidance into its own regulatory and supervisory 
DCO oversight. Alternatively, I am concerned that maintaining a 
static definition of the PFMIs to provide exempt DCOs with greater 
regulatory certainty with regard to their ongoing eligibility for 
the exemption could negatively impact the Commission's consideration 
regarding whether to adopt or incorporate future changes to the 
PFMIs or related interpretations and guidance into its regulatory 
regime. However, I am reassured that the Commission explicitly 
reserves the ability to incorporate future amendments to the PFMIs 
into the Final Rule's PFMI definition in Sec.  39.2. As well, 
because the Commission also maintains broad discretion to condition 
an exemption on any facts and circumstances it deems relevant under 
new Sec.  39.6(b)(8), I believe the Commission has clear discretion 
and authority to make appropriate changes with regard to its 
consideration of exempt DCO eligibility criteria and ongoing 
compliance to maintain comprehensive application of and adherence to 
comparable regulatory and supervisory standards.
---------------------------------------------------------------------------

    \7\ See CEA section 5b(c)(2), 7 U.S.C. 7a-1(c)(2).
---------------------------------------------------------------------------

    My decision to support the Final Rule is largely based on the 
Commission's determination to move forward with the 2018 Proposal 
without adopting the 2019 Supplemental Proposal. However, I remain 
supportive of the Commission's endeavor to explore ways to adapt 
and--if appropriate--seek to adjust 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. I remain open and look forward to the possibility of 
further discussing the regulatory and policy issues raised during 
this rulemaking.

Appendix 5--Statement of Commissioner Dan M. Berkovitz

    I am voting for the final rule establishing procedures for 
granting registration exemptions to foreign derivatives clearing 
organizations (``Exempt DCOs'') to clear swaps for certain U.S. 
persons (``Final Rule''). The Final Rule exercises the exemptive 
authority provided by Congress in the Commodity Exchange Act 
(``CEA'') \1\ in a limited, pragmatic manner that will provide U.S. 
financial services firms that operate globally with access to 
foreign clearinghouses and cleared swaps in order to more 
effectively manage the risks arising from their global operations.
---------------------------------------------------------------------------

    \1\ Commodity Exchange Act section 5b(h).
---------------------------------------------------------------------------

    In July of last year, I dissented from the proposed exempt DCO 
rule, because it also would have permitted Exempt DCOs to clear for 
U.S. customers, but only through foreign intermediaries. In doing 
so, the proposed rule would have subjected U.S. customer accounts to 
foreign bankruptcy and other regulations, promoted the use of 
foreign intermediaries at the expense of U.S. firms, and exceeded 
this agency's limited exemptive authority.\2\ Enabling U.S. 
customers to clear swaps and amass large positions in non-U.S. 
markets in this manner would not only pose risks to those customers, 
but also could have presented systemic risks to the U.S. financial 
system.
---------------------------------------------------------------------------

    \2\ See Dissenting Statement of Commissioner Berkovitz, 84 FR 
35456 at 35479 (July 23, 2019). As discussed in my prior statement, 
in addition to my substantive concerns, the proposed rule would have 
relied on CEA Section 4(c) exemptive 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. This reliance would have exceeded the clearly 
limited authority granted under Section 4(c). With the elimination 
of customer clearing in the Final Rule, the Commission no longer 
needs to resort to an overly expansive reading of Section 4(c) 
authority to adopt the Final Rule.
---------------------------------------------------------------------------

    In response to commenters who expressed similar objections, the 
Final Rule does not contain the concerning provisions. Neither 
registered FCMs nor their foreign intermediary counterparts can 
clear for U.S. person customers. With respect to clearing for U.S. 
persons, the Final Rule restricts clearing by an Exempt DCO to only 
U.S. firms that become clearing members of the Exempt DCO along with 
certain of their affiliates and persons associated with those firms 
in the manner identified in the definition of ``proprietary 
account'' in section 1.3 of our regulations. In addition, registered 
FCMs, including U.S. firms, can also clear at exempt DCOs, but only 
for themselves and persons associated with the FCMs in the manner 
provided in the definition of ``proprietary account.'' These 
sophisticated market participants are well equipped to assess the 
risks of clearing swaps under the foreign regime. Furthermore, by 
requiring that they be members of the Exempt DCO (or clear through 
an affiliate that is a member), the Commission assures that such 
entities have taken affirmative actions to assess and accept those 
risks. The margin funds and related obligations of these persons 
must also be segregated from customer funds held by registered FCMs 
thereby minimizing any impact on U.S. customers of the cleared 
positions at Exempt DCOs. These limitations are a reasonable, 
practical approach to implementing the authority provided to the 
Commission to exempt certain foreign DCOs without adding uncertain 
risk into our system of fully registered DCOs and FCMs.

[[Page 971]]

    Furthermore, the Commission has, on an ad hoc basis, previously 
granted registration exemptions to four foreign clearinghouses 
limited to proprietary swap positions with effectively the same 
conditions and limitations as provided in the Final Rule. The Final 
Rule will therefore maintain consistency with the existing 
exemptions.
    The Final Rule also contains fairly detailed daily, quarterly, 
and annual reporting requirements, as well as special event notice 
requirements. These requirements allow the Commission to monitor 
U.S. person clearing activity at the Exempt DCO on a daily basis and 
keep the Commission informed of any material changes to the 
regulatory and financial status of the Exempt DCO in its home 
jurisdiction. While the Exempt DCOs will be able to operate under 
the compliance regime and oversight of its home country regulator, 
the CFTC can maintain limited, but up-to-date oversight of the 
activities that are relevant for U.S. market participants and that 
could have an impact on our financial system.
    As noted above, the Final Rule does not permit registered FCMs 
to clear U.S. customer swaps at Exempt DCOs. In the Commission's 
initial 2018 proposal to establish a framework for Exempt DCOs, the 
Commission proposed this prohibition. 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 4d(f)(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.\3\
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    \3\ Exemption from Derivatives Clearing Organization 
Registration, 83 FR 39923, 39926 (proposed Aug. 13, 2018).
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    The Final Rule notes that the Commission may revisit the 
prohibition on U.S. customer clearing in the future. While I agree 
with the outcome in the Final Rule as to customer clearing given the 
Commission's interpretation of CEA Section 4d(f), if the above 
interpretation changes, whether by a change to the statute or by 
other appropriate means, I could support a further amendment of the 
Final Rule. Any such change should place U.S. FCMs on an equal 
footing with their foreign counterparts when competing for U.S. 
customer clearing at Exempt DCOs. In addition, such a change should 
not create an advantage for unregistered Exempt DCOs over registered 
DCOs who comply with all of our regulations.
    Finally, I note that CEA Section 5b(h) provides for the 
registration exemption if the foreign DCO is subject to 
``comparable, comprehensive supervision and home country 
regulation.'' Under the Final Rule, to demonstrate comparability, 
the DCO must be subject to home country regulations that are 
consistent with, and the DCO must ``observe in all material 
respects,'' the ``Principles for Financial Market Infrastructures'' 
\4\ (``PFMIs'') applicable to central counterparties.
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    \4\ See Committee on Payment and Settlement Systems and the 
Technical Committee of the International Organization of Securities 
Commissions, Principles for financial market infrastructures (Apr. 
2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf.
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    Several commenters objected to this approach to comparability 
determinations on a number of grounds. These commenters stated that 
the Commission should not substitute a commitment to adhere to the 
PFMIs for its own examination and assessment as to the comparability 
and comprehensiveness of the actual foreign regulations. As the 
PFMIs are only general principles, even when the PFMIs are 
implemented, material differences may exist between the PFMI-
compliant regime and the Commission's DCO core principles and 
regulations. Commenters further argued that Congress intended for 
the Commission to analyze comparability only by direct comparison to 
the CTFC's laws and regulations.
    Over the past two years, I have expressed concerns over the 
erosion of the Commission's standards and role in finding 
comparability for various CFTC regulations. The Commission's 
approach has been increasingly deferential to other regulators, 
which has the potential to permit the importation of increased risks 
into the U.S. financial system.
    In this regard, I too have some concerns about the use of the 
PFMIs as a standard for comparability. However, for the purpose of 
granting DCO registration exemptions, I believe the approach taken 
in the Final Rule is reasonable. I have consistently said that 
comparability determinations should involve a detailed examination 
of the other jurisdiction's standards, but also should be outcomes 
based. Regulators around the world take substantively different 
approaches to regulating DCOs, but that does not mean any one 
approach is necessarily better or worse than another as to its 
expected outcome. The PFMIs tend to be more general in nature than 
the DCO core principles and regulations in the CEA and CFTC 
regulations. However, regarding the general outcome of DCO 
regulation, the PFMIs--which the CFTC has contributed to and 
incorporated in regulation \5\--are consistent with our DCO core 
principles. Furthermore, given the limited scope of the Final Rule 
in that it applies only to clearing of proprietary positions, using 
the PFMIs to find comparability is not unwarranted. Finally, the 
Final Rule allows for the Commission to assess the extent to which 
the home country regulations are consistent with the PFMIs and the 
extent to which the applying DCO is observing the PFMIs. As such, I 
believe the approach taken in the Final Rule is reasonable.
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    \5\ See 17 CFR 39.30, 39.40.
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    In conclusion, the Final Rule creates a limited, practical set 
of policies and procedures for granting exemptions from registration 
for foreign DCOs. The Exempt DCOs can only clear swaps for U.S. 
persons who are proprietary traders and who are able to assess the 
specific risks of clearing at the Exempt DCO. The U.S. customer 
accounts at registered FCMs will not be commingled with accounts 
used for Exempt DCO clearing. Finally, U.S. FCMs are not put at a 
competitive disadvantage to their foreign counterparts. For these 
reasons, I support the changes made to the proposed rule that result 
in an appropriate, codified approach to exempting foreign DCOs who 
meet appropriate standards.

[FR Doc. 2020-26527 Filed 1-6-21; 8:45 am]
BILLING CODE 6351-01-P