Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations

Federal RegisterOct 21, 2020

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 140

RIN 3038-AE87

Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (Commission) is adopting regulations that will permit derivatives clearing organizations (DCOs) organized outside of the United States (hereinafter referred to as “non-U.S. DCOs”) to be registered with the Commission yet comply with the core principles applicable to DCOs set forth in the Commodity Exchange Act (CEA) through compliance with their home country regulatory regimes, subject to certain conditions and limitations. The Commission is also amending certain related delegation provisions in its regulations.

DATES:

This rule is effective November 20, 2020.

FOR FURTHER INFORMATION CONTACT:

Eileen A. Donovan, Deputy Director, (202) 418-5096,

edonovan@cftc.gov;

August A. Imholtz III, Special Counsel, (202) 418-5140,

aimholtz@cftc.gov;

Abigail S. Knauff, Special Counsel, (202) 418-5123,

aknauff@cftc.gov;

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,

tpolley@cftc.gov;

Joe Opron, Special Counsel, (312) 596-0653,

jopron@cftc.gov;

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. DCO Registration Framework

C. Overview of the New Requirements

D. Comments on the Notice of Proposed Rulemaking

II. Amendments to Parts 39 and 140 of the Commission's Regulations

A. Regulation 39.2—Definitions

B. Regulation 39.3(a)—Application Procedures

C. Regulation 39.4—Procedures for Implementing DCO Rules and Clearing New Products

D. Regulation 39.9—Scope

E. Subpart D—Provisions Applicable to DCOs Subject to Alternative Compliance

F. Part 140—Organization, Functions, and Procedures of the Commission

G. Responses to Additional Requests for Comment

H. Additional Comments

III. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Cost-Benefit Considerations

D. Antitrust Considerations

I. Background

A. Introduction

In July 2019, the Commission proposed changes to its registration and compliance framework for DCOs that would permit a non-U.S. DCO to be registered with the Commission yet comply with the core principles applicable to DCOs set forth in the CEA (DCO Core Principles) through compliance with its home country regulatory regime, subject to certain conditions and limitations.

To implement these changes, the Commission proposed a number of amendments to part 39 of the Commission's regulations (Part 39), as well as select amendments to part 140. After considering the comments received in response to the proposal, the Commission is adopting the amendments largely as proposed.

See

Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 34819 (July 19, 2019).

The Commission has made several clarifying changes to the rule text that do not otherwise alter the substance of the rules. In addition, in light of comments received, the Commission is adding a process for current non-U.S. DCOs to avail themselves of the new compliance regime without requiring

de novo

registration, but rather by amending the DCO's registration order in accordance with § 39.3(d).

B. DCO Registration Framework

Section 5b(a) of the CEA provides that a clearing organization may not “perform the functions of a [DCO]”

with respect to futures

or swaps unless the clearing organization is registered with the Commission.

The CEA permits the Commission to exempt a non-U.S. clearing organization from registration as a DCO for the clearing of swaps if the clearing organization is “subject to comparable, comprehensive supervision and regulation” by its home country regulator.

The Commission has granted exemptions from DCO registration but so far has limited exempt DCOs to clearing only proprietary swaps for U.S. persons due to uncertainty regarding the bankruptcy treatment of funds used to margin, guarantee, or secure cleared swaps customer positions if cleared at an exempt DCO.

As a result, some non-U.S. clearing organizations have opted to register with the Commission as a DCO in order to clear swaps for customers of futures commission merchants (FCMs).

The term “derivatives clearing organization” is defined in the CEA to mean a clearing organization in general. However, for purposes of the discussion in this release, the term “DCO” refers to a Commission-registered DCO, the term “exempt DCO” refers to a derivatives clearing organization that is exempt from registration, and the term “clearing organization” refers to a clearing organization that: (a) Is neither registered nor exempt from registration with the Commission as a DCO; and (b) falls within the definition of “derivatives clearing organization” under section 1a(15) of the CEA, 7 U.S.C. 1a(15), and “clearing organization or derivatives clearing organization” under § 1.3, 17 CFR 1.3.

Section 4(a) of the CEA restricts the execution of a futures contract to a designated contract market (DCM), and § 38.601 of the Commission's regulations requires any transaction executed on or through a DCM to be cleared at a DCO.

See

7 U.S.C. 6; 17 CFR 38.601. Trades executed on or through a registered foreign board of trade must be cleared through a DCO or a clearing organization that observes the CPMI-IOSCO Principles for Financial Market Infrastructures and is in good regulatory standing in its home country jurisdiction.

See

17 CFR 48.7(d).

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.”

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.

In 2018, the Commission proposed regulations that would codify the policies and procedures that the Commission currently follows with respect to granting exemptions from DCO registration to non-U.S. clearing organizations.

See

Exemption From Derivatives Clearing Organization Registration, 83 FR 39923 (Aug. 13, 2018). On July 11, 2019, as a supplement to that proposal, the Commission proposed to permit exempt DCOs to clear swaps for U.S. customers through foreign intermediaries.

See

Exemption From Derivatives Clearing Organization Registration, 84 FR 35456 (Jul. 23, 2019). All references to exempt DCOs contained in this release relate to the existing exempt DCO regime and are not indicative of the Commission's response to comments received on either of the proposals referenced in this paragraph.

The CEA requires that, in order to register and maintain registration as a DCO, a clearing organization must comply with each of the DCO Core Principles and any requirement that the Commission imposes by rule or

regulation.

The Commission adopted the regulations in subpart B of Part 39 to implement the DCO Core Principles.

7 U.S.C. 7a-1(c)(2)(A)(i).

Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 69334 (Nov. 8, 2011).

Of the 15 DCOs currently registered with the Commission, five are organized outside of the United States.

These DCOs are also registered (or have comparable status) in their respective home countries, which means they are required to comply with the CEA and Part 39 as well as their home country regulatory regimes, and they are subject to oversight by both the Commission and their home country regulators. There are, however, meaningful differences in the extent to which these non-U.S. DCOs clear swaps for U.S. persons. For example, nearly half of the swap clearing activity at LCH Limited, if measured on the basis of required initial margin, is attributable to U.S. persons,

whereas the percentage of clearing activity generated by U.S. persons at other non-U.S. DCOs is far less. The Commission, recognizing this regulatory overlap yet mindful of its responsibilities, proposed and is adopting changes to its DCO registration and compliance framework to differentiate between DCOs organized in the United States (U.S. DCOs) and non-U.S. DCOs. The framework also distinguishes non-U.S. DCOs that do not pose substantial risk to the U.S. financial system from those that do.

The five DCOs organized outside of the United States are Eurex Clearing AG, ICE Clear Europe Ltd, ICE NGX Canada Inc., LCH Ltd, and LCH SA.

Nearly half of the total required initial margin that U.S. persons post globally in connection with cleared swaps is held at LCH Limited.

The alternative compliance framework is not available to U.S. DCOs. U.S. DCOs must comply with the CEA and all Commission regulations applicable to DCOs, including all of subparts A and B of Part 39.

In addition, any non-U.S. DCO registered to clear futures listed for trading on a DCM is not eligible for the alternative compliance regime at this time. Most non-U.S. DCOs are registered for the purpose of clearing swaps only, and as noted in the proposal, the Commission's regulatory framework already distinguishes between clearing of futures executed on a DCM, for which DCO registration is required, and clearing of foreign futures, for which it is not.

In addition, any DCO that has elected to be subject to subpart C of Part 39, or that has been designated as systemically important by the Financial Stability Oversight Council, must comply with subpart C.

Under Part 39 as now amended, a non-U.S. clearing organization that wants to clear only swaps for U.S. persons has two registration options. First, the non-U.S. clearing organization may apply for DCO registration under the existing procedures in § 39.3(a)(2) and be subject to all Commission regulations applicable to DCOs, including subpart B of Part 39. If, however, the non-U.S. clearing organization does not pose substantial risk to the U.S. financial system and meets the requirements of § 39.51, as discussed below, it now has the option to be registered and maintain registration as a DCO by relying largely on its home country regulatory regime, in lieu of full compliance with Commission regulations.

C. Overview of the New Requirements

The CEA requires a DCO to comply with the DCO Core Principles and any requirement that the Commission imposes by rule or regulation.

The CEA further provides that, subject to any rule or regulation prescribed by the Commission, a DCO has “reasonable discretion” in establishing the manner by which the DCO complies with each DCO Core Principle.

Currently, a DCO is required to comply with all of the regulations in subpart B of Part 39, which were adopted to implement the DCO Core Principles. The Commission is amending its regulations to allow a non-U.S. clearing organization that seeks to clear swaps for U.S. persons,

including FCM customers, to register as a DCO and, in most instances, comply with the applicable legal requirements in its home country as an alternative means of complying with the DCO Core Principles.

7 U.S.C. 7a-1(c)(2)(A)(i).

7 U.S.C. 7a-1(c)(2)(A)(ii).

The Commission proposes to use the interpretation of “U.S. person” as set forth in the Commission's Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292, 45316—45317 (July 26, 2013) (“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.

The Commission is promulgating the final rule pursuant to its authority in section 5b(c)(2)(A), 7 U.S.C. 7a-1(c)(2)(A). The section confers on the Commission the authority and discretion to establish requirements for meeting DCO Core Principles through rules and regulations issued pursuant to section 8a(5), 12 U.S.C. 12a(5). In exercise of that discretion, the Commission has developed an alternative compliance regime whereby a non-U.S. DCO may comply with the Core Principles through compliance with its home jurisdiction's requirements.

A non-U.S. clearing organization applying for registration as a DCO subject to alternative compliance will be eligible if: (1) The Commission determines that the clearing organization's compliance with its home country regulatory regime would satisfy the DCO Core Principles;

(2) the clearing organization is in good regulatory standing in its home country; and (3) a memorandum of understanding (MOU) or similar arrangement satisfactory to the Commission is in effect between the Commission and the clearing organization's home country regulator. Each of these requirements is described in greater detail below.

As described further below, if a non-U.S. DCO fails to demonstrate compliance with a particular DCO Core Principle, the DCO may nevertheless be able to rely on alternative compliance for those DCO Core Principles for which it is able to demonstrate compliance.

An applicant for DCO registration subject to alternative compliance will be required to file only certain exhibits of Form DCO,

including a regulatory compliance chart in which the applicant identifies the applicable, legally binding requirements in its home country that correspond with each DCO Core Principle and explains how the applicant satisfies those requirements. If the application is approved by the Commission, the DCO will be permitted to comply with its home country regulatory regime rather than the regulations in subpart B of Part 39, with the exception of § 39.15, which concerns treatment of funds, and certain regulations related to those Core Principles for which the applicant has not demonstrated that compliance with the home country requirements satisfies them. Because the DCO will be permitted to clear swaps for customers

through registered FCMs, the DCO will be required to fully comply with the Commission's customer protection requirements,

as well as the swap data reporting requirements in part 45 of the Commission's regulations. The DCO also will be required to comply with

certain ongoing and event-specific reporting requirements that are more limited in scope than the reporting requirements for existing DCOs. The eligibility criteria, conditions, and reporting requirements will be set forth in new subpart D of Part 39.

Whereas an applicant for DCO registration must file the numerous and extensive exhibits required by Form DCO, an applicant for alternative compliance will only be required to file certain exhibits.

See

Appendix A to Part 39, 17 CFR part 39, appendix A.

Section 2(e) of the CEA makes it unlawful for any person, other than an eligible contract participant, to enter into a swap unless the swap is entered into on, or subject to the rules of, a DCM. 7 U.S.C. 2(e). “Eligible contract participant” is defined in section 1a(18) of the CEA and § 1.3 of the Commission's regulations. 7 U.S.C. 1a(18); 17 CFR 1.3.

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. 7 U.S.C. 6d(f)(1). Any swaps customer funds held by a DCO are also subject to the segregation requirements of section 4d(f)(2) of the CEA and related regulations.

Assuming all other eligibility criteria continue to be met, the non-U.S. DCO will be eligible for alternative compliance unless and until its U.S. clearing activity (as measured by initial margin requirements attributable to U.S. clearing members) increases to the point that the Commission determines the DCO poses substantial risk to the U.S. financial system, as described below.

D. Comments on the Notice of Proposed Rulemaking

The Commission requested comment on the proposed rulemaking and invited commenters to provide data and analysis regarding any aspect of the proposal. The Commission received a total of 15 substantive comment letters in response.

After the initial sixty-day comment period expired, the Commission extended the comment period for an additional sixty days.

After considering the comments, the Commission is largely adopting the rule changes as proposed, for the reasons explained below. In the discussion below, the Commission highlights topics of particular interest to commenters and discusses comments that are representative of the views expressed on those topics. The discussion does not explicitly respond to every comment submitted; rather, it addresses the most significant issues raised by the proposed rulemaking and analyzes those issues in the context of specific comments.

The Commission received comment letters addressing the proposal submitted by the following: ASX Clear (Futures) Pty Ltd (ASX); Better Markets, Inc. (Better Markets); CCP12; The Clearing Corporation of India Ltd. (CCIL); Citadel; Eurex Clearing AG (Eurex); Futures Industry Association (FIA); Intercontinental Exchange, Inc. (ICE); International Swaps and Derivatives Association, Inc. (ISDA); Japan Securities Clearing Corporation (JSCC); Kermit R. Kubitz; LCH Ltd and LCH SA (LCH); Securities Industry and Financial Markets Association (SIFMA); World Federation of Exchanges (WFE); and ASX, JSCC, Korea Exchange Inc., and OTC Clearing Hong Kong Limited (“ASX, JSCC, KRX, and OTC Clear”).

See

Registration With Alternative Compliance For Non-U.S. Derivatives Clearing Organizations, 84 FR 49072 (Sept. 18, 2019).

II. Amendments to Parts 39 and 140 of the Commission's Regulations

A. Regulation 39.2—Definitions

1. Good Regulatory Standing

The Commission proposed that, to be eligible for registration with alternative compliance, a DCO would have to be in good regulatory standing in its home country. The Commission further proposed that “good regulatory standing” be defined to mean either that 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 DCO.

In connection with the proposed definition of “good regulatory standing,” the Commission also requested comment on the following question: “Although the Commission proposes to incorporate a standard of `material' non-observance in the definition, should it instead remove references to materiality, and thus capture all instances of non-observance?”

The Commission did not receive any comments on the requirement that a DCO be in good regulatory standing in its home country to be eligible for registration with alternative compliance, but several commenters addressed the definition of “good regulatory standing.” Eurex, ICE, and CCIL supported the definition's standard of “material” non-observance. In contrast, Better Markets argued that the definition does not provide sufficient assurance of the DCO's compliance with relevant home country regulations because it allows non-U.S. DCOs that have been found non-compliant with certain home country regulations to maintain good regulatory standing. Better Markets argued that a non-U.S. DCO should be required to secure a representation from its regulator that it remains in good regulatory standing, without allowing for “material non-observance” of applicable law when that non-observance is in the process of being resolved to the satisfaction of the home country regulator.

The Commission is adopting the definition of “good regulatory standing” largely as proposed.

The Commission's supervisory experience with 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.

The Commission further believes that the definition provides adequate assurance of compliance with home country regulation, because any material non-observance must be resolved to the satisfaction of the home country regulator in order for the DCO to be deemed to be in good standing.

In an earlier, separate rulemaking, 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 39933 (Aug. 13, 2018). Therefore, in the proposal for this rulemaking, 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 34831 (July 19, 2019). The Commission is adopting only that portion of the definition that applies to DCOs subject to alternative compliance. The Commission will amend the definition of “good regulatory standing” as necessary if it finalizes the rulemaking on exempt DCOs.

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 MOU.

2. Substantial Risk to the U.S. Financial System

The Commission has a strong supervisory interest in any DCO that is registered, or required to register, with the Commission, regardless of its location. Given the global nature of the swaps market, these DCOs typically operate in multiple jurisdictions and are subject to overlapping or duplicative regulations. In developing the alternative compliance regime, the Commission has strived to allow for greater deference to foreign jurisdictions so as to reduce overlapping supervision and regulatory inefficiencies, while retaining direct oversight over non-U.S. DCOs that—due to the level of their U.S. clearing activity—raise a greater level of supervisory interests (relative to other non-U.S. DCOs).

The proposed

“substantial risk” test is designed to assist the Commission's assessment of its supervisory interest in a particular non-U.S. DCO.

In developing the alternative compliance regime, the Commission is guided by principles of international comity, which counsel courts and agencies to act reasonably and with due regard for the important interests of foreign sovereigns in exercising jurisdiction with respect to activities taking place abroad.

See

Restatement (Third) of Foreign Relations Law of the United States (the Restatement). With regard to deference, the G20 “agree[d] that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulatory and enforcement regimes, based on similar outcomes, in a non-discriminatory way, paying due respect to home country regulation regimes.” G20 Leaders' Declaration, St. Petersburg Summit, para. 71 (Sept. 6, 2013).

For purposes of this rulemaking, the Commission proposed to define the term “substantial risk to the U.S. financial system” to mean, with respect to a non-U.S. DCO, that (1) the DCO holds 20 percent or more of the required initial margin

of U.S. clearing members for swaps across all registered and exempt DCOs; and (2) 20 percent or more of the initial margin requirements for swaps at that DCO is attributable to U.S. clearing members; provided, however, where one or both of these thresholds are close to 20 percent, the Commission may exercise discretion in determining whether the DCO poses substantial risk to the U.S. financial system.

In general, initial margin requirements are risk-based and are meant to cover a DCO's potential future exposure to clearing members based on price movements in the interval between the last collection of variation margin and the time within which the DCO estimates that it would be able to liquidate a defaulting clearing member's portfolio. This risk-based element of the test focuses on the initial margin attributable to those clearing members who, by virtue of their relationship and connection to the U.S. financial system, raise systemic risk concerns. Accordingly, the Commission believes the relative risk that a DCO poses to the U.S. financial system can be identified by the cumulative sum of initial margin attributable to U.S. clearing members collected by the DCO.

The first prong of the test addresses systemic risk, and the Commission's primary systemic risk concern arises from the potential for loss of clearing services for a significant part of the U.S. swaps market in the event of a catastrophic occurrence affecting the DCO. The second prong respects international comity

by ensuring that the substantial risk test captures only those non-U.S. DCOs with clearing activity attributable to U.S. clearing members sufficient to warrant more active oversight by the Commission. Even if a non-U.S. DCO satisfies the first prong, it may still qualify for registration subject to alternative compliance if the proportion of U.S. activity it clears does not satisfy the second prong.

In developing this rulemaking, the Commission was guided by principles of international comity, which counsel due regard for the important interests of foreign sovereigns.

See

Restatement (Third) of Foreign Relations Law of the United States (the Restatement).

Under the test, the term “substantial” would apply to proportions of approximately 20 percent or greater. The Commission reiterates that this is not a bright-line test; by offering this figure, the Commission does not intend to suggest that, for example, a DCO that holds 20.1 percent of the required initial margin of U.S. clearing members would potentially pose substantial risk to the U.S. financial system, while a DCO that holds 19.9 percent would not. The Commission is instead indicating how it would assess the meaning of the term “substantial” in the test.

The Commission recognizes that if a test were to rely solely on initial margin requirements of U.S. clearing members, it may not fully capture the risk of that DCO to the U.S. financial system. Therefore, under the substantial risk test, the Commission retains a degree of discretion to determine whether a non-U.S. DCO poses substantial risk to the U.S. financial system. In making its determination, the Commission may look at other factors that may reduce or mitigate the DCO's risk to the U.S. financial system, or provide other indication of the systemic risk presented by the DCO.

The Commission specifically requested comment on the following question: “Is the proposed test for `substantial risk to the U.S. financial system' the best measure of such risk? If not, please explain why, and if there is a better measure/metric that the Commission should use, please provide a rationale and supporting data, if available.”

The Commission received a variety of comments regarding the substantial risk test. Some comments were generally supportive of the test and its component parts, but the majority of comments raised questions and concerns about the test, including the elements of the test, the discretion afforded to the Commission, and the operation of the test and its ramifications. LCH and CCIL both supported the substantial risk test. In particular, LCH supported using initial margin as an indicator of a non-U.S. DCO's risk to the U.S. financial system. LCH asserted that initial margin is superior to gross notional for analyzing risk, arguing that for cleared swaps gross notional does not provide a clear indication of risk and could lead to an over-estimation of the underlying risk managed by the DCO. CCIL agrees with the proposed test for substantial risk to the U.S. financial system based on the joint application of the two thresholds in the test.

Two commenters questioned how the Commission developed the substantial risk test, particularly the thresholds in the test, and requested additional information regarding this process. ICE stated that it is not clear from the proposal how the Commission determined that the 20 percent thresholds indicate that a non-U.S. DCO poses a substantial risk to the U.S. financial system. ICE requested that the Commission provide an explanation of the basis for this determination. Citadel requested that the Commission provide further information regarding how the criteria were developed, as well as the expected practical impact if the test were applied, including how many currently registered non-U.S. DCOs the Commission would identify as posing substantial risk to the U.S. financial system. Better Markets specifically opposed the first prong of the substantial risk test, which asks whether the DCO holds 20 percent or more of the required initial margin of U.S. clearing members for swaps across all registered and exempt DCOs. It argued that because the Commission did not provide data regarding the value of 20 percent of the U.S. clearing members' initial margin across all swaps, and did not provide a data-based rationale for choosing 20 percent as the appropriate threshold, the implications of this prong of the test are highly speculative, which in turn limits the ability of the public to meaningfully comment on the proposal. Based on its analysis of 2018 data from ISDA, Better Markets suggested that LCH Ltd. would be the only non-U.S. DCO to meet the criteria for presenting a substantial risk to the U.S. financial system. Better Markets further noted that, based on the ISDA data, ICE Clear Credit (were it not U.S.-based) would be eligible for alternative compliance under the first prong of the definition, despite being deemed systemically important by the Financial Stability Oversight Council (FSOC).

In developing the “substantial risk” test, the Commission applied its experience in regulating non-U.S. DCOs, including circumstances in which there can be substantial overlap between the regulatory and supervisory activity of the DCO's home country regulator and that of the Commission, as well as any associated benefits and challenges. The Commission anticipates that based on current clearing activity, one non-U.S. DCO, LCH Ltd, would satisfy the substantial risk test. With respect to the reference to FSOC designation, the Commission observes that while both the substantial risk inquiry and FSOC designation relate generally to issues of systemic risk, the related assessments will necessarily differ given their different purposes and consequences.

The substantial risk test is designed to better calibrate the Commission's oversight of non-U.S. DCOs, based on the principle of deference to their home country regulators, while at the same time taking into consideration risk to U.S. clearing members and ultimately, the U.S. financial system. If a non-U.S. DCO is determined to pose “substantial risk,” the Commission may not defer to the home country regulatory regime and the DCO will be required to comply with both Commission requirements and its home country requirements if it conducts activities requiring registration with the Commission. On the other hand, the FSOC designation process focuses on identifying those FMUs whose failure or disruption could threaten the U.S. financial system.

The consequence of FSOC designation is that the FMU becomes subject to enhanced regulatory supervision. To date, the only DCOs designated by FSOC have been U.S. DCOs. Nevertheless, a non-U.S. DCO designated by FSOC would not be eligible for alternative compliance.

Section 804 of the Dodd-Frank Act provides the FSOC the authority to designate a financial market utility (FMU), including a DCO, that the FSOC determines is or is likely to become systemically important because the failure of or a disruption to the functioning of the FMU could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or

markets and thereby threaten the stability of the U.S. financial system.

See

Authority to Designate Financial Market Utilities as Systemically Important, 76 FR 44763 (July 27, 2011).

In making a determination with respect to whether a FMU is, or is likely to become, systemically important, the FSOC takes into consideration: The aggregate monetary value of transactions processed by the FMU; the aggregate exposure of the FMU to its counterparties; the relationship, interdependencies, or other interactions of the FMU with other FMUs or payment, clearing, or settlement activities; the effect that the failure of or a disruption to the FMU would have on critical markets, financial institutions, or the broader financial system; and any other factors the FSOC deems appropriate.

See

12 CFR 1320.10.

The Commission did not propose to amend § 39.30(b), which subjects a “systemically important [DCO]” (defined in § 39.2 as a DCO designated by the FSOC for which the Commission acts as the Supervisory Agency) to the provisions of subparts A and B of Part 39.

The Commission disagrees that commenters did not have access to sufficient information to comment on the first prong of the substantial risk test. Better Markets' analysis of how the test would apply to various DCOs based on publicly available information is inconsistent with that claim. The Commission continues to believe that the first prong of the test is properly calibrated to capture those non-U.S. DCOs that pose substantial risk to the U.S. financial system. The Commission also observes that no commenter offered an alternative version of the test.

Several commenters supported the first prong of the substantial risk test but questioned the wisdom and utility of the second prong. ISDA opposed the second prong and requested that it be eliminated. ISDA stated that although it generally supports clear thresholds for determining whether a DCO poses substantial risk to the U.S. financial system, the second prong of the test does not gauge the risk of the relevant non-U.S. DCO to the U.S. financial system, but instead signifies the importance of U.S. clearing members to that particular DCO.

ISDA further argued that the second prong may incentivize non-U.S. DCOs to limit clearing for U.S. persons to avoid being designated as posing substantial risk to the U.S. financial system, and thus being ineligible for registration with alternative compliance. ISDA argued that this situation would harm U.S. banking groups, and could be viewed as violating the spirit of the Principles for Financial Market Infrastructures requirement to provide non-discriminatory treatment of all clearing members.

WFE and Eurex also acknowledged the first prong as an appropriate measure of risk, but questioned the second prong on similar grounds.

ISDA also did not recognize that the proposed definition of “substantial risk to the financial system” requires that both prongs of the test, and not only one or the other, be satisfied in order for a non-U.S. DCO to satisfy the test. Based on this misunderstanding, ISDA argued that the second prong does not provide an independent basis for finding that a non-U.S. DCO presents substantial risk to the financial system. In response to this comment, the Commission reaffirms that the substantial risk test is a two-prong test in which both the first and second prongs must be satisfied.

See

CPMI-IOSCO, Principles for Financial Market Infrastructures (PFMIs), at Principle 18 (Apr. 2012), available at

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf.

As the Commission explained previously, the second prong ensures that the test will capture a non-U.S. DCO only if a sufficiently large portion of its clearing activity is attributable to U.S. clearing members such that the United States has a substantial interest warranting more active Commission oversight. While a non-U.S. DCO could theoretically be incentivized to discriminate against U.S. clearing members to avoid satisfying the second prong, the Commission does not view this as a significant risk as a practical matter. It is unlikely that a DCO would have enough U.S. clearing member activity to satisfy the first prong, but would be able to avoid satisfying the second prong by manipulating its U.S. clearing member activity. In any event, the discretion afforded the Commission in the substantial risk test should dull any incentive for a DCO to reject U.S. clearing member business for the purposes of the test.

Three commenters questioned whether the substantial risk test should account for other factors, including the market share a non-U.S. DCO has with respect to clearing certain classes of products, as well as the DCO's size. Citadel questioned, given the relative size of the interest rate swap market, whether a DCO clearing swaps in another asset class (such as CDS) could ever be considered to pose substantial risk to the U.S. financial system under the proposed criteria. Citadel asserted that it would be a strange outcome if only non-U.S. DCOs clearing interest rate swaps would be subject to the Commission's full regulatory framework for DCOs. Similarly, Better Markets argued that the systemic risk of a non-U.S. DCO does not turn solely on the percentage of U.S. clearing member initial margin posted as a percentage of the clearing market as a whole, but also depends on other critical systemic risk factors, such as the prominence of a particular clearing organization in a particular market (such as credit-related swaps), and the potential for correlated losses to occur across U.S. and non-U.S. DCO clearing members participating in that and other markets. Because these considerations are not part of the substantial risk test, Better Markets believes that the substantial risk test does not sufficiently addresses systemic risk concerns.

The Commission recognizes that a test based solely on initial margin requirements may not fully capture the risk of a given DCO. That is why the Commission proposed to retain discretion in determining whether a non-U.S. DCO poses substantial risk to the U.S. financial system, particularly where the DCO is close to 20 percent on both prongs of the test. The Commission noted that, in making its determination in these cases, it would look at other factors that may reduce or mitigate the DCO's risk to the U.S. financial system or provide a better indication of the DCO's risk to the U.S. financial system.

In appropriate circumstances, the factors cited by the commenters, along with other similar factors, may be considered in connection with an exercise of Commission discretion. The Commission discusses these considerations in additional detail below, in connection with the discussion of Commission discretion. The Commission disagrees with the assertion that the test does not account for the size of the DCO. The first prong of the test, whether the DCO holds 20 percent or more of the required initial margin of U.S. clearing members for swaps across all registered and exempt

DCOs, is closely correlated with the size of the DCO in that only a large DCO will hold that amount of initial margin.

See

Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 3822 (Feb. 13, 2019).

Some commenters supported the proposal that the Commission retain the ability to exercise discretion for a prong of the substantial risk test that is close to the 20 percent threshold, as opposed to being limited to a mechanical application. WFE warned against any automatic trigger, stating that the Commission should be able to determine that a non-U.S. DCO does not pose substantial risk to the U.S. financial system, even if the DCO exceeds both thresholds in the substantial risk test. LCH supports the Commission's ability to exercise its discretion, but only when the non-U.S. DCO is close to 20 percent on both prongs of the substantial risk test. Similarly, CCP12 and JSCC requested that the Commission clarify that the Commission would exercise its discretion only if both of the two thresholds are close to 20 percent. Citadel recommended that the Commission retain sufficient discretion to conduct a thorough analysis of the systemic risks associated with each non-U.S. DCO seeking to use the alternative compliance framework, taking into account both U.S. participation on that DCO (including clearing members, customers, and affiliates of U.S. firms) and the DCO's market position within the relevant asset class.

Multiple commenters questioned or criticized the scope of the Commission's discretion under the substantial risk test. ICE argued that the potential scope of discretion, and the lack of definition of relevant factors that the Commission may consider, could create significant uncertainty as to how the Commission may classify a DCO, even potentially resulting in inconsistent determinations. ICE also argued that this lack of specificity could lead to unnecessary delays in the assessment of an applicant, which would increase compliance costs and may discourage clearing organizations from submitting an application. FIA similarly argued that the Commission's discretion should be subject to some parameters so as to create more transparency and clarity. FIA suggested that the Commission list factors it will consider in determining whether a non-U.S. DCO poses substantial risk. Similarly, LCH recommended there be greater transparency around the qualitative factors that may be considered in a non-U.S. DCO's substantial risk assessment, noting that any such factors should be measurable and relevant to addressing risk in the U.S. financial system. ISDA expressed concern about the Commission's proposed ability to retain discretion, arguing that this discretion undermines the Commission's objective to provide a bright-line test, and may lead to legal and compliance uncertainty. ISDA requested that the Commission clarify the factors that might reduce, mitigate, or provide a better indication of a non-U.S. DCO's risk to the U.S. financial system.

CCIL cautioned that the Commission's discretion to determine whether a non-U.S. DCO poses substantial risk based on one or both of the thresholds may have the effect of “undoing” the proposed test. FIA argued that if the Commission can exercise its discretion even when a DCO is approaching the threshold of only one prong of the test, then there would be no clarity or certainty regarding whether any particular DCO satisfies the test. Both FIA and CCP12 argued that the possibility that the Commission might exercise discretion and determine that a small non-U.S. DCO presents substantial risk to the U.S. financial system based on being close to the threshold on the second prong may create uncertainty that could lead to market fragmentation, possibly exacerbate systemic risk, or otherwise harm market participants, especially if the DCO attempts to reduce its existing U.S. clearing business, or limit new U.S. clearing business, to mitigate against perceived uncertainty.

Better Markets argued that the Commission retained too much discretion in its proposed definition of substantial risk, including discretion to determine that non-U.S. DCOs above both thresholds do not pose substantial risk to the U.S. financial system and therefore remain eligible for alternative compliance. Better Markets further stated that due to the breadth of this discretion, the substantial risk test effectively only provides one indication of how the Commission might consider eligibility for alternative compliance. In the view of Better Markets, the level of discretion appears to justify determinations that a given DCO does or does not pose substantial risk based on almost any criteria or factors, and thus asks the public to foresee the discretionary application of vague regulations with a potentially wide range of possible outcomes.

In response to comments expressing concern about the Commission exercising discretion on the substantial risk determination as a whole based on only one of the two prongs being close to a 20 percent threshold, the Commission has revised the rule text to clarify when it will exercise discretion. Specifically, the rule text has been revised to provide that where one or both of these thresholds are identified as being close to 20 percent, the Commission may exercise discretion in determining whether an identified threshold is satisfied for the purpose of determining whether the DCO poses substantial risk to the U.S. financial system. This was always the Commission's intent with respect to the exercise of discretion, but the Commission agrees with commenters who indicated that the language in the proposal was not sufficiently clear.

The Commission intends to consider all factors it believes are relevant to determine whether a non-U.S. DCO poses substantial risk to the U.S. financial system. The following non-exclusive examples illustrate the factors the Commission may consider in exercising discretion under the substantial risk test: The market share of the DCO in clearing a given asset class, and the importance of those products to the U.S. financial system; whether positions cleared at the DCO are portable to another DCO and the potential disruptions associated with transferring positions; whether the sudden failure of the DCO would significantly reduce the availability of clearing services to U.S. clearing members; and whether settlements at the DCO are primarily denominated in U.S. dollars.

As one commenter correctly observed, the Commission retained discretion to determine that non-U.S. DCOs above both thresholds nevertheless remain eligible for alternative compliance. The Commission wishes to clarify, however, that it does not intend to exercise discretion in a manner that would have the effect of negating the test. Exercising discretion is the exception, not the rule, and the Commission accordingly intends to exercise its discretion sparingly, and on a case-by-case basis, weighing and considering factors that possibly are unique to the DCO and its profile in the marketplace. Lastly, the Commission wishes to clarify that it intends to exercise its discretion on a sliding scale where the further the non-U.S. DCO is from the thresholds, the more numerous or compelling the factors will need to be for the Commission to exercise discretion.

The Commission received a number of process-related comments regarding the substantial risk test. Some of the comments were directly responsive to the Commission's request in the proposal for comment regarding the frequency with which the Commission should reassess whether a DCO presents substantial risk to the U.S. financial system, and across what time period after the DCO is registered under the

alternative compliance regime, or otherwise addressed that same topic.

Additionally, a number of commenters had other comments, questions, and recommendations regarding the process by which the Commission would apply the substantial risk test, as well as the nature and scope of a DCO's obligations in connection with that process.

See

Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 34826 (July 19, 2019).

With regard to the frequency with which the Commission will assess whether a DCO poses substantial risk to the U.S. financial system, LCH suggested that the Commission reassess a DCO's risk to the U.S. financial system annually. CCIL, CCP12, and JSCC stated that the Commission should reassess a DCO every two years, and CCP12 added that the Commission should also reassess following a material change to the DCO's clearing services or home country regulatory framework. CCP12 also suggested that the reassessment be regarded more as a “check-up” than a complete re-application process in which the DCO would have to resubmit already available data, because the Commission already would have been receiving regular reports from the DCO. FIA stated that the substantial risk test should not be applied too frequently, to avoid DCOs oscillating between being eligible or ineligible for alternative compliance. CCP12 and JSCC suggested that the Commission look at an average of the previous 12 months when reassessing each threshold to ensure that the results are not overly influenced by any specific event, such as quarter-end or year-end.

With regard to reassessments of a DCO's status under the substantial risk test, ICE asserted that it would be difficult for a DCO to determine where it stands in relation to the threshold in the first prong of the test because this information is not available to DCOs. ICE argued that although the Commission may have this information, the standard needs to be one that is predictable and assessable for the DCOs themselves. ICE further stated that it is not clear how often a DCO must test whether it poses substantial risk to the U.S. financial system, or how long it would have to come into compliance with all requirements applicable to DCOs that are not eligible for alternative compliance if it ceases to be eligible. Similarly, ISDA requested that the Commission affirm that the Commission will monitor the 20 percent threshold test by analyzing the data DCOs already report to the Commission, and that a non-U.S. DCO has no obligations with respect to the monitoring of the 20 percent threshold apart from its reporting requirements. CCP12 recommended that the Commission use an observation period of sufficient duration before determining that a non-U.S. DCO exceeds the thresholds in the substantial risk test, to verify whether the breach is a structural trend or a temporary condition.

FIA stated that there should be a formal process to designate a DCO as one that poses substantial risk to the U.S. financial system, and that the Commission should clearly establish the frequency with which the substantial risk test will be applied to DCOs. WFE suggested that the Commission adopt and implement formal milestones in the substantial risk determination process. Specifically, WFE suggested that when a DCO approaches a threshold in the substantial risk test, but prior to any Commission determination that the DCO poses substantial risk, the Commission should initiate discussions with both the DCO and its home country supervisor, and allow the DCO to raise substantive and procedural issues with the Commission. In addition, WFE stated that if the Commission determines that a DCO poses substantial risk to the U.S. financial system, that the determination should be accompanied by a communication outlining the factors the Commission took into consideration in making the determination, and that DCOs should be able to appeal the determination.

FIA stated that the DCO, home country regulator, and, if practicable, other interested parties should be given the opportunity to provide feedback to the Commission when it is determining whether a DCO presents substantial risk, and that the DCO should be given a grace period during which time it can attempt to drop under the relevant thresholds. FIA stated that the Commission should make clear what is expected to occur if a DCO that is registered subject to alternative compliance and clears for U.S. customers becomes ineligible for alternative compliance, and should allow an appropriate timeframe for the orderly transfer or close out of any accounts held by U.S. customers at the relevant DCO in the event the non-U.S. DCO decides to limit clearing activity by U.S. clearing members to attempt to remain below the thresholds in the substantial risk test. FIA argued that it is vital that clearing members be given ample notice of a proposed determination by the Commission, together with the basis for such determination. CCP12 also requested that the Commission provide sufficient notice to the DCO to permit it to adjust its clearing business prior to a determination that the DCO poses substantial risk to the U.S. financial system.

FIA asserted that because the substantial risk test is applied on an ongoing basis, the Commission should commit to publishing and updating as appropriate a list of non-U.S. DCOs that pose substantial risk to the U.S. financial system and are therefore ineligible for alternative compliance. FIA explained that market participants will assume that a DCO that does not currently pose substantial risk to the U.S. financial system will continue to be able to facilitate U.S. customer clearing. Firms will be better positioned to plan for, and potentially mitigate, the business and market disruptions that could result from a DCO's addition to the list if they have notice of the Commission's intention.

The Commission is mindful of the concerns raised by commenters regarding the frequency with which the Commission should assess whether a DCO presents substantial risk to the U.S. financial system. At this time, however, the Commission declines to define a specific time period for reassessment of whether a DCO presents substantial risk. The Commission notes that because it will be receiving the relevant data from DCOs daily, it intends to monitor whether a non-U.S. DCO subject to alternative compliance presents “substantial risk to the U.S. financial system” on an ongoing basis.

In response to the concerns commenters expressed regarding the process that the Commission will use to determine whether a non-U.S. DCO satisfies the substantial risk test, and to inform the DCO of that determination, the Commission notes that it has extensive experience with engaging DCOs on a cooperative basis, and anticipates doing so in circumstances in which a non-U.S. DCO may pose substantial risk to the U.S. financial system. The Commission anticipates early and significant dialogue with non-U.S. DCOs if they approach the thresholds, and welcomes engagement with the DCO and its home country regulators, especially if it appears that the DCO is projected to exceed the thresholds in the substantial risk test. In applying the test, the Commission will focus on the non-U.S. DCO's current U.S. clearing member activity relative to the thresholds, and whether any increases in activity by U.S. clearing members appear to be temporary, or are part of a persistent trend. The Commission does not intend that, absent extraordinary circumstances,

non-U.S. DCOs will alternate between traditional registration and registration with alternative compliance, as that would not benefit the non-U.S. DCO, market participants, or the Commission. Lastly, the Commission does not intend to publish a list of non-U.S. DCOs that pose substantial risk to the U.S. financial system. If a non-U.S. DCO subject to alternative compliance becomes ineligible for alternative compliance for any reason, the Commission will modify the DCO's registration order, which is public, to provide that it must comply with all Commission regulations applicable to DCOs and to provide a reasonable period of time for it to do so, pursuant to § 39.51(d)(4). This process should not result in any disruption to market participants. In the unlikely event that a non-U.S. DCO responds to a determination that it is no longer eligible for alternative compliance by requesting a vacation of its registration, the Commission will work with the DCO and market participants to minimize market disruption.

The Commission is adopting the substantial risk test as proposed, with one exception. As explained above, the Commission is modifying the rule text to clarify the scope of Commission discretion under the test.

3. U.S. Clearing Member

The substantial risk test focuses on the clearing activity of U.S. clearing members at non-U.S. DCOs. For purposes of the test, the Commission proposed to define “U.S. clearing member” as a clearing member of a non-U.S. DCO that falls within one of three categories: It is organized in the United States; it is an FCM, which means it may clear for U.S. customers; or it is a non-U.S. entity whose ultimate parent company is organized in the United States.

The comments focused on one aspect of the proposed definition of U.S. clearing member. Specifically, ICE, ISDA, WFE, CCP12, FIA, JSCC, and Eurex opposed the definition's inclusion of clearing members that are organized outside of the United States, but whose ultimate parent company is organized in the United States.

For example, ICE stated that the definition of “U.S. clearing member” is overbroad and should instead focus only on the location and activity of the clearing member itself. ICE argued that the fact that a clearing member located outside of the United States has a U.S. parent does not mean that its clearing activity at a non-U.S. DCO has or can be expected to have an effect on U.S. markets. FIA stated that affiliates with parent companies in the U.S. are significant participants in the four currently exempt DCOs and that it is not clear why all trades cleared by such a clearing member would be considered to pose risk to the U.S. financial system. WFE argues that rather than considering a non-U.S. clearing member with a U.S. parent to be a U.S. clearing member in every instance, that the Commission consider clearing members' legal organization (including with respect to separate capitalization) and parent organization recovery and resolution plans and make a determination based on the particular facts and circumstances.

CCP12, JSCC, and ISDA expressed concern that defining U.S. clearing member to include non-U.S. entities could lead small non-U.S. DCOs with significant clearing activity from non-U.S. subsidiaries of U.S. parents to satisfy the substantial risk test, given the increased likelihood that they would satisfy the second prong. As discussed above, both prongs of the test must be satisfied for the Commission to determine that a non-U.S. DCO poses substantial risk, and small DCOs will not satisfy the test because they will not satisfy the first prong.

Two commenters argued that this aspect of the proposed definition of U.S. clearing member is inconsistent with the Commission's existing cross-border risk management framework for swaps.

ISDA recommended that non-U.S. subsidiaries of U.S. swap dealers be excluded from the definition of U.S. clearing member, on the basis that the Commission's Cross-Border Guidance provides that non-U.S. subsidiaries of U.S. swap dealers are not considered U.S. persons simply because they are part of a U.S. banking group. CCP12 argued that section 2(i) of the CEA requires that the focus be on whether a non-U.S. clearing organization's activities have a direct and significant connection with activities in, or effect on, commerce of the United States. CCP12 believes that, under this approach, the focus should be on the non-U.S. clearing organization's clearing for U.S. participants.

See

Cross-Border Guidance, 78 FR 45292, 45316-45317 (July 26, 2013).

The Commission is adopting the definition of “U.S. clearing member” as proposed, including in the definition those clearing members that are organized outside of the United States, but whose ultimate parent company is organized in the United States. The Commission acknowledges that the definition of “U.S. clearing member” is more expansive than the definition of “U.S. person” in the Cross-Border Guidance in that a clearing member organized outside of the United States is always considered to be a “U.S. clearing member” if it has a U.S. parent. Because the risk associated with a non-U.S. clearing member can potentially flow to its U.S. parent, the Commission believes that it is appropriate to consider that activity, aggregated together with other relevant activity, in applying the substantial risk test. This approach has the important advantage of being easily administered as a bright-line test, making the calculation more predictable than it would be under an approach based on specific facts and circumstances. The Commission believes this is appropriate here, where the definition does not have jurisdictional consequences impacting issues such as the need for registration. Furthermore, this definition will be used in both the numerator and denominator to measure clearing activity as a percentage for the purposes of the first prong, limiting its impact in terms of the number of non-U.S. DCOs satisfying the test.

B. Regulation 39.3(a)(3)—Application Procedures

The Commission proposed to amend § 39.3(a) to establish application procedures for a non-U.S. clearing organization seeking to register as a DCO subject to alternative compliance. Proposed § 39.3(a) would require an applicant to submit to the Commission the following sections of Form DCO, in some instances modified as described: Cover sheet, Exhibit A-1 (regulatory compliance chart), Exhibit A-2 (proposed rulebook), Exhibit A-3 (narrative summary of proposed clearing activities), Exhibit A-4 (detailed business plan), Exhibit A-7 (documents setting forth the applicant's corporate organizational structure), Exhibit A-8 (documents establishing the applicant's legal status and certificate(s) of good standing or its equivalent), Exhibit A-9 (description of pending legal proceedings or governmental investigations), Exhibit A-10 (agreements with outside service providers with respect to the treatment of customer funds), Exhibits F-1 through F-3 (documents that demonstrate compliance with the treatment of funds requirements with respect to FCM customers), and Exhibit R (ring-fencing memorandum).

As proposed, an applicant would be required to demonstrate to the Commission in Exhibit A-1 the extent to which compliance with the applicable legal requirements in its home country would constitute compliance with the DCO Core Principles. To satisfy this requirement, the applicant would be required to provide in Exhibit A-1 the citation and

full text of each applicable legal requirement in its home country that corresponds with each DCO Core Principle and an explanation of how the applicant satisfies those requirements. In the event the home country lacks legal requirements that correspond with a particular DCO Core Principle, the applicant should explain how it would satisfy the DCO Core Principle nevertheless.

The Commission requested comment on whether it should require additional, or less, information from an applicant for alternative compliance as part of its application under proposed § 39.3(a)(3). Several commenters stated that the Commission should require less information from applicants. CCP12 stated that the proposed application procedure is substantial and therefore burdensome in terms of processes and administrative filings. ICE stated that the requirement that an applicant submit a chart comparing its home country's requirements to each DCO Core Principle would require extensive work. ICE suggested that the Commission permit applicants to meet this requirement in a more flexible manner than by requiring the provision of a mapping document, such as by allowing applicants to address categories of regulatory objectives under the Dodd-Frank Act or Commission regulations. CCIL stated that the Commission should require applicants to provide only the information required to be disclosed by the quantitative and qualitative disclosure requirements under the PFMI standards. ICE similarly stated that the Commission should benchmark its comparability assessment with regard to compliance with international standards and, in particular, the PFMIs. Eurex and LCH recommended that an existing DCO applying for alternative compliance should not have to submit all of the exhibits required under proposed § 39.3(a)(3) because the Commission would already be aware of many of the documents required by the application.

One commenter, Mr. Kubitz, suggested that the Commission should require additional information from applicants, and specifically, the applicant's current clearing volume, an explanation of any differences between the DCO Core Principles and the applicant's home country regulatory regime, and a justification for any differences in the applicant's home country reporting requirements.

After reviewing the comments, the Commission continues to believe that the information required of applicants under proposed § 39.3(a)(3) is appropriate and necessary to evaluate an applicant's eligibility for alternative compliance. This includes the regulatory compliance chart in Exhibit A-1 of Form DCO, which is necessary to ensure that an applicant is subject to requirements in its home country jurisdiction that would satisfy the DCO Core Principles. The Commission must receive this information also to ensure that an applicant for alternative compliance actually satisfies the DCO Core Principles, as is required of all registered DCOs under the CEA.

In addition, the Commission could not evaluate an application based on PFMI compliance because the CEA specifically requires compliance with the DCO Core Principles.

7 U.S.C. 7a-1(c)(2)(A)(i).

The Commission also does not believe that it needs to require additional information beyond that contained in proposed § 39.3(a)(3). If the Commission determines that it needs additional information to process a particular application, existing § 39.3(a)(3) (proposed to be renumbered as § 39.3(a)(4)) permits the Commission to request that the applicant provide that information.

With respect to a DCO that has already registered with the Commission pursuant to the procedures in § 39.3(a)(2), and that may wish to be subject to alternative compliance, those DCOs would not need to follow the procedures set forth in proposed § 39.3(a)(3). Rather, a currently registered DCO that wishes to be subject to alternative compliance would need to submit a request to amend its order of registration pursuant to § 39.3(d). The initial request would need to include only Exhibits A-1 and A-8 as described in proposed § 39.3(a)(3). Recognizing that many of the current non-U.S. DCOs are subject to the European Market Infrastructure Regulation (EMIR), the Commission has undertaken an analysis of EMIR against the DCO Core Principles that a non-U.S. DCO that wishes to apply for alternative compliance may use in preparing Exhibit A-1.

The analysis is provided in the appendix to this release.

The Commission received some additional comments on proposed § 39.3(a) that do not relate to the request for comment. LCH stated that it supports the alternative compliance application process under proposed § 39.3(a)(3). Citadel and Mr. Kubitz suggested that the Commission provide a public comment period for alternative compliance applications, and Mr. Kubitz specifically suggested a period of 90-120 days. Citadel stated that market participants should be provided with an opportunity to comment on each application because the costs and benefits of alternative compliance, including the impact on U.S. market participants, may vary greatly depending on the specific application and the associated home country regulatory regime. Mr. Kubitz suggested that the MOU between the Commission and the applicant's home country regulator should be made public, and that alternative compliance applications should be provided to relevant Congressional committees, the Federal Reserve, and the Department of Treasury.

The Commission is declining to require a public comment period for alternative compliance applications. There is no Commission regulation requiring a comment period for applications for DCO registration, and the Commission believes that it is well-equipped, with the benefit of the information applicants will need to submit to the Commission pursuant to § 39.3(a)(3), to determine whether an applicant should be registered subject to alternative compliance. However, the Commission notes that, even without a required comment period, DCO applications may be posted for public comment when the Commission believes it is warranted.

In response to Mr. Kubitz, the Commission notes that it already publishes MOUs on its website.

Finally, the Commission does not believe that it should require that alternative compliance applications be provided to Congressional committees, the Federal Reserve, or the Department of Treasury given that these bodies have no role assigned by statute or regulation in deciding whether to approve or deny an application.

See, e.g.,

CFTC Press Release, CFTC Requests Public Comment on Related Applications Submitted by LedgerX, LLC for Registration as a Derivatives Clearing Organization and Swap Execution Facility (Dec. 15, 2014),

https://www.cftc.gov/PressRoom/PressReleases/pr7078-14.

See

Memoranda of Understanding,

available at: https://www.cftc.gov/International/MemorandaofUnderstanding/index.htm.

The Commission is adopting § 39.3(a)(3) as proposed, but with one modification. In those cases where an applicant's home country lacks legal requirements that correspond to a particular DCO Core Principle, the applicant would need to explain how it would comply with the DCO Core Principle nevertheless. The Commission is adding a sentence at the end of § 39.3(a)(3) to clarify that point.

C. Regulation 39.4—Procedures for Implementing DCO Rules and Clearing New Products

Regulation 39.4(b) requires a DCO to submit proposed new or amended rules to the Commission pursuant to the self-certification procedures of § 40.6,

as required by section 5c(c) of the CEA,

unless the rules are voluntarily submitted for Commission approval pursuant to § 40.5. Pursuant to the Commission's authority under section 4(c) of the CEA,

the Commission proposed to revise § 39.4(c)

to exempt DCOs that are subject to alternative compliance from submitting rules pursuant to section 5c(c) of the CEA and § 40.6, unless the rule is related to the DCO's compliance with the requirements of part 45 of the Commission's regulations,

or with section 4d(f) of the CEA,

parts 1 or 22 of the Commission's regulations,

or § 39.15,

which set forth the Commission's customer protection requirements, as such DCOs would remain subject to compliance with these requirements. The Commission proposed to adopt this limited exemption from the standard rule submission requirements given that DCOs subject to alternative compliance will be subject to the applicable laws in their home country and oversight by their respective home country regulators.

17 CFR 40.6. A “rule,” by definition, includes any constitutional provision, article of incorporation, bylaw, rule, regulation, resolution, interpretation, stated policy, advisory, terms and conditions, trading protocol, agreement or instrument corresponding thereto, including those that authorize a response or establish standards for responding to a specific emergency, and any amendment or addition thereto or repeal thereof, made or issued by a registered entity or by the governing board thereof or any committee thereof, in whatever form adopted. 17 CFR 40.1(i).

7 U.S.C. 7a-2(c).

7 U.S.C. 6(c). Section 4(c) of the CEA provides that, in order to promote responsible economic or financial innovation and fair competition, the Commission, by rule, regulation, or order, may exempt any transaction or class of transactions subject to futures trading restrictions under section 4(a), 7 U.S.C. 6(a), (including any person or class of persons offering, entering into, rendering advice, or rendering other services with respect to, the transaction) from any of the provisions of the CEA other than certain enumerated provisions, if the Commission determines that the exemption would be consistent with the public interest and the purposes of the CEA, that the transactions will be entered into solely between appropriate persons, and that the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory responsibilities under the CEA. Section 2(d) of the CEA, 7 U.S.C. 2(d), extends the Commission's section 4(c) exemptive authority to swaps.

The Commission is also renumbering existing § 39.4(c) through (e) as § 39.4(d) through (f).

17 CFR part 45 (setting forth swap data reporting and recordkeeping requirements).

7 U.S.C. 6d(f) (relating to segregation of customer funds).

17 CFR parts 1 and 22 (setting forth general regulations under the CEA, including treatment of customer funds, and requirements for cleared swaps, respectively).

17 CFR 39.15 (setting forth requirements for the treatment of customer funds).

1. Rule Submission and Review Requirement

The Commission requested comment on whether it should require, as a condition of eligibility for alternative compliance, that an applicant be subject to a home country regulatory regime that has a rule review or approval process.

CCIL stated that it is unnecessary for the Commission to require an applicant's home country regime to have a rule review or approval process given the requirement that the home country regulator represent that an applicant is in good regulatory standing. ICE noted that regulators take different approaches to rule reviews and as such, the Commission should not require that the home country regulator have a process to review every rule, but rather should consider only whether material rule changes are reviewed by the home country regulator. ICE commented that the review process of the Bank of England, the home country regulator for central counterparties (CCPs) within the United Kingdom, only requires CCPs to file major initiatives and does not require a CCP to file each rule amendment for approval. ICE argued that as long as material rule changes are subject to review by the home country regulator, the Commission should neither deny alternative compliance nor impose a review of every rule change by either the home country regulator or the Commission for a non-U.S. DCO to be eligible for alternative compliance. Better Markets argued that permitting alternative compliance for a DCO with a home country regulatory regime that does not have a rule submission and review process commensurate with at least the Commission's part 40 rule certification process would constitute a “black hole in DCO oversight.”

The Commission agrees with the general premise of CCIL and ICE's comments that the Commission should defer to the home country regulator, which is best situated to determine what rule submissions, if any, are necessary to effectively oversee a non-U.S. DCO's clearing activities given the other regulatory and supervisory elements of the home country regulatory regime. A DCO subject to alternative compliance will still be required to submit to the Commission rules related to critical customer protection safeguards and swap data reporting requirements. In addition, the DCO will be subject to the full extent of its home country regulator's oversight of the DCO's compliance with its home country legal requirements, compliance with which must constitute compliance with the DCO Core Principles. Even if that home country regime does not include a rule review or approval process, the lack of that specific process does not amount to an absence of oversight. The Commission further believes that its MOU with a non-U.S. DCO's home country regulator will provide the Commission with access to any additional information that it might need to evaluate or review the DCO's continued compliance with registration requirements. Therefore, the Commission is not adopting a requirement that the home country regulator of an applicant for alternative compliance have a rule review or approval process that is comparable to the Commission's part 40 rule submission procedures.

The Commission also requested comment on whether it should require a DCO to file other rules pursuant to section 5c(c) of the CEA in addition to rules that relate to the DCO's compliance with the requirements of section 4d(f) of the CEA, parts 1, 22, or 45 of the Commission's regulations, or § 39.15. If so, the Commission further requested comment on whether it should retain discretion in determining which other rules must be filed based on, for example, the particular facts and circumstances, or whether it should enumerate the types of rules that must be filed (

e.g.,

rules related to certain products cleared by the DCO).

Citadel argued that part 40 of the Commission's regulations, which among other things requires that a DCO publicly disclose its rule filings, is critical to providing U.S. market participants with sufficient transparency into a DCO's governance and operations, including with respect to the DCO's risk management and default management frameworks. Citadel argued that the Commission should ensure that market participants continue to have access to this information from DCOs registered under the alternative compliance framework. The Commission believes that the rules of a DCO subject to alternative compliance will remain sufficiently transparent, as the DCO will be subject to requirements that satisfy Core Principle L, which, among other things, requires a DCO to make information concerning the rules and operating and default procedures governing its

clearing and settlement systems available to market participants.

7 U.S.C. 7a-1(c)(2)(L).

Better Markets criticized the scope of the Commission's rule certification exemption in § 39.4(c) as “fatally and legally flawed” because the Commission determined that it only needed to receive rule submissions in the customer protection and swap data reporting areas in which it will continue to exercise direct oversight. Better Markets did not, however, identify any specific additional rules that the Commission should require DCOs subject to alternative compliance to submit. Better Markets also suggested that the Commission require a DCO subject to alternative compliance to provide a notice filing for rules subject to the exemption in § 39.4(c) that demonstrates that a rule was filed with the home country regulator, and that discloses the nature and content of such a rule. The Commission is not adopting this suggestion, as a requirement along these lines would be inconsistent with the Commission's approach of deferring to the home country regulator on whether and to what extent the regulator reviews a DCO's rules.

2. CEA Section 4(c) Exemptive Authority

As noted in the proposal, the Commission believes the exemption in § 39.4(c) is consistent with the public interest and the purposes of the CEA, as required by section 4(c),

as it will allow the Commission to focus on reviewing those rules that relate to areas where the Commission exercises direct oversight. The exemption reflects the Commission's view that the protection of customers—and safeguarding of money, securities, or other property deposited by customers—is a fundamental component of the Commission's regulatory oversight of the derivatives markets and hence, DCOs subject to alternative compliance should be required to certify rules relating to the Commission's customer protection requirements. These customer protection-related rules will remain transparent to FCMs and their customers, as § 40.6(a)(2) requires a DCO to certify that it has posted on its website a copy of the rule submission.

At the same time, the exemption in § 39.4(c) will reduce the time and resources necessary for DCOs to file rules unrelated to the Commission's customer protection or swap data reporting requirements.

CEA section 4(c)(1) permits the Commission to exempt any agreement, contract, or transaction (or class thereof) that is otherwise subject to subsection (a) (including any person or class of persons offering, entering into, rendering advice or rendering other services with respect to, the agreement, contract, or transaction) from any of the requirements of subsection (a), which pertains to futures trading, or from any other provision of the CEA. 7 U.S.C. 6(c)(1).

The Commission also publicly posts on its website all § 40.6 rule certifications for which confidential treatment is not requested.

The Commission also believes the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA, as the Commission will continue to receive submissions for new rules or rule changes concerning customer protection and swap data reporting, matters for which a DCO subject to alternative compliance will still be subject to compliance with Commission regulation. Further, DCOs subject to alternative compliance satisfy section 4(c)(2)'s “appropriate person” element in clearing transactions (a rendered service) for U.S. persons.

These DCOs exclusively clear off-DCM swaps, which by virtue of section 2(e) of the CEA, a U.S. person cannot lawfully transact unless they qualify as an eligible contract participant (“ECP”).

As the Commission has previously affirmed, ECPs are appropriate persons within the scope of CEA section 4(c)(3)(K).

7 U.S.C. 6(c)(2). Under section 4(c)(2)(B)(i) of the CEA, in order for DCOs subject to alternative compliance—

i.e.,

a class of persons that render clearing services for swap transactions—to be exempted from CEA provisions, the transactions they clear must “be entered into solely between appropriate persons.” 7 U.S.C. 6(c)(2)(B)(i). Section 4(c)(3) specifies categories of persons within the defined term “appropriate person.” 7 U.S.C. 6(c)(3). Subparagraph (K) defines “appropriate person” to include such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections. 7 U.S.C. 6(c)(3)(K).

See also,

Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, 21754 (Apr. 11, 2013) (noting that the elements of the ECP definition set forth in section 1a(18)(A) and Commission regulation 1.3(m) generally are more restrictive than the comparable elements of the enumerated section 4(c)(3) “appropriate person” definition).

See, e.g.,

Exemption from Derivatives Clearing Organization Registration, 84 FR 35458 (July 23, 2019); Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21754 (April 11, 2013).

The Commission requested comment as to whether the proposed exemption in § 39.4(c) from the rule submission requirements of section 5c(c) of the CEA meets the standards for exemptive relief set out in section 4(c) of the CEA.

Better Markets stated that the Commission should have proposed an exemption under section 5b(h) of the CEA (

i.e.,

the provision that permits the Commission to exempt DCOs from registration) instead of section 4(c). It argued that section 4(c)'s exemptive authority cannot be used to exempt non-U.S. DCOs from rule submission requirements, as doing so would impermissibly expand the Commission's general exemptive authority beyond its plain language. Better Markets contended that the plain language of section 4(c) limits the Commission to exempt agreements, contracts, or transactions that are subject to section 4(a), which only applies to futures, and that section 4(c) is best read not to contemplate an exemption with respect to swap activities at all. Therefore, Better Markets indirectly concluded that section 4(c) cannot be relied on to exempt non-U.S. DCOs, which may only list swaps, from rule submission procedures.

Further, Better Markets argued that relying on section 4(c) would inappropriately supersede the CEA's more specific exemptive authority within section 5b(h), and without specific, required statutory analyses.

See

Better Markets, Inc. Letter on Exemption for Non-U.S. Derivatives Clearing Organizations, RIN 3038-AE65 (Nov. 22, 2019) at 7-8 (as cross-referenced in Better Markets Inc. Letter on Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations (Nov. 18, 2019) at n. 74).

The Commission disagrees with Better Markets' arguments. Section 5b(h) permits the Commission to exempt a DCO from registration if the Commission determines that the DCO is subject to “comparable, comprehensive supervision and regulation” by its home country regulator. The exemption at issue, however, is not an exemption from registration, and section 5b(h) does not provide the Commission with the ability to exempt a registered DCO from other requirements of the CEA. In addition, Better Markets' interpretation that the Commission's exemptive authority under section 4(c) is strictly limited to futures agreements, contracts, or transactions subject to section 4(a) of the CEA ignores section 2(d) of the CEA,

which extends the Commission's section 4(c) exemptive authority for futures transactions to swaps transactions.

7 U.S.C. 2(d).

The Commission also notes that section 4(c) provides that the Commission may use the exemptive authority thereunder “except” with respect to certain enumerated swap provisions,

unless there is an expressed authorization within the specific provision. Section 4(c) does not provide that the Commission may only use the 4(c) exemptive authority with respect to the enumerated provisions. Thus, a plain reading of the relevant text, joined with section 2(d), indicates that Congress extended the Commission's general exemptive authority under section 4(c) to swaps transactions with respect to those provisions that are not in the enumerated list. Section 5c(c) of the CEA is not included in the enumerated list. Further, the Commission has previously exercised its 4(c) exemptive authority with respect to swaps.

See, e.g.,

Exemptive Order Regarding Compliance with Certain Swap Regulations, 78 FR 43785 (July 22, 2013).

The Commission believes that section 5b(h) reflects Congress's intent that the Commission defer to other regulators that offer “comparable, comprehensive supervision and regulation” of DCOs, in appropriate circumstances and to an appropriate extent. With this rulemaking, the Commission has endeavored to defer to a non-U.S. DCO's home country regulator while allowing the DCO to maintain its registration and clear for FCM customers. The Commission believes its use of its section 4(c) exemptive authority in this context is appropriate and fully meets the requisite statutory standards, as outlined in the proposal and explained above.

The Commission is adopting § 39.4(c) as proposed.

D. Regulation 39.9—Scope

The Commission proposed to amend § 39.9 to provide that the provisions of subpart B of Part 39 apply to any DCO, except as otherwise provided by Commission order. In the context of alternative compliance, the Commission's order of registration would provide for the inapplicability of most subpart B provisions and address those that do apply, such as § 39.15 and those requirements corresponding to any DCO Core Principle for which the Commission does not find there to be alternative compliance in the DCO's home country regulatory regime (in those cases in which the Commission determines nevertheless to grant alternative compliance). Amended § 39.9 would also allow the Commission to not apply to a particular DCO any subpart B requirement that the Commission deems irrelevant or otherwise inapplicable due to, for example, certain characteristics of the DCO's business model. The Commission did not receive any comments on this proposal. The Commission is adopting § 39.9 largely as proposed.

The Commission had included in the proposal a previously proposed change to § 39.9 that would clarify that the provisions of subpart B do not apply to any exempt DCO.

See

Exemption from Derivatives Clearing Organization Registration, 83 FR 39929 (Aug. 13, 2018) (proposing an addition to § 39.9 providing that the provisions of subpart B do not apply to any exempt DCO, as defined in § 39.2). The Commission will amend § 39.9 as necessary if it finalizes the rulemaking on exempt DCOs.

E. Subpart D—Provisions Applicable to DCOs Subject to Alternative Compliance

1. Regulation 39.50—Scope

The Commission proposed new § 39.50 to state that the provisions of subpart D of part 39 apply to any DCO that is registered through the process described in § 39.3(a)(3) (

i.e.,

registration with alternative compliance). The Commission did not receive any comments on this proposal. However, the Commission is modifying § 39.50 by adding language that would allow subpart D to apply to a DCO “as otherwise provided by order of the Commission.” This will allow for subpart D to apply to a DCO registered pursuant to § 39.3(a)(2) that subsequently applies to amend its DCO registration order in accordance with § 39.3(d).

2. Regulation 39.51—Alternative Compliance

a. Eligibility for Alternative Compliance

The Commission proposed new § 39.51(a) to permit the Commission to register a non-U.S. clearing organization subject to alternative compliance for the clearing of swaps for U.S. persons if all of the eligibility requirements listed in proposed § 39.51(a)(1) and (a)(2) are met. Proposed § 39.51(a) also provides that the Commission could subject registration to any terms and conditions that the Commission determines to be appropriate.

The Commission proposed § 39.51(a)(1)(i) to require a Commission determination that a clearing organization's compliance with its home country regulatory regime would satisfy the DCO Core Principles; § 39.51(a)(1)(ii) to require that a clearing organization be in good regulatory standing in its home country; and § 39.51(a)(1)(iii) to require a Commission determination that the clearing organization does not pose substantial risk to the U.S. financial system.

The Commission proposed § 39.51(a)(1)(iv) to require that the Commission and the clearing organization's home country regulator

have an MOU or similar arrangement satisfactory to the Commission in effect. Among other things, the Commission proposed to require the home country regulator to agree within the MOU to provide the Commission with any information that the Commission deems appropriate to evaluate the clearing organization's initial and continued eligibility for registration and to review compliance with any conditions of registration. The Commission clarified in the proposal that satisfactory MOUs or similar arrangements would include provisions for information sharing and cooperation, as well as for notification upon the occurrence of certain events.

Although the Commission would retain the right to conduct site visits, the Commission stated that it did not expect to conduct routine site visits to DCOs subject to alternative compliance.

In jurisdictions where more than one regulator supervises and regulates a clearing organization, the Commission would expect to enter into an MOU or similar arrangement with more than one regulator.

See

Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 34824 (July 19, 2019) n.38.

For existing non-U.S. DCOs that wish to be subject to alternative compliance, the Commission believes the MOUs currently in place with their respective home country regulators would be sufficient to satisfy this requirement.

Id.

at n.39.

The Commission proposed § 39.51(a)(2) to provide the Commission with discretion to grant registration with alternative compliance subject to conditions if the clearing organization's home country regulatory regime lacks legal requirements that correspond to certain DCO Core Principles, if the relevant DCO Core Principles are less related to risk.

The Commission specifically requested comment on whether the Commission should take into account regulations in Part 39, in addition to the DCO Core Principles, in determining whether alternative compliance is appropriate for a non-U.S. clearing organization.

Eurex opined that the set of requirements applicable to non-U.S DCOs under the proposed alternative compliance framework was already substantial and therefore should not take into account additional regulations in Part 39.

Citadel argued that while the Commission should not require a foreign regulatory regime to precisely replicate the U.S. framework, the Commission should take into account more than just the “relatively high-level” DCO Core Principles when conducting its analysis. Citadel argued that several aspects of the Commission's implementing regulations, such as non-discriminatory access within various subsections of § 39.12, straight-through processing within § 39.12(b)(7), and public rule certifications pursuant to part 40, provide critical protections to U.S. market participants that are not explicit in the DCO Core Principles. Citadel was concerned that not requiring DCOs to provide these

“fundamental protections” to U.S. market participants could negatively impact market transparency, liquidity, and competition, as swaps cleared by such DCOs may be accessible to only certain types of market participants, thereby impairing market access and choice of trading counterparties. Citadel argued that the Commission recognized the importance of these key aspects of its underlying regulations when it assessed the comparability of the EU regulatory framework. Citadel urged the Commission to “maintain this approach for purposes of other jurisdictions,” and further recommended that the Commission reserve sufficient flexibility to conduct a case-by-case analysis of each non-U.S. clearing organization's application for alternative compliance.

The Commission agrees with Citadel that it should not require a non-U.S. DCO's home country regulatory regime to precisely replicate the U.S. framework. The Commission, however, disagrees with Citadel's suggestion that it should add other Commission regulations to the list of core customer protection and swap data reporting regulations with which all DCOs subject to alternative compliance will be required to comply. To provide a meaningful framework for deference to home country regulators, the Commission has determined to limit the universe of applicable regulations to those that provide critical protections such as those related to customer protection. In all cases, the non-U.S. DCO must still comply with home country requirements that constitute compliance with the DCO Core Principles, which the Commission's regulations were intended to implement. For example, DCO Core Principle C requires all DCOs to establish appropriate admission and continuing eligibility standards for members and participants of the DCO that are objective, publicly disclosed, and permit fair and open access to the DCO. Beyond that, the Commission may require that a given non-U.S. DCO comply with additional Commission regulations as specified in its registration order based on its particular facts and circumstances, most significantly if the Commission finds the DCO's home country requirements lacking, but the Commission does not believe it is appropriate to require compliance with additional Commission regulations as a matter of course.

While a non-U.S. DCO subject to alternative compliance will only be required to certify new and amended rules related to customer protection and swap data reporting pursuant to § 39.4(c), the DCO will still have to publicly disclose its rules and operating and default procedures governing its clearing and settlement systems pursuant to DCO Core Principle L.

This will provide transparency for the DCO's rules even if the DCO does not certify all of its rules pursuant to part 40.

7 U.S.C. 7a-1(c)(2)(L).

The Commission believes that Citadel's reference to the review that the Commission undertook to determine comparability with the European Union's regulations for dually-registered DCOs and CCPs in 2016 is misplaced.

That exercise was by its nature a regulation-by-regulation review to determine comparability with respect to Commission regulatory requirements, and the fact that the Commission examined individual regulations in that context is not determinative of the degree of deference that should be extended to a DCO's home jurisdiction in the context at issue here.

See

Comparability Determination for European Union: Dually-Registered Derivatives Clearing Organizations and Central Counterparties, 81 FR 15260 (Mar. 22, 2016).

The Commission believes that § 39.51(a) establishes clear eligibility standards by which the Commission can determine whether a non-U.S. DCO's home country regulatory regime is consistent with the DCO Core Principles, and also reserves adequate flexibility for the Commission to grant exceptions, in its discretion, as appropriate. If a non-U.S. clearing organization's home country regulatory regime lacks legal requirements that correspond to the DCO Core Principles less related to risk (

e.g.,

Core Principle N on antitrust considerations), or if the Commission determines that other conditions are appropriate to achieve compliance with a specific DCO Core Principle(s), § 39.51(a)(2) and (b)(7) would allow the Commission to, in its discretion, grant registration with alternative compliance subject to conditions that address the specific facts and circumstances at issue.

Better Markets argued that the Commission must consider Part 39 and other applicable regulations when determining whether alternative compliance is appropriate for a non-U.S. clearing organization, as section 5b(c)(2)(A)(i) of the CEA

requires all registered DCOs to comply with both the DCO Core Principles and “any [DCO] requirement that the Commission may impose by rule or regulation.” Better Markets argued that the alternative compliance framework should be re-proposed as the Commission failed to properly cite to and rely upon its exemptive authority under section 5b(h) of the CEA,

which Better Markets believes provides the appropriate basis for exemptions from the statutory requirements in section 5b(c) of the CEA. Better Markets argued that section 5b(h) requires that the Commission must have a reasonable basis to conclude not only that a non-U.S. DCO has satisfied all statutory elements of section 5b(c) of the CEA, but also that the applicable home country regulatory framework is comparable to, and as comprehensive as, the statutory and regulatory requirements for registered DCOs to be able to grant an exemption pursuant to section 5b(h). Better Markets premised this conclusion on Congress' inclusion of the phrase “supervision and regulation” within section 5b(h) of the CEA, which Better Markets opined made no distinction between U.S. statutory and U.S. regulatory requirements with respect to the Commission's exemptive authority for DCOs. Better Markets argued that as a result, non-U.S. DCOs could not receive an exemption unless their home country regulatory regime essentially mirrors the statutory and regulatory regime for U.S. DCOs.

7 U.S.C. 7a-1(c)(2)(A)(i).

7 U.S.C. 7a-1(h).

The Commission believes that Better Markets' analysis misunderstands the status of DCOs that would be subject to the alternative compliance framework. A non-U.S. DCO subject to alternative compliance will still be a registered DCO pursuant to section 5b(a) of the CEA. In contrast, section 5b(h) of the CEA relates to exempting DCOs from registration, which is not at issue here.

Better Markets correctly notes that section 5b(c)(2)(A)(i) of the CEA requires DCOs to comply with the DCO Core Principles and any requirement that the Commission may impose by rule or regulation pursuant to section 8a(5) of the CEA, which provides the Commission with discretionary rulemaking authority to make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA.

The Commission exercised that authority in adopting Part 39 and initially applying it to all DCOs. Here, the Commission is further exercising that authority to provide in new § 39.51 that DCOs subject to alternative compliance are subject to the DCO Core Principles and other specified requirements, but not to

all of the provisions that have until now applied to all DCOs.

7 U.S.C. 12a(5).

Three commenters discussed the potential role of the PFMIs in the Commission's approach to registration with alternative compliance. LCH commented that the use of the DCO Core Principles to determine whether an applicant's home country requirements are comparable to the Commission's requirements is appropriate. LCH opined that the DCO Core Principles are consistent with the PFMIs, which have been agreed by the international regulatory community as essential to strengthening and preserving financial stability.

ICE commented that an outcomes-based approach that assesses an applicant's home country regulatory regime as a whole, instead of with a rule-by-rule comparison, would provide appropriate deference to the foreign jurisdiction. However, ICE questioned how the Commission would make an assessment of the home country regulatory regime. ICE cautioned that the Commission should not determine that a jurisdiction is non-comparable or non-equivalent on the basis of “discrete” differences from a Part 39 requirement. ICE further argued that an assessment of comparability or equivalence should accept that there will be differences between the manner in which a clearing organization's home country regulator achieves international standards and the Commission's regulations, and these differences should not be disqualifying. Otherwise, ICE warned that the alternative compliance regime would likely be of little benefit, or result in substantial delays in implementation as equivalence is determined. ICE encouraged the Commission to benchmark its comparability assessment with regard to compliance with international standards such as the PFMIs as an alternative to the DCO Core Principles. CCIL also suggested that the Commission should be satisfied with adherence by a non-U.S. DCO to the PFMIs, as certified by its home country regulator.

The Commission notes that a determination of whether compliance with a home country regulatory regime constitutes compliance with the DCO Core Principles is not a comparability or equivalence determination. The Commission nevertheless agrees with the general premise of LCH and ICE's comments, and the alternative compliance framework reflects an outcomes-based approach rather than a regulation-by-regulation comparison between Commission regulations and a non-U.S. DCO's home country regulatory regime, which is suboptimal in this context in which the Commission is showing appropriate deference to the home country regulator. The Commission must however look to the DCO Core Principles, and not the PFMIs, as the basis for determining compliance. As previously noted, all DCOs, including those DCOs subject to alternative compliance, are required by the CEA to comply with each DCO Core Principle in order to be registered and to maintain registration.

The Commission is adopting § 39.51(a) as proposed.

b. Conditions of Alternative Compliance

The Commission proposed new § 39.51(b) to set forth the conditions that a non-U.S. clearing organization must satisfy for the Commission to grant registration with alternative compliance.

Proposed § 39.51(b)(1) provides that a DCO subject to alternative compliance must comply with the DCO Core Principles through compliance with applicable legal requirements in its home country, and any other requirements specified in its registration order including, but not limited to, the customer protection requirements of section 4d(f) of the CEA, parts 1 and 22, and § 39.15 of the Commission's regulations; the part 45 swap data reporting requirements; and subpart A of Part 39.

In doing so, the Commission explained that the eligibility requirements listed in proposed § 39.51(a)(1) and (a)(2) and the conditions set forth in proposed § 39.51(b) would be pre-conditions to the Commission's issuance of a registration order in this regard. 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 registration order. Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 34824 (July 19, 2019) n.37.

The Commission proposed § 39.51(b)(2) to codify the “open access” requirements of section 2(h)(1)(B) of the CEA with respect to swaps cleared by a DCO to which one or more of the counterparties is a U.S. person. Proposed § 39.51(b)(2)(i) would require a DCO to have rules providing that all such swaps with the same terms and conditions (as defined by product specifications established under the DCO's rules) submitted to the DCO for clearing would be economically equivalent and could be offset with each other, to the extent that offsetting is permitted by the DCO's rules. Proposed § 39.51(b)(2)(ii) would require that a DCO have 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 proposed § 39.51(b)(3) to require that a DCO: Consent to jurisdiction in the United States; designate, authorize, and identify to the Commission an agent in the United States to accept any 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 brought against, or any investigations relating to, the DCO or any of its U.S. clearing members; and promptly inform the Commission of any change of agent to accept such notice or service of process.

The Commission proposed § 39.51(b)(4) to require a DCO to comply, and demonstrate compliance as requested by the Commission, with any condition of the DCO's registration order.

The Commission proposed § 39.51(b)(5) to require a DCO to make all documents, books, records, reports, and other information related to its operation as a DCO (hereinafter, “books and records”) open to inspection and copying by any Commission representative, and to promptly make its books and records available and provide them directly to Commission representatives, upon the request of a Commission representative.

Finally, under proposed § 39.51(b)(7), the Commission may condition alternative compliance on any other facts and circumstances it deems relevant.

As discussed below, the Commission received comments on the applicable requirements proposed in § 39.51(b)(1) including customer protection and swap data reporting requirements; the open access condition proposed in § 39.51(b)(2); the inspection of books and records condition proposed in § 39.51(b)(5); and the Commission's ability to grant registration subject to other conditions as proposed in § 39.51(b)(7).

i. Applicable Requirements of the CEA and Commission Regulations

Proposed § 39.51(b)(1) provided that a DCO subject to alternative compliance must comply with the DCO Core Principles through compliance with

applicable legal requirements in its home country, and any other requirements specified in its registration order including, but not limited to, the customer protection requirements of section 4d(f) of the CEA, parts 1 and 22, and § 39.15 of the Commission's regulations; the part 45 swap data reporting requirements; and subpart A of Part 39. The Commission received comments on customer segregation and customer portability aspects of the proposed customer protection requirements and comments on the proposed part 45 swap data reporting requirements.

(1) Customer Segregation Requirements

ASX, JSCC, KRX, and OTC Clear, all currently exempt DCOs, opined in a joint letter that requiring DCOs subject to alternative compliance to comply with the Commission's customer segregation requirements, including the treatment of U.S. customer collateral under the U.S. Bankruptcy Code, lacked any deference by the Commission to foreign regulators. They indicated that, as a result, none of them plan to register under the alternative compliance framework.

JSCC separately argued that because the alternative compliance framework is limited to DCOs that do not pose substantial risk to the U.S. financial system, the Commission should not impose its own unique customer protection requirements. JSCC recommended that the Commission defer to a home country's customer protection requirements so long as they are consistent with the PFMIs. JSCC reasoned that the direct application of the U.S. Bankruptcy Code for the protection of customer funds would create little benefit while imposing a significant burden on non-U.S. DCOs whose home country regulators have implemented their own customer protection framework in compliance with the PFMIs. JSCC stated that requiring non-U.S. DCOs to comply with both their home country regime and the U.S. regime in this regard could be impractical when those regimes are incompatible with each other.

JSCC explained that it cannot strictly comply with section 4d(f) of the CEA, which requires that customer funds be segregated at all times, as Japanese law and JSCC's rulebook require JSCC to settle customer collateral for a period of a few hours through an account at the Bank of Japan.

JSCC argued that, as a result, it would be unable to register under the alternative compliance regime, despite the fact that swaps customers would be protected under regulations and supervision that fully conforms with the relevant PFMIs and provides sufficient safety for customers in all of the jurisdictions where JSCC operates.

JSCC attempted to register with the Commission as a DCO but, due to the issues JSCC discussed in its comment letter, JSCC ultimately sought and received an exemption from DCO registration.

See

JSCC Order of Exemption from Registration (Oct. 26, 2015), available at

https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf.

Exempt DCOs are not currently permitted to clear for U.S. customers.

See

Exemption from Derivatives Clearing Organization Registration, 83 FR 39923, 39926 (Aug. 13, 2018).

Similarly, ASX opined that its client protection model is consistent with the PFMIs and meets Australian financial stability standards, but that because it is not exactly aligned with U.S. customer protection requirements, ASX would not be able to register under the alternative compliance framework.

The Commission is not persuaded by the comments. While the PFMIs are the international standards for FMIs, they are not designed to address all of the Commission's responsibilities in this area.

The focus of the PFMIs is “to limit systemic risk and foster transparency and financial stability. . . . Other objectives, which include . . . specific types of investor and consumer protections, can play important roles in the design of [FMIs], but these issues are generally beyond the scope of” the PFMIs.

By contrast, the purposes of the CEA and thus the responsibilities of the Commission notably include “avoidance of systemic risk” and “ensur[ing] the financial integrity of all transactions subject to [the CEA],” but also include “protect[ing] all market participants from . . . misuses of customer assets.”

CPMI-IOSCO, PFMIs, ¶ 1.15 and n. 16.

7 U.S.C. 5(b).

While no FCM customer should suffer a loss of access to their assets for any period of time, customers of clearing members registered as FCMs have fared uniquely well in cases of FCM bankruptcy, both in protecting against loss of customer assets, and particularly in transferring all, or at least most, customer assets to a solvent FCM in the days (rather than months or years) following a bankruptcy. These very positive outcomes are a result of the combination of the customer collateral segregation requirements of section 4d of the CEA and the regulations thereunder, operating in an interlinked and mutually supporting manner with the relevant provisions of the Bankruptcy Code, Subchapter IV of Chapter 7,

the Commission's authorities under section 20 of the CEA,

and the Commission's bankruptcy regulations under part 190.

See

11 U.S.C. 761-767.

See

7 U.S.C. 24.

The Commission is adopting § 39.51(b)(1) as proposed, including the requirement that the DCO comply with section 4(d)(f) of the CEA, parts 1 and 22 of the Commission's regulations, and § 39.15.

(2) Customer Portability in the Event of a Default

ASX and JSCC both commented that they would not be able to register pursuant to the alternative compliance framework as they could not feasibly maintain a sufficient number of FCM clearing members to support U.S. customer clearing. ASX believes that it would be difficult to add multiple FCMs as clearing members of ASX as an FCM may already have a non-U.S. affiliate clearing member of ASX that provides access to exchange-traded futures and options products under the foreign board of trade model. Similarly, JSCC noted that entities active in swaps customer clearing are global banking groups, many of which serve customers for swaps clearing through subsidiaries in the non-U.S. markets, including Japan. JSCC noted that very few non-U.S. entities are registered as FCMs, and the overall number of FCMs has been decreasing. ASX and JSCC commented that the cost of onboarding an FCM, such as an additional foreign affiliate, solely to provide over-the-counter swaps clearing services to U.S. customers would be prohibitively expensive. As a result, ASX and JSCC concluded that non-U.S. DCOs would be unlikely to find enough FCM clearing members, particularly to achieve portability of customer positions in the event of an FCM default, as required by Commission regulations and the PFMIs. JSCC believes the requirement to have swaps customers clear through an FCM at a non-U.S. DCO likely would continue to concentrate U.S. customers at a limited number of DCOs.

The Commission is not persuaded by the commenters' suggestion that a dearth of FCMs clearing at non-U.S. DCOs should negate the requirement that a U.S. swaps customer clear through an FCM at a DCO, including a DCO subject to alternative compliance. There are multiple non-U.S. DCOs that have successfully implemented an FCM customer clearing model. The Commission believes the alternative compliance option will make registration less burdensome for non-

U.S. clearing organizations, which may incentivize additional ones to register. As a result, U.S. customers could have more clearing options without sacrificing any of the protections they have come to expect and rely upon.

As stated above, the Commission is adopting § 39.51(b)(1) as proposed.

Moreover, while both Commission regulations and the PFMIs call for a DCO to have rules (arrangements) that foster portability (

see

17 CFR 190.06(a); CPMI-IOSCO, PFMIs, Principle 14, Key Consideration 3), neither Commission regulations nor the PFMIs require DCOs to ensure that there are clearing members that are willing and able transferees.

(3) Swap Data Reporting

ICE commented that, if an applicant's home country reporting rules correspond with the Commission's swap data reporting regulations in part 45, the Commission should consider obtaining swap data from the applicant's home country regulator through an MOU. ICE noted that compliance with the Commission's rules in addition to home jurisdiction swap reporting rules could be very costly for DCOs, and provide little additional benefit. The Commission intends for this rule to provide deference to foreign regulators on non-U.S. DCO supervision, depending on the risk the DCO poses to the U.S. financial system, and notes that the part 45 swap data reporting regulations, to which DCOs are already subject, are unrelated to DCO supervision and outside the intended scope of this rule. The Commission believes that issues relating to deference on swaps data reporting by DCOs have broad real and potential cross-border implications and should instead be addressed in a larger, comprehensive review of swaps data reporting by non-U.S. entities that the Commission may undertake through future Commission action. Therefore, the Commission is adopting the requirement that DCOs subject to alternative compliance comply with part 45 as proposed.

ii. Open Access

With respect to proposed § 39.51(b)(2) which the Commission proposed to require a DCO to treat swaps with the same terms and conditions as economically equivalent, allow offset to the extent permitted by the DCO, and provide non-discriminatory clearing for swaps executed bilaterally or on unaffiliated trading platforms, ICE stated that it is not clear why this requirement is necessary if a DCO's home jurisdiction has a comparable requirement. Regulation 39.51(b)(2) would codify for DCOs subject to alternative compliance the requirements of section 2(h)(1)(B) of the CEA, with respect to swaps cleared by a DCO to which one or more of the counterparties is a U.S. person. Even if the Commission did not adopt § 39.51(b)(2), the statutory requirements would still apply. The Commission is codifying these requirements and adopting § 39.51(b)(2) as proposed.

iii. Consent to Jurisdiction; Designation of Agent for Service of Process

The Commission proposed § 39.51(b)(3) to require that a DCO: Consent to U.S. jurisdiction; designate, authorize, and identify an agent in the United States; and promptly inform the Commission of any change of its U.S. agent. The Commission did not receive any comments on this aspect of the proposal. The Commission is adopting § 39.51(b)(3) as proposed.

iv. Compliance

The Commission proposed § 39.51(b)(4) to require a DCO to comply, and demonstrate compliance as requested by the Commission, with any condition of the DCO's registration order. The Commission did not receive any comments on this aspect of the proposal. The Commission is adopting § 39.51(b)(4) as proposed.

v. Inspection of Books and Records

The Commission proposed § 39.51(b)(5) to require a DCO to make all books and records open to inspection and copying by any Commission representative, and to promptly make its books and records available and provide them directly to Commission representatives, upon the request of a Commission representative.

CCIL stated that the proposed approach may create a “parallel structure of regulatory bodies.” CCIL also argued that it may undermine and conflict with principles of international comity and the home country laws and regulations of the DCO.

ICE stated that the Commission should state explicitly that it would defer to the home country regulator's examination of the DCO's books and records provided that the home country regulator shares the results of the examination with the Commission. As explained in the proposal, the Commission does not anticipate conducting routine site visits to DCOs subject to alternative compliance. However, the Commission may request a DCO to provide access to its books and records in order for the Commission to ensure that, among other things, the DCO continues to meet the eligibility requirements for alternative compliance as well as the conditions of its registration. The Commission is adopting § 39.51(b)(5) as proposed.

vi. Representation of Good Regulatory Standing

The Commission proposed § 39.51(b)(6) to require that a DCO request and the Commission receive an annual written representation from a home country regulator that the DCO is in good regulatory standing within 60 days following the end of the DCO's fiscal year. The Commission received comments on the definition of “good regulatory standing” as discussed above, but did not receive comments on the existence of the condition. The Commission is adopting § 39.51(b)(6) as proposed.

vii. Other Conditions

The Commission proposed § 39.51(b)(7) to provide that the Commission may condition alternative compliance on any other facts and circumstances it deems relevant. ICE supported the Commission's ability to, in its discretion, grant registration subject to conditions, provided that this flexibility is applied consistently for similarly situated DCOs from the same jurisdiction and that sufficient deference is granted to the overall home country regulatory regime. ICE agreed that the Commission should be mindful of the principles of international comity, noting that the proposal stated that the Commission may take into account, in placing conditions on alternative compliance, the extent to which the home country regulator defers to the Commission with respect to the oversight of U.S. DCOs.

ICE cautioned that any such approach should not be applied to create uncertainty for a DCO relying on the relief, and that such an approach might result in other regulators taking similar positions, which could have the effect of lessening cross-border cooperation. The Commission appreciates ICE's comments. As noted in the proposal, the Commission intends to use its discretion 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.”

The recognition

that market participants and market facilities in a global swap market are subject to multiple regulators and potentially duplicative regulations, and can therefore benefit from regulatory harmonization and mutual deference among regulators, underpins the alternative compliance 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 alternative compliance to DCOs in that jurisdiction, both at the point of initially registering a non-U.S. DCO subject to alternative compliance, and in determining whether compliance under that framework should continue. The Commission is adopting § 39.51(b)(7) as proposed.

See

Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 34825 (July 19, 2019).

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.

c. General Reporting Requirement

Proposed § 39.51(c) sets forth general reporting requirements pursuant to which a DCO subject to alternative compliance must provide certain information directly to the Commission (1) on a periodic basis (daily or quarterly); and (2) after the occurrence of a specified event, each in accordance with the submission requirements of § 39.19(b).

Proposed § 39.51(c)(1) requires a DCO to provide to the Commission the information specified in § 39.51(c) (and described below), as well as any other information that the Commission deems necessary, including, but not limited to, information for use in evaluating the continued eligibility of the DCO for alternative compliance, reviewing the DCO's compliance with any conditions of its registration, and conducting oversight of U.S. clearing activity.

Proposed § 39.51(c)(2)(i) requires a DCO to compile a report as of the end of each trading day, and submit the report to the Commission by 10 a.m. U.S. central time on the following business day, containing the following information with respect to swaps: (A) Total initial margin requirements for all clearing members; (B) initial margin requirements and initial margin on deposit for each U.S. clearing member, by house origin and by each customer origin, and by each individual customer account; and (C) daily variation margin, separately listing the mark-to-market amount collected from or paid to each clearing member, by house origin and by each customer origin, and by each individual customer account.

Proposed § 39.51(c)(2)(ii) requires a DCO to compile a report as of the last day of each fiscal quarter, and submit the report to the Commission no later than 17 business days after the end of the fiscal quarter, containing a list of U.S. clearing members, with respect to the clearing of swaps.

Proposed § 39.51(c)(2)(iii) through (vii) requires a DCO to provide information to the Commission upon the occurrence of certain specified events. Proposed § 39.51(c)(2)(iii) requires a DCO to provide prompt notice to the Commission regarding any change in its home country regulatory regime. Proposed § 39.51(c)(2)(iv) requires a DCO to provide to the Commission, to the extent that it is available to the DCO, any examination report or examination findings by a home country regulator, and notify the Commission within five business days after it becomes aware of the commencement of any enforcement or disciplinary action or investigation by a home country regulator. Proposed § 39.51(c)(2)(v) requires a 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. Proposed § 39.51(c)(2)(vi) requires a DCO to provide immediate notice to the Commission in the event of a default (as defined by the DCO in its rules) by any clearing member, including the amount of the clearing member's financial obligation. If the defaulting clearing member is a U.S. clearing member, the notice must also include the name of the U.S. clearing member and a list of the positions it held. Proposed § 39.51(c)(2)(vii) requires a DCO to provide notice of any action that it has taken against a U.S. clearing member, no later than two business days after the DCO takes such action.

The Commission requested comment on whether DCOs subject to alternative compliance should be excused from reporting any particular data streams in order to limit duplicative reporting obligations in the cross-border context without jeopardizing U.S. customer protections, particularly given the existence of an MOU between the Commission and the DCO's home country regulator as a requirement for eligibility for alternative compliance.

See

Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 34826 (July 19, 2019).

In response to the Commission's request for comment, CCP12 and Eurex stated that a global harmonization of reporting requirements would eliminate duplicative requirements and enable regulators to share data on the basis of MOUs. Eurex stated that the Commission should eliminate proposed § 39.51(c)(2)(i) and (ii) in order to enhance the benefits of alternative compliance as compared to traditional registration. CCP12 suggested that the Commission limit the daily reporting requirements of proposed § 39.51(c)(2)(i) to information related to FCM clearing members. Without specifying particular provisions, CCP12 also argued that in some cases the proposed reporting requirements would be costly and would overlap with requirements imposed by home country regulators. CCIL generally supported avoiding duplicative reporting through the use of MOUs.

Because none of the commenters identified specific proposed reporting requirements as duplicative of existing obligations, the Commission is declining to modify proposed § 39.51(c). In this rulemaking, the Commission has attempted to limit required reporting to that information it will need to perform its supervisory function. The Commission believes that the reporting requirements in § 39.51(c) are appropriately tailored to accomplish that goal with respect to DCOs subject to alternative compliance. For this reason, the Commission disagrees with Eurex that § 39.51(c)(2)(i) and (ii) should be eliminated, and notes that Eurex did not identify any particular faults with these provisions. The Commission also disagrees that the daily reports required by § 39.51(c)(2)(i) should be limited to information related to FCM clearing members. Limiting daily reports in this way would provide the Commission with incomplete data and would thus frustrate its ability to assess the risk exposure of U.S. persons and the extent of a non-U.S. DCO's U.S. clearing activity.

The Commission noted in the proposal that the goal of § 39.51(c)(2)(i) is to provide the Commission with information regarding the cash flows associated with U.S. persons clearing swaps through DCOs subject to alternative compliance in order for the Commission to assess the risk exposure of U.S. persons and the extent of the DCO's U.S. clearing activity.

See

Registration With Alternative Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 34825 (July 19, 2019).

The Commission also requested comment on the proposed requirement

in § 39.51(c)(2)(iii) that a DCO provide prompt notice to the Commission regarding any change in its home country regulatory regime. Specifically, the Commission asked whether it should instead require a DCO subject to alternative compliance to provide prompt notice of any

material

change in its home country regulatory regime. The Commission did not receive any comments directly responsive to this question.

The Commission did receive several comments on proposed § 39.51(c)(1) that do not relate to the specific requests for comment. Mr. Kubitz stated that the reporting requirements for DCOs subject to alternative compliance should be at least as comprehensive as the requirements for other DCOs. The Commission believes that the reporting requirements in § 39.51(c) are appropriately tailored to protect its regulatory interests without requiring information on topics on which it intends to defer to the home country regulator, and notes that Mr. Kubitz did not identify why he believes the reporting requirements in § 39.51(c) are insufficient. If the Commission subsequently determines that it needs additional information, § 39.51(c)(1) requires a DCO subject to alternative compliance to provide the Commission with any information that it deems necessary.

In regards to proposed § 39.51(c)(2)(iii), CCIL stated that a DCO subject to alternative compliance should not have to notify the Commission regarding a change in its home country regulatory regime because notification could be addressed through an MOU between the Commission and the home country regulator. The Commission notes than an MOU would not obligate the home country regulator to notify the Commission and believes that it is therefore appropriate to require the DCO, as the Commission's registrant, to be responsible for reporting this information.

With regard to the event-specific reporting requirements of § 39.51(c)(2)(vi) and (vii), ICE noted that events involving U.S. clearing members would be subject to greater reporting requirements than those related to non-U.S. clearing members, and argued that requirements related to U.S. clearing members should be no greater than those related to other clearing members. The Commission has a greater supervisory interest in U.S clearing members and believes that this incremental difference in reporting obligations is justified as a result.

In light of the foregoing, the Commission is adopting § 39.51(c) as proposed.

d. Modification of Registration Upon Commission Initiative

Proposed § 39.51(d) permits the Commission to modify the terms and conditions of a DCO's order of registration, in its discretion and upon its own initiative, based on changes to or omissions in facts or circumstances pursuant to which the order was issued, or if any of the terms and conditions of the order have not been met. For example, the Commission could modify the terms of a registration order upon a determination that compliance with the DCO's home country regulatory regime does not satisfy the DCO Core Principles, the DCO is not in good regulatory standing in its home country, or the DCO poses substantial risk to the U.S. financial system.

Proposed § 39.51(d)(2) through (4) set forth the process for modification of registration upon the Commission's initiative. Proposed § 39.51(d)(2) requires the Commission to first provide written notification to a DCO that the Commission is considering modifying the DCO's order of registration and the basis for that consideration. Proposed § 39.51(d)(3) provides up to 30 days for a DCO to respond to the Commission's notification in writing following receipt of the notification, or at such later time as the Commission may permit in writing. Proposed § 39.51(d)(4) provides that, following receipt of a response from the DCO, or after expiration of the time permitted for a response, the Commission may: (i) Issue an order requiring the DCO to comply with all requirements applicable to DCOs registered pursuant to § 39.3(a)(2), effective as of a date to be specified in the order, which is intended to provide the DCO with a reasonable amount of time to come into compliance with the CEA and Commission regulations or request a vacation of registration in accordance with § 39.3(f); (ii) issue an amended order of registration that modifies the terms and conditions of the order; or (iii) provide written notification to the DCO that its order of registration will remain in effect without modification to its terms and conditions.

The Commission received four comments on proposed § 39.51(d). ICE stated that modification should be limited to instances covered by proposed § 39.51(d)(1)(i), where there has been a change in the home country regulatory regime such that it no longer satisfies the DCO Core Principles. ICE argued that the Commission should identify the process by which the Commission will notify the DCO subject to alternative compliance of the basis for a modification and provide the DCO with an opportunity to respond. LCH recommended that, if after registering a DCO subject to alternative compliance the Commission determines that the DCO poses substantial risk to the U.S. financial system, the Commission should clearly indicate the timeframe by which the DCO needs to become fully compliant with Commission regulations. CCP12 and Eurex stated that the Commission should establish a streamlined “re-application” process for any DCO registered under the existing framework which later applies for alternative compliance but then is subsequently deemed to pose substantial risk to the U.S. financial system and thus must again become DCOs, including all of subpart B of Part 39.

The Commission disagrees that it should only modify an order of registration granted to a DCO subject to alternative compliance when there has been a change in the DCO's home country regulatory regime such that it no longer satisfies the DCO Core Principles. The Commission must be able to modify an order if there are changes to the facts and circumstances pursuant to which the order was issued, or if any of the terms and conditions of the order have not been met.

The Commission also notes that it has the authority to suspend or revoke a DCO's registration for the failure to comply with any provision of the CEA, regulations promulgated thereunder, or any order of the Commission, pursuant to section 5e of the CEA. 7 U.S.C. 7b.

In response to ICE's suggestion that the Commission identify the process by which the Commission will notify a DCO subject to alternative compliance of the basis for a modification of its order and provide the DCO with an opportunity to respond, the Commission notes that this process is provided in § 39.51(d)(2) and (3). In response to LCH's comment that the Commission should clearly indicate the timeframe within which a DCO determined to pose substantial risk to the U.S. financial system would need to become fully compliant with Commission regulations, the Commission notes that § 39.51(d)(4)(i) requires the Commission to provide the DCO “with a reasonable amount of time to come into compliance.” The Commission believes it is inappropriate to set a specific timeframe in the regulation because how much time a DCO would need will depend on how far removed its current practices are from what is required by Commission regulations. In response to

CCP12 and Eurex, the Commission notes that a DCO that is no longer eligible for alternative compliance would not have to re-apply for registration because it would already be registered. The DCO would only have to be able to demonstrate that it has come into compliance with the applicable requirements of the CEA and Commission regulations by the date specified by the Commission pursuant to § 39.51(d)(4)(i), which it could do through the annual compliance report required by § 39.10(c)(3) (a requirement which would now apply to the DCO).

For the above stated reasons, the Commission is adopting § 39.51(d) as proposed.

F. Part 140—Organization, Functions, and Procedures of the Commission

The Commission proposed amendments to § 140.94(c) to delegate authority to the Director of the Division of Clearing and Risk for all functions reserved to the Commission in proposed § 39.51, except for the authority to grant registration to a DCO, prescribe conditions to alternative compliance of a DCO, and modify a DCO's registration order. The Commission did not receive any comments on the proposed changes to § 140.94(c) and is adopting them as proposed.

G. Responses to Additional Requests for Comment

In section IV of the proposal, the Commission requested comment on eight specific issues. In the six instances in which these requests related to particular aspects of the proposal, the responses were included in the discussion above. This section addresses the other two requests.

1. Request for Comment No. 1

In the proposal, the Commission asked whether the proposed alternative compliance regime, including both the application process and the ongoing requirements, strikes the right balance between the Commission's regulatory interests and the regulatory interests of non-U.S. DCOs' home country regulators.

Several commenters expressed support for the proposed alternative compliance regime. SIFMA stated that it supports the steps taken by the proposal to provide greater deference to home country regulation of non-U.S. DCOs. SIFMA also supported the proposal's risk-based measures to calibrate the extent of extraterritorial U.S. regulations. LCH stated that the proposal adequately balances the Commission's regulatory interests with the regulatory interests of home country regulators, and noted that the proposal appropriately accounts for both the Commission's risk-related concerns and international comity. CCIL stated that the proposed alternative compliance framework provides a better alternative to the existing structure. Specifically, CCIL supported the definitions of “good regulatory standing” and “substantial risk” in proposed § 39.2, stating that these definitions and the alternative compliance framework as a whole rightly endorse the primacy of the home country regulator and compliance under home country requirements. CCP12 stated that it welcomes the Commission's alternative compliance approach because it recognizes the importance of regulatory deference and increased cross-border cooperation. Eurex stated that the proposed framework brings welcome relief from the Part 39 rules for non-U.S. DCOs that do not pose systemic risk to the U.S. financial system. WFE advocated for an approach of regulatory deference and international comity, without taking a position on whether the proposed alternative compliance regime is such an approach. WFE added that departing from the international principle of regulatory deference should only be required if there is a clear and truly substantial risk to the financial stability of the host-authority jurisdiction.

Many of the commenters that expressed support for the proposed alternative compliance regime also recommended improvements. CCP12 recommended alleviating some of the requirements of alternative compliance, but it did not identify the requirements to which it objected. Eurex argued that the Commission should reduce the number of reporting requirements applicable to DCOs subject to alternative compliance. CCIL stated that a DCO subject to alternative compliance should not have to comply with the DCO Core Principles because its home country regulator will alternatively assess its compliance with the PFMIs. Furthermore, CCIL argued that if each country requires compliance with its own regulations, it could create a complex web of requirements that could result in a huge compliance burden on clearing organizations and confusion as to how to comply with conflicting regulations.

After reviewing these comments, the Commission continues to believe that the alternative compliance regime strikes the right balance between the Commission's regulatory interests and the regulatory interests of home country regulators. As previously discussed, the Commission does not agree that the level of reporting required of DCOs subject to alternative compliance should be further reduced. In response to CCIL, the Commission notes that the CEA requires a DCO to meet the DCO Core Principles in order to be registered and to maintain its registration, and therefore the Commission must ensure that DCOs, including DCOs subject to alternative compliance, meet the DCO Core Principles, not simply the PFMIs as implemented by each home country regulator. The Commission further notes that a non-U.S. clearing organization that wishes to meet only the PFMIs can apply for an exemption from DCO registration.

2. Request for Comment No. 2

In the proposal, the Commission asked whether there are additional regulatory requirements under the CEA or Commission regulations that should not apply to DCOs subject to alternative compliance in the interest of deference and allowing such DCOs to satisfy the DCO Core Principles through compliance with their home country regulatory regimes while still protecting the Commission's regulatory interests.

CCIL argued that the Commission should be satisfied with a certification by a home country regulator that a DCO subject to alternative compliance complies with the PFMIs. As previously noted, the CEA requires DCOs to comply with the DCO Core Principles. The Commission could not permit a DCO to be registered solely on the basis of a home country regulator's certification that the DCO complies with the PFMIs.

CCP12 stated that DCOs subject to alternative compliance could face a significant challenge complying with section 4d(f) of the CEA and the Commission's customer protection requirements, mainly because these requirements apply customer protections consistent with the U.S. Bankruptcy Code and part 190 of the Commission's regulations irrespective of the home country laws applicable to a non-U.S. DCO and its FCM clearing members. The Commission notes that all DCOs, including non-U.S. DCOs, are currently subject to these customer protection requirements. The proposal would simply leave the requirements in place. Given that CCP12 did not identify how the customer protection requirements would present new challenges for DCOs subject to alternative compliance, the Commission continues to believe that the protections afforded to customers by the requirements outweigh the burdens of compliance for these DCOs, for the reasons previously discussed.

Eurex and CCP12 each identified reporting requirements that they argued should not apply to DCOs subject to alternative compliance. In regards to the reporting requirements of § 39.51(c), CCP12 stated that oversight of U.S. customers' swaps clearing activity could be fulfilled with “less regular and more relevant data information,” and suggested that the daily reports required by § 39.51(c)(2)(i) be limited to FCMs. Eurex stated that the reporting requirements of proposed § 39.51(c)(2)(i) and (ii) and the part 45 reporting requirements should not apply to non-U.S. DCOs because these requirements are costly and overlap to a large degree with existing requirements imposed by home country regulators. Eurex recognized that the Commission needs data to evaluate eligibility for and compliance with the alternative compliance framework; however, Eurex would instead prefer a global standardization of reporting and cooperation among data repositories. CCP12 also encouraged international standard-setting bodies to standardize data fields and promote cooperation among repositories to avoid duplicative reporting.

As previously discussed, the Commission disagrees that the reporting required under § 39.51(c) should not apply to DCOs subject to alternative compliance, and that the daily reports required by § 39.51(c)(2)(i) should be limited to FCMs. With respect to the part 45 requirements, the Commission believes that the transparency into the swaps market provided by the swap data recordkeeping and reporting requirements—requirements applicable to all currently registered DCOs, including non-U.S., and exempt DCOs—strongly warrants the burden of requiring non-U.S. DCOs subject to alternative compliance to report such information. In response to Eurex and CCP12's comments about international reporting standards, the Commission agrees that global harmonization of reporting standards and cooperation between international regulators could reduce duplicative reporting. However, such an arrangement is beyond the scope of this rulemaking, and in the absence of such a regime, the Commission must require reporting at a level that will allow it to protect its regulatory interests. The Commission believes that the reporting requirements in proposed § 39.51(c) are appropriately tailored to accomplish that goal with respect to DCOs subject to alternative compliance.

H. Additional Comments

In addition to the comments discussed above, the Commission received several comments that did not directly relate to a specific part of the proposal or respond to a specific request for comment. The Commission appreciates the additional feedback. In the instances where these comments do not address proposed changes and are therefore outside the scope of this rulemaking, the Commission may take the comments under advisement for future rulemakings.

Citadel argued that the proposed alternative compliance framework did not appear to be specifically contemplated in the CEA. Citadel suggested that the Commission should proceed cautiously based on the lack of clear statutory guidance.

As discussed in the proposal, the Commission believes the CEA provides the Commission with the authority to adopt the regulations implementing the alternative compliance framework. The Commission has broad authority under section 8a(5) of the CEA to make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA.

Section 5b(c)(2)(A)(i) of the CEA provides that, to be registered and to maintain registration as a DCO, a DCO must comply with each DCO Core Principle and any requirement that the Commission may impose by rule or regulation pursuant to section 8a(5). Section 5b(c)(2)(A)(ii) of the CEA further provides that, subject to any rule or regulation prescribed by the Commission, a DCO has reasonable discretion in establishing the manner by which it complies with each DCO Core Principle. The Commission first adopted regulations to implement the DCO Core Principles in subpart B of Part 39, which, until now, have applied to all DCOs. With the adoption of the regulations implementing the alternative compliance framework, the Commission is using its authority under section 8a(5) of the CEA to establish a second, separate path to compliance with the DCO Core Principles for non-U.S. DCOs that do not pose substantial risk to the U.S. financial system.

7 U.S.C. 12a(5).

ICE noted that the proposal does not address the requirement under § 39.5 for DCOs to make certain filings before clearing new swaps or categories of swaps, and asked that the Commission clarify that § 39.5 filings would not be required of DCOs subject to alternative compliance. The Commission notes that because DCOs subject to alternative compliance would still be registered, they, in fact, would be required to comply with subpart A of Part 39, which includes § 39.5.

ICE noted that there are non-U.S. clearing organizations that clear both swaps and futures, and believes that to the extent possible, any relief for swaps clearing (including under the alternative compliance framework) should also apply to swaps cleared at a DCO that clears both futures and swaps, and suggests that the final rules be clarified to make this explicit. As explained in the proposal, the Commission's regulatory framework already distinguishes between clearing of futures executed on a DCM, for which DCO registration is required, and clearing of foreign futures, for which it is not. The Commission had not contemplated permitting a non-U.S. DCO that clears futures listed for trading on a DCM to be eligible for alternative compliance as most non-U.S. DCOs are registered to clear swaps only. The Commission would have to amend the rules being adopted herein to allow non-U.S. DCOs that clear DCM futures to be eligible; for example, the Commission would have to adjust the substantial risk test to account for futures. The Commission will give this idea further consideration.

FIA requested that the Commission confirm that its 2016 EU comparability determination

remains in place and is not replaced or amended in any way by this rulemaking such that market participants may continue to rely on it. The EU comparability determination compared Part 39 with EU regulations and identified those instances where the requirements are so similar that compliance with the Part 39 regulation(s) would constitute compliance with the EU regulation(s) as well. Unless any of the regulations included in the determination have been amended or repealed, the Commission's determination stands.

See

Comparability Determination for the European Union: Dually-Registered Derivatives Clearing Organizations and Central Counterparties, 81 FR 15260 (Mar. 22, 2016).

Better Markets argued that providing DCOs with the options of traditional registration, exemption from registration, and registration subject to alternative compliance is unnecessarily complex and over time would create competitive disparities and differences in DCO risk management and other practices. Better Markets further argued that the proposed framework would facilitate forum shopping and regulatory

arbitrage, deferring to non-U.S. DCOs to determine for themselves how they comply with U.S. requirements.

The Commission does not believe that presenting clearing organizations with the additional option of registration with alternative compliance will result in material disparities in DCO risk management practices because all registered DCOs will still be required to satisfy the DCO Core Principles. Moreover, the Commission does not believe that the alternative compliance framework will result in regulatory arbitrage because it will only be available to an applicant that can demonstrate, among other things, that compliance with its home country requirements would satisfy the DCO Core Principles.

Citadel suggested that the primary beneficiaries of the alternative compliance framework will be non-U.S. DCOs which are already registered with the Commission (and not exempt DCOs or clearing organizations that currently have no status with the Commission). Citadel stated that permitting certain non-U.S. DCOs to use an alternative compliance framework means that these DCOs will be able to provide clearing services to U.S. market participants without complying with as many U.S. regulatory requirements as U.S. DCOs, potentially creating an un-level competitive playing field where lower operational and regulatory costs allow non-U.S. DCOs to increase market share at the expense of U.S. DCOs. Such a concern may be particularly relevant where the home jurisdiction of the non-U.S. DCO has failed to grant similar deference to U.S. DCOs. As a result, Citadel recommends that the Commission assess the foreign jurisdiction's treatment of U.S. DCOs prior to granting a non-U.S. DCO's application for alternative compliance.

The Commission believes that non-U.S. DCOs, exempt DCOs, and non-U.S. clearing organizations that are neither registered nor exempt may benefit from the alternative compliance framework, but notes that each current non-U.S. DCO had to demonstrate compliance with each of the requirements of subpart B of Part 39 during its application process, which will not be required of new applicants for registration subject to alternative compliance. The Commission noted in the proposal that one of the goals of the alternative compliance framework is to ease the regulatory burden on non-U.S. DCOs that do not pose substantial risk to the U.S. financial system, including some current DCOs. The Commission believes that doing so is appropriate because these DCOs are subject to multiple regulators and regulatory regimes, and face duplicative regulations. However, as previously noted here and in the proposal, the Commission may condition alternative compliance on any other facts and circumstances it deems relevant. In doing so, the Commission would be mindful of principles of international comity. The Commission could take into account the extent to which the relevant foreign regulatory authorities defer to the Commission with respect to oversight of U.S. DCOs, in light of international comity.

SIFMA argued that the Commission should use this opportunity to promote the competitiveness of U.S. FCMs and swap dealers by expanding their ability to access non-U.S. clearing organizations. Specifically, SIFMA believes the Commission should (1) permit U.S. FCMs to use an omnibus clearing structure for foreign cleared swaps like they currently use for foreign futures and (2) allow a non-U.S. clearing organization to accept foreign branches of U.S. bank swap dealers as members without requiring the non-U.S. clearing organization to register with the Commission as a DCO or obtain an exemption from DCO registration. SIFMA argues that these changes would also promote customer choice and reduce market concentration. The Commission appreciates this additional feedback and will give it further consideration.

ASX, JSCC, KRX, and OTC Clear argued that the Commission should finalize the exempt DCO rulemaking notwithstanding the outcome of this rulemaking.

ASX, JSCC, KRX, and OTC Clear stated that a clearing member of a non-U.S. DCO should be able to clear swaps for U.S. customers without registering as an FCM. ASX, JSCC, KRX, OTC Clear, and ICE specifically suggested that the Commission adopt an exemption similar to the § 30.10 exemption for foreign futures and foreign options. ASX believes that adopting a part 30-type regime for swaps could achieve cost savings and improved customer experience for some U.S. customers of non-FCM clearing members by allowing them to access both foreign futures markets and exempt DCOs for swaps under an aligned framework. In addition, ASX, JSCC, KRX, and OTC Clear suggested that an exemption could help address their concern that U.S. customers are being forced to concentrate their clearing in a limited number of DCOs and FCM clearing members. They argued that the situation is further exacerbated for those U.S. customers who must clear swaps denominated in foreign currencies subject to the

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