The Division of Clearing and Risk issued a letter stating that it will not recommend that the Commission take enforcement action against ASX Clear (Futures) Pty Limited for failure to register as a derivatives clearin...

Summary: The Division of Clearing and Risk issued a letter stating that it will not recommend that the Commission take enforcement action against ASX Clear (Futures) Pty Limited for failure to register as a derivatives clearing organization pursuant to Section 5b(a) of the Commodity Exchange Act in connection with the clearing of certain interest rate swaps.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5430

Facsimile: (202) 418-5547

aradhakrishnan@cftc.gov

Ananda Radhakrishnan

Director

Division of Clearing and Risk

CFTC Letter No. 14-07

No-Action

February 6, 2014

Division of Clearing and Risk

Ms. Amanda J. Harkness

Group General Counsel & Company Secretary

ASX Group

Exchange Centre

20 Bridge Street

Sydney NSW 2000

PO Box H224

Australia Square NSW 1215, Australia

Dear Ms. Harkness:

This is in response to your letter dated September 18, 2013 (“Letter”), to the Division of

Clearing and Risk (“Division”) of the Commodity Futures Trading Commission

(“Commission”). In the Letter, you request that the Division confirm that it will not recommend

that the Commission take enforcement action against ASX Clear (Futures) Pty Limited

(“ASXCLF”) for failure to register as a derivatives clearing organization (“DCO”) pursuant to

Section 5b(a) of the Commodity Exchange Act (“CEA”).1

Under this requested relief, ASXCLF would be permitted to clear Australian and New

Zealand dollar-denominated interest rate swaps (“A$ IRS” and “NZ$ IRS,” respectively, and

together, “A&NZ$ IRS”) for the proprietary trades of qualified U.S. clearing participants and

their parent entities and affiliates

organization (“DCO”) pursuant to

Section 5b(a) of the Commodity Exchange Act (“CEA”).1

Under this requested relief, ASXCLF would be permitted to clear Australian and New

Zealand dollar-denominated interest rate swaps (“A$ IRS” and “NZ$ IRS,” respectively, and

together, “A&NZ$ IRS”) for the proprietary trades of qualified U.S. clearing participants and

their parent entities and affiliates. You request that such relief be effective until the earlier of

December 31, 2014 or the date upon which the Commission, acting pursuant to its authority

under Section 5b(h) of the CEA, exempts ASXCLF from the DCO registration requirement of

the CEA.2 You further represent that ASXCLF is ready to apply for an exemption from

1 7 U.S.C. § 7a-1(a).

2 Section 5b(h) of the CEA, 7 U.S.C. § 7a-1(h), permits the Commission to exempt a DCO from registration for the

clearing of swaps to the extent that the Commission determines that such DCO is subject to comparable,

comprehensive supervision by the Securities and Exchange Commission or the appropriate government authorities

Ms. Amanda J. Harkness

February 6, 2014

Page 2

registration as a DCO once the Commission addresses the process or specific criteria and

conditions necessary to obtain exemptive relief.

Statement of Facts

Based upon the representations made by ASXCLF to the Division in the Letter as well as

representations made in meetings and telephone conversations, we understand the relevant facts

to be as follows:

ASXCLF is a wholly-owned subsidiary of the ASX Clearing Corporation, which is part

of ASX Group. ASXCLF operates as a futures clearinghouse and as of September 2013,

provides dealer-only clearing services in A$ IRS.3

Currently, ASXCLF limits its swap clearing services to clearing participants that are not

U.S. persons. However, the Australian branches of two U.S

cts

to be as follows:

ASXCLF is a wholly-owned subsidiary of the ASX Clearing Corporation, which is part

of ASX Group. ASXCLF operates as a futures clearinghouse and as of September 2013,

provides dealer-only clearing services in A$ IRS.3

Currently, ASXCLF limits its swap clearing services to clearing participants that are not

U.S. persons. However, the Australian branches of two U.S. swap dealers have expressed a

strong interest in becoming direct participants of ASXCLF for the purpose of clearing

proprietary A$ IRS transactions.

In addition to providing clearing services for proprietary A$ IRS transactions, ASXCLF

would also like to provide clearing services to U.S. persons for interest rate swaps in other non-

U.S. currencies, such as NZ$ IRS.

With respect to the regulation and supervision of ASXCLF, all clearing organizations in

Australia must be licensed under the Australian Corporations Act of 2001, which requires the

Treasury Minister to make a finding that the clearing organization has adequate operating rules

and procedures to ensure that systemic risk is reduced and that the clearing organization operates

in a fair and effective manner. In making this assessment, the Treasury Minister considers

advice from two independent government agencies, the Australian Securities and Investment

Commission (“ASIC”), which ensures that a clearing organization’s operations are carried out in

a fair and effective way and that other conditions on a clearing organization’s license are

satisfied, and the Reserve Bank of Australia (“RBA”), which is responsible for ensuring the

financial system stability of the clearing organization.

Clearing organizations in Australia must also comply with the Australian Financial

Stability Standards (“FSS”), which set forth requirements relating to the reduction of systemic

risk. On March 29, 2013, new FSS became effective

license are

satisfied, and the Reserve Bank of Australia (“RBA”), which is responsible for ensuring the

financial system stability of the clearing organization.

Clearing organizations in Australia must also comply with the Australian Financial

Stability Standards (“FSS”), which set forth requirements relating to the reduction of systemic

risk. On March 29, 2013, new FSS became effective. The new FSS align with the Principles for

Financial Market Infrastructures (“PFMIs”) developed by the Bank for International Settlements’

Committee on Payment and Settlement Systems (“CPSS”) and the Technical Committee of the

in the home country of the DCO. At present, no foreign clearing organization has been granted an exemption from

registration for the clearing of swaps.

3 ASXCLF has represented that it is developing client clearing services, which are scheduled for commercial launch

in the second quarter of 2014. See Letter at 1 n.2.

Ms. Amanda J. Harkness

February 6, 2014

Page 3

International Organization of Securities Commissions (“IOSCO”). ASIC and the RBA have

both confirmed that they apply domestic regulations to ASXCLF that are consistent with the

PFMIs.4 In addition, the Australian Prudential Regulation Authority (“APRA”) has confirmed

that it considers ASXCLF to meet the criteria of a “Qualifying CCP,” which means that APRA

affirms that ASXCLF is prudentially supervised in a jurisdiction where the relevant regulator has

established and publicly indicated that it applies, on an ongoing basis, domestic rules and

regulations that are consistent with the PFMIs.5 In August 2013, CPSS-IOSCO noted in the

“Implementation Monitoring of PFMIs – Level 1 Assessment Report” that Australia’s

implementation of CCP-related PFMIs is complete.6

Discussion of Request for No-Action Relief and Applicable Legal Requirements

The Divi

d and publicly indicated that it applies, on an ongoing basis, domestic rules and

regulations that are consistent with the PFMIs.5 In August 2013, CPSS-IOSCO noted in the

“Implementation Monitoring of PFMIs – Level 1 Assessment Report” that Australia’s

implementation of CCP-related PFMIs is complete.6

Discussion of Request for No-Action Relief and Applicable Legal Requirements

The Division accepts, without independent analysis, ASXCLF’s representation that the

A&NZ$ IRS contracts subject to its request are swaps under the CEA and Commission

regulations. The Division also accepts, without further inquiry, that the Australian branches of

two U.S. swap dealers have expressed a strong interest in becoming direct participants of

ASXCLF for the purpose of clearing proprietary A$ IRS transactions, and that these branches

would provide liquidity to the A$ IRS market.

Section 1a(47)(A)(iii)(I) of the CEA includes interest rate swaps within the definition of

“swap” and Regulation 1.3(iii) includes interest rate swaps as one of the major swap categories.7

Section 5b(a) of the CEA provides that a clearing organization may not perform the functions of

a DCO with respect to swaps unless it is registered with the Commission.8

ASXCLF’s request for relief is consistent with recent requests for no-action letters

permitting non-U.S. clearing organizations to clear swaps for U.S. Persons prior to becoming

4 See Letter at 2 n.4.

5 See Letter at 2 n.5.

6 Available at http://www.bis.org/publ/cpss111.pdf .

7 Section 1a(47)(A) of the CEA, 7 U.S.C

ommission.8

ASXCLF’s request for relief is consistent with recent requests for no-action letters

permitting non-U.S. clearing organizations to clear swaps for U.S. Persons prior to becoming

4 See Letter at 2 n.4.

5 See Letter at 2 n.5.

6 Available at http://www.bis.org/publ/cpss111.pdf .

7 Section 1a(47)(A) of the CEA, 7 U.S.C. § 1a(47)(a), states: “Except as provided in subparagraph (B), the term

‘swap’ means any agreement, contract, or transaction-- … (iii) that provides on an executory basis for the exchange,

on a fixed or contingent basis, of 1 or more payments based on the value or level of 1 or more interest or other rates

… including any agreement, contract, or transaction commonly known as— (I) an interest rate swap ….” Regulation

1.3(iii), 17 C.F.R. §1.3(iii), states: “… the terms major swap category, category of swaps and any similar terms

mean any of the following category of swaps listed below…. (1) Rate swaps. Any swap which is primarily based on

one or more reference rates, including but not limited to any swap of payments determined by fixed and floating

interest rates ….”

8 Section 5b(a) of the CEA, 7 U.S.C. § 7a-1(a), states: “Except as provided in paragraph (2), it shall be unlawful for

a derivatives clearing organization, directly or indirectly, to make use of the mails or any means or instrumentality

of interstate commerce to perform the functions of a derivatives clearing organization with respect to … (B) a swap.

y fixed and floating

interest rates ….”

8 Section 5b(a) of the CEA, 7 U.S.C. § 7a-1(a), states: “Except as provided in paragraph (2), it shall be unlawful for

a derivatives clearing organization, directly or indirectly, to make use of the mails or any means or instrumentality

of interstate commerce to perform the functions of a derivatives clearing organization with respect to … (B) a swap.

(2) EXCEPTION. – Paragraph (1) shall not apply to a derivatives clearing organization that is registered with the

Commission.”

Ms. Amanda J. Harkness

February 6, 2014

Page 4

registered with the Commission as a DCO.9 Granting the relief requested by ASXCLF during

the pendency of its application for an exemption pursuant to Section 5b(h) of the CEA, is

appropriate in order to facilitate the centralized clearing of the A&NZ$ IRS contracts and to

promote competition and enhance choice in clearing services for such contracts. The Division

notes, however, that the Commission has not established a regulatory framework for exempting a

clearing organization from registration as a DCO pursuant to Section 5b(h) of the CEA.

Accordingly, the Division’s granting of no-action relief herein should not be interpreted to mean

that the Commission will exempt ASXCLF from registration as a DCO.

Grant of No-Action Relief

Based on the facts presented and the representations you have made, the Division will not

recommend that the Commission take enforcement action against ASXCLF for failure to register

as a DCO pursuant to the requirements of Section 5b(a) of the CEA, subject to the following

conditions:

(1) Product Scope. This relief is limited to A&NZ$ IRS contracts accepted for clearing by

ASXCLF;

Based on the facts presented and the representations you have made, the Division will not

recommend that the Commission take enforcement action against ASXCLF for failure to register

as a DCO pursuant to the requirements of Section 5b(a) of the CEA, subject to the following

conditions:

(1) Product Scope. This relief is limited to A&NZ$ IRS contracts accepted for clearing by

ASXCLF;

(2) Participant Scope. The relief applies to ASXCLF’s clearing of the proprietary trades of

ASXCLF’s U.S. clearing participants, including transactions of a parent or affiliate of an

ASXCLF U.S. clearing participant (meaning, ASXCLF shall not accept, and no ASXCLF

member shall offer for clearing through ASXCLF, swaps on behalf of a U.S. customer);

(3) Reporting. ASXCLF shall comply with the reporting obligations applicable to DCOs

under the Commission’s Part 45 regulations; and

(4) Limited Duration. The no-action relief shall expire at the earlier of: (i) December 31,

2014 or (ii) the date upon which the Commission either registers ASXCLF as a DCO

under Section 5b(a) of the CEA or exempts ASXCLF from registration as a DCO under

Section 5b(h) of the CEA.

The position taken herein concerns enforcement action only and does not represent a

legal conclusion with respect to the applicability of any provision of the CEA or the

Commission’s regulations. In addition, the Division’s position does not necessarily reflect the

views of the Commission or any other division or office of the Commission. Because this

position is based upon the representations contained in the Letter, it should be noted that any

9 See CFTC No-Action Letter No. 13-73 (Dec. 19, 2013) (extending previous grant of no-action relief to Japan

Securities Clearing Corporation and certain of its clearing members); CFTC No-Action Letter No. 13-43 (July 11,

2013) (granting no-action relief to LCH.Clearnet SA and certain of its clearing members); CFTC No-Action Letter

No

that any

9 See CFTC No-Action Letter No. 13-73 (Dec. 19, 2013) (extending previous grant of no-action relief to Japan

Securities Clearing Corporation and certain of its clearing members); CFTC No-Action Letter No. 13-43 (July 11,

2013) (granting no-action relief to LCH.Clearnet SA and certain of its clearing members); CFTC No-Action Letter

No. 13-33 (July 11, 2013) (granting no-action relief to Eurex Clearing AG and certain of its clearing members);

CFTC No-Action Letter No. 12-63 (Dec. 21, 2012) (granting no-action relief to Singapore Exchange Derivatives

Clearing Limited and certain of its clearing members); and CFTC No-Action Letter No. 12-56 (Dec. 17, 2012)

(granting no action relief to Japan Securities Clearing Corporation and certain of its clearing members).

Ms. Amanda J. Harkness

February 6, 2014

Page 5

different, changed, or omitted material facts or circumstances may require a different conclusion

or render this letter void. Finally, as with all no-action letters, the Division retains the authority

to condition further, modify, suspend, terminate, or otherwise restrict the terms of the no-action

relief provided herein, in its discretion.

Should you have any questions, please do not hesitate to contact me at (202) 418-5188, or

Andrea Musalem, Special Counsel, at (202) 418-5167.

Sincerely,

Ananda Radhakrishnan

Director

cc: Andrea Musalem