Extension of time-limited no-action relief for Korea Exchange, Inc. with regard to Section 5b(a) of the Commodity Exchange Act and implementing regulations thereunder.

Summary: Extension of time-limited no-action relief for Korea Exchange, Inc. with regard to Section 5b(a) of the Commodity Exchange Act and implementing regulations thereunder.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Facsimile: (202) 418-5521

www.cftc.gov

Division of Clearing and

Risk

CFTC Letter No. 14-150

No-Action

December 18, 2014

Division of Clearing and Risk

Mr. Kiwon Kang

President & COO

Derivatives Markets Division

Korea Exchange, Inc.

825-3, beomil-dong, Dong-gu

Busan 601-720, Republic of Korea

Re:

Extension of No-Action Relief with Regard to Section 5b(a) of the Commodity

Exchange Act and Commission Regulations Thereunder

Dear Mr. Kang:

This is in response to your letter dated December 5, 2014 (“Letter”) to the Division of

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

(“Commission”). In the Letter, you request that the Division extend the no-action relief

granted to Korea Exchange, Inc. (“KRX”) by letter dated June 26, 2014,1 from the derivatives

clearing organization (“DCO”) registration requirement under Section 5b(a) of the

Commodity Exchange Act (“CEA”).

Pursuant to the no-action relief, KRX is permitted to clear Korean Won-denominated

interest rate swaps (“KRW IRS”) for proprietary trades of U.S. clearing members. The relief

is set to expire at the earlier of: (i) December 31, 2014; or (ii) the date on which the

Commission either registers KRX as a DCO under Section 5b(a) of the CEA, or the

Commission exempts KRX from registration pursuant to Section 5b(h) of the CEA

relief, KRX is permitted to clear Korean Won-denominated

interest rate swaps (“KRW IRS”) for proprietary trades of U.S. clearing members. The relief

is set to expire at the earlier of: (i) December 31, 2014; or (ii) the date on which the

Commission either registers KRX as a DCO under Section 5b(a) of the CEA, or the

Commission exempts KRX from registration pursuant to Section 5b(h) of the CEA.

By letter dated November 26, 2014, the Division informed KRX that it was amenable

to extending the no-action relief until December 31, 2015, subject to KRX notifying the

Division, no later than December 15, 2014, that it will file by June 30, 2015: (i) a materially

complete Form DCO application for registration as a DCO; or (ii) a petition for an exemption

from registration. The Division’s letter also set forth the standards and procedures applicable

to a petition for an exemption from registration.

1 CFTC Letter 14-87 (June 26, 2014).

Mr. Kiwon Kang

December 17, 2014

Page 2

In the Letter, you represent that KRX will file, by June 30, 2015, a petition for an

exemption from DCO registration. 2 Based on this representation, and in order to allow KRX

the necessary time to prepare and file its petition, the Division will extend the no-action relief

now in effect and will not recommend that the Commission take enforcement action against

KRX 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 clearing of KRW IRS swaps;

(2) Participant Scope. The relief applies to KRX’s clearing of proprietary trades3 of

U.S. Clearing Members;

nd will not recommend that the Commission take enforcement action against

KRX 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 clearing of KRW IRS swaps;

(2) Participant Scope. The relief applies to KRX’s clearing of proprietary trades3 of

U.S. Clearing Members;

(3) Reporting. If a clearing member clears through KRX a swap (referred to as the

“alpha” swap) that has been reported to a Commission-registered swap data repository

(“SDR”) pursuant to Part 45 of the Commission’s regulations,4 then KRX must report

to an SDR, pursuant to Part 45, data regarding the two swaps resulting from the

novation of the alpha swap that had been submitted to KRX for clearing (referred to as

“beta” and “gamma” swaps);5 and

2 Pursuant to an exemption, KRX would be authorized to clear only proprietary swaps positions for U.S. persons.

In order to clear both proprietary and customer swaps positions for U.S. persons, KRX would have to register

with the Commission as a DCO.

3 See 17 C.F.R. § 1.3(y) (definition of “proprietary account”).

4 See Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136 (Jan. 13, 2012) (adopting Part

45).

5 Pursuant to Regulation 39.12(b)(6), 17 C.F.R. § 39.12(b)(6), during the clearing process, a swap submitted for

clearing to a registered DCO (the alpha swap) is extinguished or terminated, and two new swaps (the beta and

gamma swaps) are created. The registered DCO must then report the beta and gamma swaps to an SDR under

Part 45 and associate the unique swap identifier of the alpha swap with the beta and gamma swaps in order for

the Commission to confirm that such alpha swap was cleared

p submitted for

clearing to a registered DCO (the alpha swap) is extinguished or terminated, and two new swaps (the beta and

gamma swaps) are created. The registered DCO must then report the beta and gamma swaps to an SDR under

Part 45 and associate the unique swap identifier of the alpha swap with the beta and gamma swaps in order for

the Commission to confirm that such alpha swap was cleared. See Statement of the Commission concerning

CME Rule 1001 (March 6, 2013), page 6, available at:

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/statementofthecommission.pdf; see also 17

C.F.R. § 45.4(a) (“[R]eporting counterparties and [DCOs] required to report swap continuation data must do so

in a manner sufficient to ensure that all data in the [SDR] concerning the swap remains current and accurate, and

includes all changes to the primary economic terms of the swap occurring during the existence of the swap.”); 77

Fed. Reg. at 2153 (“[T]he final rule requires registered entities and reporting counterparties to report

continuation data in a manner sufficient to ensure that the information in the SDR concerning the swap is current

and accurate, and includes all changes to any of the primary economic terms of the swap.”).

In order to avoid duplicative reporting for such transactions, KRX should have rules that prohibit the Part 45

reporting of the beta and gamma swaps by the original counterparties to the alpha swap. These rules should make

it clear to market participants that KRX is reporting the beta and gamma swaps as if it were a registered DCO

under the Part 45 rules.

Mr. Kiwon Kang

December 17, 2014

Page 3

to avoid duplicative reporting for such transactions, KRX should have rules that prohibit the Part 45

reporting of the beta and gamma swaps by the original counterparties to the alpha swap. These rules should make

it clear to market participants that KRX is reporting the beta and gamma swaps as if it were a registered DCO

under the Part 45 rules.

Mr. Kiwon Kang

December 17, 2014

Page 3

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

31, 2015 or (ii) the date upon which the Commission exempts KRX 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

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 Eileen Donovan,

Acting Deputy Director, at (202) 418-5096, edonovan@cftc.gov; or Tad Polley, Acting

Associate Director, at (312) 596-0551, tpolley@cftc.gov.

Sincerely,

Phyllis Dietz

Acting Director