Time-limited no-action relief for Shanghai Clearing House with regard to Section 5b(a) of the Commodity Exchange Act and Commission Regulations thereunder.

Summary: Time-limited no-action relief for Shanghai Clearing House with regard to Section 5b(a) of the Commodity Exchange Act and Commission Regulations thereunder.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5430

Facsimile: (202) 418-5547

Division of Clearing and Risk

CFTC Letter No. 16-56

No-Action

May 31, 2016

Division of Clearing and Risk

Mr. Karl Chen

Chief Financial Officer

Shanghai Clearing House

No. 2 East Beijing Road

Huangpu District

Shanghai, People’s Republic of China

Re: No-Action Relief with Regard to Section 5b(a) of the Commodity Exchange Act and

Commission Regulations Thereunder

Dear Mr. Chen:

This is in response to your letter dated April 15, 2016 (“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 Shanghai Clearing House (“SHCH”) for failing to register as a

derivatives clearing organization (“DCO”) pursuant to Section 5b(a) of the Commodity Exchange

Act (“CEA”)1 and Commission regulations thereunder.

Under the requested relief, SHCH would be permitted temporarily to clear certain swaps

subject to mandatory clearing in the People’s Republic of China (“PRC”) for the proprietary trades

of SHCH clearing members that are U.S. persons or affiliates of U.S. persons. You request that

such relief be effective for one year.

You represent in the Letter that SHCH intends to petition the Commission for an exemption

from the DCO registration requirement by a date no later than six months following the effective

date of the no-action relief

China (“PRC”) for the proprietary trades

of SHCH clearing members that are U.S. persons or affiliates of U.S. persons. You request that

such relief be effective for one year.

You represent in the Letter that SHCH intends to petition the Commission for an exemption

from the DCO registration requirement by a date no later than six months following the effective

date of the no-action relief. You also represent that SHCH meets the requirements of the Principles

for Financial Market Infrastructures (“PFMIs”) developed by the Committee on Payment and

Settlement Systems of the Bank for International Settlements and the Technical Committee of the

International Organization of Securities Commissions.

1 7 U.S.C. § 7a-1(a).

Mr. Karl Chen

May 31, 2016

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Statement of Facts

Based on the representations made in the Letter, as well as representations made by SHCH

to the Division in meetings and telephone conversations and via electronic mail, we understand the

relevant facts to be as follows:

SHCH has been authorized by the People’s Bank of China (“PBOC”), which is the central

bank of the PRC, to act as the central counterparty for the PRC’s over-the-counter derivatives

market. SHCH has provided clearing services since December 19, 2011 and currently clears, inter

alia, renminbi-denominated (“RMB”) interest rate swaps, RMB standard bond forwards, foreign

exchange forwards, and foreign exchange swaps. SHCH is currently neither a registered nor an

exempt DCO.

Effective July 1, 2014, the PBOC requires clearing of certain RMB interest rate swaps. The

PBOC has also indicated that it may mandate the clearing of additional swaps in the future. Certain

U.S. financial institutions or their affiliates participate in the market for products subject to

mandatory clearing in the PRC and would like to become clearing members of SHCH. SHCH has

represented that a PRC-based branch of a U.S

OC requires clearing of certain RMB interest rate swaps. The

PBOC has also indicated that it may mandate the clearing of additional swaps in the future. Certain

U.S. financial institutions or their affiliates participate in the market for products subject to

mandatory clearing in the PRC and would like to become clearing members of SHCH. SHCH has

represented that a PRC-based branch of a U.S. bank meets the requirements to become a clearing

member of SHCH and has completed preparation work including business qualification training and

system testing with SHCH.

SHCH has also indicated that it intends to accept additional U.S. persons as clearing

members, including but not limited to branches of U.S. banks located in the PRC and/or their

affiliates. SHCH has indicated that it will not provide clearing services to U.S. persons in their

capacities as customers or clients of clearing members.

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

SHCH has represented that the swaps that it seeks to clear for proprietary trades of U.S.

clearing members are swaps under the CEA and Commission regulations, and the Division accepts

SHCH’s representation without independent analysis.2 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.3 However, Section 5b(h) of the CEA4 states that

2 The CEA’s statutory definition of “swap” includes interest rate swaps. See Section 1a(47)(A) of the CEA,

7 U.S.C. § 1a(47)(A) (“[T]he 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 . . . .”)

f the CEA,

7 U.S.C. § 1a(47)(A) (“[T]he 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 . . . .”).

3 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.”

4 7 U.S.C. § 7a-1(h).

Mr. Karl Chen

May 31, 2016

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The Commission may exempt, conditionally or unconditionally, a

derivatives clearing organization from registration under this section

for the clearing of swaps if the Commission determines that the

derivatives clearing organization is subject to comparable,

comprehensive supervision and regulation by…the appropriate

government authorities in the home country of the organization.

In accordance with Section 5b(h) of the CEA, the Commission has exempted several non-

U.S. clearing organizations from the DCO registration requirement to allow them to clear swaps for

their U.S. clearing members on a proprietary basis.5 The Commission determined that each of these

clearing organizations satisfies the “comparable, comprehensive supervision and regulation”

requirement of Section 5b(h) of the CEA through its respective home country regulator requiring

compliance with the PFMIs.

The Division has granted no-action relief to these and other non-U.S. clearing organizations

to permit them to clear certain swaps for U.S

mission determined that each of these

clearing organizations satisfies the “comparable, comprehensive supervision and regulation”

requirement of Section 5b(h) of the CEA through its respective home country regulator requiring

compliance with the PFMIs.

The Division has granted no-action relief to these and other non-U.S. clearing organizations

to permit them to clear certain swaps for U.S. persons prior to being exempted from registration. 6

SHCH’s request for relief is generally consistent with the requests that prompted such relief.

Granting the relief requested by SHCH with respect to swaps subject to mandatory clearing pending

consideration of its anticipated petition for an exemption pursuant to Section 5b(h) of the CEA is

appropriate in order to facilitate the centralized clearing of RMB interest swaps and other swaps

subject to mandatory clearing in the PRC. The Division notes that SHCH, which has represented

that it meets the PFMIs and provided certification from the PBOC that it complies with the PFMIs,

has committed to petitioning the Commission for an exemption from the DCO registration

requirement no later than six months following the effective date of the no-action relief granted

herein. Accordingly, the Division believes that it is in the public interest to grant no-action relief on

a temporary basis for limited clearing services with respect to swaps currently subject to mandatory

clearing in the PRC, or that become subject to mandatory clearing in the PRC during the period

covered by this relief, while permitting SHCH to take the time needed to prepare its petition for

exemption and to allow the Commission to thoroughly review and assess that petition. This relief is

limited to clearing by U.S. persons who are SHCH clearing members only for themselves (or their

affiliates). It does not cover customer clearing

to mandatory clearing in the PRC during the period

covered by this relief, while permitting SHCH to take the time needed to prepare its petition for

exemption and to allow the Commission to thoroughly review and assess that petition. This relief is

limited to clearing by U.S. persons who are SHCH clearing members only for themselves (or their

affiliates). It does not cover customer clearing. In addition, the Division’s grant of no-action relief

herein should not be interpreted to mean that the Commission will exempt SHCH from registration

as a DCO.

5 The exempted clearing organizations include ASX Clear (Futures) Pty Limited (see

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexemption.pdf), Japan

Securities Clearing Corporation (see

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf),5 Korea Exchange,

Inc. (see http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-15.pdf),5 and

OTC Clearing Hong Kong Limited (see

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf).

6 See CFTC No-Action Letter No. 14-107 (Aug. 18, 2014) (granting no-action relief to the Clearing Corporation of

India Ltd.); CFTC No-Action Letter No. 14-87 (June 26, 2014) (granting no-action relief to Korea Exchange, Inc.);

CFTC No-Action Letter No. 14-68 (May 7, 2014) (granting no-action relief to OTC Clearing Hong Kong Limited);

CFTC No-Action Letter No. 14-07 (Feb. 6, 2014) (granting no-action relief to ASX Clear (Futures) Pty Limited); 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).

xchange, Inc.);

CFTC No-Action Letter No. 14-68 (May 7, 2014) (granting no-action relief to OTC Clearing Hong Kong Limited);

CFTC No-Action Letter No. 14-07 (Feb. 6, 2014) (granting no-action relief to ASX Clear (Futures) Pty Limited); 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).

Mr. Karl Chen

May 31, 2016

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Grant of No-Action Relief

Based on the facts presented and the representations SHCH has made, the Division will not

recommend that the Commission take enforcement action against SHCH 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. The relief is limited to the clearing of swaps accepted for clearing by SHCH

and subject by the PBOC to mandatory clearing in the PRC. Any swaps accepted for

clearing by SHCH that are not subject by the PBOC to mandatory clearing in the PRC as of

the date of this letter, but that become subject to such mandatory clearing prior to the

expiration of this letter, shall be included within the scope of the relief provided herein

without any further action.

(2) Participant Scope. The relief applies to SHCH’s clearing of proprietary trades7 of U.S.

clearing members.

(3) Reporting. If a clearing member clears through SHCH a swap that has been reported to a

Commission-registered swap data repository (“SDR”) pursuant to Part 45 of the

Commission’s regulations,8 then SHCH must report to an SDR, pursuant to Part 45, data

regarding the two swaps resulting from the novation of the original swap that had been

submitted to SHCH for clearing. SHCH must also report the termination of the swap

accepted for clearing by SHCH to the SDR to which the swap was originally reported.9

ap data repository (“SDR”) pursuant to Part 45 of the

Commission’s regulations,8 then SHCH must report to an SDR, pursuant to Part 45, data

regarding the two swaps resulting from the novation of the original swap that had been

submitted to SHCH for clearing. SHCH must also report the termination of the swap

accepted for clearing by SHCH to the SDR to which the swap was originally reported.9

(4) Limited Duration. The no-action relief shall expire at the earlier of: (i) May 31, 2017, or

(ii) the date on which the Commission exempts SHCH 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 on

the representations contained in the Letter, 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.

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

8 See Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136 (Jan. 13, 2012) (adopting Part 45).

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

reporting of the two new swaps by the original counterparties to the original swap. These rules should make it clear to

market participants that SHCH is reporting the two new swaps as if it were a registered DCO under the Part 45 rules.

eg. 2136 (Jan. 13, 2012) (adopting Part 45).

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

reporting of the two new swaps by the original counterparties to the original swap. These rules should make it clear to

market participants that SHCH is reporting the two new swaps as if it were a registered DCO under the Part 45 rules.

Mr. Karl Chen

May 31, 2016

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Should you have questions regarding this matter, please contact Brian Baum, Special

Counsel (bbaum@cftc.gov, 202-418-5654), Laura Astrada, Associate Director (lastrada@cftc.gov,

202-418-7622) or Eileen Donovan, Deputy Director (edonovan@cftc.gov, 202-418-5096).

Sincerely,

Jeffrey M. Bandman

Acting Director