No-action relief from specified Part 39 regulations applicable to derivatives clearing organizations due to CX Clearinghouse, L.P.'s fully-collateralized clearing model.

Summary: No-action relief from specified Part 39 regulations applicable to derivatives clearing organizations due to CX Clearinghouse, L.P.'s fully-collateralized clearing model.

CFTC LETTER NO. 21-13 NO-ACTION MAY 03, 2021

May 3, 2021

Mr. Nolan Glantz

Chief Operations Officer

CX Clearinghouse, L.P.

499 Park Avenue

New York, NY 10022

RE:

Request for Relief from Certain Derivatives Clearing Organization Regulations

Dear Mr. Glantz:

This no-action letter responds to your request dated February 11, 2021 (“Request”) for

relief from certain provisions of Commodity Futures Trading Commission (“Commission”)

regulations applicable to registered derivatives clearing organizations (“DCOs”). According to

the Request, CX Clearinghouse, L.P. (“CX”) seeks relief from certain provisions of part 391 of

the Commission’s regulations due to the nature of CX’s fully collateralized clearing model. The

Division of Clearing and Risk (“Division”) has determined to grant CX no-action relief.2 The

specific provisions from which CX seeks relief and the responsive no-action relief granted by the

Division are discussed below.

I.

Overview of CX

CX is registered with the Commission pursuant to Section 5b of the Commodity

Exchange Act (“the Act”)3 to clear fully collateralized futures, options on futures, and swaps for

which there is an underlying commodity, as such term is defined in Section 1a(9) of the Act.4

CX is a fully collateralized DCO, meaning that a participant must provide CX with eligible

1 17 C.F.R. pt. 39.

2 Under Regulation 140.99(a)(2), the Division, acting under delegated authority from the Commission, may issue a

written statement that it will not recommend enforcement action to the Commission for failure to comply with

specific provisions of the Commodity Exchange Act or of a rule, regulation or order issued thereunder by the

Commission

1 17 C.F.R. pt. 39.

2 Under Regulation 140.99(a)(2), the Division, acting under delegated authority from the Commission, may issue a

written statement that it will not recommend enforcement action to the Commission for failure to comply with

specific provisions of the Commodity Exchange Act or of a rule, regulation or order issued thereunder by the

Commission. Only the party requesting a no-action letter may rely on the letter. Commission regulations referred to

herein are found at 17 C.F.R. Ch. I (2021).

3 7 U.S.C. § 7a-1.

4 7 U.S.C. § 1a(9). See CFTC Amended Order of Registration (Aug. 3, 2018), available at

https://www.cftc.gov/sites/default/files/2018-08/AmendedOrderofDCORegistrationforCXlearinghouse8-3-18.pdf.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Division of Clearing and Risk

Page 2

collateral sufficient to cover the maximum potential loss of the contract before the trade can be

executed.5 CX performs a pre-trade credit check to ensure each participant has sufficient eligible

collateral at CX to cover the maximum potential loss that a participant could incur upon

liquidation or expiration. CX accepts U.S. dollars as eligible collateral.

CX has rules that require all of its participants to self-clear. The CX rules do not permit

its participants to clear through a futures commission merchant (“FCM”). CX only clears trades

executed on its affiliated designated contract market, Cantor Futures Exchange, L.P. CX

participants must satisfy certain eligibility criteria before they can clear contracts through CX.

Section 5b(c)(2)(A)(i) of the Act6 provides that to be registered and to maintain

registration with the Commission as a DCO, a DCO must comply with the Act’s core principles

applicable to DCOs and with the Commission’s implementing regulations (i.e., part 39)

Cantor Futures Exchange, L.P. CX

participants must satisfy certain eligibility criteria before they can clear contracts through CX.

Section 5b(c)(2)(A)(i) of the Act6 provides that to be registered and to maintain

registration with the Commission as a DCO, a DCO must comply with the Act’s core principles

applicable to DCOs and with the Commission’s implementing regulations (i.e., part 39). CX

requests relief from certain provisions of part 39 due to CX’s fully collateralized clearing model,

as further discussed below.

II.

Specific Provisions of Part 39

A. Treatment of Funds

Regulation 39.15(d). Regulation 39.15(d) requires a DCO to have rules providing that

the DCO will promptly transfer all or a portion of a customer’s portfolio of positions and related

funds as necessary from the carrying clearing member of the DCO to another clearing member of

the DCO, without requiring the close-out and re-booking of the positions prior to the requested

transfer, subject to certain conditions.7 CX rules only permit its participants to clear positions for

their respective proprietary accounts on a non-intermediated basis. CX rules do not permit

FCMs to clear for customers. Accordingly, CX seeks relief from Regulation 39.15(d).

Relief

It is the Division’s understanding that CX does not permit FCM participants or clearing

on behalf of customers. Accordingly, the requirements of Regulation 39.15(d) do not apply to

CX under the present circumstances, as the purpose of the transfer provision is to permit a

customer to move positions and funds from one FCM to another without having to close out and

re-book those positions. Based on the facts presented and representations made by CX, the

Division will not recommend that the Commission take enforcement action against CX for not

complying with the requirements of Regulation 39.15(d)

umstances, as the purpose of the transfer provision is to permit a

customer to move positions and funds from one FCM to another without having to close out and

re-book those positions. Based on the facts presented and representations made by CX, the

Division will not recommend that the Commission take enforcement action against CX for not

complying with the requirements of Regulation 39.15(d). In the event that CX amends its rules

5 As defined in Regulation 39.1, a “fully collateralized position” means “a contract cleared by a [DCO] that requires

the [DCO] to hold, at all times, funds in the form of the required payment sufficient to cover the maximum possible

loss that a party or counterparty could incur upon liquidation or expiration of the contract.” 17 C.F.R. § 39.1. Fully

collateralized positions prevent a DCO from being exposed to credit risk stemming from the inability of a clearing

member or customer of a clearing member to meet a margin call or a call for additional capital. This limited

exposure and full collateralization of that exposure renders certain provisions of part 39 inapplicable or unnecessary.

6 7 U.S.C. § 7a-1(c)(2)(A)(i).

7 17 C.F.R. § 39.15(d).

Page 3

to permit clearing through an FCM and adds only one FCM participant, then that participant

would not have another FCM to which it could transfer the positions of its customers. In the

event that CX adds more than one FCM participant, however, the Division would expect CX to

comply with Regulation 39.15(d) as it pertains to those participants.

B. Public Information

Regulation 39.21(c)(3), (4), and (7). Regulation 39.21(c) requires a DCO to make certain

information readily available to the general public, in a timely manner, by posting such

information on the DCO’s website, unless otherwise permitted by the Commission.8 Regulation

39.21(c)(3) requires a DCO to publicly disclose information concerning its margin-setting

methodology

Public Information

Regulation 39.21(c)(3), (4), and (7). Regulation 39.21(c) requires a DCO to make certain

information readily available to the general public, in a timely manner, by posting such

information on the DCO’s website, unless otherwise permitted by the Commission.8 Regulation

39.21(c)(3) requires a DCO to publicly disclose information concerning its margin-setting

methodology. CX has indicated that, due to its fully collateralized clearing model, it does not

use a margin methodology. Thus, CX seeks relief from Regulation 39.21(c)(3) as long as its

full-collateralization requirement is disclosed.

Regulation 39.21(c)(4) requires a DCO to publicly disclose the size and composition of

the financial resource package available in the event of a clearing member default, updated as of

the end of the most recent fiscal quarter or upon Commission request and posted as promptly as

practicable after submission of the report to the Commission under Regulation 39.11(f)(1)(i)(A).

CX represents that, due to its fully collateralized model, a default by a clearing participant would

not result in any financial shortfall to CX, and CX’s participants would not be exposed to risk

emanating from a default by another CX participant as risk is not mutualized between its clearing

participants. Thus, CX does not have a mutualized default fund and it therefore seeks relief from

Regulation 39.21(c)(4). CX believes such relief would be consistent with Regulation 39.16(e),

which provides that a DCO may satisfy the default rules and procedures requirements in

paragraphs (a), (b), and (c) of Regulation 39.16 by having rules that permit the DCO to clear

only fully collateralized positions.

Regulation 39.21(c)(7) requires a DCO to publicly disclose a current list of all of its

clearing members. CX seeks relief from Regulation 39.21(c)(7), as all of its participants self-

clear and such disclosure would require CX to publish identifying information of each its

participants

(c) of Regulation 39.16 by having rules that permit the DCO to clear

only fully collateralized positions.

Regulation 39.21(c)(7) requires a DCO to publicly disclose a current list of all of its

clearing members. CX seeks relief from Regulation 39.21(c)(7), as all of its participants self-

clear and such disclosure would require CX to publish identifying information of each its

participants. CX believes such relief would protect the privacy of its clearing members while not

compromising the purpose or policy of Regulation 39.21(c)(7), which provides market

participants with sufficient information to enable them to identify and evaluate the risks and

costs associated with using the DCO’s services.

Relief

In CFTC Interpretative Letter No. 14-05,9 the Division expressed its view that a DCO’s

full-collateralization requirement satisfies the requirements of Regulations 39.11(a)(1) (the

requirement to have sufficient financial resources to withstand a clearing member default) and

39.13(g) (the requirement to have a risk-based margin methodology). In a recent rulemaking, the

8 17 C.F.R. § 39.21(c).

9 See CFTC Interpretative Letter No. 14-05 (Jan. 16, 2014) (responding to a request from North American

Derivatives Exchange, Inc. for an interpretation of certain Commission regulations applicable to registered DCOs).

Page 4

Commission stated that the 2014 interpretative guidance was not impacted by the recent

amendments to part 39.10 The Commission also amended Regulation 39.16(e), which provides

that a DCO may satisfy the default rules and procedures requirements in paragraphs (a), (b), and

es Exchange, Inc. for an interpretation of certain Commission regulations applicable to registered DCOs).

Page 4

Commission stated that the 2014 interpretative guidance was not impacted by the recent

amendments to part 39.10 The Commission also amended Regulation 39.16(e), which provides

that a DCO may satisfy the default rules and procedures requirements in paragraphs (a), (b), and

(c) of Regulation 39.16 by having rules that permit the DCO to clear only fully collateralized

positions.11 In light of the related staff interpretation in CFTC Interpretative Letter No. 14-05,

and Commission statement and rulemaking consistent with that interpretation, the Division

clarifies that CX’s full-collateralization requirement satisfies Regulation 39.21(c)(3) and (4).

The Division understands that CX’s participants are not FCMs. The Division agrees that

the purpose of publishing a list of clearing members is to provide market participants with

sufficient information to enable them to identify and evaluate the risks and costs associated with

using the DCO’s services. Because each CX participant must fully collateralize its own trades,

and CX does not have a mutualized default fund, participants do not face the risk of needing to

cover fellow participant losses. Therefore, based on these facts and representations, the Division

will not recommend that the Commission take enforcement action against CX for not complying

with Regulation 39.21(c)(7).

III.

Conclusion

This letter is based upon the representations of CX, as well as applicable laws and

regulations. The Division believes that granting the Request would not be contrary to the public

interest or to the purposes of those provisions of the Commission’s regulations from which CX

has sought relief. However, any new, different or changed material facts or circumstances could

change the Division’s position and render this letter void

sentations of CX, as well as applicable laws and

regulations. The Division believes that granting the Request would not be contrary to the public

interest or to the purposes of those provisions of the Commission’s regulations from which CX

has sought relief. However, any new, different or changed material facts or circumstances could

change the Division’s position and render this letter void. Moreover, this letter represents the

position of the Division only and does not necessarily represent the views of the Commission or

those of any other division or office of the Commission.

If you have any questions, please do not hesitate to contact Abigail Knauff, Special

Counsel, at (202) 418-5123.

Sincerely,

Clark Hutchison

Director

10 Derivatives Clearing Organization General Provisions and Core Principles, 85 Fed. Reg. 4800, 4804 n.14 (Jan. 27,

2020).

11 17 C.F.R. 39.16(e).