Time-limited no-action position for Taiwan Futures Exchange with regard to Section 5b(a) of the Commodity Exchange Act and Commission regulations thereunder.

Summary: Time-limited no-action position for Taiwan Futures Exchange with regard to Section 5b(a) of the Commodity Exchange Act and Commission regulations thereunder.

CFTC LETTER NO. 22-12 NO-ACTION SEPTEMBER 15, 2022

Mr. Tzu-Hsin Wu

Chairman

Taiwan Futures Exchange Corporation

14F, No. 100, Sec. 2, Roosevelt Rd.

Zhongzheng Dist., Taipei City 100404

Taiwan

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

Commission Regulations Thereunder

Dear Mr. Wu:

This is in response to your letter dated April 14, 2022 (“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 Taiwan Futures Exchange Corporation

(“TAIFEX”) 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, TAIFEX would be permitted temporarily to clear certain

swaps for the proprietary trades of TAIFEX clearing members that are U.S. persons or affiliates

of U.S. persons while its application for exemption from DCO registration is pending.

TAIFEX has submitted to the Commission an application for exemption from the

requirement to register as a DCO, pursuant to Commission regulation 39.6.2 TAIFEX represents

in its application that it meets the requirements of the Principles for Financial Market

Infrastructures (“PFMIs”).3

1 7 U.S.C. § 7a-1(a).

2 17 C.F.R. § 39.6.

3 See Committee on Payments and Market Infrastructures (“CPMI”) (formerly Committee on

Payment and Settlement Systems) and the International Organization of Securities

Commissions (“IOSCO”), Principles for financial market infrastructures (Apr

inciples for Financial Market

Infrastructures (“PFMIs”).3

1 7 U.S.C. § 7a-1(a).

2 17 C.F.R. § 39.6.

3 See Committee on Payments and Market Infrastructures (“CPMI”) (formerly Committee on

Payment and Settlement Systems) and the International Organization of Securities

Commissions (“IOSCO”), Principles for financial market infrastructures (Apr. 2012),

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

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

www.cftc.gov

Division of Clearing and Risk

Mr. Tzu-Hsin Wu

Page 2

Statement of Facts

Based on the representations made in the Letter and the application for exemption, we

understand the relevant facts to be as follows:

TAIFEX is organized under the laws of Taiwan and is subject to oversight by the

Securities and Futures Bureau of the Taiwan Financial Supervisory Commission(the “FSC”).

Since December 1, 1997, TAIFEX has been licensed by the FSC to operate as a futures exchange

and clearing organization. In January 2019, Article 3 of the Futures Trading Act (the “FTA”)

was amended to include other types of contracts, including swaps, within the scope of futures

and to empower the FSC to mandate central clearing of futures by a designated clearing

organization. On June 24, 2019, the FSC designated TAIFEX as the over-the-counter (“OTC”)

clearing organization pursuant to Article 3(2) of the FTA, which makes TAIFEX the sole

clearing organization authorized to clear swaps in Taiwan. TAIFEX is subject to oversight by

the FSC, which applies, on an ongoing basis, statutes, rules, regulations, policies, or a

combination thereof, that, taken together, are consistent with the PFMIs.

TAIFEX intends to launch swap clearing services in mid-2022, to include Taiwan dollar

(“TWD”)-denominated interest rate swaps (“IRS”) for dealer-to-dealer transactions

to clear swaps in Taiwan. TAIFEX is subject to oversight by

the FSC, which applies, on an ongoing basis, statutes, rules, regulations, policies, or a

combination thereof, that, taken together, are consistent with the PFMIs.

TAIFEX intends to launch swap clearing services in mid-2022, to include Taiwan dollar

(“TWD”)-denominated interest rate swaps (“IRS”) for dealer-to-dealer transactions. The FSC

has not yet issued a clearing mandate for swaps in Taiwan but plans to mandate the central

clearing of TWD-denominated IRS in mid-2023.

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

TAIFEX 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 TAIFEX’s representation without independent analysis.4 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.5 However, Section 5b(h) of the CEA6 states

that

4 The CEA’s statutory definition of “swap” includes IRS. 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 . . . .”).

5 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 [DCO], directly or indirectly, to make use of the mails or any means

or instrumentality of interstate commerce to perform the functions of a [DCO] with respect to

– . . . (B) a swap. (2) EXCEPTION

ract, or transaction commonly known as – (I) an interest rate

swap . . . .”).

5 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 [DCO], directly or indirectly, to make use of the mails or any means

or instrumentality of interstate commerce to perform the functions of a [DCO] with respect to

– . . . (B) a swap. (2) EXCEPTION. – Paragraph (1) shall not apply to a [DCO] that is

registered with the Commission.”

6 7 U.S.C. § 7a-1(h).

Mr. Tzu-Hsin Wu

Page 3

The Commission may exempt, conditionally or unconditionally, a

[DCO] from registration under this section for the clearing of

swaps if the Commission determines that the [DCO] 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.7 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.8

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. 9 TAIFEX’s request for relief is generally consistent with the requests that

prompted such relief. Granting the relief requested by TAIFEX pending consideration of its

application for an exemption pursuant to Section 5b(h) of the CEA and Commission regulation

39.6 is appropriate in order to facilitate access for U.S. persons to clearing of swaps in Taiwan

to being exempted

from registration. 9 TAIFEX’s request for relief is generally consistent with the requests that

prompted such relief. Granting the relief requested by TAIFEX pending consideration of its

application for an exemption pursuant to Section 5b(h) of the CEA and Commission regulation

39.6 is appropriate in order to facilitate access for U.S. persons to clearing of swaps in Taiwan.

The Division notes that TAIFEX, which has represented that it meets the PFMIs and provided

certification from the FSC that it is in good regulatory standing, has submitted to the

Commission an application for exemption from the DCO registration requirement. Before the

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

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/asxclearamdorderdcoexe

mption.pdf), Japan Securities Clearing Corporation (see

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-

26-15.pdf), Korea Exchange, Inc. (see

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/krxdcoexemptorder10-26-

15.pdf), and OTC Clearing Hong Kong Limited (see

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12

-21-15.pdf).

8 The Commission subsequently codified requirements for exemption from DCO registration in

Commission regulation 39.6. See Exemption From Derivatives Clearing Organization

Registration, 86 Fed. Reg. 949 (Jan. 7, 2021).

9 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); CFTC No-Action Letter No. 12-56 (Dec

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); 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); and CFTC No-

Action Letter 16-56 (May 13, 2016) (granting no-action relief to Shanghai Clearing House).

Mr. Tzu-Hsin Wu

Page 4

Commission grants an exemption from DCO registration, the requirements and conditions in

Commission regulation 39.6(a)-(b) must be satisfied.

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

on a temporary basis, while allowing the Commission to thoroughly review and assess

TAIFEX’s application. This relief is limited to clearing by U.S. persons who are TAIFEX

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 TAIFEX from registration as a DCO.

Grant of No-Action Relief

Based on the facts presented and the representations TAIFEX has made, the Division will

not recommend that the Commission take enforcement action against TAIFEX 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

TAIFEX.

(2) Participant Scope. The relief applies to TAIFEX’s clearing of proprietary trades10 of U.S.

clearing members.

ssion take enforcement action against TAIFEX 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

TAIFEX.

(2) Participant Scope. The relief applies to TAIFEX’s clearing of proprietary trades10 of U.S.

clearing members.

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

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

Commission’s regulations,11 then TAIFEX 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 TAIFEX for clearing. TAIFEX must also report the termination of the

swap accepted for clearing by TAIFEX to the SDR to which the swap was originally

reported.

In order to avoid duplicative reporting for such transactions, TAIFEX shall have rules

that prohibit the reporting, pursuant to part 45 of the Commission’s regulations, of the

two new swaps by the counterparties to the original swap.12

(4) Limited Duration. The no-action relief shall expire at the earlier of: (i) September 15,

2023, or (ii) the date on which the Commission exempts TAIFEX from registration as a

DCO under Section 5b(h) of the CEA and § 39.6 of the Commission’s regulations.

10 See definition of “proprietary account” in 17 C.F.R. § 1.3.

11 See Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136 (Jan. 13,

2012) (adopting Part 45); and 85 Fed. Reg. 75503 (Nov. 25, 2020) (amending Part 45).

12 These rules should make it clear to market participants that TAIFEX is reporting the two new

swaps as if it were a registered DCO under the Part 45 regulations.

ee definition of “proprietary account” in 17 C.F.R. § 1.3.

11 See Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136 (Jan. 13,

2012) (adopting Part 45); and 85 Fed. Reg. 75503 (Nov. 25, 2020) (amending Part 45).

12 These rules should make it clear to market participants that TAIFEX is reporting the two new

swaps as if it were a registered DCO under the Part 45 regulations.

Mr. Tzu-Hsin Wu

Page 5

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.

Should you have questions regarding this matter, please contact Eileen Chotiner, Senior

Compliance Analyst (echotiner@cftc.gov, 202-418-5647), or Eileen Donovan, Deputy Director

(edonovan@cftc.gov, 202-418-5096).

Sincerely,

M. Clark Hutchison

Director