No-action relief for LCH SA with regard to Regulations 1.20(g)(4) and 22.5, and an exemption from the requirements of Regulation 1.49(d)(3) for customer accounts held at the Banque de France.

Summary: No-action relief for LCH SA with regard to Regulations 1.20(g)(4) and 22.5, and an exemption from the requirements of Regulation 1.49(d)(3) for customer accounts held at the Banque de France.

CFTC Letter No. 24-01 No-Action, Exemption January 16, 2024

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5430

Facsimile: (202) 418-5547

c_hutchison@cftc.gov

Division of Clearing and Risk

Clark Hutchison

Director

Corentine Poilvet-Clédière

Chief Executive Officer

LCH SA

18 rue du Quatre Septembre

Paris, France 75002

RE:

Request for No-Action Letter with regard to Section 4d(f) of the Commodity Exchange

Act and Commission Regulations 1.20(g)(4) and 22.5; Request for Exemptive Letter with

regard to Commission Regulation 1.49(d)(3)

Dear Ms. Poilvet-Clédière:

This is in response to your letter dated September 8, 2023 (“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 LCH SA (“LCH”) for failing to obtain, or

provide the Commission with, an executed version of the template acknowledgment letter set

forth in Appendix B to Regulation 1.20 (“Template Acknowledgment Letter”), as required by

Regulations 1.20(g)(4) and 22.5, for customer accounts maintained at the Banque de France

(“BdF”). You additionally request that, in connection with holding customer funds at the BdF,

the Division grant an exemption from the requirements of Regulation 1.49(d)(3)(i), thereby

permitting the BdF to hold customer funds, notwithstanding the fact that it does not hold

regulatory capital.

I

Regulations 1.20(g)(4) and 22.5, for customer accounts maintained at the Banque de France

(“BdF”). You additionally request that, in connection with holding customer funds at the BdF,

the Division grant an exemption from the requirements of Regulation 1.49(d)(3)(i), thereby

permitting the BdF to hold customer funds, notwithstanding the fact that it does not hold

regulatory capital.

I.

No-Action Letter regarding the Written Acknowledgment Requirements in

Commission Regulations 1.20(g)(4) and 22.5

Regulations 1.20(g)(4) and 22.5 require, among other things, that a derivatives clearing

organization (“DCO”) obtain a Template Acknowledgment Letter from each depository with

which the DCO deposits futures customer funds or cleared swaps customer funds.1 By letter

1 See Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission

Merchants and Derivatives Clearing Organizations, 78 Fed. Reg. 68,506 (Nov. 14, 2013). Regulation

Ms. Corentine Poilvet-Clédière

January 16, 2024

Page 2

dated September 8, 2023, LCH informed the Division that the BdF, a depository with which

LCH seeks to maintain customer accounts, had indicated that it required certain modifications to

the Template Acknowledgment Letter.

A. Statement of Facts

The Division understands the relevant facts to be as follows:

In addition to its registration with the Commission as a DCO, LCH is also a clearing

agency regulated by the Securities Exchange Commission and an authorized central clearing

counterparty under the European Market Infrastructure Regulation regulated by the Autorité de

Contrôle Prudentiel et de Résolution, the BdF, and the Autorité des Marchés Financiers

s the relevant facts to be as follows:

In addition to its registration with the Commission as a DCO, LCH is also a clearing

agency regulated by the Securities Exchange Commission and an authorized central clearing

counterparty under the European Market Infrastructure Regulation regulated by the Autorité de

Contrôle Prudentiel et de Résolution, the BdF, and the Autorité des Marchés Financiers. As the

central bank of the French Republic, the BdF is the issuer of bank notes within France, holds the

French exchange reserves in gold and foreign currency, exercises the sovereign functions of

overseeing market infrastructure, payment systems and credit institutions, and acts as lender of

last resort. Under French law, the BdF may not be made insolvent.

LCH seeks to maintain accounts at the BdF into which LCH may deposit customer funds.

In this regard, the BdF has indicated to LCH that it requires certain modifications to the

Template Acknowledgment Letter associated with such accounts.

B. Discussion of Request for No-Action Letter and Applicable Legal Requirements

The Division notes that the BdF is a central bank for a money center country, which the

Commission has recognized as a permissible location for a depository holding customer funds.2

As a central bank, the BdF’s provision of account services to LCH is distinguishable from the

provision of account services by a commercial bank

of Request for No-Action Letter and Applicable Legal Requirements

The Division notes that the BdF is a central bank for a money center country, which the

Commission has recognized as a permissible location for a depository holding customer funds.2

As a central bank, the BdF’s provision of account services to LCH is distinguishable from the

provision of account services by a commercial bank. In adopting the Template Acknowledgment

Letter requirements, the Commission explicitly recognized the “unique role of the Federal

Reserve Bank” in excluding Federal Reserve Banks, when providing account services, from the

requirement that depositories accepting customer funds from DCOs execute a Template

Acknowledgment Letter.3

Further, the Commission contemplated the possibility that foreign depositories might

require modifications to the Template Acknowledgment Letter in certain situations, in which

22.5 applies the Template Acknowledgment Letter requirements of Regulation 1.20(g)(4) to DCOs in

connection with the holding of cleared swaps customer collateral.

2 See Regulation 1.49(a)(1) (defining “money center country”).

3 See 78 Fed. Reg. at 68,535. The Commission subsequently issued an exemption under Section 4(c) of

the Commodity Exchange Act which exempts, in part, the Federal Reserve Banks from requirements

relating to the provision of customer accounts. Order Exempting the Federal Reserve Banks From

Sections 4d and 22 of the Commodity Exchange Act, 81 Fed. Reg. 53,467 (Aug. 12, 2016).

ter country”).

3 See 78 Fed. Reg. at 68,535. The Commission subsequently issued an exemption under Section 4(c) of

the Commodity Exchange Act which exempts, in part, the Federal Reserve Banks from requirements

relating to the provision of customer accounts. Order Exempting the Federal Reserve Banks From

Sections 4d and 22 of the Commodity Exchange Act, 81 Fed. Reg. 53,467 (Aug. 12, 2016).

Ms. Corentine Poilvet-Clédière

January 16, 2024

Page 3

case the Commission would consider “alternative approaches” on a case-by-case basis.4 In

recognition of this issue, the Division previously issued no-action letters to DCOs in connection

with the holding of customer funds at the Bank of Canada, Deutsche Bundesbank, and the Bank of

England.5 In light of the above, the Division has had discussions with the BdF regarding a

mutually acceptable version of the Template Acknowledgment Letter, i.e., the BdF

Acknowledgment Letter, set forth in an attachment to this letter.

The Division further notes that both Title VIII of the Dodd-Frank Act and the CPMI-

IOSCO Principles for Financial Market Infrastructures (“PFMIs”)6 support central banks acting

as depositories for customer funds, due to certain favorable policy considerations. The BdF, in

its capacity as a central bank for a money center country, does not present the same types of risks

as traditional commercial banks, as it serves in the public interest and operates with the goal of

maintaining stability in the financial markets. Further, deposits at a central bank have the lowest

credit risk and are the source of liquidity with regard to their currency of issue;7 LCH would,

therefore, face much lower credit and liquidity risk with a deposit at the BdF than it would with a

deposit at a commercial bank. Thus, granting the requested no-action letter is appropriate to

permit LCH to maintain customer accounts at the BdF.

C

r, deposits at a central bank have the lowest

credit risk and are the source of liquidity with regard to their currency of issue;7 LCH would,

therefore, face much lower credit and liquidity risk with a deposit at the BdF than it would with a

deposit at a commercial bank. Thus, granting the requested no-action letter is appropriate to

permit LCH to maintain customer accounts at the BdF.

C. Terms and Conditions set forth in the BdF Acknowledgment Letter

The BdF Acknowledgment Letter incorporates essential provisions of the Template

Acknowledgment Letter and includes certain provisions that are specific to the customer

accounts maintained at the BdF. Specifically, paragraph 1 of the BdF Acknowledgment Letter is

consistent with the first clause of the second paragraph of the Template Acknowledgment Letter,

stating that LCH has informed the BdF that it has opened the accounts for the purpose of

depositing customer funds, as required by Commission regulations. Paragraph 2 of the BdF

Acknowledgment Letter identifies the subject matter of the letter and makes no substantive

change to the first paragraph of the Template Acknowledgment Letter.

4 78 Fed. Reg. at 68,536.

5 See CFTC Letter No. 16-59 (June 21, 2016) (use of a modified acknowledgment letter for customer

accounts maintained by the Chicago Mercantile Exchange, Inc. at the Bank of Canada); CFTC Letter No.

16-05 (Feb. 1, 2016) (use of a modified acknowledgment letter for customer accounts maintained by

Eurex Clearing AG at Deutsche Bundesbank); and CFTC Letters No. 14-123 (Oct. 8, 2014), and 14-124

(Oct. 8, 2014) (use of a modified acknowledgment letter for customer accounts maintained by ICE Clear

Europe Limited and LCH Ltd, respectively, at the Bank of England).

6 The PFMIs are a set of international risk management standards for financial market infrastructures,

including DCOs, which have been adopted and implemented by many jurisdictions

etters No. 14-123 (Oct. 8, 2014), and 14-124

(Oct. 8, 2014) (use of a modified acknowledgment letter for customer accounts maintained by ICE Clear

Europe Limited and LCH Ltd, respectively, at the Bank of England).

6 The PFMIs are a set of international risk management standards for financial market infrastructures,

including DCOs, which have been adopted and implemented by many jurisdictions.

7 See PFMIs, ¶ 3.9.3 (noting that “[c]entral banks have the lowest credit risk and are the source of

liquidity with regard to their currency of issue”); see also PFMIs, Key Consideration 8 (specifying that a

financial market infrastructure “with access to central bank accounts, payment services, or securities

services should use these services, where practical, to enhance its management of liquidity risk,” which is

consistent with the standards set forth in Section 806(a) of the Dodd-Frank Act, authorizing accounts at a

Federal Reserve Bank for designated financial market utilities). See 12 U.S.C. § 5465(a).

Ms. Corentine Poilvet-Clédière

January 16, 2024

Page 4

Paragraph 3 of the BdF Acknowledgment Letter is consistent with the second and third

clauses of the second paragraph of the Template Acknowledgment Letter, including the

requirement that funds in the accounts be separately accounted for, segregated from LCH’s own

funds, and otherwise treated in accordance with Section 4d of the Commodity Exchange Act

(“CEA”). Paragraph 4 of the BdF Acknowledgment Letter refers to a provision in the account

agreement between LCH and the BdF (“Account Agreement”) in which the BdF waived its right

of set off against the account. This provision is consistent with the third paragraph of the

Template Acknowledgment Letter

funds, and otherwise treated in accordance with Section 4d of the Commodity Exchange Act

(“CEA”). Paragraph 4 of the BdF Acknowledgment Letter refers to a provision in the account

agreement between LCH and the BdF (“Account Agreement”) in which the BdF waived its right

of set off against the account. This provision is consistent with the third paragraph of the

Template Acknowledgment Letter.

Paragraph 5 of the BdF Acknowledgment Letter provides that the BdF will, as soon as

reasonably practicable, reply to any request for confirmation of account balances or provision of

any other information regarding or related to the account from the Division of Clearing and Risk

or the Market Participants Division. This provision deviates from the fourth paragraph of the

Template Acknowledgment Letter in one respect, i.e., the BdF is to provide a response “as soon

as reasonably practicable” rather than “promptly.” This change is intended to take into account

such circumstances as time zone differences and French bank holidays which could impact the

timing of the BdF’s response.

Paragraph 6 of the BdF Acknowledgment Letter is consistent with the sixth paragraph of

the Template Acknowledgment Letter, specifying that LCH will not hold the BdF responsible for

acting pursuant to Commission inquiries in paragraph 5. Finally, paragraph 7 of the BdF

Acknowledgment Letter clarifies that except for the BdF’s commitment to waive its right of set

off against the account in paragraph 4 and to respond to Commission inquiries in paragraph 5,

the BdF Acknowledgment Letter is not intended to amend the Account Agreement. This

provision also acknowledges that the BdF is not making any representations as to LCH’s

representations in the BdF Acknowledgment Letter, e.g., the funds in the account are customer

funds and LCH is treating them in accordance with Section 4d of the CEA.

D

pond to Commission inquiries in paragraph 5,

the BdF Acknowledgment Letter is not intended to amend the Account Agreement. This

provision also acknowledges that the BdF is not making any representations as to LCH’s

representations in the BdF Acknowledgment Letter, e.g., the funds in the account are customer

funds and LCH is treating them in accordance with Section 4d of the CEA.

D. Grant of No-Action Letter

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

recommend that the Commission take enforcement action against LCH for executing, and

submitting to the Commission, the BdF Acknowledgment Letter, in place of the Template

Acknowledgment Letter.

The positions taken herein represent the views of the Division only, and do not

necessarily represent the position or view of the Commission or of any other office or division of

the Commission. The staff positions taken in this letter do not excuse persons relying on it from

compliance with any other applicable requirements contained in the CEA or in Commission

regulations. Further, this letter, and the positions taken herein, are based upon the facts and

circumstances presented to the Division. Any different, changed, or omitted material facts or

circumstances might render the staff positions taken in this letter void.

II.

Exemption from the Requirements of Commission Regulation 1.49(d)(3)

e requirements contained in the CEA or in Commission

regulations. Further, this letter, and the positions taken herein, are based upon the facts and

circumstances presented to the Division. Any different, changed, or omitted material facts or

circumstances might render the staff positions taken in this letter void.

II.

Exemption from the Requirements of Commission Regulation 1.49(d)(3)

Ms. Corentine Poilvet-Clédière

January 16, 2024

Page 5

In the context of maintaining customer accounts at the BdF, LCH has requested that the

Division grant an exemption from Regulation 1.49(d)(3) to permit LCH to hold customer funds

at the BdF. Regulation 1.49(d)(3) provides that, in order to hold customer funds with a

depository located outside of the United States, the depository must be: (i) a bank or trust

company that has in excess of $1 billion of regulatory capital, (ii) a registered futures

commission merchant, or (iii) a DCO.8 The Division finds that Regulation 1.49(d)(3)(i)

unintentionally precludes the BdF from acting as a depository for customer funds,

notwithstanding that it is a central bank for a money center country, because the BdF cannot

satisfy the regulatory capital requirement. Nonetheless, based on the following analysis, the

Division is granting an exemption to LCH from the requirements of Regulation 1.49(d)(3).

In adopting Regulation 1.49, the Commission sought to address the various types of risks

that arise in the context of holding customer funds with a depository. In requiring that a non-

U.S. bank or trust company have at least $1 billion in regulatory capital, the Commission sought

to ensure that customer funds would not be deposited with a small commercial bank or trust

company, which, because of its size, would be unlikely to have the financial or operational

resources to adequately administer customer accounts

ding customer funds with a depository. In requiring that a non-

U.S. bank or trust company have at least $1 billion in regulatory capital, the Commission sought

to ensure that customer funds would not be deposited with a small commercial bank or trust

company, which, because of its size, would be unlikely to have the financial or operational

resources to adequately administer customer accounts. The $1 billion regulatory capital

requirement, therefore, serves as a proxy for a bank or trust company’s suitability as a depository

for customer funds, both in terms of financial strength and operational sophistication. The BdF,

while it has adequate financial and operational resources to properly handle customer funds,9

does not technically satisfy the $1 billion regulatory capital requirement. Regulatory capital

consists of the capital required pursuant to a depository’s regulatory regime, and is typically

composed of Tier 1 capital (i.e., common stock). Unlike commercial banks, central banks, like

the BdF, are not held to regulatory capital requirements. Therefore, because the BdF does not,

by definition, satisfy the requirements of Regulation 1.49(d)(3)(i), the Division finds that an

exemption is appropriate to address the preclusive effect of the regulation’s plain meaning.

The Division notes that Section 4d of the CEA, which establishes segregation

requirements for futures and cleared swaps customer funds, similarly refers to “a bank or trust

company” or “any depository institution,” without distinguishing between a commercial or

central bank, a large or small depository, or a depository located in the United States or in a

foreign country.10 In addition, Regulation 1.49(c)(1)(ii) permits customer funds to be held in a

depository located in France.11 Section 4d of the CEA and Regulation 1.49(c)(1)(ii) can be read

8 17 C.F.R. § 1.49(d)(3).

9 The BdF holds reserves of 2,436 tonnes of gold valued at approximately 133.6 billion Euros

ed in the United States or in a

foreign country.10 In addition, Regulation 1.49(c)(1)(ii) permits customer funds to be held in a

depository located in France.11 Section 4d of the CEA and Regulation 1.49(c)(1)(ii) can be read

8 17 C.F.R. § 1.49(d)(3).

9 The BdF holds reserves of 2,436 tonnes of gold valued at approximately 133.6 billion Euros. See BdF

Annual Report (2022), available at https://publications.banque-france.fr/sites/default/files/medias/

documents/arbf-2022_accounts_web.pdf.

10 7 U.S.C. § 6d.

11 Regulation 1.49(c)(1)(ii) provides that customer funds may be held in a depository located in a money

center country, which is defined to include France. See Regulation 1.49(a)(1) (defining “money center

country”).

Ms. Corentine Poilvet-Clédière

January 16, 2024

Page 6

to permit the BdF to act as a depository for customer funds; however, Regulation 1.49(d)(3)(i), in

its reference to regulatory capital, precludes the BdF in this regard.

As discussed in greater detail above,12 there are distinct financial safeguards afforded by

holding customer funds at the BdF, as a central bank for a money center country, that merit an

exemption in this regard. The BdF, in its capacity as a central bank for a money center country,

does not present the same types of risks as traditional commercial banks, as it serves in the public

interest and operates with the goal of maintaining stability in the financial markets. Further,

deposits at a central bank have the lowest credit risk and are the source of liquidity with regard to

their currency of issue; LCH would, therefore, face much lower credit and liquidity risk with a

deposit at the BdF than it would with a deposit at a commercial bank. The Division believes that

granting the exemption would not be contrary to the public interest or to the purposes of

Regulation 1.49(d)(3)

a central bank have the lowest credit risk and are the source of liquidity with regard to

their currency of issue; LCH would, therefore, face much lower credit and liquidity risk with a

deposit at the BdF than it would with a deposit at a commercial bank. The Division believes that

granting the exemption would not be contrary to the public interest or to the purposes of

Regulation 1.49(d)(3). Based on the foregoing, pursuant to delegated authority from the

Commission, the Division hereby grants an exemption to LCH from the requirements of

Regulation 1.49(d)(3) to permit LCH to hold customer funds at the BdF.

This exemption is based upon the representations of LCH and applicable laws and

regulations in their current form; any new, different, or changed material facts or circumstances

might render this exemption void. The positions taken herein do not excuse persons relying on

the exemption from compliance with any other applicable requirements contained in the CEA or

in Commission regulations.

Should you have any questions, please do not hesitate to contact Gavin Young, Special

Counsel, at gyoung@cftc.gov, or (202) 418-5976.

Sincerely,

Clark Hutchison

Director

Attachment

12 See discussion supra Part I.B. (emphasizing the favorable policy considerations of holding customer

funds at a central bank, as supported by Title VIII of the Dodd-Frank Act and the PFMIs).