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The CFTC proposed rule changes relating to the treatment of DCO registration requirements in a cross-border context.
Specifically, the CFTC seeks public comment on two proposals (the text of which had yet to be posted by the CFTC at the time of writing):
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a proposed rule that would formalize the CFTC approach to registration of non-U.S. DCOs that clear swaps for U.S. persons, and establish a process by which non-U.S. DCOs that do not pose a substantial risk to the U.S. financial system ("Low-Risk DCOs") can register with the CFTC but satisfy compliance obligations by complying with home country requirements ("Non-U.S. DCOs Proposal"); and
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a proposal that would permit Low-Risk DCOs to offer clearing to U.S. persons through foreign clearing firms that are not CFTC-registered FCMs ("Supplemental Proposal").
The Non-U.S. DCOs Proposal was approved by a 5-0 vote. CFTC Chair J. Christopher Giancarlo said that "[t]he main purpose of this rulemaking is to address the current informality of the CFTC's approach and, in doing so, introduce significant additional areas where the CFTC can defer, appropriately and consistent with its risk oversight responsibilities, to non-U.S. DCOs' home country supervisors." CFTC Commissioner Dan M. Berkovitz supported the proposal but expressed concern about the threshold test for determining when an entity is a Low-Risk DCO and whether the standards for substituted compliance are robust enough. (Mr. Berkovitz indicated that the test is if: (1) the DCO "holds 20% or more of the required initial margin of U.S. members for swaps aggregated across all registered and exempt DCOs"; and (2) "20% or more of the initial margin for swaps required at the DCO is attributable to U.S. members.")
Commissioner Dawn Stump also supported the proposal, but suggested it did not go far enough to address "the increased strain on our registered FCMs." In particular, Ms. Stump suggested permitting clearing through affiliates of CFTC-registered FCMs in order to reduce the burden of U.S. FCMs registering with (and capitalizing) a non-U.S. DCO.
The Supplemental Proposal was approved by a 3-2 vote, with Commissioners Berkovitz and Rostin Behnam dissenting. Mr. Giancarlo said that the Supplemental Proposal is similar to the CFTC's long-standing approach to foreign futures clearing, allowing retail customers to opt out of the bankruptcy protections offered to foreign futures funds under U.S. law. Mr. Berkovitz expressed concern regarding the Supplemental Proposal, saying that it (i) poses risk to the U.S. financial system, (ii) promotes foreign intermediaries and (iii) exceeds the CFTC's limited exemptive authority. Commissioner Brian Quintenz added that he was particularly interested in comments on other possibilities for U.S. persons to get access to foreign DCOs, including: (i) whether U.S. FCMs should be able to provide access to exempt DCOs; (ii) whether foreign DCOs that are not registered or exempt should be able to clear for non-U.S. branches of U.S. banks; and (iii) whether a foreign clearing member of a foreign DCO should be permitted to sponsor a U.S. FCM's access to a foreign DCO to facilitate access for U.S. customers.
Commentary / Nihal Patel
CFTC Chair Giancarlo has long advocated permitting U.S. customers to access foreign futures through non-U.S. clearing members. As discussed when he first articulated the framework, the proposal raises significant policy questions - several of which are now being articulated by Commissioner Berkovitz.
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