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###### Commodity Futures Trading Commission

          - RIN 3038-AC

# AGENCY:

Commodity Futures Trading Commission.

# ACTION:

Notice and Order.

# SUMMARY:

The Commodity Futures Trading Commission (CFTC) is issuing an order, pursuant to Section 409(b)(3) of FDICIA, stating that the supervision provided by BaFin, in conjunction with the Bundesbank, with respect to the clearing activities of Eurex satisfies appropriate standards (the Order). The Order will permit Eurex to operate a multilateral clearing organization (MCO) in the United States for any over-the-counter (OTC) derivative instrument.

# DATES:

*Effective Date:*                         July 31, 2009.                    

# FOR FURTHER INFORMATION CONTACT:

                        Robert B. Wasserman, Associate Director, (202) 418-5092,                         *rwasserman@cftc.gov*, or Nancy Schnabel, Attorney-Advisor, (202) 418-5334,                         *nschnabel@cftc.gov*, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581.                    

# SUPPLEMENTARY INFORMATION:

                    Section 409(a) of FDICIA provides that, in order to operate an MCO [1]                                          in the United States                           ( print page 39304)                        for an OTC derivative instrument,[2]                                          a clearing organization must meet one of several alternative requirements.[3]                                          Section 409(b)(3) of FDICIA sets forth one such alternative.[4]                                          It states that a clearing organization will qualify to operate such an MCO, if such clearing organization is supervised by a foreign financial regulator that the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, or the CFTC, as applicable, has determined satisfies appropriate standards.[5] 

                    Eurex, a central counterparty licensed by BaFin, has requested that the CFTC determine that the supervision provided by BaFin, in conjunction with the Bundesbank,[6]                                          with respect to Eurex's clearing activities, satisfies appropriate standards in accordance with Section 409(b)(3) of FDICIA.[7]                                          Such a determination would permit Eurex to operate an MCO in the United States for any OTC derivative instrument.[8] 

                    In reviewing the request from Eurex, the CFTC primarily considered three factors. First, the CFTC considered whether the German statutory and regulatory regime applicable to Eurex clearing activities substantially corresponds with the Commodity Exchange Act (the CEA) including the core principles applicable to a derivatives clearing organization (DCO), and the regulations promulgated thereunder (the Regulations).[9]                                          In Germany, a central counterparty such as Eurex, is regulated as a “credit institution” conducting “banking business.” [10]                                          Accordingly, the CFTC reviewed translated versions of the following documents, among others: (i) The                     *Gesetz über das Kreditwesen*                     (                    *i.e.*                    , the German Banking Act); (ii) the guidance that BaFin or Bundesbank provided on compliance therewith, including (A) “Minimum Requirements for Risk Management” (Circular 5/2007), (B) Auditor's Report Regulation,[11]                                          (C) Principle I (Concerning the Capital of Institutions), and (D) Principle II (Concerning Own Funds and the Liquidity of Institutions); and (iii) the                     *Bundesgesetzblatt*                     (                    *i.e.*, the German Insolvency Statute); and (iv)                     *Gesetz gegen Wettbewerbsbeschränkunge*                     (                    *i.e.*, the German Act Against Restraints of Competition). The CFTC also reviewed an analysis provided by Eurex regarding the correspondence between the German statutory and regulatory regime and the core principles applicable to a DCO.                

                    Second, the CFTC considered whether the supervision provided by BaFin, in conjunction with Bundesbank, with respect to Eurex's clearing activities, substantially corresponds with the supervision provided by the CFTC with respect to the activities of a DCO. Accordingly, the CFTC reviewed the manner in which BaFin, with the assistance of the Bundesbank, conducts supervision of a credit institution (including a central counterparty such as Eurex), both on an annual basis and through special reviews.[12]                                          The CFTC also reviewed the manner in which BaFin, as well as the Bundesbank, rely on external auditors of a credit institution in conducting certain aspects of such supervision, including the control which BaFin, as well as Bundesbank, exerts over such external auditors.                

                    Third, the CFTC considered whether the supervision provided by BaFin, with the assistance of the Bundesbank, substantially comports with the                     *Principles and Objectives of Securities Regulation*                     (the IOSCO Principles), as developed by the International Organization of Securities Commissions (IOSCO).                

                    In reviewing the request from Eurex, the CFTC also considered additional facts, such as (i) the risk management procedures implemented by Eurex with respect to the clearing of credit default swaps, and (ii) existing arrangements with BaFin to exchange information regarding Eurex.[13] 

As a matter of courtesy, the CFTC invited the other federal financial regulators listed in Section 409(b)(3) of FDICIA to comment on the Application. The CFTC also invited the public to comment on the Application, by posting the Application on its Web site on May 13, 2009. The CFTC received no comments.

Based on its review, the CFTC has determined, pursuant to Section 409(b)(3) of FDICIA, that the supervision provided by BaFin, in conjunction with the Bundesbank, with respect to the clearing activities of Eurex satisfies appropriate standards. Accordingly, the CFTC has issued this Order. Any material changes or omissions in the facts and circumstances upon which this Order is based might require the CFTC to reconsider this matter.

      ( print page 39305)    
Issued in Washington, DC, on July 31, 2009.

David A. Stawick,

Secretary of the Commission.

# Footnotes

1.                             Section 408(1) of FDICIA (12 U.S.C. 4421(1)) defines MCO to mean “a system utilized by more than [two] participants in which the bilateral credit exposures of participants arising from the                                                 transactions cleared are effectively eliminated and replaced by a system of guarantees, insurance, or mutualized risk of loss.”                    
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2.                             Section 408(2) of FDICIA (12 U.S.C. 4421(2)) defines “OTC derivative instrument.”                    
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3.                             12 U.S.C. 4422(a).                    
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4.                             12 U.S.C. 4422(b)(3).                    
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5.                             Section 409(b)(3) of FDICIA (12 U.S.C. 4422(b)(3)). The CFTC has issued three previous orders, pursuant to Section 409(b)(3) of FDICIA, determining that the supervision of a particular MCO by a foreign financial regulator met appropriate standards. The foreign financial regulators involved were (i) the Norwegian Banking, Insurance and Securities Commission, (ii) the Alberta (Canada) Securities Commission, and (iii) the United Kingdom Financial Services Authority.                         *See*67 FR 2419 (January 17, 2002), 71 FR 10958 (March 3, 2006), and 73 FR 44706 (July 31, 2008), respectively.                    
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6.                             The Bundesbank is the central bank of the Federal Republic of Germany.                         *See http://www.bundesbank.de/​aufgaben/​aufgaben.en.php*.                    
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7.                                                     *See*                         Letter, dated March 27, 2009, from Paul Architzel of Alston & Bird LLP, submitted on behalf of Eurex, to David A. Stawick, Secretary of the CFTC, with enclosure and appendices thereto (collectively, the Application).                    

                        BaFin is authorized under the German Banking Act to (i) supervise the operation of a “credit institution” conducting “banking business” (including a central counterparty) domiciled in Germany, and to (ii) enforce compliance with applicable laws, rules and regulations. Because clearing comprises “banking business” under the German Banking Act, BaFin has the authority to regulate any entity engaged in the clearing of OTC derivative instruments. BaFin undertakes such supervision with the assistance of Bundesbank.                         *See*                         Sections 6 and 7 of the German Banking Act.                    
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8.                             Currently, Eurex intends to clear as an MCO (i) OTC derivative instruments that share common terms and conditions with commodity contracts that are listed on the Eurex Deutschland Exchange, and (ii) credit default swaps.                    
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9.                                                     *See*                         Section 5b(c)(2) of the CEA (7 U.S.C. 7a-1(c)(2)(A)-(N)) and Appendix A to Part 39 of the Regulations (17 CFR pt. 39, app. A).                    

Section 409(b)(3) of FDICIA (12 U.S.C. 4422(b)(3)) does not reference the supervision of the foreign financial regulator over trading, and the CFTC has accordingly not reviewed BaFin or Bundesbank supervision of trading in considering the Eurex request.
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10.                                                     *See*                         Attachment to the Application entitled, “Permit according to Section 32 of the Banking Act, issued by BaFin to Eurex as of December 18, 2006 (GZ: WA 22-K 5000-10119203/2006).”                    
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11.                             The full title of the Auditor's Report Regulation is “Regulation, as of December 17, 1998, governing the auditing of the annual accounts and interim reports of credit institutions and financial services institutions and auditing in accordance with section 12(1) sentence 3 of the Act on Investment Companies as well as the reports to be drawn up on these.”                    
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12.                             The division of responsibilities between BaFin and the Bundesbank may be found in the Supervision Directive.                         *See*                         Attachment to the Application entitled, “Directive for Implementation and Quality Assurance of the Current Supervision of the Credit and Financial Service Institutions by the Deutsche Bundesbank.”                    
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13.                                                     *See*                         Memorandum of Understanding, dated October 17, 1997, between the Commission and the German                         *Bundesaufsichtsamt für den Wertpapierhandel*                         (                        *i.e.*, the predecessor of BaFin) Concerning Consultation and Cooperation in the Administration and Enforcement of Futures Laws (the Memorandum of Understanding), and the Side Letter Relating to the Memorandum of Understanding, dated July 28, 2009 between the Commission and BaFin.                    

BaFin is also a signatory of the multilateral Declaration on Cooperation and Supervision of International Futures Exchanges and Clearing Organizations, and the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information.
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[FR Doc. E9-18854 Filed 8-5-09; 8:45 am]

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