[Federal Register Volume 83, Number 143 (Wednesday, July 25, 2018)]
[Notices]
[Pages 35241-35246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15860]


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COMMODITY FUTURES TRADING COMMISSION


Order Granting Exemption From Certain Provisions of the Commodity 
Exchange Act Regarding Investment of Customer Funds and From Certain 
Related Commission Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is issuing an order in response to a petition from ICE 
Clear Credit LLC, ICE Clear US, Inc., and ICE Clear Europe Limited 
(collectively, ``the ICE DCOs'' or ``the Petitioners'') seeking an 
exemption permitting the investment of futures and swap customer funds 
in certain categories of euro-denominated sovereign debt. The 
Commission is also granting exemptive relief to expand the universe of 
permissible counterparties and depositories that can be used in 
connection with these investments given the structure of the market for 
repurchase agreements in euro-denominated sovereign debt.

DATES: Applicable as of July 25, 2018.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
(202) 418-5096, <a href="/cdn-cgi/l/email-protection#c0a5a4afaeafb6a1ae80a3a6b4a3eea7afb6"><span class="__cf_email__" data-cfemail="cbaeafa4a5a4bdaaa58ba8adbfa8e5aca4bd">[email protected]</span></a>, Division of Clearing and Risk, or 
Lihong McPhail, Research Economist, (202) 418-5722, <a href="/cdn-cgi/l/email-protection#137f7e70637b727a7f53707567703d747c65"><span class="__cf_email__" data-cfemail="7915141a0911181015391a1f0d1a571e160f">[email protected]</span></a>, 
Office of the Chief Economist, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; or 
Tad Polley, Associate Director, (312) 596-0551, <a href="/cdn-cgi/l/email-protection#9eeaeef1f2f2fbe7defdf8eafdb0f9f1e8"><span class="__cf_email__" data-cfemail="fa8e8a9596969f83ba999c8e99d49d958c">[email protected]</span></a>, or 
Scott Sloan, Attorney-Advisor, (312) 596-0708, <a href="/cdn-cgi/l/email-protection#1b686877747a755b787d6f78357c746d"><span class="__cf_email__" data-cfemail="196a6a75767877597a7f6d7a377e766f">[email protected]</span></a>, 
Division of Clearing and Risk, Commodity Futures Trading Commission, 
525 West Monroe Street, Chicago, Illinois 60661.

SUPPLEMENTARY INFORMATION:

I. Background

    By petition dated June 22, 2017, the Petitioners, all registered 
derivatives clearing organizations (``DCOs''), requested an exemptive 
order under section 4(c) of the Commodity Exchange Act (``CEA'' or 
``Act'') permitting the ICE DCOs to invest futures and cleared swap 
customer funds in certain categories of euro-denominated sovereign 
debt. On December 15, 2017, the Commission published a proposed order 
that would grant the requested exemption (``Proposed Order'') and 
requested public comment on the Proposed Order.\1\
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    \1\ 82 FR 59586 (Dec. 15, 2017).
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    Section 4d of the Act \2\ and Commission Regulation 1.25(a) \3\ set 
out the permitted investments in which DCOs may invest customer 
funds.\4\ Section 4d limits investments of customer money to 
obligations of the United States (``U.S. Government Securities''), 
general obligations of any State or of any political subdivision 
thereof, and obligations fully guaranteed as to principal and interest 
by the United States.\5\ Regulation 1.25 expands the list of permitted 
investments but does not permit investment of customer funds in foreign 
sovereign debt.\6\
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    \2\ 7 U.S.C. 6d.
    \3\ 17 CFR 1.25(a) (2017).
    \4\ Although Regulation 1.25 by its terms applies only to 
futures customer funds, Regulation 22.3(d) requires that a DCO 
investing cleared swap customer funds comply with the requirements 
of Regulation 1.25.
    \5\ See 7 U.S.C. 6d(a)(2) (futures), (f)(4) (cleared swaps).
    \6\ Regulation 1.25 permits investment of customer funds in: (i) 
Obligations of the United States and obligations fully guaranteed as 
to principal and interest by the United States (U.S. government 
securities); (ii) General obligations of any State or of any 
political subdivision thereof (municipal securities); (iii) 
Obligations of any United States government corporation or 
enterprise sponsored by the United States government (U.S. agency 
obligations); (iv) Certificates of deposit issued by a bank 
(certificates of deposit) as defined in section 3(a)(6) of the 
Securities Exchange Act of 1934, or a domestic branch of a foreign 
bank that carries deposits insured by the Federal Deposit Insurance 
Corporation; (v) Commercial paper fully guaranteed as to principal 
and interest by the United States under the Temporary Liquidity 
Guarantee Program as administered by the Federal Deposit Insurance 
Corporation (commercial paper); (vi) Corporate notes or bonds fully 
guaranteed as to principal and interest by the United States under 
the Temporary Liquidity Guarantee Program as administered by the 
Federal Deposit Insurance Corporation (corporate notes or bonds); 
and (vii) Interests in money market mutual funds.
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    Regulation 1.25 previously included foreign sovereign debt as a 
permitted investment for customer funds.\7\ In 2011, the Commission 
removed this option from Regulation 1.25, but also acknowledged that 
the safety of sovereign debt issuances of one country may vary greatly 
from those of another, and stated that it was amenable to considering 
requests for section 4(c) exemptions from this restriction.\8\ 
Specifically, the Commission stated that it would consider permitting 
foreign sovereign debt investments (1) to the extent that the 
petitioner has balances in segregated accounts owed to customers or 
clearing member futures commission merchants in that country's currency 
and (2) to the extent that the sovereign debt serves to preserve 
principal and maintain liquidity of customer funds as

[[Page 35242]]

required for all other investments of customer funds under Regulation 
1.25.\9\
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    \7\ See 17 CFR 1.25(a) (2005).
    \8\ Investment of Customer Funds and Funds Held in an Account 
for Foreign Futures and Foreign Options Transactions, 76 FR 78776, 
78782 (Dec. 19, 2011).
    \9\ Id.
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    In connection with their proposal to invest customer funds in 
foreign sovereign debt, the ICE DCOs have also requested an exemption 
from Regulations 1.25(d)(2) and (7). Regulation 1.25(d)(2) limits the 
counterparties with which a DCO can enter into a repurchase agreement 
involving customer funds to a bank as defined in section 3(a)(6) of the 
Securities Exchange Act of 1934, a domestic branch of a foreign bank 
insured by the Federal Deposit Insurance Corporation, a securities 
broker or dealer, or a government securities broker or government 
securities dealer registered with the Securities and Exchange 
Commission or which has filed notice pursuant to section 15C(a) of the 
Government Securities Act of 1986. Regulation 1.25(d)(7) requires a DCO 
to hold the securities transferred to the DCO under a repurchase 
agreement in a safekeeping account with a bank as referred to in 
Regulation 1.25(d)(2), a Federal Reserve Bank, a DCO, or the Depository 
Trust Company in an account that complies with the requirements of 
Regulation 1.26.

II. The ICE DCOs' Petition

    The ICE DCOs request a limited exemption from section 4d of the Act 
and Commission Regulation 1.25(a) to invest euro-denominated customer 
funds in sovereign debt issued by the French Republic and the Federal 
Republic of Germany (``Designated Foreign Sovereign Debt'') through 
both direct investment and repurchase agreements.\10\ The Petitioners 
also request an exemption from Regulation 1.25(d)(2) that would permit 
them to enter into reverse repurchase agreements with certain foreign 
banks, certain regulated securities dealers, or the European Central 
Bank and the central banks of Germany and France.\11\ Lastly, the ICE 
DCOs request an exemption from Regulation 1.25(d)(7) that would permit 
them to hold the securities purchased through reverse repurchase 
agreements in a safekeeping account with a non-U.S. bank that qualifies 
as a depository under the requirements of Regulation 1.49.
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    \10\ A copy of the petition is available on the Commission's 
website at http://www.cftc.gov/idc/groups/public/@requestsandactions/documents/ifdocs/icedcos4cappl6-22-17.pdf.
    \11\ The ICE DCOs have indicated they may not currently be able 
to enter into repurchase agreements with these central banks.
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III. Section 4(c) Analysis

    In connection with the Proposed Order, the Commission preliminarily 
determined that granting the requested exemption would be consistent 
with Section 4(c) of the Act.\12\ After reviewing the comments received 
in response to the Proposed Order, all of which supported an exemption, 
the Commission has determined that the exemption detailed below 
satisfies the requirements of Section 4(c)(2) of the Act.\13\
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    \12\ Section 4(c)(1) of the Act empowers the Commission to 
promote responsible economic or financial innovation and fair 
competition by exempting any transaction or class of transactions 
(including any person or class of persons offering, entering into, 
rendering advice or rendering other services with respect to, the 
agreement, contract, or transaction), from any of the provisions of 
the Act, subject to exceptions not relevant here. 7 U.S.C. 6(c)(1).
    \13\ Section 4(c)(2) of the Act provides that the Commission may 
grant exemptions under Section 4(c)(1) only when it determines that 
the requirements for which an exemption is being provided should not 
be applied to the agreements, contracts, or transactions at issue; 
that the exemption is consistent with the public interest and the 
purposes of the Act; that the agreements, contracts, or transactions 
will be entered into solely between appropriate persons; and that 
the exemption will not have a material adverse effect on the ability 
of the Commission or any contract market or derivatives transaction 
execution facility to discharge its regulatory or self-regulatory 
responsibilities under the Act.
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    Specifically, the Commission has determined that the restriction on 
investments of customer funds by DCOs should not apply to Designated 
Foreign Sovereign Debt. As the Commission previously observed, the ICE 
DCOs demonstrated that the Designated Foreign Sovereign Debt has 
credit, liquidity, and volatility characteristics that are comparable 
to U.S. Government Securities, which are permitted investments under 
the Act and Regulation 1.25. For example, as evidence of the 
creditworthiness of France and Germany, the ICE DCOs provided data 
demonstrating that credit default swap spreads of France and Germany 
have historically been similar to those of the United States. To 
demonstrate the liquidity of the markets, the ICE DCOs pointed to, for 
example, the substantial amount of outstanding marketable French and 
German debt and the daily transaction value of the repo markets for 
their debt. And with respect to volatility, the ICE DCOs provided data 
on daily changes to sovereign debt yields demonstrating that the price 
stability of French and German debt is comparable to that of U.S. 
Government Securities.
    The Commission also observed that the ICE DCOs demonstrated that 
investing in the Designated Foreign Sovereign Debt poses less risk to 
customer funds than the current alternative of holding the funds at a 
commercial bank, on the basis that exposure to high-quality sovereign 
debt is preferable to facing the credit risk of commercial banks 
through unsecured bank demand deposit accounts. While investments 
through reverse repurchase agreements (as opposed to direct 
investments) still involve exposure to a commercial counterparty, a DCO 
would receive the additional benefit of receiving securities as 
collateral against that counterparty's credit risk. The ICE DCOs also 
represented that in the event a securities custodian enters insolvency 
proceedings, they would have a claim to specific securities rather than 
a general claim against the assets of the custodian.
    Further, the Commission has determined that the exemption is 
consistent with the public interest and the purposes of the Act, which 
include ensuring the financial integrity of transactions and avoiding 
systemic risk.\14\ As noted above, investing customer funds in 
Designated Foreign Sovereign Debt is often a prudent alternative to 
holding cash at a commercial bank from a risk management perspective, 
and granting the exemption thus serves to protect market participants 
and the public. For the same reasons, granting the exemption may 
enhance the financial integrity of the DCO and thereby help to avoid 
systemic risk.
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    \14\ See 7 U.S.C. 5(b).
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    Finally, the Commission has determined that granting an exemption 
allowing investment of customer funds in instruments with risk 
characteristics comparable to currently permitted investments does not 
have a material adverse effect on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory duties 
under the Act.\15\
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    \15\ The section 4(c)(2) factor of whether an agreement, 
contract or transaction is entered into solely between appropriate 
persons does not apply here.
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    Based on the foregoing, the Commission has determined that granting 
the exemption provided in the order below satisfies the requirements of 
section 4(c) of the Act.

IV. Proposed Order

    The Commission proposed an exemption to permit the ICE DCOs, 
subject to certain conditions, to invest customer funds in Designated 
Foreign Sovereign Debt. The first condition required that the ICE DCOs 
only use customer euro cash to invest in the Designated Foreign 
Sovereign Debt. This restriction was previously included in

[[Page 35243]]

Regulation 1.25 \16\ when the rule permitted the investment of customer 
funds in foreign sovereign debt, and the Commission believes it is 
still an appropriate restriction on the amount that may be invested in 
these instruments.
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    \16\ See 17 CFR 1.25(b)(4)(D) (2005) (providing that sovereign 
debt is subject to the following limits: A futures commission 
merchant may invest in the sovereign debt of a country to the extent 
it has balances in segregated accounts owed to its customers 
denominated in that country's currency; a DCO may invest in the 
sovereign debt of a country to the extent it has balances in 
segregated accounts owed to its clearing member futures commission 
merchants denominated in that country's currency).
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    Second, the Commission proposed to permit the ICE DCOs to invest in 
Designated Foreign Sovereign Debt only so long as the two-year credit 
default spread of the issuing sovereign is 45 basis points (``BPS'') or 
less. The Commission explained that because the proposed order was not 
intended to expand the universe of permitted investments beyond 
instruments with a risk profile similar to those that are currently 
permitted, U.S. Government Securities provide an appropriate benchmark 
to confine permitted investments in foreign sovereign debt. The 
Commission proposed the cap of 45 BPS based on a historical analysis of 
the two-year credit default spread of the United States (``U.S. 
Spread''). Forty-five BPS is approximately two standard deviations 
above the mean U.S. Spread over the past eight years and represents a 
risk level that the U.S. Spread has exceeded approximately 5% of the 
time over that period.\17\ The Proposed Order provided that if the 
spread exceeds 45 BPS, the ICE DCOs would not be permitted to make new 
investments in the relevant debt. They also would not need to 
immediately divest all current investments, however, due to risks 
associated with selling assets in a potentially volatile market. The 
Commission explained that prohibiting new investments, together with 
the length to maturity condition discussed immediately below, 
sufficiently protects customer funds in the event that a country's 
Designated Foreign Sovereign Debt were to exceed the 45 BPS spread 
limit.
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    \17\ The Commission reviewed the daily U.S. Spread from July 3, 
2009 to July 3, 2017. Over this time period, the U.S. Spread had a 
mean of approximately 26.5 BPS and a standard deviation of 
approximately 9.72 BPS. Over this same period, the two-year German 
spread exceeded 45 BPS approximately 6% of the time, and the two-
year French spread exceeded 45 BPS approximately 25% of the time. 
Neither the German nor the French two-year spread has exceeded 45 
BPS since September 2012.
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    Third, the Commission proposed to limit the length to maturity of 
direct investments in Designated Foreign Sovereign Debt, to limit 
permitted investments to those with a lower risk profile. Specifically, 
the Proposed Order contained a requirement that each of the ICE DCOs 
ensure that the dollar-weighted average of the time-to-maturity of 
their portfolio of direct investments in each type of Designated 
Foreign Sovereign Debt does not exceed 60 days. This restriction was 
modeled on Securities and Exchange Commission requirements for money 
market mutual funds,\18\ which have liquidity timing needs 
appropriately analogous to those of a DCO in this instance, and was 
designed to ensure that the investments will mature relatively quickly, 
providing the ICE DCOs with access to euro cash.
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    \18\ See 17 CFR 270.2a-7.
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    To provide the ICE DCOs with the ability to invest customer funds 
in the Designated Foreign Sovereign Debt, the Commission proposed to 
exempt the ICE DCOs from the counterparty and depository requirements 
of Regulation 1.25(d)(2) and (7), subject to conditions. As a practical 
matter, complying with these requirements would severely restrict the 
ICE DCOs' ability to enter into repurchase agreements for Designated 
Foreign Sovereign Debt.
    Specifically the Commission proposed to exempt the ICE DCOs from 
the counterparty restrictions of Regulation 1.25(d)(2), subject to the 
condition that counterparties be limited to certain categories that are 
intended to limit the risk associated with reverse repurchase 
transactions. The ICE DCOs represented that the principal participants 
in the European sovereign debt repurchase markets are non-U.S. banks, 
non-U.S. securities dealers, and foreign branches of U.S. banks. As a 
result, the counterparty requirements under Regulation 1.25(d)(2) would 
significantly constrain the use of euro-denominated sovereign debt 
repurchase agreements. Additionally, the ICE DCOs represented that it 
would be impractical and inefficient to hold such securities at a U.S. 
custodian, and the Commission proposed to exempt the ICE DCOs from the 
depository requirement of Regulation 1.25(d)(7), so long as the 
depository qualifies as a permitted depository under Regulation 1.49. 
The Commission explained that the proposed restrictions on permitted 
counterparties and depositories are designed to ensure that the 
counterparties and depositories used by the ICE DCOs will be regulated 
entities comparable to those currently permitted under Regulation 
1.25(d)(2) and (7).

V. Comments on the Proposed Order

    The Commission published a request for comments regarding the 
Proposed Order in the Federal Register on December 15, 2017.\19\
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    \19\ 82 FR 59586 (Dec. 15, 2017).
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    The Commission received three comment letters.\20\ Each of the 
commenters supported an exemption and suggested several changes to the 
Proposed Order. Both Eurex and FIA stated that the proposed exemption 
is consistent with the Regulation 1.25 objectives of preserving 
principle and maintaining liquidity.
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    \20\ Letters were submitted by CME Group, Inc (``CME''), Eurex 
Clearing AG (``Eurex''), and the Futures Industry Association 
(``FIA''). All comment letters are available through the 
Commission's website at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2850.
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    All three commenters recommended that the Commission expand the 
scope of the order to grant relief to additional registrants. Eurex, a 
registered DCO, requested that it be included within the scope of the 
exemption. CME encouraged the Commission to include all DCOs in the 
scope of the exemption, and FIA recommended including all DCOs and 
their FCM clearing members.
    CME and Eurex argued that expanding the scope of the order is 
consistent with the promotion of fair competition, which is one of the 
stated purposes of section 4(c) exemptions.\21\ They also highlighted 
the benefits of investing customer funds in Designated Foreign 
Sovereign Debt as justification for expanding the scope of the order. 
Eurex stated that investing in Designated Foreign Sovereign Debt is 
safer than holding euro cash at a commercial bank. Additionally, CME 
noted that investing in Designated Foreign Sovereign Debt promotes 
effective management of liquidity risk by aligning collateral types 
with potential liquidity obligations and by diversifying risk in the 
investment portfolio. CME further stated that investments in Designated 
Foreign Sovereign Debt allow DCOs to better mitigate collateral 
concentration risk and argued that these benefits are not unique to any 
particular DCO.
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    \21\ See 7 U.S.C. 6(c)(1).
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    The Commission agrees that the benefits of the Proposed Order are 
not unique to the ICE DCOs and is accordingly expanding the scope of 
the Proposed Order to permit all DCOs to invest customer funds in 
Designated Foreign Sovereign Debt, subject to the conditions of the 
order. The Commission notes, however, that some DCOs have access to a 
central bank account for euro deposits and believes that such access 
can, in certain

[[Page 35244]]

circumstances, reduce or eliminate the need for investing customer 
funds in Designated Foreign Sovereign Debt. The Commission therefore 
encourages DCOs to deposit customer euro with a central bank when it is 
practical to do so.\22\ The comments received did not provide support 
for an expansion of the exemption to FCMs,\23\ a separate class of 
registrants subject to differing regulatory obligations that the 
Commission would need to carefully consider on their own terms. As a 
result, the Commission declines to expand the order to permit FCMs to 
invest customer funds in Designated Foreign Sovereign Debt at this 
time.
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    \22\ See Comm. on Payment and Settlement Sys. and Technical 
Comm. of the Int'l Org. of Sec. Comm'ns [CPSS-IOSCO, now CPMI-IOSCO] 
Principles for Financial Market Infrastructures, Princ. 7 Key 
Consideration 8 (2012) (``An FMI with access to central bank 
accounts, payment services, or security services should use these 
services, where practical, to enhance its management of liquidity 
risk.'').
    \23\ See FIA comment letter at 3 (providing only that ``[w]e see 
no reason why the proposed relief should not be'' available to FCMs 
holding euro-denominated segregated balances).
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    Both Eurex and FIA encouraged the Commission to expand the weighted 
average time-to-maturity limit beyond the proposed 60 days. Eurex 
recommended limiting portfolios, including repurchase agreements, to a 
two-year time-to-maturity requirement, consistent with the current 
limit in Regulation 1.25 for the overall portfolio of investments 
purchased with customer funds. It argued that because the Commission 
found the risk characteristics of German and French debt to be similar 
to those of U.S. Government Securities, the same time-to-maturity limit 
should apply. FIA recommended using a six month time-to-maturity 
limit.\24\ Based on discussions with trading desks at several member 
firms, FIA suggested that the 60-day limit would be too restrictive. It 
explained that the new issuance supply of French and German sovereign 
debt that could be used to satisfy this restriction is limited and 
thinly traded and quoted, which could force participants to invest in 
less-liquid secondary market securities. Further, FIA noted that 
although the discussion of the proposed 60-day time-to-maturity limit 
noted the SEC's requirement for mutual funds as a point of reference, 
the SEC rule includes overnight repos in the calculation, which 
significantly reduces the average time-to-maturity of the portfolio as 
a whole.
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    \24\ FIA did not specify whether repurchase agreements would be 
included in the calculation of the time-to-maturity limit it 
proposed.
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    The 60-day average time-to-maturity limitation as proposed to apply 
only to direct investments may unduly limit investments in Designated 
Foreign Sovereign Debt, and the Commission is therefore amending the 
calculation of the limitation. Under the final order, the dollar-
weighted average time-to-maturity of all investments in Designated 
Foreign Sovereign Debit, including repurchase agreements, may not 
exceed 60 days. The Commission is also, however, limiting individual 
direct investments in Designated Foreign Sovereign Debt to securities 
that have a remaining maturity of 180 days or less. While the risk 
characteristics of Designated Foreign Sovereign Debt are broadly 
comparable to those of U.S. Government Securities, Designated Foreign 
Sovereign Debt is somewhat less liquid than U.S. Government Securities 
and the cap on the time-to-maturity of individual investments is 
intended to address that reduced liquidity.
    FIA recommended using the five-year credit default swap (``CDS'') 
spread as the measure of credit quality for Designated Foreign 
Sovereign Debt, arguing that the two-year CDS is thinly traded and 
quoted compared to the five-year instrument. FIA recommended permitting 
investments in French and German debt when the five-year CDS spread is 
at 60 basis points or less.
    The Commission understands that the five-year CDS is more commonly 
traded than the two-year, but believes that the two-year spread is more 
suitable for this purpose because it more closely tracks the duration 
of the investments that DCOs will make in Designated Foreign Sovereign 
debt. While liquidity of the two-year product may not match that of the 
five-year, the Commission believes that data and quotes on the two-year 
spread are adequately available for their intended use as a measure of 
creditworthiness.
    FIA noted that under the proposed exemption from Regulation 
1.25(d)(2) and (7), the ICE DCOs would be required to comply with the 
remaining provisions of Regulation 1.25(d). FIA stated that these 
requirements provide important protections for customer funds employed 
in repurchase agreements and should not be waived. The Commission 
agrees and confirms that DCOs must continue to comply with all 
requirements in Regulation 1.25 not exempted by the order.
    Eurex requested the Commission clarify that like U.S. Government 
Securities, Foreign Sovereign Debt is not subject to an asset-based 
concentration limit. The Commission confirms that the order does not 
subject Designated Foreign Sovereign Debt to an asset-based 
concentration limit. Because investments of customer funds in 
Designated Foreign Sovereign Debt will be limited to the amount of euro 
cash held by DCOs, the Commission does not believe that an asset-based 
concentration limit is necessary.
    In addition, the Commission is amending the Proposed Order to 
permit DCOs a reasonable amount of time after the two-year CDS spread 
of France or Germany exceeds 45 basis points to determine an 
appropriate alternative investment or depository for funds that had 
been invested in a repurchase agreement for the relevant Designated 
Foreign Sovereign Debt. The Commission does not believe it is prudent 
to immediately require DCOs to locate depositories for potentially 
large amounts of cash without notice. The order as revised will require 
DCOs to stop entering into repurchase agreements as soon as practicable 
under the circumstances while the French or German two-year CDS spread 
exceeds 45 basis points. The Commission is not amending the restriction 
that no new direct investments in the relevant debt may be made if the 
two-year spread is greater than 45 basis points.
    The Commission is also making a change to the Proposed Order to 
clarify that the exemption to Regulation 1.25(d)(2) and (7) only 
applies to investments in Designated Foreign Sovereign Debt and not all 
securities purchased with customer funds.
    The Commission does not intend this order to relieve a DCO of any 
obligation relating to investments in Designated Foreign Sovereign Debt 
that would apply if Designated Foreign Sovereign Debt were a permitted 
investment under Commission Regulation 1.25. The Commission is adding a 
new paragraph to the order to clarify that certain Commission 
regulations apply to investments made pursuant to this order.

VI. Order

    After considering the above factors and the comment letters 
received in response to its request for comments, the Commission has 
determined to issue the following:
    (1) The Commission, pursuant to its authority under section 4(c) of 
the Commodity Exchange Act (``Act'') and subject to the conditions 
below, hereby grants registered derivatives clearing organizations 
(``DCOs'') a limited exemption to section 4d of the Act and to 
Commission Regulation 1.25(a) to permit all registered DCOs to invest 
euro-denominated futures and cleared swap customer funds in euro-
denominated sovereign debt issued by the French Republic and the 
Federal

[[Page 35245]]

Republic of Germany (``Designated Foreign Sovereign Debt'').
    (2) The Commission, subject to the conditions below, additionally 
grants:
    (a) A limited exemption to Commission Regulation 1.25(d)(2) to 
permit registered DCOs to use customer funds to enter into repurchase 
agreements for Designated Foreign Sovereign Debt with foreign banks and 
foreign securities brokers or dealers; and
    (b) A limited exemption to Commission Regulation 1.25(d)(7) to 
permit registered DCOs to hold Designated Foreign Sovereign Debt 
purchased under a repurchase agreement in a safekeeping account at a 
foreign bank.
    (3) This order is subject to the following conditions:
    (a) Investments of customer funds in Designated Foreign Sovereign 
Debt by a DCO must be limited to investments made with euro customer 
cash.
    (b) If the two-year credit default spread of an issuing sovereign 
of Designated Foreign Sovereign Debt is greater than 45 basis points:
    (i) A DCO must discontinue investing customer funds in the relevant 
debt through repurchase transactions as soon as practicable under the 
circumstances;
    (ii) A DCO may not make any new direct investments in the relevant 
debt using customer funds. Direct investment refers to purchases of 
Designated Foreign Sovereign Debt unaccompanied by a contemporaneous 
agreement to resell the securities.
    (c) The dollar-weighted average of the time-to-maturity of a DCO's 
portfolio of investments in each sovereign's Designated Foreign 
Sovereign Debt may not exceed 60 days.
    (d) A DCO may not make a direct investment in any Designated 
Foreign Sovereign Debt that has a remaining maturity of greater than 
180 calendar days.
    (e) A DCO may use customer funds to enter into repurchase 
agreements for Designated Foreign Sovereign Debt with a counterparty 
that does not meet the requirements of Commission Regulation 1.25(d)(2) 
only if the counterparty is:
    (i) A foreign bank that qualifies as a permitted depository under 
Commission Regulation 1.49(d)(3) and that is located in a money center 
country (as defined in Commission Regulation 1.49(a)(1)) or in another 
jurisdiction that has adopted the euro as its currency;
    (ii) A securities dealer located in a money center country as 
defined in Commission Regulation 1.49(a)(1) that is regulated by a 
national financial regulator such as the UK Prudential Regulation 
Authority or Financial Conduct Authority, the German Bundesanstalt 
f[uuml]r Finanzdienstleistungsaufsicht (BaFin), the French 
Autorit[eacute] Des March[eacute]s Financiers (AMF) or Autorit[eacute] 
de Contr[ocirc]le Prudentiel et de R[eacute]solution (ACPR), or the 
Italian Commissione Nazionale per le Societ[agrave] e la Borsa 
(CONSOB); or
    (iii) The European Central Bank, the Deutsche Bundesbank, or the 
Banque de France.
    (f) A DCO may hold customer Designated Foreign Sovereign Debt 
purchased under a repurchase agreement with a depository that does not 
meet the requirements of Commission Regulation 1.25(d)(7) only if the 
depository meets the location and qualification requirements contained 
in Commission Regulation 1.49(c) and (d) and if the account complies 
with the requirements of Commission Regulation 1.26.
    (4) A DCO must continue to comply with all other requirements in 
Commission Regulation 1.25, including but not limited to the 
counterparty concentration limits in Commission Regulation 
1.25(b)(3)(v), and other applicable Commission regulations.
    (5) Investments made pursuant to this order will be considered 
``instruments described in Sec.  1.25'' for the purposes of Commission 
Regulation 1.29 and will be considered to be made ``in accordance with 
Sec.  1.25'' for the purposes of Commission Regulation 22.3.

IV. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') imposes certain requirements 
on federal agencies (including the Commission) in connection with their 
conducting or sponsoring any collection of information as defined by 
the PRA. This exemptive order does not involve a collection of 
information. Accordingly, the PRA does not apply.

B. Cost-Benefit Analysis

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its action before issuing an order under the CEA. 
By its terms, section 15(a) does not require the Commission to quantify 
the costs and benefits of an order or to determine whether the benefits 
of the order outweigh its costs. Rather, section 15(a) simply requires 
the Commission to ``consider the costs and benefits'' of its action. 
The Commission did not receive any comments on its proposed costs and 
benefits.
1. Baseline
    The Commission's baseline for consideration of the costs and 
benefits of the exemptive order are the costs and benefits that DCOs 
and the public would face if the Commission does not grant the order, 
or in other words, the status quo. In that scenario, DCOs would be 
limited to investing customer funds in the instruments listed in 
Regulation 1.25.
2. Costs and Benefits
    The costs and benefits of the order are not presently susceptible 
to meaningful quantification. Therefore, the Commission discusses costs 
and benefits in qualitative terms.
    The Commission does not believe granting the exemption will impose 
additional costs on DCOs. The order permits but does not require DCOs 
to invest customer funds in Designated Foreign Sovereign Debt. Each DCO 
may therefore decide whether to accept any costs and benefits of an 
investment. The Commission also does not expect the order to impose 
additional costs on other market participants or the public, which do 
not face any direct costs from the order. While other market 
participants or the public could potentially face costs from riskier 
investment activity leading to financial instability at a DCO, the 
Commission believes that this is unlikely, because the order prescribes 
limits on investments of customer funds in Designated Foreign Sovereign 
Debt designed to preserve principal and maintain liquidity. In 
addition, the flexibility to hold customer funds in Designated Foreign 
Sovereign Debt rather than in euro cash at a commercial bank provides 
risk management benefits as described above.
    The Commission believes that DCOs will benefit from the order. The 
exemption provides DCOs additional flexibility in how they manage and 
hold customer funds and allows them to improve the risk management of 
their customer accounts. Further, if DCOs invest customer funds in 
Designated Foreign Sovereign Debt, other participants in the relevant 
market may benefit from the additional liquidity. Moreover, as 
described above, it is safer from a risk management perspective to hold 
Foreign Sovereign Debt in a safekeeping account than to hold euro cash 
at a commercial bank. Therefore, market participants and the public may 
also benefit from the exemption.
3. Section 15(a) Factors
    Section 15(a) of the CEA further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: protection of market participants and the public; efficiency, 
competitiveness, and

[[Page 35246]]

financial integrity of futures markets; price discovery; sound risk 
management practices; and other public interest considerations. The 
Commission could in its discretion give greater weight to any one of 
the five enumerated areas and could in its discretion determine that, 
notwithstanding its costs, a particular order was necessary or 
appropriate to protect the public interest or to effectuate any of the 
provisions or to accomplish any of the purposes of the CEA. The 
Commission is considering the costs and benefits of this exemptive 
order in light of the specific provisions of section 15(a) of the CEA, 
as follows:
    1. Protection of market participants and the public. As described 
above, investing in the Designated Foreign Sovereign Debt as requested 
by the Petitioners can provide risk management benefits relative to the 
current alternative of holding euro collateral in a commercial bank. 
Granting the exemption thus serves to protect market participants and 
the public.
    2. Efficiency, competition, and financial integrity. Granting the 
exemption may increase efficiency by providing DCOs additional 
flexibility in how they manage customer funds. Making the investments 
permitted by the order is elective, within the discretion of each DCO, 
and thus does not impose additional costs. Further, as discussed in the 
above, DCOs can exercise prudent risk management by investing in the 
Designated Foreign Sovereign Debt, which may enhance the financial 
integrity of the DCO.
    3. Price discovery. The exemption is unlikely to impact price 
discovery in the derivatives markets.
    4. Sound risk management practices. As described above, investing 
customer funds in the Designated Foreign Sovereign Debt is intended to 
advance sound risk management practices, including by limiting 
custodian and collateral concentration risks.
    5. Other public interest considerations. The Commission believes 
that the relevant cost-benefit considerations are captured in the four 
factors above.

    Issued in Washington, DC, on July 19, 2018, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

Appendix To Order Granting Exemption From Certain Provisions of the 
Commodity Exchange Act Regarding Investment of Customer Funds and From 
Certain Related Commission Regulations--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz 
and Behnam voted in the affirmative. No Commissioner voted in the 
negative.
[FR Doc. 2018-15860 Filed 7-24-18; 8:45 am]
 BILLING CODE 6351-01-P


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