```

[Federal Register: July 7, 1998 (Volume 63, Number 129)]
[Notices]
[Page 36657]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07jy98-35]

=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION


Petition of the London Clearing House Limited for Exemption
Pursuant to Section 4(c) of the Commodity Exchange Act

AGENCY: Commidity Futures Trading Commission.

ACTION: Notice of petition for exemption and request for comment.

-----------------------------------------------------------------------

SUMMARY: The London Clearing House Limited ("LCH") has submitted a
petition dated June 15, 1998 ("Petition") to the Commodity Futures
Trading Commission ("Commission") requesting an exemption, pursuant
to Section 4(c) of the Commodity Exchange Act ("Act" or "CEA"), in
connection with LCH's proposed provision of clearing services for
certain swap agreements. The Commission believes that publication of
the Petition for comment is in the public interest, will assist the
Commission in considering the views of interested persons, and is
consistent with the purposes of the Commission Exchange Act. The
Petition also may be accessed on the Commission's Internet web site
(http://www.cftc.gov) and may be obtained through the Commission's
Office of the Secretariat.

DATES: Comments must be received on or before September 8, 1998.

ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary,
Commodity Futures Trading Commission, 1155 21st Street, NW, Washington,
DC 20581. Comments also may be sent by facsimile to (202) 418-5521 or
by electronic mail to secretary @cftc.gov. Reference should be made to
the Petition of LCH.

FOR FURTHER INFORMATION CONTACT:
Thomas E. Joseph, Division of Trading and Markets, Commodity Futures
Trading Commission, 1155 21st Street NW Washington, DC 20581. Telephone
number (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

    By petition dated June 15, 1998, the LCH applied pursuant to
Section 4(c) of the Act \1\ for an exemption from

    \1\ 7 U.S.C. 6(c).
---------------------------------------------------------------------------

all provisions of the Act (except for Sections 2(a)(1)(B), 4b and 4o
of the Act, and the provisions of Sections 6(c) and 9(a)(2) of the
Act to the extent these provisions prohibit manipulation of the
market price of any commodity in interstate commerce or for future
delivery on or subject to the rules of any contract market and
Section 32.9 of the CFTC's Rules) to qualified U.S. entities that
utilize [the LCH facility] to clear transactions in "swap
agreements" (as such term is defined in CFTC Rule 35.1(b)).\2\

    \2\ Petition at 2.
---------------------------------------------------------------------------

    LCH has developed a clearing facility for swap agreements
("SwapClear") which is scheduled to commence operations in mid-
1999.\3\ The facility will be used to clear interest rate swaps and
forward rate agreements in the following currencies: U.S. dollars,
Japanese yen, Euros (and the eleven underlying currencies), British
pounds, and possibly Canadian dollars.\4\ Participation will be limited
to large institutions that participate as dealers in the swap market
and that meet specified financial and operational standards.\5\
---------------------------------------------------------------------------

    \3\ Id.
    \4\ Id at 14.
    \5\ Id. at 12-13.
---------------------------------------------------------------------------

    LCH states that it will not provide any facility for arranging or
executing transactions and will have no impact on the way
counterparties negotiate or effect swap transactions.\6\ It will
perform credit enhancement, risk management, and position
administration functions for those swaps that qualified participants
choose to submit for clearing.\7\ LCH will net payment amounts due to
or from a clearing member related to swaps with other obligations due
to or from the clearing member where possible, including amounts
related to exchange-traded business.\8\
---------------------------------------------------------------------------

    \6\ Id. at 9.
    \7\ Id.
    \8\ Id. at 10.
---------------------------------------------------------------------------

    In the Petition, LCH summarizes the principal features of its risk
management procedures.\9\ It also describes the regulatory regime to
which it is subject in the United Kingdom \10\ and its internal
governance procedures.\11\
---------------------------------------------------------------------------

    \9\ Id. at 15-17.
    \10\ Id. at 17-18.
    \11\ Id. at 19.
---------------------------------------------------------------------------

    LCH asserts that the Petition satisfies the statutory standards for
relief. In particular, LCH argues that:
    (1) The exchange trading requirements should not apply to swap
agreements cleared through SwapClear because SwapClear will not impact
current OTC trading arrangements;\12\
---------------------------------------------------------------------------

    \12\ Id. at 21-22.
---------------------------------------------------------------------------

    Swap agreements cleared through SwapClear will be entered into
solely by wholesale market participants whose qualifications exceed
Congressional standards regarding appropriate persons and Commission
standards for "eligible swap participants"; \13\
---------------------------------------------------------------------------

    \13\ Id. at 23.
---------------------------------------------------------------------------

    (3) The proposed relief is consistent with the public interest and
the purpose of the Act; \14\
---------------------------------------------------------------------------

    \14\ Id. at 23-33.
---------------------------------------------------------------------------

    (4) The proposed relief will have no material adverse effect on
Commission or contract market regulatory or self-regulatory
responsibilities; \15\ and
---------------------------------------------------------------------------

    \15\ Id. at 34-39.
---------------------------------------------------------------------------

    (5) The proposed Exemption is pro-competitive.\16\
---------------------------------------------------------------------------

    \16\ Id. at 39-42.
---------------------------------------------------------------------------

II. Request for Comment

    The Commission requests comment on all the aspect of the LCH
Petition. In this regard, the Commission directs the attention of
commenters to the issues raised in the discussion of swaps clearing in
the OTC derivatives concept release.\17\ In addition, the Commission
requests comment on any specific features of the LCH proposal that may
raise issues particular to that proposal. Such features might include
the location of LCH outside the United States, the status of LCH as a
regulated entity in the United Kingdom, and LCH's plans to integrate
its proposed new clearing operations in some respects with its
established exchange clearing operations.
---------------------------------------------------------------------------

    \17\ See 63 FR 26114, 26122-26123 (May 12, 1988).
---------------------------------------------------------------------------

    Copies of the Petition are available for inspection at the Office
of the Secretariat at the above address. Copies also may be obtained
through the Office of the Secretariat at the above address or by
telephone at 202-418-5100 or on the Commission's Internet web site
(http://www.cftc.gov).

    Issued in Washington, DC, on June 30, 1998 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-17922 Filed 7-6-98; 8:45 am]
BILLING CODE 6351-01-M
```

----

**========RETURN TO INDEX ========**

----