U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5430

Facsimile: (202) 418-5547

Division of Clearing and Risk Jeffrey M. Bandman

Acting Director

CFTC Letter No. 16-26

No-Action

March 16, 2016

Division of Clearing and Risk 

Re: No-Action Relief for EU-Based Registered Derivatives Clearing Organizations that are 

Authorized to Operate in the European Union, from Certain Requirements under Part 22 

and Part 39 of Commission Regulations 

Ladies and Gentlemen:

The Division of Clearing and Risk (“Division”) of the Commodity Futures Trading Commission (the 

“Commission” or “CFTC”) is issuing this letter to provide limited no-action relief from the following 

Commission requirements, on the terms and subject to the conditions below, for EU-based central 

counterparties (“CCPs”) that are registered with the Commission as derivatives clearing organizations 

(“DCOs”) (such EU-based CCPs referred to hereinafter as “DCO/CCPs”) and are authorized to operate in 

the European Union (“EU”): 

(1) CFTC Regulation 39.12(b)(6)’s requirement that, upon a DCO’s acceptance of a 

swap for clearing, the original swap is extinguished and it is replaced by an equal and 

opposite swap between the DCO and each clearing member (acting as a principal for 

a house trade or an agent for a customer trade) will not apply in the context of a 

DCO/CCP where neither party is a U.S. clearing member or a futures commission 

merchant (“FCM”) clearing member; 

(2) Part 22 of CFTC Regulations and its “legally segregated but operationally 

commingled” (“LSOC”) account model for cleared swaps customer accounts will not 

apply in the context of a DCO/CCP to clearing members that are not FCMs; 

(3) CFTC Regulation 39.13(g)(8)(i)’s requirement that a DCO calculate and collect 

initial margin for customer accounts cleared by an FCM on a gross basis will not 

apply in the context of a DCO/CCP to non-FCM clearing member intermediaries; 

(4) CFTC Regulation 39.13(g)(8)(ii)’s requirement that a DCO collect initial margin at a 

level that is greater than 100% of the DCO’s initial margin requirements for the nonhedge positions of FCM customers will not apply in the context of a DCO/CCP to 

such positions of the customers of non-FCM clearing member intermediaries; 

(5) CFTC Regulation 39.12(a)(2)(iii)’s prohibition that a DCO not set a minimum capital 

requirement of more than $50 million for any person that seeks to become a clearing 

member to clear swaps will not apply in the context of a DCO/CCP to non-U.S. 

clearing members or non-FCM clearing members; 
March 14, 2016 

Page 2 

(6) CFTC Regulation 39.12(b)(7)’s requirement that DCOs utilize “straight-throughprocessing” of swaps submitted for clearing will not apply to trades that are not 

executed on or subject to the rules of a designated contract market (“DCM”) or a 

swap execution facility (“SEF”) and for which neither clearing member is an FCM, a 

swap dealer, or a major swap participant; 

(7) Regulation 39.13(h)(5)’s requirement that DCOs must require their clearing members 

to maintain written risk management policies and procedures and that DCOs must 

have the authority to obtain information and documents from clearing members 

regarding their risk will still apply; however, DCO/CCPs may implement different 

oversight programs for U.S./FCM clearing members and non-U.S. clearing members; 

and 

(8) Regulation 39.11(f)’s and Regulation 39.19(c)(3)(ii)’s implicit requirements that 

DCOs submit to the CFTC quarterly financial resource reports and an audited yearend financial statement that are prepared in accordance with U.S. Generally Accepted 

Accounting Principles (“GAAP”) will not apply in the context of a DCO/CCP; rather, 

the DCO/CCPs may submit financial statements prepared in accordance with 

International Financial Reporting Standards (“IFRS”), with periodic reconciliation to 

assist staff in reviewing the financial statements. 

This no-action letter is being issued simultaneously with Federal Register Notice __ (“the Notice”), 

pursuant to which the Commission makes a comparability determination regarding the European Market 

Infrastructure Regulation (“EMIR”).

1

 In particular, the Notice concludes that certain laws and regulations 

applicable in the EU provide a sufficient basis for an affirmative finding of comparability with respect to 

certain regulatory obligations applicable to DCOs that are registered with the Commission and are 

authorized to operate as CCPs in the EU. Under the Notice, EU-based DCOs that are registered with the 

Commission and that are authorized to operate as CCPs in the EU may demonstrate compliance with 

certain Commission requirements for financial resources, risk management, settlement procedures, and 

default rules and procedures (as set forth in the Notice) by complying with the terms of corresponding

requirements under the EMIR Framework, as defined in the Notice. 

Background 

The Commodity Exchange Act (“CEA”) does not impose geographic limitations on the registration of 

DCOs. Nor does it mandate that clearing of futures traded on U.S. exchanges must take place in the 

United States.2

 To the contrary, it permits futures traded on exchanges in the United States to be cleared 

outside the United States. However, the CEA and CFTC regulations require that foreign-based CCPs that 

wish to clear such futures be registered with the Commission and comply with CFTC regulations.3

 

Under this regulatory framework, a number of foreign-based CCPs have been registered with the 

Commission for some time. LCH.Clearnet Ltd., which is based in London, for example, has been 

registered with the Commission since 2001, and thus has been subject to dual supervision by UK 

 

1 See Regulation (EU) No 648/2012 of the European Parliament and the Council on OTC derivatives, central 

counterparties and trade repositories of 4 July 2012 (“EMIR”), Art. 25(6). 

2 7 USC § 7a-1(a). 

3 See generally 7 USC §§ 7(d)(9)(iii) and (11); 17 CFR 38.601. 
March 14, 2016 

Page 3 

authorities and the Commission since long before the EU adopted its current regulatory scheme – EMIR. 

This dual registration system has been a foundation on which the cleared swaps market grew to be a 

global market. In addition to LCH.Clearnet Ltd., there are currently five other registered foreign-based 

DCOs that are subject to the dual registration of the Commission and their home country regulator(s): 

Singapore Exchange Derivatives Clearing Limited (home country regulator is the Monetary Authority of 

Singapore), LCH.Clearnet SA (home country regulators are the Autorité de contrôle prudentiel et 

résolution, the Autorité des marchés financiers, and the Banque de France), ICE Clear Europe Ltd. (home 

country regulator is the Bank of England), Natural Gas Exchange (home country regulator is the Alberta 

Securities Commission) and Eurex Clearing AG (home country regulators are Bundesanstalt für 

Finanzdienstleistungsaufsicht (BaFin) and Deutsche Bundesbank). Two additional foreign-based CCPs 

have applications pending before the Commission for registration as DCOs (CME Clearing Europe Ltd.

and Japan Securities Clearing Corporation).

Following the financial crisis of 2008, the United States and the EU undertook efforts to regulate overthe-counter (“OTC”) derivatives markets and market participants. For swaps, Title VII of the DoddFrank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)4 amended the CEA to, 

among other things, establish a comprehensive statutory framework for the execution and clearing of 

swaps. Section 5b(a) of the CEA, as amended by the Dodd-Frank Act, establishes a comprehensive 

regulatory framework for clearing organizations that clear swaps, including (i) registration, operation, and 

compliance requirements for DCOs; and (ii) 17 core principles.5

 Applicants and registered DCOs are 

required to comply with the core principles as a condition of obtaining and maintaining their registration 

as a DCO. Thus, the registration of foreign-based CCPs clearing U.S. markets or serving U.S. persons is 

an important part of the Commission’s regulatory scheme. Nevertheless, for the reasons discussed below 

in this letter, the Division has determined to provide limited and enumerated relief from the application of 

certain of the Commission regulations to discrete aspects of a DCO/CCP’s non-U.S. clearing activities.

The European Parliament and the European Council passed EMIR on July 4, 2012, which entered into 

force on August 16, 2012. EMIR sets out standards regarding the registration and operation of CCPs and 

trade repositories; the clearing and regulatory reporting of OTC transactions; and risk mitigation 

techniques relating to uncleared OTC transactions. Pursuant to authority granted under EMIR, the 

European Securities and Markets Authority (“ESMA”) developed technical standards that were adopted 

by the European Commission on December 19, 2012, published in the Official Journal on February 23, 

2013 and generally entered into force on March 15, 2013.

Discussion of Limited No-Action Relief

The Division acknowledges that clearing organizations operate in different jurisdictions and under 

different regulatory regimes and that the differences between these various regimes may lead to 

regulatory arbitrage. Previously, the Commission provided exemptions to registration for foreign-based

DCOs who clear proprietary swaps positions for their U.S. members and affiliates but that do not clear for 

 

4 Section 701 et seq. of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 

Stat. 1376 (2010).

5 7 USC § 7a-1(a); 17 CFR 39.3; see also 7 U.S.C. § 2(i) (providing that the CEA’s swap-related provisions shall not 

apply to activities outside the United States unless those activities “have a direct and significant connection with 

activities in, or effect on, commerce of the United States” or “contravene such rules or regulations as the 

Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of 

[the CEA]”).
March 14, 2016 

Page 4 

U.S. customers generally. (These foreign-based DCOs also do not clear futures traded on DCMs.) These 

exemptions have been issued pursuant to Section 5b(h) of the CEA, which permits the Commission to 

exempt a clearing organization from DCO registration for the clearing of swaps where the Commission 

determines that such clearing organization is subject to comparable, comprehensive supervision by 

appropriate government authorities in the clearing organization’s home country.6

 Pursuant to this 

authority, the Commission granted exemptions to clearing organizations in Australia, Japan, South Korea, 

and Hong Kong. Each of these exemptions required that each exempt CCP limit direct clearing by U.S. 

persons and FCMs to certain specified circumstances.7

 

Thus, consistent with the interests of comity and facilitating cross border regulatory coordination, the 

Division has determined to provide the following limited and enumerated relief from the application of 

Commission regulations to discrete aspects of a DCO/CCP’s non-U.S. clearing activities, subject to the 

restrictions identified below. This letter, and the relief contained here, shall become effective when the 

Notice becomes effective.

1. Regulation 39.12(b)(6) 

CFTC Regulation 39.12(b)(6) requires that, upon a DCO’s acceptance of a swap for clearing, the original 

swap is extinguished and it is replaced by an equal and opposite swap between the DCO and each clearing 

member acting as a principal for a house trade or an agent for a customer trade. 

For the reasons set forth above, the Division will not require DCO/CCPs to apply this “futures clearing 

model” to trades where neither party is a U.S. clearing member or an FCM clearing member.

2. Part 22 of CFTC Regulations 

Part 22 of CFTC Regulations sets forth the LSOC account model for cleared swaps customer accounts. 

For the reasons set forth above, the Division will not require DCO/CCPs to apply Part 22’s LSOC 

account model to their clearing members that are not FCMs. 

 

6 7 USC § 7a-1(h). 

7 In particular, the Commission required that each CCP maintain rules that limit clearing services for U.S. persons 

and FCMs to the following circumstances: (1) “A U.S. person that is a clearing member of [the exempt CCP] may 

clear swaps for itself and those persons identified in the Commission’s definition of ‘proprietary account’ set forth in 

Regulation 1.3(y)”; (2) “A non-U.S. person that is a clearing member of [the exempt CCP] may clear swaps for any 

affiliated U.S. person identified in the definition of ‘proprietary account’ set forth in Regulation 1.3(y)”; and (3) “An 

entity that is registered with the Commission as an FCM may be a clearing member of [the exempt CCP], or 

otherwise maintain an account with an affiliated broker that is a clearing member, for the purpose of clearing swaps 

for itself and those persons identified in the definition of ‘proprietary account’ set forth in Regulation 1.3(y).” See

In re Petition of ASX Clear (Futures) Pty Limited for Exemption from Registration as a Derivatives Clearing 

Organization (Aug. 18, 2015); In re Petition of Japan Securities Clearing Corp. for Exemption from Registration as a 

Derivatives Clearing Organization (Oct. 26, 2015); In re Petition of Korea Exchange, Inc. for Exemption from 

Registration as a Derivatives Clearing Organization (Oct. 26, 2015); In re Petition of OTC Clearing Hong Kong Ltd. 

for Exemption from Registration as a Derivatives Clearing Organization (Dec. 21, 2015).
March 14, 2016 

Page 5 

3. CFTC Regulation 39.13(g)(8)(i) 

CFTC Regulation 39.13(g)(8)(i) requires that initial margin for customer accounts cleared by an FCM 

must be calculated and collected on a gross basis. Regulation 39.13(g)(8)(i) further prohibits a DCO from 

permitting FCM clearing members to net customer positions. 

For the reasons set forth above, the Division will not require DCO/CCPs to apply this regulation to nonFCM clearing member intermediaries.

4. CFTC Regulation 39.13(g)(8)(ii) 

CFTC Regulation 39.13(g)(8)(ii) requires a DCO to collect initial margin at a level that is greater than 

100% of the DCO’s initial margin requirements for the non-hedge positions of FCM customers. 

For the reasons set forth above, the Division will not require DCO/CCPs to apply this regulation to such 

non-hedge positions of the customers of non-FCM clearing member intermediaries.

5. Regulation 39.12(a)(2)(iii) 

CFTC Regulation 39.12(a)(2)(iii) prohibits a DCO from setting a minimum capital requirement of more 

than $50 million for any person that seeks to become a clearing member to clear swaps. Regulation 

39.12(a)(2)(iii) is designed to ensure that participation requirements do not unreasonably restrict any 

entity from becoming a clearing member while, at the same time, limiting risk to the DCO and its clearing 

member. 

For the reasons set forth above, the Division will not require DCO/CCPs to apply this requirement to nonU.S. clearing members or non-FCM clearing members.

6. Regulation 39.12(b)(7) 

CFTC Regulation 39.12(b)(7) requires “straight-through-processing” of swaps submitted for clearing.

For the reasons set forth above, the Division will not require DCO/CCPs to apply straight-throughprocessing requirements to trades that are not executed on or subject to the rules of a DCM or a SEF and 

for which neither clearing member is an FCM, a swap dealer, or a major swap participant.

7. Regulation 39.13(h)(5) 

Regulation 39.13(h)(5) requires DCOs to require that their clearing members maintain written risk 

management policies and procedures and further requires that DCOs must have the authority to obtain 

information and documents from clearing members regarding their risk. 

For the reasons set forth above, although Regulation 39.13(h)(5) will still apply, the Division will permit 

DCO/CCPs to implement different oversight programs for U.S./FCM clearing members and non-U.S. 

clearing members.

8. Regulation 39.11(f) and Regulation 39.19(c)(3)(ii) 

Regulation 39.11(f) requires DCOs to submit to the CFTC quarterly financial resource reports that 

include a quarterly financial statement. Similarly, Regulation 39.19(c)(3)(ii) requires DCOs to submit to 
March 14, 2016 

Page 6 

the CFTC an audited year-end financial statement. Although not explicitly stated in the text of either 

regulation, it is implicit that the financial statements will be prepared in accordance with U.S. GAAP.

For the reasons set forth above and because the Division recognizes that foreign-based CCPs may not 

have financial statements prepared in U.S. GAAP, absent Commission registration, the Division will 

permit DCO/CCPs to submit financial statements prepared in accordance with IFRS, with periodic 

reconciliation to assist staff in reviewing the financial statements.

Conclusion 

The relief provided in this letter does not excuse any DCO/CCP from any obligation under the CEA or 

Commission regulations, other than those mentioned explicitly herein. 

The position taken in this letter concerns enforcement action only and does not represent a legal 

conclusion with respect to the applicability of any provision of the CEA or the Commission’s regulations. 

In addition, the Division’s position does not necessarily reflect the views of the Commission or any other 

division or office of the Commission. 

This letter, and the relief contained herein, is based upon the Division’s understanding of the regulatory 

provisions applicable in the EU. Any different, changed, or omitted material facts or circumstances might 

render the relief void. Finally, as with all no-action letters, the Division retains the authority to condition 

further, modify, suspend, terminate, or otherwise restrict the terms of the no-action relief provided in this 

letter, in its discretion. 

Should you have any questions concerning this correspondence, please contact Robert B. Wasserman, 

Chief Counsel, 202-418-5092, rwasserman@cftc.gov; Tracey Wingate, Special Counsel, 202-418-5319, 

twingate@cftc.gov; or Michael H. Margolis, Special Counsel, 312-596-0576, mmargolis@cftc.gov. 

 Sincerely, 

 

 

 

Jeffrey M. Bandman 

Acting Director 

Division of Clearing and Risk