Following on a joint statement by the Commodity Futures Trading Commission and European Commission announcing a common approach to the regulation of central counterparties (CCPs), the CFTC published a comparability determination regarding the European Market Infrastructure Regulation (EMIR). The CFTC found that certain EU laws and regulations provide a sufficient basis for an affirmative finding of comparability with respect to certain regulatory obligations applicable to derivatives clearing organization (DCOs) registered with the CFTC and authorized to operate as CCPs in Europe (hereinafter “DCO/CCPs”). On the basis of such comparability determination, the CFTC’s Division of Clearing and Risk released a letter detailing no action relief for DCO/CCPs:

  • DCO/CCPs will not need to apply CFTC Regulation 39.12(b)(6), which requires that upon a DCO’s acceptance of a swap for clearing, the original swap be extinguished and 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, where neither party is a U.S. clearing member or a futures commission merchant (FCM) clearing member.
  • DCO/CCPs will not need to apply the “legally segregated but operationally commingled” account model under Part 22 of the CFTC Regulations to their clearing members that are not FCMs.
  • DCO/CCPs will not need to apply CFTC Regulation 39.13(g)(8)(i), which requires that initial margin for customer accounts cleared by an FCM be calculated and collected on a gross basis, to non-FCM clearing member intermediaries.
  • DCP/CCPs will not need to collect initial margin at a level greater than 100 percent of its initial margin requirements, as required by CFTC Regulation 39.13(g)(8)(ii), with respect to non-hedge positions of customers of non-FCM clearing member intermediaries.
  • DCO/CCPs are not required to apply CFTC Regulation 39.12(a)(2)(iii), which 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, to non-US clearing members or non-FCM clearing members.
  • DCO/CCPs will not need to apply CFTC Regulation 39.12(b)(7), which requires “straight-through-processing” of swaps submitted for clearing, 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.
  • CFTC Regulation 39.13(h)(5), under which DCOs must require their clearing members maintain written risk management policies and procedures and under which DCMs must obtain information from clearing members regarding their risk, will still apply to DCO/CCPs, although DCO/CCPs may implement different oversight programs for US/FCM clearing members and non-US clearing members.
  • DCO/CCPs will be permitted to submit financial statements prepared in accordance with IFRS (as opposed to US GAAP), with periodic reconciliation to assist staff in reviewing the financial statements, in order to satisfy Regulations 39.11(f) and 39.19(c)(3)(ii).

The CFTC’s comparability determination analyzed the requirements of the US and EU regulatory regimes with respect to the financial resources, risk management, settlement procedures and default procedures required of CCPs.

  • Financial resources. The CFTC found that both regimes regulated the financial resources required of CCPs with the goal of ensuring that CCPs can meet financial obligations to market participants and contribute to the financial integrity of the derivatives markets. The CFTC noted that both regimes include provisions pertaining to resources used to cover a clearing member’s default, the types of acceptable financial resources and regular stress testing.
  • Risk management. The CFTC found that both regimes had similar risk management provisions that prescribe how CCPs should monitor, evaluate and manage the risks to which they are exposed.
  • Settlement and default procedures. The CFTC found that both regimes had comparable requirements with respect to CCP settlement procedures (designed to eliminate or strictly limit a CCP’s exposures to settlement risk) and default procedures (requiring timely action to contain losses and liquidity pressures).

The CFTC also seeks to streamline the process by which a EU CCP will register with the CFTC as a DCO. Under the streamline process, a EU CCP may evidence compliance with certain EU regulations in lieu of requiring compliance with CFTC Regulations and may submit documents provided to EU regulators in lieu of certain documents required by the CFTC.

The CFTC’s No Action Letter is available here.

The CFTC’s Comparability Determination is available here.