On December 18, 2014, the Commodity Futures Trading Commission’s (“CFTC’s”) Division of Clearing and Risk (“DCR”) issued extensions of previously granted “No-Action” relief to four foreign clearing organizations. The relief allows these foreign clearing organizations to continue to clear swaps for certain United States persons (“U.S. persons”) without being registered as a derivatives clearing organization (“DCO”) with the CFTC or obtaining an exemption from registration.
The four foreign clearing organizations are:
- ASX Clear (Futures) Pty Limited (“ASXCLF”) which is located in Sydney, Australia (DCR Letter No. 14-148)
- Clearing Corporation of India Ltd. (“CCIL”) which is located in Mumbai, India (DCR Letter No. 14-149)
- Korea Exchange, Inc. (“KRX”) which is located in Busan, Republic of Korea (DCR Letter No. 14-150)
- OTC Clearing Hong Kong Limited (“OTC Clear”) which is located in Hong Kong, SAR (DCR Letter No. 14-151)
This post describes the relevant statutory provisions, the need for the relief, and the specifics of the relief granted on December 18, 2014.
The relevant statutory provisions
In relevant part, Section 5b(a) of the Commodity Exchange Act (“CEA”) provides that a clearing organization may not clear swaps unless it is first registered with the CFTC as a DCO. DCR has taken the position that, with respect to a foreign clearing organization, Section 5b(a) applies when the foreign clearing organization seeks to clear swaps (as defined in the CEA and CFTC regulations) for U.S. persons. Further, Section 5b(h) of the CEA empowers the CFTC to exempt a foreign clearing organization from DCO registration (an “exempt DCO”) for the express purpose of clearing swaps.
Before the CFTC may exercise the exemptive power, it must make a determination that the foreign clearing organization is subject to comparable, comprehensive supervision and regulation by the appropriate government authorities. To date, the CFTC has not exempted any foreign clearing organization from DCO registration. In summary, any clearing organization that seeks to clear swaps for U.S. persons must either be a registered DCO or an exempt DCO.
The need for relief and initial relief provided
The fundamental feature of any CFTC staff no-action letter is that if the recipient acts in a manner that conforms to the specifics of the letter, the relevant CFTC staff will not recommend to the Commission that the Commission take enforcement action against the recipient for failure to comply with the CEA, CFTC regulations or both.
Earlier in 2014, each clearing organization mentioned in this post requested that DCR provide no-action relief to allow them to start clearing swaps for certain U.S. persons before they had obtained an exemption from registration. These clearing organizations did not wish to seek registered DCO status. DCR was of the view that such relief was appropriate in order to facilitate the centralized clearing of swaps that each clearing organization wanted to clear for such U.S. persons and to promote competition and enhance choice of services for such swaps. However, DCR felt that the relief should only extend to the clearing of proprietary trades of U.S. clearing participants and that no U.S. customer trades could be cleared.
DCR therefore issued the initial round of No-Action letters earlier in 2014. Specifically, DCR issued a No-Action letter to ASXCLF on February 6, 2014 (DCR Letter No. 14-07); OTC Clear on May 7, 2014 (DCR Letter No. 14-68); KRX on June 26, 2014 (DCR Letter No. 14-87); and CCIL on August 18 (DCR Letter No. 14-107). Each letter contained a “sunset” provision that stated that the no-action relief shall expire at the earlier of December 31, 2014 or the date upon which the CFTC either registers the clearing organization as a DCO or exempts it from registration.
The specifics of the no-action letters issued on December 18, 2014
Each letter extending relief contained the following common conditions:
- Clearing activity is limited to the proprietary trades of U.S. clearing members with reference to CFTC Regulation 1.3(y) as to the definition of “proprietary account”
- Any clearing member that clears a swap that has previously been reported (“alpha swap) to a CFTC-registered swap data repository (“SDR”) must report data regarding the two swaps (“beta and gamma swaps”)
- Each clearing organization will file a petition for an exemption from DCO registration by June 30, 2015
- The no-action relief expires at the earlier of December 31, 2015 or the date upon which the CFTC exempts the recipient from registration as a DCO.
Appearing below is a list of the swaps that each clearing organization may clear pursuant to the letters:
- ASXCLF – Australian and New Zealand Dollar-denominated interest rate swaps (“IRS”)
- CCIL – Indian Rupee (“INR”)-denominated IRS and forward-rate agreements
- KRX – Korean Won (“KRW”)-denominated IRS
- OTC Clear – Chinese Renminbi (“RMB”), Hong Kong Dollar, U.S. Dollar and Euro denominated IRS; RMB, KRW, INR, and Taiwan Dollar non-deliverable forwards