At an open meeting on July 11, the five members of the U.S. Commodity Futures Trading Commission voted unanimously to release a proposed rulemaking designed to create a less burdensome regulatory regime for foreign clearinghouses that clear swaps for U.S. customers. The proposal, which now will be published for public comment, would allow clearinghouses in other parts of the world to offer their swap clearing services to institutional investors and other "eligible contract participants" so long as they fall below a certain threshold of importance to the U.S. financial system. They would still be required to register with the CFTC, but the CFTC's oversight would be limited to customer protection issues.
A related proposal fared less well, however. The agency's two Democratic commissioners strongly objected to a supplemental proposal to exempt foreign clearinghouses from U.S. regulation if they are subject to regulation in their home countries that is comparable to the U.S. Under that proposal, a non-U.S. clearinghouse that does not pose significant risk to the U.S. financial system could opt for an exemption and still clear swaps for U.S. customers. However, that clearinghouse would have to exclude U.S. futures commission merchants from clearing those swaps, and the customers would have to be informed that their positions would not benefit from the U.S. bankruptcy regime.
CFTC Chairman Chris Giancarlo explained that the pair of proposals are part of his broader initiative to reform the agency's rules for the cross-border trading and clearing of swaps, and he emphasized that his approach is based on "deference" to foreign regulators with comparable regulation and supervision. If a clearinghouse does not pose a substantial risk to the U.S. financial system, he said, then the CFTC should be able to rely on that clearinghouse's home country regulator to be the primary supervisor.
CFTC staff explained that under the alternative registration proposal, the CFTC would assess whether the non-U.S. jurisdiction's regulatory regime is comparable to the CFTC's core principles for designated clearing organizations, rather than make a line-by-line comparison of regulations. The exempt CCP proposal would take a different approach; the assessment would compare the non-U.S. jurisdiction's regulatory regime to a set of international standards known as the CPMI-IOSCO Principles for Financial Markets Infrastructures.
The CFTC staff said both proposals would reduce regulatory overlap. They also said it would allow the CFTC to concentrate on supervising domestic clearinghouses where it is the primary supervisor as well as the handful of foreign clearinghouses that pose a substantial risk to the U.S. financial system. "This will allow us to focus more smartly on where the risks are in the DCO landscape," said Brian Bussey, the head of the CFTC's clearing and risk division.
To determine whether a non-U.S. clearinghouse poses substantial risk to the U.S. financial system, the CFTC would use two quantitative criteria based on the amount of initial margin posted for cleared swaps: the amount of IM held by a non-U.S. clearinghouse as a share of total IM across all clearinghouses, and the amount of IM held by U.S. members relative to the total IM held by all members of that clearinghouse. If either ratio goes above 20%, then the clearinghouse would be determined to be substantially important to the US and therefore ineligible for the proposed deference approach.
Bussey noted that the CFTC currently oversees 10 U.S. DCOs and six non-U.S. DCOs, and he said several European clearinghouses currently registered with the CFTC had expressed interest in the proposed alternative to full registration. He also noted that several Asian clearinghouses are currently clearing swaps under an exemption issued by the CFTC. They can only clear swaps for member firms, however, and he added that some have expressed interest in the alternative registration regime as a way to extend their clearing services to include customers of U.S. FCMs.
During the open meeting, the two Democratic commissioners—Rostin Behnam and Dan Berkovitz—joined with their Republican colleagues in expressing support for the first proposal as an "alternative" to full registration. Berkovitz commented, however, he believes that the proposed 20-20 criteria did not seem to capture the risk of the DCO and was not grounded with sufficient analysis. Berkovitz invited public comment on other metrics that could be used.
When the discussion turned to the second proposal, a number of disagreements emerged. Behnam and Berkovitz expressed strong opposition to allowing U.S. customers to clear swaps through a clearinghouse that is exempted from U.S. registration, saying this would pose risks to the overall U.S. financial system as well as to U.S. customers individually. Behnam complained that it would put U.S. futures commission merchants at a competitive disadvantage to non-U.S. intermediaries, since the U.S. FCMs would not be able to provide access to those exempt clearinghouses. Berkovitz was particularly critical of the potential impact on U.S. FCMs, saying it was "bizarro-world" that the agency would put U.S. FCMs at a competitive disadvantage to unregistered non-U.S. FCMs.
Republican CFTC Commissioner Brian Quintenz argued in favor of the exemption, saying that this would provide "greater choice and flexibility" to market participants and would provide U.S. customers with increased access to foreign markets. Dawn Stump, the other Republican commissioner, also voted for the proposal, but expressed concerns about the exclusion of U.S. FCMs from providing access to exempt DCOs. If the CFTC decides to allow U.S. customers to clear swaps through those DCOs, then the choice of which clearing firm to use should be a "business decision between the customer and their preferred clearing member, which may well be an FCM," she said.
Despite the objections, the supplemental proposal passed by a vote of three to two and will be published for public comment.