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e9-18854

  • FR Doc E9-18854[Federal Register: August 6, 2009 (Volume 74, Number 150)]

    [Notices]

    [Page 39303-39305]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr06au09-37]

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    COMMODITY FUTURES TRADING COMMISSION

    RIN 3038-AC

    Determination of Appropriateness of the Supervision by the

    Bundesanstalt f[uuml]r Finanzdienstleistungaufsicht (BaFin), in

    Conjunction With Deutsche Bundesbank (Bundesbank), Both of the Federal

    Republic of Germany, With Respect to the Clearing Activities of Eurex

    Clearing AG (Eurex)

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice and Order.

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    SUMMARY: The Commodity Futures Trading Commission (CFTC) is issuing an

    order, pursuant to Section 409(b)(3) of FDICIA, stating that the

    supervision provided by BaFin, in conjunction with the Bundesbank, with

    respect to the clearing activities of Eurex satisfies appropriate

    standards (the Order). The Order will permit Eurex to operate a

    multilateral clearing organization (MCO) in the United States for any

    over-the-counter (OTC) derivative instrument.

    DATES: Effective Date: July 31, 2009.

    FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate

    Director, (202) 418-5092, rwasserman@cftc.gov, or Nancy Schnabel,

    Attorney-Advisor, (202) 418-5334, nschnabel@cftc.gov, Division of

    Clearing and Intermediary Oversight, Commodity Futures Trading

    Commission, Three Lafayette Centre, 1151 21st Street, NW., Washington,

    DC 20581.

    SUPPLEMENTARY INFORMATION: Section 409(a) of FDICIA provides that, in

    order to operate an MCO \1\ in the United States

    [[Page 39304]]

    for an OTC derivative instrument,\2\ a clearing organization must meet

    one of several alternative requirements.\3\ Section 409(b)(3) of FDICIA

    sets forth one such alternative.\4\ It states that a clearing

    organization will qualify to operate such an MCO, if such clearing

    organization is supervised by a foreign financial regulator that the

    Comptroller of the Currency, the Board of Governors of the Federal

    Reserve System, the Federal Deposit Insurance Corporation, the

    Securities and Exchange Commission, or the CFTC, as applicable, has

    determined satisfies appropriate standards.\5\

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    \1\ Section 408(1) of FDICIA (12 U.S.C. 4421(1)) defines MCO to

    mean ``a system utilized by more than [two] participants in which

    the bilateral credit exposures of participants arising from the

    transactions cleared are effectively eliminated and replaced by a

    system of guarantees, insurance, or mutualized risk of loss.''

    \2\ Section 408(2) of FDICIA (12 U.S.C. 4421(2)) defines ``OTC

    derivative instrument.''

    \3\ 12 U.S.C. 4422(a).

    \4\ 12 U.S.C. 4422(b)(3).

    \5\ Section 409(b)(3) of FDICIA (12 U.S.C. 4422(b)(3)). The CFTC

    has issued three previous orders, pursuant to Section 409(b)(3) of

    FDICIA, determining that the supervision of a particular MCO by a

    foreign financial regulator met appropriate standards. The foreign

    financial regulators involved were (i) the Norwegian Banking,

    Insurance and Securities Commission, (ii) the Alberta (Canada)

    Securities Commission, and (iii) the United Kingdom Financial

    Services Authority. See 67 FR 2419 (January 17, 2002), 71 FR 10958

    (March 3, 2006), and 73 FR 44706 (July 31, 2008), respectively.

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    Eurex, a central counterparty licensed by BaFin, has requested that

    the CFTC determine that the supervision provided by BaFin, in

    conjunction with the Bundesbank,\6\ with respect to Eurex's clearing

    activities, satisfies appropriate standards in accordance with Section

    409(b)(3) of FDICIA.\7\ Such a determination would permit Eurex to

    operate an MCO in the United States for any OTC derivative

    instrument.\8\

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    \6\ The Bundesbank is the central bank of the Federal Republic

    of Germany. See http://www.bundesbank.de/aufgaben/aufgaben.en.php.

    \7\ See Letter, dated March 27, 2009, from Paul Architzel of

    Alston & Bird LLP, submitted on behalf of Eurex, to David A.

    Stawick, Secretary of the CFTC, with enclosure and appendices

    thereto (collectively, the Application).

    BaFin is authorized under the German Banking Act to (i)

    supervise the operation of a ``credit institution'' conducting

    ``banking business'' (including a central counterparty) domiciled in

    Germany, and to (ii) enforce compliance with applicable laws, rules

    and regulations. Because clearing comprises ``banking business''

    under the German Banking Act, BaFin has the authority to regulate

    any entity engaged in the clearing of OTC derivative instruments.

    BaFin undertakes such supervision with the assistance of Bundesbank.

    See Sections 6 and 7 of the German Banking Act.

    \8\ Currently, Eurex intends to clear as an MCO (i) OTC

    derivative instruments that share common terms and conditions with

    commodity contracts that are listed on the Eurex Deutschland

    Exchange, and (ii) credit default swaps.

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    In reviewing the request from Eurex, the CFTC primarily considered

    three factors. First, the CFTC considered whether the German statutory

    and regulatory regime applicable to Eurex clearing activities

    substantially corresponds with the Commodity Exchange Act (the CEA)

    including the core principles applicable to a derivatives clearing

    organization (DCO), and the regulations promulgated thereunder (the

    Regulations).\9\ In Germany, a central counterparty such as Eurex, is

    regulated as a ``credit institution'' conducting ``banking business.''

    \10\ Accordingly, the CFTC reviewed translated versions of the

    following documents, among others: (i) The Gesetz [uuml]ber das

    Kreditwesen (i.e., the German Banking Act); (ii) the guidance that

    BaFin or Bundesbank provided on compliance therewith, including (A)

    ``Minimum Requirements for Risk Management'' (Circular 5/2007), (B)

    Auditor's Report Regulation,\11\ (C) Principle I (Concerning the

    Capital of Institutions), and (D) Principle II (Concerning Own Funds

    and the Liquidity of Institutions); and (iii) the Bundesgesetzblatt

    (i.e., the German Insolvency Statute); and (iv) Gesetz gegen

    Wettbewerbsbeschr[auml]nkunge (i.e., the German Act Against Restraints

    of Competition). The CFTC also reviewed an analysis provided by Eurex

    regarding the correspondence between the German statutory and

    regulatory regime and the core principles applicable to a DCO.

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    \9\ See Section 5b(c)(2) of the CEA (7 U.S.C. 7a-1(c)(2)(A)-(N))

    and Appendix A to Part 39 of the Regulations (17 CFR pt. 39, app.

    A).

    Section 409(b)(3) of FDICIA (12 U.S.C. 4422(b)(3)) does not

    reference the supervision of the foreign financial regulator over

    trading, and the CFTC has accordingly not reviewed BaFin or

    Bundesbank supervision of trading in considering the Eurex request.

    \10\ See Attachment to the Application entitled, ``Permit

    according to Section 32 of the Banking Act, issued by BaFin to Eurex

    as of December 18, 2006 (GZ: WA 22-K 5000-10119203/2006).''

    \11\ The full title of the Auditor's Report Regulation is

    ``Regulation, as of December 17, 1998, governing the auditing of the

    annual accounts and interim reports of credit institutions and

    financial services institutions and auditing in accordance with

    section 12(1) sentence 3 of the Act on Investment Companies as well

    as the reports to be drawn up on these.''

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    Second, the CFTC considered whether the supervision provided by

    BaFin, in conjunction with Bundesbank, with respect to Eurex's clearing

    activities, substantially corresponds with the supervision provided by

    the CFTC with respect to the activities of a DCO. Accordingly, the CFTC

    reviewed the manner in which BaFin, with the assistance of the

    Bundesbank, conducts supervision of a credit institution (including a

    central counterparty such as Eurex), both on an annual basis and

    through special reviews.\12\ The CFTC also reviewed the manner in which

    BaFin, as well as the Bundesbank, rely on external auditors of a credit

    institution in conducting certain aspects of such supervision,

    including the control which BaFin, as well as Bundesbank, exerts over

    such external auditors.

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    \12\ The division of responsibilities between BaFin and the

    Bundesbank may be found in the Supervision Directive. See Attachment

    to the Application entitled, ``Directive for Implementation and

    Quality Assurance of the Current Supervision of the Credit and

    Financial Service Institutions by the Deutsche Bundesbank.''

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    Third, the CFTC considered whether the supervision provided by

    BaFin, with the assistance of the Bundesbank, substantially comports

    with the Principles and Objectives of Securities Regulation (the IOSCO

    Principles), as developed by the International Organization of

    Securities Commissions (IOSCO).

    In reviewing the request from Eurex, the CFTC also considered

    additional facts, such as (i) the risk management procedures

    implemented by Eurex with respect to the clearing of credit default

    swaps, and (ii) existing arrangements with BaFin to exchange

    information regarding Eurex.\13\

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    \13\ See Memorandum of Understanding, dated October 17, 1997,

    between the Commission and the German Bundesaufsichtsamt f[uuml]r

    den Wertpapierhandel (i.e., the predecessor of BaFin) Concerning

    Consultation and Cooperation in the Administration and Enforcement

    of Futures Laws (the Memorandum of Understanding), and the Side

    Letter Relating to the Memorandum of Understanding, dated July 28,

    2009 between the Commission and BaFin.

    BaFin is also a signatory of the multilateral Declaration on

    Cooperation and Supervision of International Futures Exchanges and

    Clearing Organizations, and the IOSCO Multilateral Memorandum of

    Understanding Concerning Consultation and Cooperation and the

    Exchange of Information.

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    As a matter of courtesy, the CFTC invited the other federal

    financial regulators listed in Section 409(b)(3) of FDICIA to comment

    on the Application. The CFTC also invited the public to comment on the

    Application, by posting the Application on its Web site on May 13,

    2009. The CFTC received no comments.

    Based on its review, the CFTC has determined, pursuant to Section

    409(b)(3) of FDICIA, that the supervision provided by BaFin, in

    conjunction with the Bundesbank, with respect to the clearing

    activities of Eurex satisfies appropriate standards. Accordingly, the

    CFTC has issued this Order. Any material changes or omissions in the

    facts and circumstances upon which this Order is based might require

    the CFTC to reconsider this matter.

    [[Page 39305]]

    Issued in Washington, DC, on July 31, 2009.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-18854 Filed 8-5-09; 8:45 am]

    Last Updated: August 6, 2009