Derivatives Clearing Organizations
A derivatives clearing organization (DCO) is an entity that enables each party to an agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties; arranges or provides, on a multilateral basis, for the settlement or netting of obligations; or otherwise provides clearing services or arrangements that mutualize or transfer credit risk among participants.
A DCO that seeks to provide clearing services with respect to futures contracts, options on futures contracts, or swaps must register with the CFTC before it can begin providing such services. The Commission may exempt a DCO from registration for the clearing of swaps if the Commission determines that such DCO is subject to comparable, comprehensive supervision by appropriate government authorities in the DCO’s home country.
To obtain and maintain registration, a DCO must comply with the DCO core principles established in Section 5b, 7 USC § 7a-1, of the Commodity Exchange Act (CEA):
- Adequate financial, operational, and managerial resources
- Appropriate standards for participant and product eligibility
- Adequate and appropriate risk management capabilities
- Ability to complete settlements on a timely basis under varying circumstances
- Standards and procedures to protect member and participant funds
- Efficient and fair default rules and procedures
- Adequate rule enforcement and dispute resolution procedures
- Adequate and appropriate systems safeguards, emergency procedures, and plan for disaster recovery
- Obligation to provide necessary reports to allow the CFTC to oversee clearinghouse activities
- Maintenance of all business records for five years in a form acceptable to the CFTC
- Publication of clearinghouse rules and operating procedures
- Participation in appropriate domestic and international information-sharing agreements
- Avoidance of actions that are unreasonable restraints of trade or that impose anti-competitive burdens
- Governance arrangements and fitness standards
- Rules to minimize conflicts of interest in the DCO's decision-making process, and a process for resolving any conflicts
- Composition of governing boards to include market participants
- Well founded legal framework for the activities of the DCO
How to Register as a Derivatives Clearing Organization
Criteria, procedures, and requirements for registration as a DCO are set forth in Section 5b of the CEA, 7 USC § 7a-1, and Part 39 of the CFTC’s regulations.