2018-15860
Federal Register, Volume 83 Issue 143 (Wednesday, July 25, 2018)
[Federal Register Volume 83, Number 143 (Wednesday, July 25, 2018)]
[Notices]
[Pages 35241-35246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15860]
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COMMODITY FUTURES TRADING COMMISSION
Order Granting Exemption From Certain Provisions of the Commodity
Exchange Act Regarding Investment of Customer Funds and From Certain
Related Commission Regulations
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is issuing an order in response to a petition from ICE
Clear Credit LLC, ICE Clear US, Inc., and ICE Clear Europe Limited
(collectively, ``the ICE DCOs'' or ``the Petitioners'') seeking an
exemption permitting the investment of futures and swap customer funds
in certain categories of euro-denominated sovereign debt. The
Commission is also granting exemptive relief to expand the universe of
permissible counterparties and depositories that can be used in
connection with these investments given the structure of the market for
repurchase agreements in euro-denominated sovereign debt.
DATES: Applicable as of July 25, 2018.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
(202) 418-5096, [email protected], Division of Clearing and Risk, or
Lihong McPhail, Research Economist, (202) 418-5722, [email protected],
Office of the Chief Economist, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; or
Tad Polley, Associate Director, (312) 596-0551, [email protected], or
Scott Sloan, Attorney-Advisor, (312) 596-0708, [email protected],
Division of Clearing and Risk, Commodity Futures Trading Commission,
525 West Monroe Street, Chicago, Illinois 60661.
SUPPLEMENTARY INFORMATION:
I. Background
By petition dated June 22, 2017, the Petitioners, all registered
derivatives clearing organizations (``DCOs''), requested an exemptive
order under section 4(c) of the Commodity Exchange Act (``CEA'' or
``Act'') permitting the ICE DCOs to invest futures and cleared swap
customer funds in certain categories of euro-denominated sovereign
debt. On December 15, 2017, the Commission published a proposed order
that would grant the requested exemption (``Proposed Order'') and
requested public comment on the Proposed Order.\1\
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\1\ 82 FR 59586 (Dec. 15, 2017).
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Section 4d of the Act \2\ and Commission Regulation 1.25(a) \3\ set
out the permitted investments in which DCOs may invest customer
funds.\4\ Section 4d limits investments of customer money to
obligations of the United States (``U.S. Government Securities''),
general obligations of any State or of any political subdivision
thereof, and obligations fully guaranteed as to principal and interest
by the United States.\5\ Regulation 1.25 expands the list of permitted
investments but does not permit investment of customer funds in foreign
sovereign debt.\6\
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\2\ 7 U.S.C. 6d.
\3\ 17 CFR 1.25(a) (2017).
\4\ Although Regulation 1.25 by its terms applies only to
futures customer funds, Regulation 22.3(d) requires that a DCO
investing cleared swap customer funds comply with the requirements
of Regulation 1.25.
\5\ See 7 U.S.C. 6d(a)(2) (futures), (f)(4) (cleared swaps).
\6\ Regulation 1.25 permits investment of customer funds in: (i)
Obligations of the United States and obligations fully guaranteed as
to principal and interest by the United States (U.S. government
securities); (ii) General obligations of any State or of any
political subdivision thereof (municipal securities); (iii)
Obligations of any United States government corporation or
enterprise sponsored by the United States government (U.S. agency
obligations); (iv) Certificates of deposit issued by a bank
(certificates of deposit) as defined in section 3(a)(6) of the
Securities Exchange Act of 1934, or a domestic branch of a foreign
bank that carries deposits insured by the Federal Deposit Insurance
Corporation; (v) Commercial paper fully guaranteed as to principal
and interest by the United States under the Temporary Liquidity
Guarantee Program as administered by the Federal Deposit Insurance
Corporation (commercial paper); (vi) Corporate notes or bonds fully
guaranteed as to principal and interest by the United States under
the Temporary Liquidity Guarantee Program as administered by the
Federal Deposit Insurance Corporation (corporate notes or bonds);
and (vii) Interests in money market mutual funds.
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Regulation 1.25 previously included foreign sovereign debt as a
permitted investment for customer funds.\7\ In 2011, the Commission
removed this option from Regulation 1.25, but also acknowledged that
the safety of sovereign debt issuances of one country may vary greatly
from those of another, and stated that it was amenable to considering
requests for section 4(c) exemptions from this restriction.\8\
Specifically, the Commission stated that it would consider permitting
foreign sovereign debt investments (1) to the extent that the
petitioner has balances in segregated accounts owed to customers or
clearing member futures commission merchants in that country's currency
and (2) to the extent that the sovereign debt serves to preserve
principal and maintain liquidity of customer funds as
[[Page 35242]]
required for all other investments of customer funds under Regulation
1.25.\9\
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\7\ See 17 CFR 1.25(a) (2005).
\8\ Investment of Customer Funds and Funds Held in an Account
for Foreign Futures and Foreign Options Transactions, 76 FR 78776,
78782 (Dec. 19, 2011).
\9\ Id.
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In connection with their proposal to invest customer funds in
foreign sovereign debt, the ICE DCOs have also requested an exemption
from Regulations 1.25(d)(2) and (7). Regulation 1.25(d)(2) limits the
counterparties with which a DCO can enter into a repurchase agreement
involving customer funds to a bank as defined in section 3(a)(6) of the
Securities Exchange Act of 1934, a domestic branch of a foreign bank
insured by the Federal Deposit Insurance Corporation, a securities
broker or dealer, or a government securities broker or government
securities dealer registered with the Securities and Exchange
Commission or which has filed notice pursuant to section 15C(a) of the
Government Securities Act of 1986. Regulation 1.25(d)(7) requires a DCO
to hold the securities transferred to the DCO under a repurchase
agreement in a safekeeping account with a bank as referred to in
Regulation 1.25(d)(2), a Federal Reserve Bank, a DCO, or the Depository
Trust Company in an account that complies with the requirements of
Regulation 1.26.
II. The ICE DCOs' Petition
The ICE DCOs request a limited exemption from section 4d of the Act
and Commission Regulation 1.25(a) to invest euro-denominated customer
funds in sovereign debt issued by the French Republic and the Federal
Republic of Germany (``Designated Foreign Sovereign Debt'') through
both direct investment and repurchase agreements.\10\ The Petitioners
also request an exemption from Regulation 1.25(d)(2) that would permit
them to enter into reverse repurchase agreements with certain foreign
banks, certain regulated securities dealers, or the European Central
Bank and the central banks of Germany and France.\11\ Lastly, the ICE
DCOs request an exemption from Regulation 1.25(d)(7) that would permit
them to hold the securities purchased through reverse repurchase
agreements in a safekeeping account with a non-U.S. bank that qualifies
as a depository under the requirements of Regulation 1.49.
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\10\ A copy of the petition is available on the Commission's
website at http://www.cftc.gov/idc/groups/public/@requestsandactions/documents/ifdocs/icedcos4cappl6-22-17.pdf.
\11\ The ICE DCOs have indicated they may not currently be able
to enter into repurchase agreements with these central banks.
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III. Section 4(c) Analysis
In connection with the Proposed Order, the Commission preliminarily
determined that granting the requested exemption would be consistent
with Section 4(c) of the Act.\12\ After reviewing the comments received
in response to the Proposed Order, all of which supported an exemption,
the Commission has determined that the exemption detailed below
satisfies the requirements of Section 4(c)(2) of the Act.\13\
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\12\ Section 4(c)(1) of the Act empowers the Commission to
promote responsible economic or financial innovation and fair
competition by exempting any transaction or class of transactions
(including any person or class of persons offering, entering into,
rendering advice or rendering other services with respect to, the
agreement, contract, or transaction), from any of the provisions of
the Act, subject to exceptions not relevant here. 7 U.S.C. 6(c)(1).
\13\ Section 4(c)(2) of the Act provides that the Commission may
grant exemptions under Section 4(c)(1) only when it determines that
the requirements for which an exemption is being provided should not
be applied to the agreements, contracts, or transactions at issue;
that the exemption is consistent with the public interest and the
purposes of the Act; that the agreements, contracts, or transactions
will be entered into solely between appropriate persons; and that
the exemption will not have a material adverse effect on the ability
of the Commission or any contract market or derivatives transaction
execution facility to discharge its regulatory or self-regulatory
responsibilities under the Act.
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Specifically, the Commission has determined that the restriction on
investments of customer funds by DCOs should not apply to Designated
Foreign Sovereign Debt. As the Commission previously observed, the ICE
DCOs demonstrated that the Designated Foreign Sovereign Debt has
credit, liquidity, and volatility characteristics that are comparable
to U.S. Government Securities, which are permitted investments under
the Act and Regulation 1.25. For example, as evidence of the
creditworthiness of France and Germany, the ICE DCOs provided data
demonstrating that credit default swap spreads of France and Germany
have historically been similar to those of the United States. To
demonstrate the liquidity of the markets, the ICE DCOs pointed to, for
example, the substantial amount of outstanding marketable French and
German debt and the daily transaction value of the repo markets for
their debt. And with respect to volatility, the ICE DCOs provided data
on daily changes to sovereign debt yields demonstrating that the price
stability of French and German debt is comparable to that of U.S.
Government Securities.
The Commission also observed that the ICE DCOs demonstrated that
investing in the Designated Foreign Sovereign Debt poses less risk to
customer funds than the current alternative of holding the funds at a
commercial bank, on the basis that exposure to high-quality sovereign
debt is preferable to facing the credit risk of commercial banks
through unsecured bank demand deposit accounts. While investments
through reverse repurchase agreements (as opposed to direct
investments) still involve exposure to a commercial counterparty, a DCO
would receive the additional benefit of receiving securities as
collateral against that counterparty's credit risk. The ICE DCOs also
represented that in the event a securities custodian enters insolvency
proceedings, they would have a claim to specific securities rather than
a general claim against the assets of the custodian.
Further, the Commission has determined that the exemption is
consistent with the public interest and the purposes of the Act, which
include ensuring the financial integrity of transactions and avoiding
systemic risk.\14\ As noted above, investing customer funds in
Designated Foreign Sovereign Debt is often a prudent alternative to
holding cash at a commercial bank from a risk management perspective,
and granting the exemption thus serves to protect market participants
and the public. For the same reasons, granting the exemption may
enhance the financial integrity of the DCO and thereby help to avoid
systemic risk.
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\14\ See 7 U.S.C. 5(b).
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Finally, the Commission has determined that granting an exemption
allowing investment of customer funds in instruments with risk
characteristics comparable to currently permitted investments does not
have a material adverse effect on the ability of the Commission or any
contract market to discharge its regulatory or self-regulatory duties
under the Act.\15\
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\15\ The section 4(c)(2) factor of whether an agreement,
contract or transaction is entered into solely between appropriate
persons does not apply here.
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Based on the foregoing, the Commission has determined that granting
the exemption provided in the order below satisfies the requirements of
section 4(c) of the Act.
IV. Proposed Order
The Commission proposed an exemption to permit the ICE DCOs,
subject to certain conditions, to invest customer funds in Designated
Foreign Sovereign Debt. The first condition required that the ICE DCOs
only use customer euro cash to invest in the Designated Foreign
Sovereign Debt. This restriction was previously included in
[[Page 35243]]
Regulation 1.25 \16\ when the rule permitted the investment of customer
funds in foreign sovereign debt, and the Commission believes it is
still an appropriate restriction on the amount that may be invested in
these instruments.
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\16\ See 17 CFR 1.25(b)(4)(D) (2005) (providing that sovereign
debt is subject to the following limits: A futures commission
merchant may invest in the sovereign debt of a country to the extent
it has balances in segregated accounts owed to its customers
denominated in that country's currency; a DCO may invest in the
sovereign debt of a country to the extent it has balances in
segregated accounts owed to its clearing member futures commission
merchants denominated in that country's currency).
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Second, the Commission proposed to permit the ICE DCOs to invest in
Designated Foreign Sovereign Debt only so long as the two-year credit
default spread of the issuing sovereign is 45 basis points (``BPS'') or
less. The Commission explained that because the proposed order was not
intended to expand the universe of permitted investments beyond
instruments with a risk profile similar to those that are currently
permitted, U.S. Government Securities provide an appropriate benchmark
to confine permitted investments in foreign sovereign debt. The
Commission proposed the cap of 45 BPS based on a historical analysis of
the two-year credit default spread of the United States (``U.S.
Spread''). Forty-five BPS is approximately two standard deviations
above the mean U.S. Spread over the past eight years and represents a
risk level that the U.S. Spread has exceeded approximately 5% of the
time over that period.\17\ The Proposed Order provided that if the
spread exceeds 45 BPS, the ICE DCOs would not be permitted to make new
investments in the relevant debt. They also would not need to
immediately divest all current investments, however, due to risks
associated with selling assets in a potentially volatile market. The
Commission explained that prohibiting new investments, together with
the length to maturity condition discussed immediately below,
sufficiently protects customer funds in the event that a country's
Designated Foreign Sovereign Debt were to exceed the 45 BPS spread
limit.
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\17\ The Commission reviewed the daily U.S. Spread from July 3,
2009 to July 3, 2017. Over this time period, the U.S. Spread had a
mean of approximately 26.5 BPS and a standard deviation of
approximately 9.72 BPS. Over this same period, the two-year German
spread exceeded 45 BPS approximately 6% of the time, and the two-
year French spread exceeded 45 BPS approximately 25% of the time.
Neither the German nor the French two-year spread has exceeded 45
BPS since September 2012.
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Third, the Commission proposed to limit the length to maturity of
direct investments in Designated Foreign Sovereign Debt, to limit
permitted investments to those with a lower risk profile. Specifically,
the Proposed Order contained a requirement that each of the ICE DCOs
ensure that the dollar-weighted average of the time-to-maturity of
their portfolio of direct investments in each type of Designated
Foreign Sovereign Debt does not exceed 60 days. This restriction was
modeled on Securities and Exchange Commission requirements for money
market mutual funds,\18\ which have liquidity timing needs
appropriately analogous to those of a DCO in this instance, and was
designed to ensure that the investments will mature relatively quickly,
providing the ICE DCOs with access to euro cash.
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\18\ See 17 CFR 270.2a-7.
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To provide the ICE DCOs with the ability to invest customer funds
in the Designated Foreign Sovereign Debt, the Commission proposed to
exempt the ICE DCOs from the counterparty and depository requirements
of Regulation 1.25(d)(2) and (7), subject to conditions. As a practical
matter, complying with these requirements would severely restrict the
ICE DCOs' ability to enter into repurchase agreements for Designated
Foreign Sovereign Debt.
Specifically the Commission proposed to exempt the ICE DCOs from
the counterparty restrictions of Regulation 1.25(d)(2), subject to the
condition that counterparties be limited to certain categories that are
intended to limit the risk associated with reverse repurchase
transactions. The ICE DCOs represented that the principal participants
in the European sovereign debt repurchase markets are non-U.S. banks,
non-U.S. securities dealers, and foreign branches of U.S. banks. As a
result, the counterparty requirements under Regulation 1.25(d)(2) would
significantly constrain the use of euro-denominated sovereign debt
repurchase agreements. Additionally, the ICE DCOs represented that it
would be impractical and inefficient to hold such securities at a U.S.
custodian, and the Commission proposed to exempt the ICE DCOs from the
depository requirement of Regulation 1.25(d)(7), so long as the
depository qualifies as a permitted depository under Regulation 1.49.
The Commission explained that the proposed restrictions on permitted
counterparties and depositories are designed to ensure that the
counterparties and depositories used by the ICE DCOs will be regulated
entities comparable to those currently permitted under Regulation
1.25(d)(2) and (7).
V. Comments on the Proposed Order
The Commission published a request for comments regarding the
Proposed Order in the Federal Register on December 15, 2017.\19\
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\19\ 82 FR 59586 (Dec. 15, 2017).
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The Commission received three comment letters.\20\ Each of the
commenters supported an exemption and suggested several changes to the
Proposed Order. Both Eurex and FIA stated that the proposed exemption
is consistent with the Regulation 1.25 objectives of preserving
principle and maintaining liquidity.
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\20\ Letters were submitted by CME Group, Inc (``CME''), Eurex
Clearing AG (``Eurex''), and the Futures Industry Association
(``FIA''). All comment letters are available through the
Commission's website at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2850.
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All three commenters recommended that the Commission expand the
scope of the order to grant relief to additional registrants. Eurex, a
registered DCO, requested that it be included within the scope of the
exemption. CME encouraged the Commission to include all DCOs in the
scope of the exemption, and FIA recommended including all DCOs and
their FCM clearing members.
CME and Eurex argued that expanding the scope of the order is
consistent with the promotion of fair competition, which is one of the
stated purposes of section 4(c) exemptions.\21\ They also highlighted
the benefits of investing customer funds in Designated Foreign
Sovereign Debt as justification for expanding the scope of the order.
Eurex stated that investing in Designated Foreign Sovereign Debt is
safer than holding euro cash at a commercial bank. Additionally, CME
noted that investing in Designated Foreign Sovereign Debt promotes
effective management of liquidity risk by aligning collateral types
with potential liquidity obligations and by diversifying risk in the
investment portfolio. CME further stated that investments in Designated
Foreign Sovereign Debt allow DCOs to better mitigate collateral
concentration risk and argued that these benefits are not unique to any
particular DCO.
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\21\ See 7 U.S.C. 6(c)(1).
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The Commission agrees that the benefits of the Proposed Order are
not unique to the ICE DCOs and is accordingly expanding the scope of
the Proposed Order to permit all DCOs to invest customer funds in
Designated Foreign Sovereign Debt, subject to the conditions of the
order. The Commission notes, however, that some DCOs have access to a
central bank account for euro deposits and believes that such access
can, in certain
[[Page 35244]]
circumstances, reduce or eliminate the need for investing customer
funds in Designated Foreign Sovereign Debt. The Commission therefore
encourages DCOs to deposit customer euro with a central bank when it is
practical to do so.\22\ The comments received did not provide support
for an expansion of the exemption to FCMs,\23\ a separate class of
registrants subject to differing regulatory obligations that the
Commission would need to carefully consider on their own terms. As a
result, the Commission declines to expand the order to permit FCMs to
invest customer funds in Designated Foreign Sovereign Debt at this
time.
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\22\ See Comm. on Payment and Settlement Sys. and Technical
Comm. of the Int'l Org. of Sec. Comm'ns [CPSS-IOSCO, now CPMI-IOSCO]
Principles for Financial Market Infrastructures, Princ. 7 Key
Consideration 8 (2012) (``An FMI with access to central bank
accounts, payment services, or security services should use these
services, where practical, to enhance its management of liquidity
risk.'').
\23\ See FIA comment letter at 3 (providing only that ``[w]e see
no reason why the proposed relief should not be'' available to FCMs
holding euro-denominated segregated balances).
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Both Eurex and FIA encouraged the Commission to expand the weighted
average time-to-maturity limit beyond the proposed 60 days. Eurex
recommended limiting portfolios, including repurchase agreements, to a
two-year time-to-maturity requirement, consistent with the current
limit in Regulation 1.25 for the overall portfolio of investments
purchased with customer funds. It argued that because the Commission
found the risk characteristics of German and French debt to be similar
to those of U.S. Government Securities, the same time-to-maturity limit
should apply. FIA recommended using a six month time-to-maturity
limit.\24\ Based on discussions with trading desks at several member
firms, FIA suggested that the 60-day limit would be too restrictive. It
explained that the new issuance supply of French and German sovereign
debt that could be used to satisfy this restriction is limited and
thinly traded and quoted, which could force participants to invest in
less-liquid secondary market securities. Further, FIA noted that
although the discussion of the proposed 60-day time-to-maturity limit
noted the SEC's requirement for mutual funds as a point of reference,
the SEC rule includes overnight repos in the calculation, which
significantly reduces the average time-to-maturity of the portfolio as
a whole.
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\24\ FIA did not specify whether repurchase agreements would be
included in the calculation of the time-to-maturity limit it
proposed.
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The 60-day average time-to-maturity limitation as proposed to apply
only to direct investments may unduly limit investments in Designated
Foreign Sovereign Debt, and the Commission is therefore amending the
calculation of the limitation. Under the final order, the dollar-
weighted average time-to-maturity of all investments in Designated
Foreign Sovereign Debit, including repurchase agreements, may not
exceed 60 days. The Commission is also, however, limiting individual
direct investments in Designated Foreign Sovereign Debt to securities
that have a remaining maturity of 180 days or less. While the risk
characteristics of Designated Foreign Sovereign Debt are broadly
comparable to those of U.S. Government Securities, Designated Foreign
Sovereign Debt is somewhat less liquid than U.S. Government Securities
and the cap on the time-to-maturity of individual investments is
intended to address that reduced liquidity.
FIA recommended using the five-year credit default swap (``CDS'')
spread as the measure of credit quality for Designated Foreign
Sovereign Debt, arguing that the two-year CDS is thinly traded and
quoted compared to the five-year instrument. FIA recommended permitting
investments in French and German debt when the five-year CDS spread is
at 60 basis points or less.
The Commission understands that the five-year CDS is more commonly
traded than the two-year, but believes that the two-year spread is more
suitable for this purpose because it more closely tracks the duration
of the investments that DCOs will make in Designated Foreign Sovereign
debt. While liquidity of the two-year product may not match that of the
five-year, the Commission believes that data and quotes on the two-year
spread are adequately available for their intended use as a measure of
creditworthiness.
FIA noted that under the proposed exemption from Regulation
1.25(d)(2) and (7), the ICE DCOs would be required to comply with the
remaining provisions of Regulation 1.25(d). FIA stated that these
requirements provide important protections for customer funds employed
in repurchase agreements and should not be waived. The Commission
agrees and confirms that DCOs must continue to comply with all
requirements in Regulation 1.25 not exempted by the order.
Eurex requested the Commission clarify that like U.S. Government
Securities, Foreign Sovereign Debt is not subject to an asset-based
concentration limit. The Commission confirms that the order does not
subject Designated Foreign Sovereign Debt to an asset-based
concentration limit. Because investments of customer funds in
Designated Foreign Sovereign Debt will be limited to the amount of euro
cash held by DCOs, the Commission does not believe that an asset-based
concentration limit is necessary.
In addition, the Commission is amending the Proposed Order to
permit DCOs a reasonable amount of time after the two-year CDS spread
of France or Germany exceeds 45 basis points to determine an
appropriate alternative investment or depository for funds that had
been invested in a repurchase agreement for the relevant Designated
Foreign Sovereign Debt. The Commission does not believe it is prudent
to immediately require DCOs to locate depositories for potentially
large amounts of cash without notice. The order as revised will require
DCOs to stop entering into repurchase agreements as soon as practicable
under the circumstances while the French or German two-year CDS spread
exceeds 45 basis points. The Commission is not amending the restriction
that no new direct investments in the relevant debt may be made if the
two-year spread is greater than 45 basis points.
The Commission is also making a change to the Proposed Order to
clarify that the exemption to Regulation 1.25(d)(2) and (7) only
applies to investments in Designated Foreign Sovereign Debt and not all
securities purchased with customer funds.
The Commission does not intend this order to relieve a DCO of any
obligation relating to investments in Designated Foreign Sovereign Debt
that would apply if Designated Foreign Sovereign Debt were a permitted
investment under Commission Regulation 1.25. The Commission is adding a
new paragraph to the order to clarify that certain Commission
regulations apply to investments made pursuant to this order.
VI. Order
After considering the above factors and the comment letters
received in response to its request for comments, the Commission has
determined to issue the following:
(1) The Commission, pursuant to its authority under section 4(c) of
the Commodity Exchange Act (``Act'') and subject to the conditions
below, hereby grants registered derivatives clearing organizations
(``DCOs'') a limited exemption to section 4d of the Act and to
Commission Regulation 1.25(a) to permit all registered DCOs to invest
euro-denominated futures and cleared swap customer funds in euro-
denominated sovereign debt issued by the French Republic and the
Federal
[[Page 35245]]
Republic of Germany (``Designated Foreign Sovereign Debt'').
(2) The Commission, subject to the conditions below, additionally
grants:
(a) A limited exemption to Commission Regulation 1.25(d)(2) to
permit registered DCOs to use customer funds to enter into repurchase
agreements for Designated Foreign Sovereign Debt with foreign banks and
foreign securities brokers or dealers; and
(b) A limited exemption to Commission Regulation 1.25(d)(7) to
permit registered DCOs to hold Designated Foreign Sovereign Debt
purchased under a repurchase agreement in a safekeeping account at a
foreign bank.
(3) This order is subject to the following conditions:
(a) Investments of customer funds in Designated Foreign Sovereign
Debt by a DCO must be limited to investments made with euro customer
cash.
(b) If the two-year credit default spread of an issuing sovereign
of Designated Foreign Sovereign Debt is greater than 45 basis points:
(i) A DCO must discontinue investing customer funds in the relevant
debt through repurchase transactions as soon as practicable under the
circumstances;
(ii) A DCO may not make any new direct investments in the relevant
debt using customer funds. Direct investment refers to purchases of
Designated Foreign Sovereign Debt unaccompanied by a contemporaneous
agreement to resell the securities.
(c) The dollar-weighted average of the time-to-maturity of a DCO's
portfolio of investments in each sovereign's Designated Foreign
Sovereign Debt may not exceed 60 days.
(d) A DCO may not make a direct investment in any Designated
Foreign Sovereign Debt that has a remaining maturity of greater than
180 calendar days.
(e) A DCO may use customer funds to enter into repurchase
agreements for Designated Foreign Sovereign Debt with a counterparty
that does not meet the requirements of Commission Regulation 1.25(d)(2)
only if the counterparty is:
(i) A foreign bank that qualifies as a permitted depository under
Commission Regulation 1.49(d)(3) and that is located in a money center
country (as defined in Commission Regulation 1.49(a)(1)) or in another
jurisdiction that has adopted the euro as its currency;
(ii) A securities dealer located in a money center country as
defined in Commission Regulation 1.49(a)(1) that is regulated by a
national financial regulator such as the UK Prudential Regulation
Authority or Financial Conduct Authority, the German Bundesanstalt
f[uuml]r Finanzdienstleistungsaufsicht (BaFin), the French
Autorit[eacute] Des March[eacute]s Financiers (AMF) or Autorit[eacute]
de Contr[ocirc]le Prudentiel et de R[eacute]solution (ACPR), or the
Italian Commissione Nazionale per le Societ[agrave] e la Borsa
(CONSOB); or
(iii) The European Central Bank, the Deutsche Bundesbank, or the
Banque de France.
(f) A DCO may hold customer Designated Foreign Sovereign Debt
purchased under a repurchase agreement with a depository that does not
meet the requirements of Commission Regulation 1.25(d)(7) only if the
depository meets the location and qualification requirements contained
in Commission Regulation 1.49(c) and (d) and if the account complies
with the requirements of Commission Regulation 1.26.
(4) A DCO must continue to comply with all other requirements in
Commission Regulation 1.25, including but not limited to the
counterparty concentration limits in Commission Regulation
1.25(b)(3)(v), and other applicable Commission regulations.
(5) Investments made pursuant to this order will be considered
``instruments described in Sec. 1.25'' for the purposes of Commission
Regulation 1.29 and will be considered to be made ``in accordance with
Sec. 1.25'' for the purposes of Commission Regulation 22.3.
IV. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') imposes certain requirements
on federal agencies (including the Commission) in connection with their
conducting or sponsoring any collection of information as defined by
the PRA. This exemptive order does not involve a collection of
information. Accordingly, the PRA does not apply.
B. Cost-Benefit Analysis
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its action before issuing an order under the CEA.
By its terms, section 15(a) does not require the Commission to quantify
the costs and benefits of an order or to determine whether the benefits
of the order outweigh its costs. Rather, section 15(a) simply requires
the Commission to ``consider the costs and benefits'' of its action.
The Commission did not receive any comments on its proposed costs and
benefits.
1. Baseline
The Commission's baseline for consideration of the costs and
benefits of the exemptive order are the costs and benefits that DCOs
and the public would face if the Commission does not grant the order,
or in other words, the status quo. In that scenario, DCOs would be
limited to investing customer funds in the instruments listed in
Regulation 1.25.
2. Costs and Benefits
The costs and benefits of the order are not presently susceptible
to meaningful quantification. Therefore, the Commission discusses costs
and benefits in qualitative terms.
The Commission does not believe granting the exemption will impose
additional costs on DCOs. The order permits but does not require DCOs
to invest customer funds in Designated Foreign Sovereign Debt. Each DCO
may therefore decide whether to accept any costs and benefits of an
investment. The Commission also does not expect the order to impose
additional costs on other market participants or the public, which do
not face any direct costs from the order. While other market
participants or the public could potentially face costs from riskier
investment activity leading to financial instability at a DCO, the
Commission believes that this is unlikely, because the order prescribes
limits on investments of customer funds in Designated Foreign Sovereign
Debt designed to preserve principal and maintain liquidity. In
addition, the flexibility to hold customer funds in Designated Foreign
Sovereign Debt rather than in euro cash at a commercial bank provides
risk management benefits as described above.
The Commission believes that DCOs will benefit from the order. The
exemption provides DCOs additional flexibility in how they manage and
hold customer funds and allows them to improve the risk management of
their customer accounts. Further, if DCOs invest customer funds in
Designated Foreign Sovereign Debt, other participants in the relevant
market may benefit from the additional liquidity. Moreover, as
described above, it is safer from a risk management perspective to hold
Foreign Sovereign Debt in a safekeeping account than to hold euro cash
at a commercial bank. Therefore, market participants and the public may
also benefit from the exemption.
3. Section 15(a) Factors
Section 15(a) of the CEA further specifies that costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: protection of market participants and the public; efficiency,
competitiveness, and
[[Page 35246]]
financial integrity of futures markets; price discovery; sound risk
management practices; and other public interest considerations. The
Commission could in its discretion give greater weight to any one of
the five enumerated areas and could in its discretion determine that,
notwithstanding its costs, a particular order was necessary or
appropriate to protect the public interest or to effectuate any of the
provisions or to accomplish any of the purposes of the CEA. The
Commission is considering the costs and benefits of this exemptive
order in light of the specific provisions of section 15(a) of the CEA,
as follows:
1. Protection of market participants and the public. As described
above, investing in the Designated Foreign Sovereign Debt as requested
by the Petitioners can provide risk management benefits relative to the
current alternative of holding euro collateral in a commercial bank.
Granting the exemption thus serves to protect market participants and
the public.
2. Efficiency, competition, and financial integrity. Granting the
exemption may increase efficiency by providing DCOs additional
flexibility in how they manage customer funds. Making the investments
permitted by the order is elective, within the discretion of each DCO,
and thus does not impose additional costs. Further, as discussed in the
above, DCOs can exercise prudent risk management by investing in the
Designated Foreign Sovereign Debt, which may enhance the financial
integrity of the DCO.
3. Price discovery. The exemption is unlikely to impact price
discovery in the derivatives markets.
4. Sound risk management practices. As described above, investing
customer funds in the Designated Foreign Sovereign Debt is intended to
advance sound risk management practices, including by limiting
custodian and collateral concentration risks.
5. Other public interest considerations. The Commission believes
that the relevant cost-benefit considerations are captured in the four
factors above.
Issued in Washington, DC, on July 19, 2018, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Appendix To Order Granting Exemption From Certain Provisions of the
Commodity Exchange Act Regarding Investment of Customer Funds and From
Certain Related Commission Regulations--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz
and Behnam voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2018-15860 Filed 7-24-18; 8:45 am]
BILLING CODE 6351-01-P