Federal Register, Volume 81 Issue 55 (Tuesday, March 22, 2016)  
[Federal Register Volume 81, Number 55 (Tuesday, March 22, 2016)]
[Pages 15260-15272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06261]



Comparability Determination for the European Union: Dually-
Registered Derivatives Clearing Organizations and Central 

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Comparability Determination for Certain Requirements 
Under the European Market Infrastructure Regulation.


SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' 
or ``CFTC'') has determined that certain laws and regulations 
applicable in the European Union (``EU'') provide a sufficient basis 
for an affirmative finding of comparability with respect to certain 
regulatory obligations applicable to derivatives clearing organizations 
(``DCOs'') that are registered with the Commission and are authorized 
to operate as central counterparties (``CCPs'') in the EU. The 
Commission's determination provides for substituted compliance with 
respect to requirements for financial resources, risk management, 
settlement procedures, and default rules and procedures.

DATES: This determination will become effective upon publication in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT: Jeffrey M. Bandman, Acting Director, 
202-418-5044, [email protected]; Robert B. Wasserman, Chief Counsel, 
202-418-5092, [email protected]; Tracey Wingate, Special Counsel, 
202-418-5319, [email protected], in each case at the Division of 
Clearing and Risk, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC

[[Page 15261]]

20581; or Michael H. Margolis, Special Counsel, 312-596-0576, 
[email protected], Division of Clearing and Risk, Commodity Futures 
Trading Commission, 525 W. Monroe Street, Suite 1100, Chicago, IL 


I. Introduction

    On February 10, 2016 Commission Chairman Timothy Massad issued a 
joint statement with Commissioner Jonathan Hill of the European 
Commission setting forth a common approach regarding the regulation of 
CCPs. Under the common approach, the European Commission (``EC'') will 
propose a third-country equivalence decision (``Equivalence Decision'') 
regarding the Commission's regulatory regime for DCOs, which is a 
prerequisite for the European Securities and Markets Authority 
(``ESMA'') to recognize U.S. DCOs as equivalent third-country CCPs. 
Once recognized by ESMA, U.S. DCOs may continue to operate and provide 
clearing services in the EU.
    This Notice is being issued in connection with the resolution of 
equivalence for U.S. DCOs. For an Equivalence Decision under Article 25 
of the European Market Infrastructure Regulation (``EMIR''), one of the 
conditions requires that the legal and supervisory regime of the United 
States must include an ``effective equivalent system'' for the 
recognition of CCPs authorized in the EU under EMIR.\1\ As described 
below, U.S. law and CFTC regulations require that foreign-based CCPs 
register with the CFTC in certain circumstances. If registered, they 
must comply with the relevant U.S. requirements, including the 
Commission regulations applicable to registered DCOs.

    \1\ See Regulation (EU) No 648/2012 of the European Parliament 
and the Council on OTC derivatives, central counterparties and trade 
repositories of 4 July 2012 (`EMIR'), Art. 25(6).

    Under this Notice, EU-based CCPs that register with or are 
currently registered with the Commission as DCOs and that are 
authorized to operate in the EU may comply with certain Commission 
requirements for financial resources, risk management, settlement 
procedures, and default rules and procedures (as set forth in this 
Notice) by complying with the terms of corresponding requirements under 
the EMIR Framework, as defined below.

II. Statutory and Regulatory Framework for Registration of non-U.S. 

    The Commodity Exchange Act (``CEA'') does not impose geographic 
limitations on the registration of DCOs. Nor does it mandate that 
clearing of futures traded on U.S. exchanges must take place in the 
United States.\2\ To the contrary, it permits futures traded on 
exchanges in the United States to be cleared outside the United States. 
However, the CEA and CFTC regulations require that foreign-based CCPs 
that wish to clear such futures be registered with the Commission and 
comply with CFTC regulations.\3\ In addition, consistent with Section 
2(i) of the CEA, foreign-based CCPs that clear swaps with a sufficient 
nexus to U.S. commerce must register with the Commission.\4\

    \2\ 7 U.S.C. 7a-1(a).
    \3\ See generally 7 U.S.C. 7(d)(9)(iii) and (11); 17 CFR 38.601.
    \4\ 7 U.S.C. 7a-1(a); 17 CFR 39.3; see also 7 U.S.C. 2(i) 
(providing that the CEA's swap-related provisions shall not apply to 
activities outside the United States unless those activities have a 
direct and significant connection with activities in, or effect on, 
commerce of the United States or contravene such rules or 
regulations as the Commission may prescribe or promulgate as are 
necessary or appropriate to prevent the evasion of any provision of 
the CEA).

    Thus, under this regulatory framework, a number of foreign-based 
CCPs have been registered with the Commission for some time. 
LCH.Clearnet Ltd., which is based in London, for example, has been 
registered with the Commission since 2001, and thus has been subject to 
dual supervision by UK authorities and the Commission since long before 
the EU adopted its current regulatory scheme--EMIR.\5\ This dual 
registration system has been a foundation on which the cleared swaps 
market grew to be a global market. In addition to LCH.Clearnet Ltd., 
there are currently five other foreign-based DCOs that are registered 
both with the Commission and their home country regulators: Singapore 
Exchange Derivatives Clearing Limited (home country regulator is the 
Monetary Authority of Singapore), LCH.Clearnet SA (home country 
regulators are the Autorit[eacute] de contr[ocirc]le prudentiel et 
r[eacute]solution, the Autorit[eacute] des march[eacute]s financiers, 
and the Banque de France), ICE Clear Europe Ltd. (home country 
regulator is Bank of England), Natural Gas Exchange (home country 
regulator is the Alberta Securities Commission), and Eurex Clearing AG 
(home country regulators are Bundesanstalt f[uuml]r 
Finanzdienstleistungsaufsicht (BaFin) and Deutsche Bundesbank). Two 
additional foreign-based CCPs have applications pending before the 
Commission for registration as DCOs (CME Clearing Europe Ltd. and Japan 
Securities Clearing Corporation). Additionally, the Commission has 
provided exemptions from registration for foreign-based CCPs that clear 
proprietary swaps positions for their U.S. members and affiliates but 
not for U.S. customers generally. (These foreign-based DCOs also do not 
clear futures traded on U.S. designated contract markets (``DCMs'').) 
These exemptions have been issued pursuant to Section 5b(h) of the CEA, 
which permits the Commission to exempt a clearing organization from DCO 
registration for the clearing of swaps to the extent that the 
Commission determines that such clearing organization is subject to 
comparable, comprehensive supervision by appropriate government 
authorities in the clearing organization's home country.\6\

    \5\ Regulation (EU) No 648/2012 on OTC derivatives, central 
counterparties and trade repositories.
    \6\ 7 U.S.C. 7a-1(h).

    For purposes of the granting of exemptions to foreign-based CCPs 
that are not clearing futures traded on U.S. DCMs nor clearing swaps 
for U.S. customers, the Commission has determined that a supervisory 
and regulatory framework that is consistent with the Principles for 
Financial Market Infrastructures (``PFMIs'') can be considered to be 
comparable to and as comprehensive as the supervisory and regulatory 
framework established by the CEA and part 39 of the Commission's 
regulations.\7\ Pursuant to this authority, the Commission has granted 
exemptions to clearing organizations in Australia, Japan, South Korea, 
and Hong Kong, provided that each exempt CCP not offer customer 
clearing services for U.S. persons and limit direct clearing by U.S. 
persons and futures commission merchants (``FCMs'') to the following 
circumstances: (1) ``A U.S. person that is a clearing member of [the 
exempt CCP] may clear swaps for itself and those persons identified in 
the Commission's definition of `proprietary account' set forth in 
Regulation 1.3(y)''; (2) ``A non-U.S. person that is a clearing member 
of [the exempt CCP] may clear swaps for any affiliated U.S. person 
identified in the definition of `proprietary account' set forth in 
Regulation 1.3(y)''; and (3) ``An entity that is registered with the 

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as an FCM may be a clearing member of [the exempt CCP], or otherwise 
maintain an account with an affiliated broker that is a clearing 
member, for the purpose of clearing swaps for itself and those persons 
identified in the definition of `proprietary account' set forth in 
Regulation 1.3(y).'' \8\

    \7\ The PFMIs were jointly issued by the Committee on Payment 
and Settlement Systems (now, the Committee on Payments and Market 
Infrastructures (``CPMI'')) of the Bank for International 
Settlements and the Technical Committee of the International 
Organization of Securities Commissions (``IOSCO'') in April 2012. 
The PFMIs are available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
    \8\ See In re Petition of ASX Clear (Futures) Pty Limited for 
Exemption from Registration as a Derivatives Clearing Organization 
(Aug. 18, 2015); In re Petition of Japan Securities Clearing Corp. 
for Exemption from Registration as a Derivatives Clearing 
Organization (Oct. 26, 2015); In re Petition of Korea Exchange, Inc. 
for Exemption from Registration as a Derivatives Clearing 
Organization (Oct. 26, 2015); In re Petition of OTC Clearing Hong 
Kong Ltd. for Exemption from Registration as a Derivatives Clearing 
Organization (Dec. 21, 2015).

    To clear U.S. customer transactions, the Commission requires that a 
CCP register with the Commission as a DCO and such a DCO becomes 
subject to Section 4d of the CEA, which establishes a customer 
protection regime for futures, options, and swaps customers.\9\ For 
example, with respect to swaps customers, Section 4d(f)(1) states that 
it shall be unlawful for any person to accept money, securities, or 
property (funds) from a swaps customer to margin a swap cleared through 
a DCO unless the person is registered as an FCM.\10\ Additionally, 
Section 4d(f)(2) requires segregation of cleared swaps customer funds 
from the funds of the FCM, and Section 4d(f)(6) extends these 
segregation requirements to DCOs.\11\ These provisions of the CEA 
interlock with the commodity broker provisions of the Bankruptcy Code, 
Subchapter IV of Chapter 7.\12\ No EU-based CCP has sought an exemption 
from registration. This is because EU-based CCPs offer, or are seeking 
to offer, clearing for U.S. customers and thus have obtained or are 
seeking to obtain, registration as DCOs. Nevertheless, EU-based CCPs 
that do not clear swaps for U.S. customers may petition the Commission 
for exempt DCO status.

    \9\ 7 U.S.C. 6d(a), (b), and (f).
    \10\ Section 4d(f)(l) of the CEA, 7 U.S.C 6d(f)(l), states, in 
relevant part, that it shall be unlawful for any person to accept 
any money, securities, or property (or to extend any credit in lieu 
of money, securities, or property) from, for, or on behalf of a 
swaps customer to margin, guarantee, or secure a swap cleared by or 
through a derivatives clearing organization (including money, 
securities, or property accruing to the customer as the result of 
such a swap), unless the person shall have registered under the CEA 
with the Commission as a futures commission merchant, and the 
registration shall not have expired nor been suspended nor revoked.
    \11\ 7 U.S.C 6d(f)(2) and (6).
    \12\ See 11 U.S.C. 761-767; see also Section 101(6) of the 
Bankruptcy Code, 11 U.S.C. 101(6).

    Additionally, in all instances in which the Commission has granted 
registration to a foreign-based CCP, it also has entered into a 
memorandum of understanding or similar arrangement (``MOU'') with the 
CCP's home country regulator(s). Such MOUs establish a framework 
pursuant to which the Commission and the CCP's home country 
regulator(s) intend to cooperate with each other in fulfilling their 
respective regulatory responsibilities with respect to covered cross-
border entities, including CCPs licensed by the home country 
regulator(s) and registered with the Commission. Specifically, such an 
MOU sets forth procedures for, among other things, information sharing 
between the CFTC and the home country regulator(s), notification of 
certain material information, conduct of on-site visits, and the use 
and treatment of non-public information.

III. Regulation of CCPs in the EU

    EU-based CCPs are subject to the regulations laid down in EMIR and 
the Regulatory Technical Standards (``RTS'') (collectively, the ``EMIR 
Framework'').\13\ EMIR and the RTS establish uniform legal requirements 
for EU CCPs that, as EU-level legislation, have an immediate, binding, 
and direct effect in all EU member states without the need for 
additional action by national authorities.\14\ Moreover, where the 
European Parliament and the European Council have passed EU-level 
legislation, EU member states cannot legislate laws that duplicate or 
conflict with EMIR.\15\

    \13\ For the purposes of this Notice the Commission only 
considered those EMIR Framework provisions published as of the date 
of this Notice. The relevant RTS include: Commission Delegated 
Regulation No. 152/2013 with regard to regulatory technical 
standards on capital requirements for central counterparties (``RTS-
CR''); and Commission Delegated Regulation No. 153/2013 with regard 
to regulatory technical standards on requirements for central 
counterparties (``RTS-CCP'').
    \14\ See EMIR (stating that ``[t]his Regulation shall be binding 
in its entirety and directly applicable in all Member States.'').
    \15\ EMIR Article 13(1).

    The European Parliament and the European Council passed EMIR on 
July 4, 2012, which entered into force on August 16, 2012. The relevant 
technical standards for CCPs, including the RTS for capital 
requirements (``RTS-CR'') and the RTS for central counterparties 
(``RTS-CCP''), generally entered into force on March 15, 2013.
    Pursuant to EMIR, each EU member state is responsible for 
implementing the EMIR Framework by designating a national competent 
authority(s) (``NCA'') to authorize and supervise the day-to-day 
operations of CCPs established in its territory. The NCAs are required 
to regularly review how the CCP complies with EMIR by examining the 
CCP's rules, arrangements, procedures, and mechanisms, and to evaluate 
the risks to which such CCPs are, or might be, exposed. At a minimum, 
these reviews and examinations must occur at least annually. As part of 
such reviews and evaluations, the CCP is subject to on-site 

    \16\ See EMIR Articles 21 and 22.

    Additionally, for each authorized CCP, a college of supervisors is 
established that comprises members of the NCA, ESMA, other EU national 
authorities that may supervise entities on which the operations of that 
CCP might have an impact (i.e., selected clearing members, trading 
venues, interoperable CCPs and central securities depositories), as 
well as members of the European System of Central Banks (ESCB), as 
relevant.\17\ The NCAs regularly, and at least annually, inform the 
college of the results of the review and evaluation of the CCP, 
including any remedial action taken or penalty imposed.\18\ The CCP 
college is responsible for reaching an opinion on (1) the authorization 
of a CCP; (2) extensions of authorization; and (3) any changes to a 
CCP's risk model.

    \17\ Id. at Article 18.
    \18\ Id. at Articles 12 and 21.

    While NCAs remain in charge of supervising CCPs, ESMA, as an 
independent European supervisory authority, validates changes to the 
risk models of authorized CCPs and is responsible for harmonizing and 
coordinating the implementation of EMIR across the EU member states. 
ESMA is managed by a Board of Supervisors, which is composed of the 
heads of 28 national authorities (where there is more than one national 
authority in a Member State those authorities agree which of their 
heads will represent them), with observers from Norway, Iceland, and 
Liechtenstein. The Board makes decisions on the compliance by NCAs with 
community legislation, interpretation of community legislation, 
decisions in crisis situations, the approval of draft technical 
standards, guidelines, peer reviews, and any reports that are 

    \19\ See ESMA: Board of Supervisors and NCAs, https://www.esma.europa.eu/about-esma/governance/board-supervisors-and-ncas.

IV. Comparable and Comprehensive Standard

    Consistent with CEA Section 2(i) and principles of international 
comity, in the case of foreign-based DCOs, the Commission will make a 
comparability determination on a requirement-by-requirement basis, 
rather than on the

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basis of the foreign regime as a whole.\20\ In making its comparability 
determinations, the Commission may include conditions that address, 
among other things, timing and other issues related to coordinating the 
implementation of reform efforts across jurisdictions.

    \20\ The Commission has taken analogous action with respect to 
foreign-based swap dealers and major swap participants. Cf 78 FR 
78864 (Dec. 27, 2013) (Australia); 78 FR 78852 (Dec. 27, 2013) (Hong 
Kong); 78 FR 78910 (Dec. 27, 2013) (Japan--Entity Level 
Requirements); 78 FR 78890 (Dec. 27, 2013) (Japan--Transaction Level 
Requirements);78 FR 78899 (Dec. 27, 2013) (Switzerland); 78 FR 78839 
(Dec. 27, 2013) (Canada); 78 FR 78923 (Dec. 27, 2013) (EU--Entity 
Level Requirements); 78 FR 78878 (Dec. 27, 2013) (EU--Transaction 
Level Requirements); see also 78 FR 45292 (July 26, 2013).

    In evaluating whether a particular category of foreign regulatory 
requirement(s) is comparable and comprehensive to the corollary 
requirement(s) under the CEA and Commission regulations, the Commission 
will take into consideration all relevant factors, including, but not 
limited to: The comprehensiveness of the requirement(s); the scope and 
objectives of the relevant requirement(s); the comprehensiveness of the 
foreign regulator's supervisory compliance program; and the foreign 
jurisdiction's authority to support and enforce its oversight of the 
    In making this comparability determination, the Commission is 
relying on the provisions of the EMIR Framework. The Commission assumes 
that the provisions of the EMIR Framework discussed herein are in full 
force and effect and that the description of the EMIR Framework that is 
contained within this Notice is accurate and complete.\21\ The 
Commission also assumes that the provisions of the EMIR Framework 
discussed herein have been implemented in accordance with their terms 
and there are no Member State or EU laws, regulations, or actions of 
the NCAs or any other authorities that are contrary to the provisions 
of the EMIR Framework. Further, the Commission's determination is based 
on the EMIR Framework as it exists at this time; any changes to the 
EMIR Framework (including, but not limited to, changes in the relevant 
supervisory or regulatory regime) could, depending on the nature of the 
change, invalidate the Commission's comparability determination.

    \21\ The Commission additionally provided the EC and ESMA the 
opportunity to consult regarding the relevant provisions of the EMIR 
Framework described in this Notice; however, in reaching its 
conclusions the Commission ultimately relied upon the English-
language published text of the provisions of the EMIR Framework.

V. Comparability Determination

    The following section presents the requirements imposed by specific 
sections of the CEA and Commission regulations applicable to DCOs that 
are the subject of this comparability determination. Following the 
discussion of each Commission requirement, the Commission provides the 
corresponding provision of the EMIR Framework.
    The Commission's determinations in this regard are intended to 
inform the public of the Commission's views regarding whether the 
specific provisions of the EMIR Framework may be comparable to, and as 
comprehensive as, specific requirements in the CEA and CFTC regulations 
and, therefore, may form the basis for substituted compliance. The 
descriptions provided herein of CEA and CFTC requirements, as well as 
the provisions of the EMIR Framework, are summaries of the actual 
provisions and are qualified by reference to them. Statements of 
regulatory objectives are general in nature and provided only for the 
purpose of this Notice. Likewise, the Commission's summary of what is 
comparable as between specific CEA and CFTC requirements on the one 
hand and corresponding provisions of the EMIR Framework on the other is 
only a summary. In particular, there may be aspects that are not cited, 
including particular features that may not be comparable, but that do 
not affect the overall determination with respect to that provision or 
set of provisions.

A. Financial Resources (Regulation 39.11)

    CEA Section 7a-1(c)(2)(B) (``Core Principle B'') establishes 
general requirements for DCOs to have adequate financial resources. To 
implement Core Principle B the Commission adopted regulation 39.11, 
which requires a DCO to maintain financial resources sufficient to 
cover its exposures with a high degree of confidence and to enable it 
to perform its functions in compliance with the core principles set out 
in Section 5b of the CEA.
    Commission Requirement: Regulation 39.11 sets forth requirements by 
which a DCO must identify and adequately manage its general business 
risks and hold sufficient liquid resources to cover potential losses 
that are not related to clearing members' defaults so that the DCO can 
continue to provide services as a going concern.
    Regulation 39.11 provides that a DCO's financial resources will be 
considered sufficient if their value, at a minimum, exceeds the total 
amount that would enable the DCO to meet its financial obligations to 
its clearing members notwithstanding a default by the clearing member 
creating the largest financial exposure for the DCO in extreme but 
plausible market conditions (``Cover 1'').\22\ A DCO may use the 
following types of financial resources to satisfy this requirement, 
including: the DCO's own capital; guaranty fund deposits; default 
insurance; potential assessments for additional guaranty fund 
contributions, if permitted by the DCO's rules; and any other financial 
resource deemed acceptable.\23\

    \22\ 17 CFR 39.11(a)(1).
    \23\ 17 CFR 39.11(b)(1).

    On a monthly basis, a DCO must perform stress testing that will 
allow it to make a reasonable calculation of the financial resources 
needed to meet its Cover 1 requirement. A DCO has reasonable discretion 
to determine the methodology it uses to compute its Cover 1 
requirement; however, the Commission may review the methodology and 
require changes as appropriate.\24\ A DCO may allocate a financial 
resource to satisfy its Cover 1 credit risk or its operating costs, but 
it may not allocate a financial resource to satisfy both its Cover 1 
credit risk and its operating costs.\25\

    \24\ 17 CFR 39.11(c)(1).
    \25\ 17 CFR 39.11(b)(3).

    If a DCO's rules provide for assessments for additional guaranty 
fund contributions, then the DCO must: Have rules requiring that its 
clearing members have the ability to meet an assessment within the time 
frame of a normal end-of-day variation settlement cycle; monitor the 
financial and operational capacity of its clearing members to meet 
potential assessment(s); apply a 30% haircut to the value of potential 
assessments; and only count the value of assessments after the haircut, 
to meet up to 20% of those obligations.\26\

    \26\ 17 CFR 39.11(d)(2).

    In addition, CFTC regulation 39.11 provides that a DCO must 
effectively measure, monitor, and manage its liquidity risks, 
maintaining sufficient liquid resources such that it can, at a minimum, 
fulfill its cash obligations when due.\27\ A DCO also must hold its 
assets in a manner that minimizes the risk of loss or delay in 
accessing them.\28\ The financial resources the DCO allocates to meet 
this liquidity requirement must be sufficiently liquid to enable the 
DCO to fulfill its obligations as a CCP during a one-day settlement 
cycle.\29\ A DCO must

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maintain cash, U.S. Treasury obligations, or high quality, liquid, 
general obligations of a sovereign nation, in an amount equal or 
greater than an amount calculated as follows:

    \27\ 17 CFR 39.11(e)(1)(i).
    \28\ Id.
    \29\ 17 CFR 39.11(e)(1)(ii).

     Calculate the average daily settlement pay for each 
clearing member over the last fiscal quarter;
     Calculate the sum of those average daily settlement pays; 
     Using that sum, calculate the average of its clearing 
members' average pays.\30\

    \30\ 17 CFR 39.11(e)(1)(ii).

    A DCO may take into account a committed line of credit or similar 
facility for the purposes of meeting the remainder of this liquidity 
    CFTC regulation 39.11 further provides that the assets a DCO holds 
in a guaranty fund must have minimal credit, market, and liquidity 
risks and must be readily accessible on a same-day basis.\31\ 
Additionally, letters of credit are not permissible assets for a 
guaranty fund.\32\

    \31\ 17 CFR 39.11(e)(3)(i).
    \32\ 17 CFR 39.11(e)(3)(iii).

    Finally, CFTC regulation 39.11 provides that a DCO's cash balances 
must be invested or placed in safekeeping in a manner that bears little 
or no principal risk.\33\

    \33\ 17 CFR 39.11(e)(3)(ii).

    Regulatory Objective: Core Principle B and the Commission's 
implementing regulations are designed to establish uniform standards 
that further the goals of avoiding market disruptions and financial 
losses to market participants and the general public, and avoiding 
systemic problems that could arise from a DCO's failure to maintain 
adequate resources. The regulations promote financial strength and 
stability, thereby fostering efficiency and a greater ability to 
compete in the broader financial market.
    As highlighted by the events of 2007-2008 in global financial 
markets, maintaining sufficient financial resources is a critical 
aspect of any financial entity's risk management system, and ultimately 
contributes to the goal of stability in the broader financial markets. 
By setting specific standards with respect to how DCOs must access and 
monitor the adequacy of their financial resources, Core Principle B and 
the Commission's implementing regulations contribute to a DCO's 
maintenance of sound risk management practices and further the goal of 
minimizing systemic risk.
    Comparable EU Law and Regulations: The following provisions of the 
EMIR Framework address financial resources.
    EMIR, Art. 43: At all times, a CCP shall maintain sufficient 
prefunded available financial resources to enable the CCP to withstand 
the default of at least the two clearing members to which it has the 
largest exposure under extreme but plausible market conditions. Such 
prefunded financial resources shall include dedicated resources of the 
CCP, shall be freely available to the CCP, and shall not be used to 
meet the CCP's capital requirements.
    RTS-CCP, Art. 51(2) and 53(1): On a regular basis, a CCP shall 
conduct stress tests designed to ensure that its combination of margin, 
default fund contributions, and other financial resources are 
sufficient to cover the default of at least the two clearing members to 
which the CCP has the largest exposures under extreme but plausible 
market conditions. As part of its stress testing, the CCP also shall 
examine potential losses resulting from the default of entities in the 
same corporate group as the two clearing members to which it has the 
largest exposure under extreme but plausible market conditions.
    RTS-CCP, Art. 30(2) and 59(5): A CCP shall develop a framework for 
defining the types of extreme but plausible market conditions based on 
a range of (1) historical scenarios that could expose it to the 
greatest risk; and (2) potential future scenarios founded on consistent 
assumptions regarding market volatility and price correlation across 
markets and financial instruments, drawing on both quantitative and 
qualitative assessments of potential market conditions. If a CCP 
decides that recurrence of a historical instance of large price 
movements is not plausible, the CCP shall justify to the competent 
authority its omission from the framework. A CCP shall analyze and 
monitor its financial resources coverage in the event of defaults by 
conducting at least daily stress testing using standard and 
predetermined parameters and assumptions.
    EMIR, Art. 44 and 47(3)-(5): At all times, a CCP shall have access 
to adequate liquidity to perform its services and activities and, on a 
daily basis, shall measure its potential liquidity needs. Financial 
instruments posted as margin or as default fund contributions shall be 
deposited in a manner that ensures the full protection of those 
financial instruments. Cash deposits of a CCP, other than with a 
central bank, shall be executed through highly secure arrangements with 
authorized financial institutions. Where a CCP deposits assets with a 
third party, it shall ensure that the assets are identifiable 
separately by means of differently titled accounts.
    RTS-CCP, Chapter VIII (Art. 32-34): A CCP shall establish a robust 
liquidity risk management framework, which shall include, among other 
things, effective operational and analytical tools to identify, 
measure, and monitor its settlement and funding flows on an ongoing and 
timely basis and assess its potential future liquidity needs under a 
wide range of potential stress scenarios. A CCP shall maintain, in each 
relevant currency, liquid resources commensurate with its liquidity 
requirements. These liquid resources shall be limited to the following: 
cash deposited at a central bank of issue; cash deposited at authorized 
credit institutions; committed lines of credit; committed repurchase 
agreements; and/or highly marketable financial instruments that are 
readily available and convertible into cash on a same-day basis using 
prearranged and highly reliable funding arrangements.
    EMIR, Art. 46 and 47: A CCP shall accept highly liquid collateral 
with minimal credit and market risk to cover its initial and ongoing 
exposure to its clearing members and it shall invest its financial 
resources only in cash or highly liquid financial instruments with 
minimal market and credit risk.
    EMIR, Art. 16 and 47(2): A CCP's capital, including retained 
earnings and reserves, shall be proportionate to the risk stemming from 
the activities of the CCP. Capital not invested in cash or highly 
liquid financial instruments with minimal credit risk, however, shall 
not count for purposes of calculating a CCP's regulatory capital.
    RTS-CR, Art. 2(2): A CCP shall calculate and retain the amount of 
capital it requires to wind down or restructure. This estimated time 
span shall be sufficient to ensure an orderly winding down or 
restructuring of its activities, reorganizing its operations, 
liquidating its clearing portfolio, or transferring its clearing 
activities to another CCP, including in stressed market conditions. For 
the purposes of this RTS, the prescribed time span for purposes of 
determining sufficient capital to wind down or restructure a CCP's 
activities is subject to a minimum of six months.
    RTS-CCP, Art. 43-46 and Annex II: A debt instrument can be 
considered highly liquid, bearing minimal credit and market risk if it 
is issued by or explicitly guaranteed by a government, central bank, 
multilateral development bank, or the European Financial Stability 
Facility or the European Stability Mechanism; the CCP can demonstrate 
that the debt instrument has low credit and market risk based upon an 
internal assessment; the

[[Page 15265]]

average time-to-maturity of the CCP's portfolio does not exceed two 
years; the debt instrument is denominated in a currency the risks of 
which the CCP can demonstrate it is able to manage or in a currency in 
which the CCP clears transactions; the debt instrument is freely 
transferrable and without any regulatory constraint or third party 
claims that impair liquidation; the debt instrument has an active 
outright sale or repurchase market with a diverse group of buyers and 
sellers, including during stress conditions; and reliable price data on 
the debt instrument is published on a regular basis.
    Commission Determination: The Commission finds that the provisions 
of the EMIR Framework with respect to financial resources are generally 
similar to the applicable provisions of CFTC Regulation 39.11, and set 
specific and uniform standards with respect to how CCPs should access 
and monitor the adequacy of their financial resources. These standards 
seek to ensure that CCPs can meet their financial obligations to market 
participants, thus contributing to the financial integrity of the 
derivatives market as a whole. Both regimes require prefunding of 
financial resources sufficient to at least cover a default caused by a 
clearing member creating the largest financial exposure for the EU-
based CCP that is dually registered with the CFTC as a DCO (``DCO/
CCP'') in extreme but plausible market conditions. Both regimes also 
require that a DCO/CCP's financial resources include dedicated 
resources (e.g., prefunded mutualized resources) and require frequent 
and regular stress testing of financial resources. Likewise, both 
regimes require that assets in the default fund have minimal credit, 
market, and liquidity risks, and be readily accessible on a same-day 
basis. Additionally, both regimes prohibit a DCO/CCP from allocating 
the same financial resources to different categories of financial 
exposure and both regimes require that cash balances must be either 
invested or appropriately safeguarded in a manner which bears little to 
no principal risk.
    Accordingly, the Commission finds that the provisions of the EMIR 
Framework with respect to financial resources discussed above and 
identified below in Table 1(a) are comparable to and as comprehensive 
as the financial resource requirements of CFTC regulation 39.11, with 
the exception of 39.11(f), which requires DCOs to submit to the 
Commission quarterly financial resource reports that include a 
quarterly financial statement. The Commission recognizes that European 
CCPs would not have financial statements prepared in accordance with 
U.S. Generally Accepted Accounting Principles (``GAAP'') absent 
Commission registration. Thus, the Commission will permit CCPs to 
submit financial statements prepared in accordance with International 
Financial Reporting Standards (``IFRS''), with periodic reconciliation 
to assist staff in reviewing the financial statements.

                     Table 1(a)--Financial Resources
        Subject area            CFTC regulations       EMIR framework
Default financial resources   17 CFR 39.11(a)(1),   EMIR, Art 43; RTS-
 (Credit risk: Cover 1).       17 CFR 39.11(b)(1),   CCP, Art 53(1)
                               17 CFR 39.11(d)(2).
Monthly stress-testing of     17 CFR 39.11(c)(1)..  RTS-CCP, Art. 51(2)
 default financial resources.                        and 53(1); RTS-CCP,
                                                     Art 30(2) and 59(5)
Liquidity of default          17 CFR 39.11(e)(1)..  EMIR, Art 44 and
 financial resources.                                47(3)-(5); RTS-CCP,
                                                     Chapter VIII (Art
Default fund collateral.....  17 CFR                EMIR, Art 46 and 47
                               39.11(e)(3)(i), 17
General business risks,       17 CFR 39.11(b)(3)..  EMIR Art 16 and
 (Allocation of financial                            47(2); RTS-Capital
 resources).                                         Requirements for
                                                     CCP, Art 2(2)
Cash management.............  17 CFR                EMIR, Art 47; RTS-
                               39.11(e)(3)(ii).      CCP, Art 43-46 and
                                                     Annex II

B. Risk Management (Regulation 39.13)

    CEA Section 7a-1(c)(2)(D) (``Core Principle D'') establishes 
general requirements for DCOs to have the ability to manage the risks 
associated with discharging the responsibilities of the DCO through the 
appropriate tools and procedures. To implement Core Principle D, the 
Commission adopted regulation 39.13, which requires a DCO to maintain 
appropriate tools and procedures to manage the risks associated with 
discharging the responsibilities of a DCO in compliance with the core 
principles set out in Section 5b of the CEA.
    Commission Requirement: CFTC regulation 39.13 generally requires a 
DCO to measure its credit exposure to each clearing member not less 
than once during each business day and to monitor such exposure 
periodically during the business day. CFTC regulation 39.13 also 
requires a DCO to limit its exposure to potential losses from defaults 
by clearing members, through margin requirements and other risk control 
mechanisms, to ensure that its operations would not be disrupted and 
that non-defaulting clearing members would not be exposed to losses 
that non-defaulting clearing members cannot anticipate or control. 
Finally, CFTC regulation 39.13 also requires that a DCO collect margin 
from each clearing member sufficient to cover potential exposures in 
normal market conditions and that each model and parameter used in 
setting such margin requirements be risk-based and reviewed on a 
regular basis.
    CFTC regulation 39.13 requires a DCO to establish, maintain, and 
regularly update a written risk management framework (approved by its 
board of directors) that, at a minimum, clearly identifies and 
documents the range of risks to which the DCO is exposed, addresses 
monitoring and managing those risks, and provides a mechanism for 
internal audit.\34\

    \34\ 17 CFR 39.13(b).

    CFTC regulation 39.13 also requires a DCO to appoint a chief risk 
officer (``CRO''), who must be responsible for implementing the DCO's 
written risk management framework and for making appropriate 
recommendations to the DCO's risk management committee or board of 
directors.\35\ Given the importance of the risk management function and 
the comprehensive nature of the responsibilities of a DCO's chief 
compliance officer (``CCO''), the Commission previously has stated that 
it expects that a DCO's CRO and CCO would be two different 

    \35\ 17 CFR 39.13(c).
    \36\ 76 FR 69363.

    Pursuant to CFTC regulation 39.13, through margin requirements and 
other risk control mechanisms, a DCO must

[[Page 15266]]

limit its exposure to potential losses from defaults by its clearing 
members to ensure that its operations would not be disrupted and non-
defaulting clearing members would not be exposed to losses that they 
cannot anticipate or control.\37\

    \37\ 17 CFR 39.13(f).

    CFTC regulation 39.13 also provides that a DCO must establish 
initial margin requirements that are commensurate with the risk of each 
product and portfolio, including any unusual characteristics of, or 
risks associated with, particular products or portfolios, including but 
not limited to jump-to-default risk or other similar risk.\38\ Each 
model and parameter used in setting initial margin requirements must be 
risk-based and reviewed on a regular basis.\39\ On a daily basis, a DCO 
must determine the adequacy of its initial margin requirements.\40\

    \38\ 17 CFR 39.13(g)(2)(i).
    \39\ 17 CFR 39.13(g)(1).
    \40\ 17 CFR 39.13(g)(6).

    The actual coverage of a DCO's initial margin requirements must 
meet an established confidence level of at least 99%, based on data 
from an appropriate historical time period, for each product for which 
the DCO uses a product-based margin methodology; for each spread within 
or between products for which there is a defined spread margin rate; 
for each account held by a clearing member at the DCO, by house origin 
and by each customer origin; and for each swap portfolio, including any 
portfolio containing futures and/or options and held in a commingled 
account pursuant to CFTC regulation 39.15(b)(2), by beneficial 
owner.\41\ A DCO must determine the appropriate historic time period 
based on the characteristics, including volatility patterns, of each 
product, spread, account, or portfolio.\42\

    \41\ 17 CFR 39.13(g)(2)(iii).
    \42\ 17 CFR 39.13(g)(2)(iv).

    In addition, CFTC regulation 39.13 provides that on a regular 
basis, a qualified and independent party must review and validate a 
DCO's systems for generating initial margin requirements, including its 
theoretical models, and that this party must not be the person 
responsible for development or operation of the systems and models 
being tested.\43\

    \43\ 17 CFR 39.13(g)(3).

    A DCO may reduce initial margin requirements for related positions 
if the price risks with respect to such positions are significantly and 
reliably correlated--i.e., there is a theoretical basis for the 
correlation in addition to an exhibited statistical correlation.\44\

    \44\ 17 CFR 39.13(g)(4).

    Additionally, CFTC regulation 39.13 provides that a DCO must back 
test its initial margin requirements by comparing its initial margin 
requirements with historical price changes to determine the extent of 
actual margin coverage using an appropriate time period but not less 
than the previous 30 days, as follows: On a daily basis, the DCO must 
back test products or swaps portfolios that are experiencing 
significant market volatility; and on at least a monthly basis, the DCO 
must back test the adequacy of all of its initial margin 

    \45\ 17 CFR 39.13(g)(7).

    On a daily basis, a DCO must use prudent valuation practices to 
value assets posted as initial margin.\46\ In particular, a DCO must 
appropriately reduce its valuation of the assets that it accepts in 
satisfaction of its initial margin requirements, to reflect credit, 
market, and liquidity risks, taking into account stressed market 
conditions, and must evaluate the appropriateness of such haircuts on 
at least a quarterly basis.\47\

    \46\ 17 CFR 39.13(g)(11).
    \47\ 17 CFR 39.13(g)(12).

    Regulatory Objective: Core Principle D and the Commission's 
implementing regulations are designed to ensure that each DCO possesses 
the ability and necessary tools to manage the risks associated with 
discharging the responsibilities of being a DCO. The Commission's 
regulation requiring a DCO to maintain and update a written risk 
management framework seeks to ensure that a DCO carefully has 
considered its risk management framework, and it will provide guidance 
to DCO management, staff, and market participants. By requiring a 99% 
confidence level for initial margin, the Commission's regulations seek 
to prevent DCOs from competing with respect to how much risk they are 
willing to take on or from misjudging the amount of risk they would 
take on if they operated under lower standards. Through requiring 
independent validation of the DCO's margin models, the Commission's 
regulations seek to prevent bias in validating the DCO's models. By 
requiring daily review and back testing, the regulations seek to ensure 
that DCOs monitor the adequacy of their initial margin requirements.
    Comparable EU Law and Regulations: The following provisions of the 
EMIR Framework address risk management.
    RTS-CCP Art. 4: A CCP shall have a sound, written framework for the 
comprehensive management of all material risks to which it is or may be 
exposed. In developing its risk management framework, a CCP shall take 
an integrated and comprehensive view of all relevant risks.
    RTS-CCP, Art. 3(3) and 4(6): A CCP shall have a CRO, who shall 
implement the risk management framework. The CCP shall ensure that the 
functions of the CRO, CCO, and chief technology officer are carried out 
by different individuals, who shall be employees of the CCP entrusted 
with the exclusive responsibility of performing these functions.
    EMIR, Art. 48(2): A CCP shall take prompt action to contain losses 
and liquidity pressures resulting from defaults and shall ensure that 
the closing out of any clearing member's positions does not disrupt its 
operations or expose non-defaulting clearing members to losses that 
they cannot anticipate or control.
    EMIR, Art. 41(2), 49(1): A CCP shall adopt models and parameters 
for setting margin requirements that capture the risk characteristics 
of the products and swaps cleared and take into account the interval 
between margin collections, market liquidity, and the possibility of 
changes over the duration of the transaction. The models shall be 
validated by the competent authority. A CCP regularly shall review its 
models and parameters for setting margin requirements and shall subject 
the models to rigorous and frequent stress tests. A CCP also shall 
obtain independent validations of its models and parameters.
    RTS-CCP, Art. 24(2)(b): In determining the adequate confidence 
interval for each class of product that it clears, a CCP shall 
consider, among other factors, the risk characteristics of the class of 
product, which can include, but are not limited to, volatility, 
duration, liquidity, non-linear price characteristics, jump-to-default 
risk and wrong-way risk.
    RTS-CCP, Art. 24(1): A CCP shall calculate the initial margins to 
cover the exposures arising from market movements for each financial 
instrument that is collateralized on a product basis, over an 
appropriate time horizon for the liquidation of the position, with a 
confidence level of 99.5% for over-the-counter derivatives and 99% for 
all other products.
    RTS-CCP, Art. CCP 25: A CCP shall ensure that its model methodology 
and its validation process for determining initial margin covers at 
least the latest 12 months and captures a full range of market 
conditions, including periods of stress.
    RTS-CCP, Art 47 and 59(1): At least annually, a CCP shall conduct a

[[Page 15267]]

comprehensive and well-documented validation of its models, their 
methodologies, and the liquidity risk management framework used to 
quantify, aggregate, and manage the CCP's risks.
    RTS-CCP, Art. 27 and 59(9): A CCP may allow offsets or reductions 
in the required margin across the products and swaps that it clears if 
the price risk of one financial instrument or a set of products or 
swaps is significantly and reliably correlated, or based on an 
equivalent statistical parameter of dependence, with the price risk of 
other products or swaps. The CCP shall demonstrate the existence of an 
economic rationale for the price correlation. At least annually, a CCP 
shall test offsets among products and swaps and how correlations 
perform during periods of actual and hypothetical severe market 
    RTS-CCP, Art. 49 and 60(2): On a daily basis, a CCP shall assess 
its margin coverage by back testing its margin coverage against 
expected outcomes derived from the use of margin models to evaluate 
whether there are any testing exceptions to margin coverage. In 
conducting such back testing, the CCP shall evaluate its current 
positions and clearing members, and take into account possible effects 
from portfolio margining and, where appropriate, interoperable CCPs. 
The historical time horizons used for back tests shall include data 
from at minimum the most recent year or as long as a CCP has been 
clearing the relevant product or swap if that is less than a year.
    RTS-CCP, Art. 40(2): A CCP shall mark-to-market its collateral on a 
near to real-time basis, and where not possible, a CCP shall be able to 
demonstrate to the competent authorities that it is able to manage the 
    EMIR, Art. 46(1); RTS-CCP, Art. 41(2) and 59(10): A CCP shall 
accept highly liquid collateral with minimal credit and market risk to 
cover its initial and ongoing exposure to its clearing members. It 
shall apply adequate haircuts to collateral asset values that take into 
account the liquidity risk following the default of a market 
participant and concentration risk, and that reflect the potential for 
the value of such assets to decline over the interval between their 
last reevaluation and the time by which they reasonably can be assumed 
to be liquidated. Such haircuts shall consider, for each among other 
factors, the type of asset and the credit risk associated with the 
financial instrument, the maturity of the asset; the historical and 
hypothetical future price volatility of the asset in stressed market 
conditions; the liquidity of the underlying market, including bid/ask 
spread; the foreign exchange risks; and any wrong-way risk. The CCP 
shall test its haircuts at least monthly.
    Commission Determination: The Commission finds that the provisions 
of the EMIR Framework with respect to risk management are generally 
similar to Core Principle D and CFTC regulation 39.13, and prescribe 
how CCPs should monitor, evaluate, and manage the risks to which they 
are exposed. These standards seek to ensure that CCPs can meet their 
financial obligations to market participants, thus contributing to the 
financial integrity of the derivatives market as a whole.
    Both regimes include a broad, general requirement for a DCO/CCP to 
manage the risk to which it is exposed and both regimes require the 
appointment of a CRO to perform similar functions. Both regimes require 
a DCO/CCP to use risk control mechanisms, such as margin requirements, 
to limit exposure to potential clearing member defaults. Similarly, 
both regimes require that margin models and parameters be risk-based 
and regularly reviewed and both regimes require that the calculation of 
initial margin include factoring the risk characteristics of each 
cleared product. Both regimes require at least a 99% confidence level 
in determining the adequacy of initial margin and both regimes have 
similar proscriptions for back testing initial margin models. Finally, 
both regimes require that cash balances must be either invested or 
appropriately safeguarded in a manner that bears little or no principal 
    Accordingly, the Commission finds that the provisions of the EMIR 
Framework with respect to risk management standards discussed above and 
identified below in Table 1(b) are comparable to and as comprehensive 
as the risk management requirements of CFTC regulation 39.13, with the 
exception of 39.13(g)(8)(i) and (ii), which respectively require FCMs 
to calculate initial margin for cleared customer accounts on a gross 
(as opposed to net) basis and require DCOs to collect additional 
initial margin for non-hedge positions of FCM customers. Despite the 
importance of gross margining of customer accounts and the collection 
of this additional initial margin, in an effort to promote comity, the 
Commission would not require DCO/CCPs to apply either of these 
regulations to non-FCM clearing member intermediaries or to the 
customers of non-FCM clearing member intermediaries. Additionally, the 
Commission makes this finding notwithstanding that the EMIR Framework's 
treatment of affiliates does not shield customers from potential losses 
by affiliates of the clearing member in the same manner as the CFTC's 
approach and in fact potentially exposes customers to proprietary 
trading losses.

                       Table 1(b)--Risk Management
        Subject area            CFTC regulations       EMIR framework
General/documentation         17 CFR 39.13(a)-(b).  RTS-CCP, Art 4
Chief risk officer..........  17 CFR 39.13(c).....  RTS-CCP, Art 3(3)
                                                     and 4(6)
Limitation of exposure to     17 CFR 39.13(f).....  EMIR, Art 48(2)
 potential losses from
Margin models/parameters....  17 CFR 39.13(g)(1)..  EMIR, Art 41(2),
Risk factors for margin.....  17 CFR                RTS-CCP, Art
                               39.13(g)(2)(i).       24(2)(b)
Minimum confidence level....  17 CFR                RTS-CCP, Art 24(1)
Lookback period.............  17 CFR                RTS-CCP, Art 25
Regular independent           17 CFR 39.13(g)(3)..  RTS-CCP, Art 47 and
 validation.                                         59(1)
Portfolio margining.........  17 CFR 39.13(g)(4)..  RTS-CCP, Art 27; RTS-
                                                     CCP, Art 59(9)
Margin Back tests...........  17 CFR 39.13(g)(7)..  RTS-CCP, Art 49 and
Daily valuation of            17 CFR 39.13(g)(11).  RTS-CCP, Art 40(2)
 collateral posted as
 initial margin.
Haircuts....................  17 CFR 39.13(g)(12).  EMIR, Art 46(1); RTS-
                                                     CCP, Art 41(2) and
Daily determination of        17 CFR 39.13(g)(6)..  EMIR, Art 49(1)
 initial margin adequacy.

[[Page 15268]]

C. Settlement Procedures (Regulation 39.14)

    CEA Section 7a-1(c)(2)(E) (``Core Principle E'') establishes 
general requirements for DCOs to have sufficient settlement procedures. 
To implement Core Principle E the Commission adopted regulation 39.14, 
which requires a DCO to complete money settlements on a timely basis, 
but not less frequently than once each business day; employ money 
settlement arrangements to eliminate or strictly limit exposure to 
settlement bank risks; maintain an accurate record of the flow of funds 
associated with money settlements; possess the ability to comply with 
the terms and conditions of any permitted netting or offset arrangement 
with another DCO; establish rules that clearly state the obligation of 
a DCO with respect to physical deliveries; and ensure that a DCO 
identifies and manages each risk arising from any of its obligation 
with respect to physical deliveries.
    Commission Requirement: Regulation 39.14 requires that a DCO 
collect margin from its clearing members on a daily basis. 
Specifically, a DCO must effect settlement with each clearing member at 
least once each business day, and must have the authority and 
operational capacity to effect a settlement with each clearing member 
on an intraday basis, either routinely, when thresholds specified by 
the DCO are breached, or in times of extreme market volatility.\48\

    \48\ 17 CFR 39.14(b).

    CFTC regulation 39.14 provides that a DCO must employ settlement 
arrangements that eliminate or strictly limit its exposure to 
settlement bank risk, by among other things, having documented criteria 
with respect to those banks that are acceptable settlement banks for 
the DCO and its clearing members, including criteria addressing the 
capitalization, creditworthiness, access to liquidity, operational 
reliability, and regulation or supervision of such banks.\49\ A DCO 
further must monitor each approved settlement bank on an ongoing basis 
to ensure that such bank continues to meet the DCO's established 

    \49\ 17 CFR 39.14(c)(1).
    \50\ 17 CFR 39.14(c)(2).

    A DCO must monitor the full range of and concentration of its 
exposure to its own and its clearing members' settlement bank(s) and 
assess its own and its clearing members' potential losses and liquidity 
in the event that the settlement bank with the largest share of 
settlement activity were to fail. A DCO must take any one or more of 
the following actions, as needed, to eliminate or strictly limit such 
exposures: maintain accounts at one or more additional settlement 
banks; approve one or more additional settlement banks that its 
clearing members could choose to use; impose concentration limits with 
respect to one or more of its own or its clearing members' settlement 
banks; and/or take any other appropriate actions.\51\

    \51\ 17 CFR 39.14(c)(3).

    A DCO must maintain an accurate record of the flow of funds 
associated with each settlement.\52\

    \52\ 17 CFR 39.14(e).

    A DCO must possess the ability to comply with each term and 
condition of any permitted netting or offset arrangement with any other 
clearing organization.\53\

    \53\ 17 CFR 39.14(f).

    For products that are settled by physical transfer of the 
underlying instruments or commodities, a DCO must establish rules that 
clearly state each obligation that the DCO has assumed with respect to 
such physical deliveries, including whether it has an obligation to 
make or receive delivery of a physical instrument or commodity, or 
whether it indemnifies clearing members for losses incurred in the 
delivery process, and ensure that the risks of each such obligation are 
identified and properly managed.\54\

    \54\ 17 CFR 39.14(g).

    Regulatory Objective: On a daily basis, DCOs are exposed to 
significant inflows and outflows of cash and other liquid financial 
instruments. Core Principle E and the Commission's implementing 
regulations are designed to ensure that a DCO has the authority and 
operational capacity to effect settlement with each clearing member, on 
an intraday basis and to also monitor, eliminate, or strictly limit the 
settlement risks to which a DCO is exposed.
    Comparable EU Law and Regulations: The following provisions of the 
EMIR Framework address settlement procedures.
    EMIR, Art. 41(1) and (3): A CCP shall impose, call, and collect 
margins to limit its exposures from its clearing members, and where 
relevant, from CCPs with which it has interoperability arrangements. 
Such margins shall be sufficient to cover potential exposures that the 
CCP estimates will occur until the liquidation of the relevant 
positions. Such margins also shall be sufficient to cover losses that 
result from at least 99% of the exposures' movements over an 
appropriate time horizon and they shall ensure that a CCP fully 
collateralizes its exposures with all its clearing members, and, where 
relevant, with CCPs with which it has interoperability arrangements, at 
least on a daily basis. A CCP shall regularly monitor and, if 
necessary, revise its margins to reflect current market conditions, 
taking into account any potential procyclical effects of such 
revisions. A CCP shall call and collect margins on an intraday basis, 
at a minimum when predefined thresholds are exceeded.
    EMIR, Art. 50(1): Where practical and available, a CCP shall use 
central bank money to settle its transactions. Where a CCP cannot use 
central bank money, it shall take steps to strictly limit cash 
settlement risk.
    RTS-CCP, Art. 4(2), 32(4)(a), and 51(3): A CCP shall take an 
integrated and comprehensive view of all relevant risk, including the 
risks it bears from and poses to, among other things, settlement banks. 
A CCP also shall assess the liquidity risk it faces, including 
situations in which the CCP or its clearing members cannot settle their 
payment obligations when due as part of the clearing or settlement 
process. Such assessment shall address the liquidity needs arising from 
the CCP's relationship with, among others, settlement banks. As part of 
its stress testing procedures, a CCP should consider stress testing 
scenarios involving the technical or financial failure of, among 
others, its settlement banks.
    RTS-CCP, Art. 13 and Art. 14(3): A CCP shall maintain records of 
all transactions in all contracts it clears and shall ensure that its 
records include all information necessary to conduct a comprehensive 
and accurate reconstruction of the clearing process. A CCP shall make, 
and keep updated, a record of the amounts of margin, default fund 
contributions, and other financial resources, with respect to each 
single clearing member and client account, if known to the CCP.
    EMIR, Art. 50(2)-(3): A CCP shall clearly state its obligations 
with respect to deliveries of financial instruments, including whether 
it has any obligation to make or receive delivery of a financial 
instrument or whether it indemnifies participants for losses incurred 
in the delivery process. Where a CCP has an obligation to make or 
receive deliveries of financial instruments, it shall eliminate 
principal risk by using delivery-versus-payment mechanisms, to the 
extent possible.
    Commission Determination: The Commission finds that the provisions 
of the EMIR Framework with respect to settlement procedures are 
generally similar to Core Principle E and CFTC regulation 39.14, and 
eliminate or

[[Page 15269]]

strictly limit a CCP's exposure to settlement risk. Both regimes 
require the daily collection of margin and both require a DCO/CCP to 
employ settlement arrangements that limit exposure to various risks, 
including exposure to settlement banks, concentration risk, and 
physical delivery of instruments. Both regimes have similar 
recordkeeping requirements. Finally, both regimes require a DCO/CCP to 
have rules with respect to the physical delivery of an instrument or 
commodity, and to identify and manage the risks associated with the 
physical delivery of such instruments.
    Accordingly, the Commission finds that the provisions of the EMIR 
Framework with respect to settlement procedures discussed above and 
identified below in Table 1(c) are comparable to and as comprehensive 
as the default rules and procedures of CFTC regulation 39.14.
    For the avoidance of doubt, the Commission notes that the foregoing 
comparability determination only applies with regard to certain 
provisions of regulation 39.14 (i.e., Sec.  39.14(b), Sec.  39.14(c), 
Sec.  39.14(e), Sec.  39.14(f), and Sec.  39.14(g)). No comparability 
finding is made regarding Sec.  39.14(d), which requires a DCO to 
ensure that settlements are final when effected by ensuring that it has 
entered into legal agreements that state that settlement fund transfers 
are irrevocable and unconditional no later than when the DCO's accounts 
are debited or credited.

                    Table 1(c)--Settlement Procedures
        Subject area            CFTC regulations       EMIR framework
Settlement procedures.......  17 CFR 39.14(b),      EMIR, Art. 41(1) and
                               (c), (e)-(g).         (3); EMIR, Art
                                                     50(1); RTS-CCP, Art
                                                     4(2), 32(4)(a) and
                                                     51(3); RTS-CCP, Art
                                                     13 and 14(3); EMIR,
                                                     Art 50(2)-(3).

D. Default Rules and Procedures (Regulation 39.16)

    CEA Section 7a-1(c)(2)(G) (``Core Principle G'') establishes 
general requirements for DCOs to have adequate default rules and 
procedures. To implement Core Principle G the Commission adopted 
regulation 39.16, which requires a DCO to have rules and procedures 
designed to allow for the efficient, fair, and safe management of 
events during which members or participants become insolvent or 
otherwise default on the obligations of the members or participants to 
the DCO.
    Commission Requirement: CFTC regulation 39.16 provides requirements 
by which a DCO must adopt rules and procedures designed to allow DCOs 
to effectively manage events during which clearing members become 
insolvent or default on the obligations of such clearing members to the 

    \55\ 17 CFR 39.16(a).

    Pursuant to CFTC regulation 39.16, a DCO must adopt procedures that 
would permit the DCO to timely take action to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of a default on the obligations of a clearing member to the 
DCO.\56\ Further, a DCO must adopt rules setting forth its default 
procedures; including the DCO's definition of default, the actions that 
the DCO may take upon default, which must include the prompt transfer, 
liquidation, or hedging of the customer or house positions of the 
defaulting clearing member, as applicable, and which may include, in 
the DCO's discretion, the auctioning or allocation of positions to 
other clearing members; any obligations that the DCO imposes on its 
clearing members to participate in auctions or to accept allocations, 
of the customer or house positions of a defaulting clearing member, 
subject to certain limitations; the default waterfall--i.e., the 
sequence in which the funds and assets of the defaulting clearing 
member and its customers and the financial resources maintained by the 
DCO would be applied in the event of a default; and a provision that 
the funds and assets of a defaulting clearing member must be applied to 
cover losses with respect to a customer default, if the relevant 
customer funds and assets are insufficient to cover the shortfall.\57\ 
The DCO must make its default rules publicly available.\58\

    \56\ 17 CFR 39.16(c)(1).
    \57\ 17 CFR 39.16(c)(2)(i)-(v).
    \58\ 17 CFR 39.16(c)(3).

    Regulatory Objective: Core Principle G and the Commission's 
implementing regulations are designed to ensure that each DCO clearly 
states its default procedures, makes its default rules publicly 
available, and has rules and procedures that allow it to take timely 
action to contain losses and liquidity pressures and to continue 
meeting its obligations.
    Comparable EU Law and Regulations: The following provisions of the 
EMIR Framework address default rules and procedures.
    EMIR, Art. 48: A CCP shall have written procedures to be followed 
in the event of the default of a clearing member. The CCP shall take 
prompt action to contain losses and liquidity pressures resulting from 
defaults and shall ensure that the closing out of any clearing member's 
positions does not disrupt its operations or expose the non-defaulting 
clearing members to losses that they cannot anticipate or control.
    EMIR, Art. 37(6): A CCP may impose specific additional obligations 
on clearing members, including the participation in auctions of a 
defaulting member's positions. Such obligations shall be proportional 
to the risk brought by the clearing member and shall not restrict 
participation to certain categories of clearing members.
    EMIR, Art. 45: A CCP shall use a defaulting clearing member's 
margins before using other financial resources to cover losses. Where 
the margins posted by the defaulting clearing member are insufficient 
to cover the losses covered by the CCP, the CCP shall use the default 
fund contribution of the defaulting member to cover the loss. A CCP 
shall use contributions to the default fund of the non-defaulting 
clearing members and any other financial resources only after having 
exhausted the defaulting clearing member's contributions. A CCP further 
shall use its own dedicated financial resources before using the 
default fund contributions of non-defaulting clearing members. A CCP 
shall not use the margins posted by non-defaulting clearing members to 
cover losses resulting from the default of another clearing member.
    RTS-CCP, Art. 58 and 59(12): At least on a quarterly basis, a CCP 
shall test and review its default procedures to ensure they are both 
practical and effective. At least annually, a CCP shall perform 
simulation exercises as part of the testing of its default procedures. 
It also shall perform simulation exercises

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following any material change to its default procedures.
    ESMA Q&A CCP Question 8(f)(1): A CCP shall use the margins posted 
by a defaulting clearing member prior to other financial resources when 
covering losses and may have rules which allow it to use surplus margin 
on a defaulted clearing member's house account to meet any obligation 
of the clearing member with respect to losses on a client account of 
that clearing member. For the avoidance of doubt, surplus margin on a 
client account of a default clearing member cannot be used to meet any 
losses on the defaulted clearing member's house account(s).\59\

    \59\ Questions and Answers: Implementation of the Regulation 
(EU) No 648/2012 on OTC derivatives, central counterparties and 
trade repositories (EMIR) https://www.esma.europa.eu/system/files_force/library/2016-293_qa_xvi_on_emir_implementation.pdf?download=1.

    RTS-CCP, Art. 61(2): A CCP shall make publicly available key 
aspects of its default procedures, including the circumstances in which 
action may be taken, who may take action, the scope of the actions that 
may be taken (including the treatment of both proprietary and client 
positions, funds and assets), and the mechanisms for addressing a CCP's 
obligations to non-defaulting clearing members.
    Commission Determination: The Commission finds that the provisions 
of the EMIR Framework with respect to default rules and procedures are 
generally similar to CFTC regulation 39.16, and prescribe how CCPs 
should clearly state their default procedures. Both regimes require a 
DCO/CCP to have detailed procedures to follow in the event of a 
default, including requirements for the orderly transfer and/or 
liquidation of customer or proprietary positions, participation in 
auctions, the sequence of the default waterfall, and public disclosure 
of the default procedures. These standards seek to ensure that CCPs may 
take timely action to contain losses and liquidity pressures and to 
continue meeting their obligations.
    Accordingly, the Commission finds that the EMIR Framework with 
respect to default rules and procedures discussed above and identified 
below in Table 1(d) are comparable to and as comprehensive as the 
default rules and procedures of CFTC regulation 39.16.
    For the avoidance of doubt, the Commission notes that the foregoing 
comparability determination only applies with regard to the above 
mentioned provisions of CFTC regulation 39.16 (i.e., Sec.  39.16(a), 
Sec.  39.16(c)(1), Sec.  39.16(c)(2)(i)-(v), and Sec.  39.16(c)(3)). No 
comparability finding is made regarding the other provisions of Sec.  
39.16, namely Sec.  39.16(b), which requires a DCO to maintain a 
written default management plan, and Sec.  39.16(d), which requires a 
DCO to have certain rules in place regarding the insolvency of clearing 

                Table 1(d)--Default Rules and Procedures
        Subject area            CFTC regulations       EMIR framework
Default rules & procedures..  17 CFR 39.16(a),....  EMIR, Art 48, 37(6)
                              17 CFR 39.16(c)(1),    and 45; RTS-CCP,
                               17 CFR                Art 58, 59(12) and
                               39.16(c)(2)(i)-(v),   61(2); ESMA Q&A CCP
                               17 CFR 39.16(c)(3).   Question 8(f)1.

VI. DCO/CCP Registration

    Section 5b(a) of the CEA and Commission Regulations 39.1 and 39.3 
require a DCO to register with the Commission in the format and manner 
specified by the Commission. In particular, Regulation 39.3 specifies 
that a DCO seeking registration from the Commission must file a Form 
DCO and various supporting exhibits.
    In the interest of comity, the Commission generally will tailor its 
registration process both in terms of administration and substantive 
review to reflect the availability of substituted compliance for EU 
CCPs. Accordingly, consistent with Regulation 39.3, EU CCPs seeking 
registration must complete Form DCO. However, with respect to questions 
and information requirements in areas where compliance with the EMIR 
Framework is substituted for compliance with part 39, the EU CCP may 
evidence its compliance with the EMIR Framework in lieu of its 
compliance with part 39. DCO/CCPs that are already dually registered 
need not take any further action to take advantage of the substituted 
compliance determinations made under this Notice. These determinations 
will be applied automatically to all current DCO/CCPs registrants.
    Moreover, to streamline the registration process, an EU CCP 
applicant may, instead of submitting the exhibits required under the 
CFTC Form DCO regulation, use existing materials that it has submitted 
to its NCA for its EMIR authorization or other relevant documents 
produced by its NCA that demonstrate compliance with EMIR provisions 
for which substituted compliance is available (e.g., supervisory 
examination reports or reports from its NCA). The positive opinion of 
the CCP supervisory college should also be submitted to the Commission 
by way of supporting evidence. The Commission will not require an EU 
CCP to obtain certification from its NCA, certifying that it has 
complied with the EMIR Framework.
    In addition, for the Form DCO documents listed below, the 
Commission will accept a copy of the original document filed by the EU 
CCP with its NCA with an attestation by that authority that they are 
acceptable to that authority:
     Exhibit A-8: articles of incorporation or similar 
corporate documents;
     Exhibit A-10: outside service provider agreements;
     Exhibit E-1(4): settlement bank agreements;
     Exhibit F(a)(2): depository agreements; and
     Exhibit M(a): information-sharing agreements.
    If these documents are not in English, and an English translation 
is available, the EU CCP applying for registration should provide the 
English translation. If an English translation is not available, the EU 
CCP applying for registration should inform the Commission in writing 
but need not provide a translated version unless requested by the CFTC.
    The Commission will review the documentation received to determine 
if it is complete and comprehensive. In the case that information 
evidencing compliance with the EMIR Framework is incomplete, the 
Commission will seek to obtain further evidence from the relevant NCA 
evidencing its assessment of compliance. If the documentation is still 
not sufficient for the Commission to review compliance with the terms 
of the

[[Page 15271]]

EMIR Framework, the Commission will request additional evidence from 
the CCP and notify the NCA of the request made.
    The Commission will seek to obtain any other missing information 
from the relevant EU CCP. The Commission also will provide the relevant 
NCA with the opportunity to be consulted with respect to any questions 
if so requested at the outset by that authority.

VII. Limited Application of Certain CFTC Regulations

    As a general matter, the Commission acknowledges that CCPs 
registered in foreign jurisdictions operate under different regulatory 
regimes, and that the differences between these various regimes may 
lead to regulatory arbitrage. The Commission also understands that the 
CFTC staff intends to provide limited no-action relief for DCO/CCPs 
from the application of Commission regulations to discrete aspects of a 
DCO/CCP's non-U.S. clearing activities as set forth below when this 
Notice becomes effective.
    (1) CFTC Regulation 39.12(b)(6)'s requirement that, upon a DCO's 
acceptance of a swap for clearing, the original swap is extinguished 
and it is replaced by an equal and opposite swap between the DCO and 
each clearing member acting as a principal for a house trade or an 
agent for a customer trade will not apply where neither party is a U.S. 
clearing member or an FCM clearing member;
    (2) Part 22 of CFTC Regulations and its ``legally segregated but 
operationally commingled'' (``LSOC'') account model for cleared swaps 
customer accounts will not apply to clearing members that are not FCMs;
    (3) CFTC Regulation 39.13(g)(8)(i)'s requirement that initial 
margin for customer accounts cleared by an FCM be calculated and 
collected on a gross basis would not apply to non-FCM clearing member 
    (4) CFTC Regulation 39.13(g)(8)(ii)'s requirement that a DCO 
collect initial margin at a level that is greater than 100% of the 
DCO's initial margin requirements for the non-hedge positions of FCM 
customers will not apply to non-FCM clearing member intermediaries;
    (5) CFTC Regulation 39.12(a)(2)(iii)'s prohibition that a DCO not 
set a minimum capital requirement of more than $50 million for any 
person that seeks to become a clearing member to clear swaps will not 
apply to non-U.S. clearing members or non-FCM clearing members;
    (6) CFTC Regulation 39.12(b)(7)'s requirement that DCOs utilize 
``straight-through-processing'' of swaps submitted for clearing will 
not apply to trades that are not executed on or subject to the rules of 
a DCM or a swap execution facility and for which neither clearing 
member is an FCM, a swap dealer, or a major swap participant;
    (7) Regulation 39.13(h)(5)'s requirement that DCOs must require 
their clearing members to maintain written risk management policies and 
procedures and that DCOs must have the authority to obtain information 
and documents from clearing members regarding their risk will still 
apply; however, DCO/CCPs may implement different oversight programs for 
U.S./FCM clearing members and non-U.S. clearing members; and
    (8) Regulation 39.11(f)'s and Regulation 39.19(c)(3)(ii)'s implicit 
requirements that DCOs submit to the CFTC quarterly financial resource 
reports and an audited year-end financial statement that are prepared 
in accordance with GAAP will not apply; rather, the DCO/CCPs may submit 
financial statements prepared in accordance with IFRS, with periodic 
reconciliation to assist staff in reviewing the financial statements.

VIII. Supervisory Arrangement

    As noted above, with respect to dually-registered DCO/CCPs, the 
Commission retains its examination authority with respect to DCO/CCPs 
and requires that home country regulator(s) enter into an MOU that 
addresses how the regulator(s) will cooperate and share information 
with respect to supervision of the DCO/CCP. Thus, the Commission has 
entered into a supervisory MOU with the home country regulator(s) of a 
DCO/CCP.\60\ For dual registrants in the future, the Commission 
similarly expects that an MOU will establish procedures for ongoing 
cooperation, address direct access to information, provide for 
notification upon the occurrence of specified events, memorialize 
understandings related to on-site visits, and include protections 
related to the use and confidentiality of non-public information shared 
pursuant to the MOU.

    \60\ The Commission also requires an MOU with respect to exempt 

    While certain principles of supervision are universal, based on its 
experience supervising DCO/CCPs, the Commission recognizes the benefits 
of tailoring a joint supervisory regime to (1) the unique legal and 
regulatory framework in which each regulator operates and (2) the 
unique financial, operational, and organizational characteristics of 
each DCO/CCP. With respect to CFTC regulations for which there would be 
substituted compliance, the Commission generally believes that there 
should be joint examinations. By way of example, Commission staff 
already has participated in joint examinations with the Bank of 
England, and the Commission believes that joint examinations can be an 
efficient means for effective, in-depth review of a DCO/CCP's 
regulatory compliance.
    However, depending on the individual circumstances, it may be 
appropriate for the home country regulator(s) to assume greater 
responsibility for conducting the examinations. The Commission expects 
that its staff would be flexible in determining their approach to a 
given examination based on the nature and scope of the examination. 
Therefore, with the overall goal of applying uniform principles in a 
consistent yet flexible way, the Commission intends to address 
supervisory matters, including examinations, on a case-by-case basis 
for each individual DCO/CCP in close consultation with the relevant 
home country regulator(s).

IX. Conclusion

    As noted above, the Commission finds that each provision of the 
EMIR Framework discussed above, is comparable to and comprehensive as 
the Commission requirements identified above and thus a CCP's 
compliance with the identified provisions of the EMIR Framework will 
satisfy compliance with the corresponding Commission requirements.

    Issued in Washington, DC, on March 16, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

Appendices to Comparability Determination for the European Union: 
Dually-Registered Derivatives Clearing Organizations and Central 
Counterparties--Commission Voting Summary, Chairman's Statement, and 
Commissioner's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 

Appendix 2--Statement of Chairman Timothy G. Massad

    Today, the CFTC has taken action to implement our agreement with 
the European Commission regarding requirements for central clearing 
counterparties (CCPs). Our unanimous action today means that 
European CCPs registered with the CFTC can comply with many of our 
rules by meeting

[[Page 15272]]

the corresponding European Market Infrastructure Regulation (EMIR) 
    The equivalence agreement announced by European Commissioner 
Jonathan Hill and myself is an important step in achieving cross-
border harmonization of derivatives regulation. It provides a 
foundation for cooperation among regulators in the oversight of the 
global clearinghouses that are so important in our financial system 
today. It resolves the issues that were standing in the way of 
Europe recognizing U.S. CCPs. And it helps make sure that the U.S. 
and European derivatives markets can continue to be dynamic, with 
robust competition and liquidity across borders.
    The action we have taken today is an important component of that 
agreement. The notice identifies the rules for which the CFTC will 
grant substituted compliance. These include rules related to CCP 
financial resources, risk management, settlement procedures, and 
default management. We have also streamlined the process for 
registration, which will further harmonize our regimes.
    Finally, CFTC staff today are also providing no-action relief 
from the application of Commission regulations to discrete aspects 
of a clearinghouse's non-U.S. clearing activities.
    The Commission is working with U.S. clearinghouses seeking 
recognition by the European Securities and Market Authority (ESMA) 
to ensure ESMA has all necessary information to review their 
applications in a timely manner. I look forward to ESMA completing 
the recognition process in a manner that ensures the global 
derivatives markets can continue to function efficiently and without 

Appendix 3--Statement of Commissioner J. Christopher Giancarlo

    I support the comparability determinations issued by the 
Commodity Futures Trading Commission (``CFTC'').
    Today's action furthers the commitment to a common approach for 
transatlantic central clearing counterparties (CCPs) announced on 
February 10, 2016 by my colleague, CFTC Chairman Timothy Massad, and 
Commissioner Jonathan Hill of the European Commission (EC). Under 
the comparability determinations, CCPs that are authorized in the 
European Union (EU) under the European Market Infrastructure 
Regulation (EMIR) and registered with the CFTC may comply with 
certain CFTC requirements for financial resources, risk management, 
settlement procedures, and default rules and procedures by complying 
with corresponding requirements under the EMIR framework. Today's 
notice also provides for a streamlined approach for EU CCPs that may 
wish to register with the CFTC in the future.
    As I said when it was announced, the agreement reached between 
the EC and the CFTC avoids unacceptable changes to four decades of 
U.S. clearinghouse margin policy and higher costs of hedging risk 
for America's farmers, ranchers, financial institutions, energy 
firms and manufacturers.
    Yet, as I have observed, the protracted process for reaching 
this compromise was made needlessly complex because both the EC and 
the CFTC insisted on a line-by-line rule analysis contrary to the 
flexible, outcomes-based approach advocated by the OTC Derivatives 
Regulators Group. While the end result is a good one, the approach 
taken to get here was needlessly circuitous and uncertain.
    The CFTC and its global counterparts must now recommit 
themselves to work together to implement an equivalence and 
substituted compliance process, particularly for swaps execution and 
the cross-border activities of swap dealers and major swaps 
participants, based on common principles in order to increase 
regulatory harmonization and reduce market balkanization.\1\ The 
future of the global swaps marketplace depends on it.

    \1\ See, e.g., IOSCO Task Force on Cross-Border Regulation, 
Final Report (Sept. 2015) (advocating for an outcomes-based approach 
as opposed to a line-by-line comparison of rules).

[FR Doc. 2016-06261 Filed 3-21-16; 8:45 am]