Opening Statement of Commissioner Brian Quintenz before the Open Commission Meeting on July 11, 2019
Open Meeting on Proposed Rule on Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations and Supplemental Proposal on Exemption from Derivatives Clearing Organization Registration
July 11, 2019
Mr. Chairman, thank you for calling this meeting and thank you for lending your invaluable leadership and voice to this agency during your tenure here, first as Commissioner and then as Chairman. I have consistently been impressed and inspired by your commitment to thoughtful public policy, willingness to consider alternative viewpoints, and unwavering dedication to the success and well-being of the CFTC and all of its employees. You will be greatly missed.
I am pleased to support both of today’s proposals, which embrace a view of global swaps market regulation based on open competition and choice, deference to comparable foreign jurisdictions, and cooperation with the CFTC’s foreign counterparts.
I would also like to note that today’s two rules are part of a three-pronged approach to right-size the CFTC’s extraterritorial application of its regulations. The third piece, on the regulation of foreign entities’ swaps activities, is still being considered and actively discussed. I very much look forward to the Commission considering a proposal on this important topic that takes a similar view towards foreign deference in the near future. That vision of deference was fully laid out almost one whole year ago with the Chairman’s release of his Cross Border White Paper. It should come as no surprise to anyone who follows this Commission that actual rule proposals to effectuate that white paper would be forthcoming. I’m very pleased with the work of the staff to put these two pieces of that vision before us today.
Proposed Rule on Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations
The first proposed rule considered by the Commission today would reduce the degree to which CFTC-registered foreign derivatives clearing organizations (DCO) are subject to duplicative regulation by the CFTC and their home country regulator. The proposal would permit a foreign DCO that does not pose “substantial risk to the U.S. financial system” to comply with its home country authorities’ regulations instead of most CFTC regulations. To satisfy CFTC regulations, the foreign DCO would only need to comply with certain of our customer protection and swap data reporting requirements.
The proposal recognizes that foreign regulators have a substantial interest and expertise in supervising DCOs located in their home jurisdictions. Deference to their oversight is appropriate when compliance with the home country regulatory regime would achieve compliance with DCO core principles. This proposal is consistent with, and in many ways an expansion of, the CFTC’s 2016 Equivalence Agreement with the European Commission, pursuant to which the CFTC granted substituted compliance to dually-registered DCOs based in the European Union.
I also strongly support the proposal’s transparent, fact-based procedure for determining when a foreign DCO poses “substantial risk to the U.S. financial system.” The proposal defines “substantial risk” to mean two simple criteria: (i) the foreign DCO holds 20 percent or more of the required initial margin of U.S. clearing members for swaps across all registered and exempt DCOs; and (ii) 20 percent or more of the initial margin requirements for swaps at that foreign DCO is attributable to U.S. clearing members. I think this two-prong test correctly assesses the DCO’s focus on U.S. firms and impact on the U.S. marketplace.
Today’s proposal contrasts starkly with the European Securities and Markets Authority’s (ESMA) recent proposal to determine the systemic importance of a foreign DCO to the European Union and thereby apply the European Market Infrastructure Regulation (EMIR) and ESMA oversight. Unlike today’s CFTC proposal, ESMA has not proposed any quantitative thresholds for assessing systemic importance. Instead, ESMA proposed 14 “indicators” for determining systemic importance that would grant it considerable discretion and raise serious questions about the judgement and consistency of the indicators’ application. I hope that, through its consultative process, ESMA decides to revise its criteria and ultimately adopts a predictable, transparent, and appropriately calibrated threshold regime for such an important and extraterritorial regulatory determination.
I welcome comments and suggestions from market participants and foreign jurisdictions about all aspects of the Commission’s proposed alternative compliance regime for non-U.S. DCOs. It is also my hope that incoming Chairman Tarbert will prioritize finalizing a version of this proposal. Lastly, I look forward to discussing this proposal, and advocating for its deference-based approach, with our regulatory colleagues around the globe.
Supplemental Proposal on Exemption from Derivatives Clearing Organization Registration
Today’s supplemental proposal to permit exempt DCOs to clear swaps for U.S. customers will provide greater choice and flexibility to market participants. Currently, an exempt DCO is only authorized to clear the proprietary positions of its U.S. clearing members. Today’s proposal will provide U.S. customers, like U.S. asset managers, insurance companies, and others, with increased access to foreign markets and an enhanced ability to hedge their risk.
I strongly support this proposal’s inclusion of specific criteria that the Commission will use to determine whether a foreign DCO poses a “substantial risk to the U.S. financial system,” and would therefore be ineligible for an exemption from registration. Today’s rulemaking also appropriately streamlines exempt DCO reporting requirements to focus solely on the information necessary to evaluate “substantial risk” and to assess the extent to which the foreign DCO is clearing U.S. business.
I look forward to receiving comments on additional possibilities for U.S. customers to clear on exempt DCOs. In particular, I am interested to hear from commenters about whether U.S. futures commission merchants (FCMs) should be permitted to provide their U.S. customers with access to exempt DCOs, and, if so, how the protection of U.S. customer funds should be addressed. I also welcome comment about whether a foreign DCO, neither registered with the CFTC nor exempted from CFTC registration, should be permitted to clear for a foreign branch of a U.S. bank that is registered with the CFTC as a swap dealer. Finally, I look forward to hearing from market participants about whether a foreign clearing member of a foreign DCO should be permitted to sponsor a U.S. FCM’s membership to the foreign DCO in order to facilitate access by U.S. customers.
In conclusion, I would like to once again thank Chairman Giancarlo for his exemplary service to the CFTC and the United States. We will all benefit from his long fight to promote deference culminating with today’s two rule proposals.
 Comparability Determination for the European Union: Dually-Registered Derivatives Clearing Organizations and Central Counterparties, 81 Fed. Reg. 15260 (March 22, 2016).