Throughout my tenure at the Commodity Futures Trading Commission (CFTC or Commission), I have discussed the benefits of shared goals, cooperation, and mutual recognition (often referred to as “deference”) among regulators.  In early 2019, I wrote an opinion piece in the Financial Times in which I appealed to our international regulatory partners to recommit to a coordinated approach in order to ensure that our alliance remains strong rather than fractured.[1]  When the CFTC proposed this rulemaking last summer, I committed to advancing a coordinated approach to the regulation of global central counterparties (CCPs).  I expressed both my belief that the proposal we put forward was an important first step in that process, and my sincere hope that our international regulatory partners would also take the opportunity to reset and recognize that our shared interest in advancing derivatives clearing would be best achieved by respecting each jurisdiction’s successful implementation of the principles agreed to by the Group of 20 Nations (G-20) in 2009.[2]

I believe that we are in a better position today than we were just a year and a half ago.  Earlier this summer, the European Commission adopted three Delegated Acts regarding the European Union’s (EU) supervision of third-country CCPs.[3]  This week, the European Parliament’s no-objection period for those Delegated Acts concluded, and they are expected to come into force later this month.  I am pleased that under those Delegated Acts, we do not expect that any U.S. derivatives clearing organization (DCO) will be designated as a Tier 2 third country CCP.  And we at the CFTC are now adopting a rule that would allow a registered DCO organized outside of the United States to comply with the Commodity Exchange Act’s (CEA) DCO core principles by complying with its home country regulatory regime.

Furthermore, in connection with finalizing this rule, staff of the Division of Clearing and Risk has already conducted an analysis of EU legal requirements that correspond to specific DCO core principles.  We have included that analysis in an appendix to this rule to assist EU-based CCPs wishing to avail themselves of this rule.  I am pleased that in so doing, we are taking a principles-based approach that assesses comparability at the core principle level rather than conducting a line-by-line comparison of each jurisdiction’s regulations.  As I have said before, deference is a two way street, and I appreciate that we and our European colleagues have advanced measures that respect each other’s regulatory interests and expertise. 

But we must not rest on our laurels.  Our work here is not done.  We are still requiring that registered DCOs availing themselves of this rule comply with the swap data reporting requirements in Part 45 of the Commission’s regulations as well as certain ongoing and event-specific reporting requirements.[4]  I hope that the CFTC will soon turn to considering substituted compliance for our reporting rules, which we are amending today.  I am heartened by the acknowledgment in the preamble to today’s Part 45 rulemaking that we are “open to further ways to cooperate with our foreign regulatory counterparts in the supervision of [trade repositories]”[5] including, for example, “when and how the Commission should grant swap data reporting substituted compliance determinations for… DCOs domiciled in non-U.S. jurisdictions with similar swap data reporting requirements, permitting reporting of swap data to a foreign [trade repository] to satisfy Commission swap data requirements under appropriate circumstances.”[6]

Furthermore, finalizing this rule does not eliminate the need to consider exempting foreign CCPs from registration with the CFTC, pursuant to the express authority provided for in the CEA.[7]  I anticipate that the Commission will soon consider finalizing the rule we proposed last summer, whereby U.S. customers would be allowed to use a foreign intermediary, but not a futures commission merchant (FCM), to access a foreign CCP that is exempt from registration with the CFTC.[8]  But I still maintain that U.S. customers deserve optionality in how they access a third country CCP that does not present substantial risk to the U.S. financial system and is subject to regulation that is comprehensive and comparable to our own.  To that end, I hope that the Commission will consider an approach that would allow U.S. customers to utilize an FCM to access an exempt DCO.

Thank you to the staff of the Division of Clearing and Risk for their efforts on cross-border clearing issues over the past several years and, in particular, the amount of time and energy they have spent working with me and my office over the past two years.  I look forward to continuing our engagement on these topics.

Nations have borders, but markets rarely do. That is certainly the case with the global derivatives markets.

For more than a century, U.S. derivatives markets have provided hedging and price discovery opportunities not only for Americans but also to individuals and businesses from abroad.  In the 21st century, these markets involve participants domiciled in the Americas, Europe, Asia and elsewhere each and every day. And the clearinghouses that provide the credit risk management services for our exchanges have members and ultimate customers from around the world.  The same is true for clearinghouses based in, for example, Europe.  So the question that has naturally arisen is how the home regulator of the clearinghouse-which in the United States we refer to as a derivatives clearing organization (DCO)-should work with regulators in home jurisdictions of the DCO's members and customers.

When it comes to international regulatory comity, I find the concept of the "categorical imperative" of the great philosopher Immanuel Kant instructive.[1]  Basically, Kant asks us to consider what would happen if everyone was bound by the same regulation-that is, we should take a particular obligation (imperative) and make it universal (categorical).  If the result is chaos, then it is probably not a good regulation.  Therefore, if every jurisdiction mandated that its own detailed, domestic DCO regulations applied to every foreign DCO that accepted its members or customers from that domestic jurisdiction, the result would likely be a mishmash of duplicative or contradictory regulations at best.  At worst, the result would be market fragmentation, because DCOs might not accept members or customers from certain jurisdictions.[2]  Neither result is good for the integrity, resilience, and vibrancy of global derivatives markets.  Consequently, such an approach cannot be considered sound regulation.

Today we are finalizing a rule that meets the categorical imperative-a rule for non-U.S. DCOs that we would hope foreign jurisdictions would impose on U.S.DCOs in return.   Specifically, I am pleased to support today's final rule for Registration with Alternative Compliance for Non-U.S. DCOs under Parts 39 and 140 of our regulations.  This rule is a significant step in building an effective, efficient and cooperative international regulatory framework for the oversight of DCOs operating in the international derivatives markets.  The alternative compliance rule takes a principles-based approach, and also reflects deference in the form of international regulatory cooperation.  The rule recognizes that certain foreign regulatory systems can mirror the requirements of the CFTC's Core Principles for DCOs, but not necessarily all our detailed rules implementing those Core Principles.  Provided that a foreign regulatory system produces similar outcomes to the CFTC's Core Principles, it makes sense to afford it flexibility in how to do it. The rule acknowledges that, while a foreign jurisdiction may take a different route, it can still reach the same endpoint.

In terms of the particulars, the final rule allows a DCO organized outside the United States to comply with our Core Principles through compliance with its home country's regulatory regime, provided:

1. The CFTC determines that compliance by the DCO with its home country regulatory regime constitutes compliance with the Core Principles set forth in section 5b(c)(2) of the Act;
2. The DCO is in good regulatory standing in its home jurisdiction;
3. The DCO does not pose a substantial risk to the U.S. financial system; and
4. A memorandum of understanding or similar arrangement satisfactory to the CFTC is in effect with the DCO's home country regulator.

As we vote to adopt this rule today, our approach is already bearing fruit.  I am pleased to note that the European Union has finalized its Delegated Acts addressing EU oversight of DCOs domiciled abroad.  The Delegated Acts take a similar approach as does our final rule,[3] insofar as they allow non-EU clearinghouses to meet EU requirements by following their home jurisdiction's rules if the EU determines those rules are designed to have equivalent outcomes.  In short, both the United States and European Union are recognizing our respective national borders without being unduly confined by them.