CFTC Extends No-Action Relief to UK-Based DCOs

The CFTC issued no-action relief to certain EU- and UK-based derivatives clearing organizations ("DCOs") from US regulatory requirements on swap extinguishment and replacement, initial margin calculations and collection, minimum capital requirements and straight-through-processing. The no-action letter replaces CFTC Letter 16-26, which provided similar relief exclusively to EU-based central counterparties by providing the same relief to UK-based counterparties. (See previous coverage.)

The exemptions are from requirements under CFTC Parts 22 ("Cleared Swaps") and 39 ("Derivatives Clearing Organizations") for DCOs where neither party is a US clearing member or an FCM clearing member. These exemptions include:

• Extinguishment and Replacement of Swaps. The requirement that a swap be extinguished and replaced with an equal and opposite swap between a DCO and each clearing member does not apply when neither party is a US clearing member or an FCM.
• LSOC Account Model. The "legally segregated but operationally commingled" account model for cleared swaps customer accounts does not apply to clearing members that are not FCMs.
• Initial Margin Calculations. The requirement for DCOs to calculate and collect initial margin for customer accounts cleared by an FCM on a gross basis does not apply to non-FCM clearing member intermediaries.
• Initial Margin Collection. The rule that DCOs must collect initial margin at no less than 100 percent of the DCO's initial margin requirements for non-hedge positions of FCM customers does not apply to non-FCM intermediaries.
• Minimum Capital Requirements. The prohibition against a DCO setting a minimum capital requirement of more than $50 million for any entity seeking to become a clearing member does not apply to non-US or non-FCM clearing members.
• Straight-Through Processing. The requirement for straight-through processing of swaps does not apply to trades not executed on or subject to the rules of a DCM or SEF where neither clearing member is an FCM or swap dealer.

The CFTC emphasized that while DCOs must still require their clearing members to maintain written risk management policies and procedures, they are allowed to implement different oversight programs for US and non-US clearing members.