CFTC Approves Substituted Compliance Framework for DCOs That Are EU CCPs

The CFTC unanimously approved (i) a substituted compliance framework for dually-registered central counterparties ("CCPs") located in the European Union and (ii) a comparability determination with respect to certain EU rules. In conjunction with the action, the CFTC provided limited no-action relief for EU-based CCPs that are registered with the CFTC as derivatives clearing organizations ("DCOs"). The relief for these DCO/CCPs is from the application of CFTC regulations to "discrete aspects" of a DCO/CCP's non-U.S. clearing activities.

The CFTC's comparability determination recognizes EU-based CCP compliance with CFTC requirements for financial resources, risk management, settlement procedures, and default rules and procedures (as set forth in Part 39 of the CFTC's rules) by their compliance with corresponding requirements under the EMIR Framework. In taking this action, the CFTC determined that certain laws and regulations that are applicable in the EU provide sufficient basis for an affirmative finding of comparability with respect to certain regulatory obligations applicable to DCOs that are registered with the CFTC and are authorized to operate as CCPs in the European Union.

The CFTC also provided limited no-action relief (see CFTC No-Action Letter 16-26) under specified conditions for EU-based DCO/CCPs from the application of certain CFTC requirements in Parts 22 and 3 to their non-U.S. clearing activities relating to (i) the extinguishment and replacement of an original swap with an equal and opposite swap between a DCO and a clearing member, (ii) the application of the LSOC segregation of collateral model, (iii) the calculation and collection of initial margin for customer accounts cleared by a futures commission merchant on a gross basis, (iv) the collection of initial margin at a level greater than 100% of the DCO's initial margin requirements for non-hedge positions, (v) restrictions on setting minimum capital requirements for clearing members to clear swaps, and (vi) the "straight-through-processing" requirement for swaps that are not executed on a designated contract market or swap execution facility.

Although CFTC requirements still apply to the maintenance of written risk management policies and procedures by clearing members and to the access by DCOs of information regarding such members' risks, DCO/CCPs may apply different oversight programs for U.S. and non-U.S. clearing members. Additionally, DCO/CCPs may submit quarterly financial resource reports and audited year-end financial statements in accordance with IFRS standards instead of those of GAAP.

In his supporting statement, CFTC Chair Timothy M. Massad emphasized that this unanimous action "means that European CCPs registered with the CFTC can comply with many of our rules by meeting the corresponding European Market Infrastructure Regulation requirements."

CFTC Commissioner J. Christopher Giancarlo also expressed his general support for the agreement. However, he voiced concern that "the protracted process for reaching this compromise was made needlessly complex because both the E[uropean] C[ommission] 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 [t]here was needlessly circuitous and uncertain."

Both the substituted compliance framework and the limited no-action relief will become effective on the date of publication in the Federal Register.