FR 2020-26527

General Summary

The Commodities Futures Trading Commission (CFTC) has finalized a rule regarding exemptions for non-U.S. derivatives clearing organizations, also known as DCOs. This rule allows certain foreign entities to clear swaps for U.S.-based entities if these foreign DCOs are regulated by their home countries in a manner that aligns with international standards. However, these exemptions don’t extend to clearing customer accounts, which keeps the transactions largely limited within the realm of sophisticated financial entities.

Significant Issues and Concerns

The document is lengthy and laden with specialized legal terms, which could deter a general audience from understanding the rule's full implications. It mentions various proposals and adjustments without clearly demarcating the differences or the evolutionary path from proposal to final rule, which may result in confusion.

The reliance on international standards, referred to as the Principles for Financial Market Infrastructures (PFMIs), is central to the exemption process. Some stakeholders are concerned that relying on PFMIs may not entirely satisfy U.S. legal standards, raising questions about the adequacy of this approach. Moreover, the document does not incorporate any updates or future amendments to these international standards unless explicitly decided by the CFTC, which could create a disconnect over time.

There are also clauses regarding the potential modification or termination of exemptions if material facts change, which introduces uncertainty for the DCOs seeking these exemptions. Additionally, the document does not offer in-depth guidance on forming Memoranda of Understanding (MOUs), which are necessary for these exemptions, possibly leading to delays due to unclear procedures.

Impact on the Public

For the general public, particularly those not engaged in financial markets, the impact might be minimal. However, the availability of more options for financial institutions to clear swaps outside the U.S. could contribute to broader economic trends, such as increased global financial integration and efficiency.

Impact on Specific Stakeholders

For U.S. financial institutions operating globally, these rules could present new opportunities to clear their proprietary swaps through foreign DCOs. This flexibility could help them manage risks associated with their global operations more effectively. However, the decision not to permit customer account clearing through exempt DCOs limits the rule's applicability to a smaller group of stakeholders.

For foreign DCOs, the rule provides a potential entry into U.S. markets but comes with the burden of proving that their home country regulatory standards align comprehensively with international standards, as interpreted by the CFTC. The requirement to designate an agent for service in the U.S. might also be seen as an additional burden for such entities unfamiliar with U.S. legal practices.

Some stakeholders, like small financial entities or those without substantial international dealings, might not see any immediate benefit. The CFTC’s move to promote international cooperation might positively influence markets by enhancing competition and cross-border trading, but these benefits are noted by some as possibly overvalued in the absence of empirical support.

In summary, while the rule certainly represents an effort to harmonize international financial operations, its full impact will likely depend on how these standards are interpreted and applied both within and beyond the U.S. borders.

In analyzing the financial references within the rule on exemptions from derivatives clearing organization registration, the document provides several cost estimates associated with compliance and application processes. These references are essential for understanding the economic burden on entities seeking exemption and the implications of these costs within the broader regulatory framework.

Application Costs

The document highlights a specific cost related to the application for exemption from derivatives clearing organization (DCO) registration, estimating it at $10,500. This estimate is identified as significantly lower compared to an application for full DCO registration, which is estimated at $100,000. Notably, the final rule mentions a slight adjustment bringing the exemption application estimate down to $10,000 per application. This reduction likely stems from consolidating burden estimates for the application components, demonstrating an effort to streamline the process and mitigate financial burdens.

One comment on these cost estimates points out potential inaccuracies. The Japan Securities Clearing Corporation (JSCC), in its commentary, suggested that the Commission's cost estimate might be underestimated. However, JSCC did not provide concrete figures to delineate the true extent of discrepancy, leaving some uncertainty about the complete financial impact on applicant organizations.

Issues and Financial Implications

Several issues related to the financial aspects of the rule could affect the overarching applicability and clarity for organizations. The potential misestimate of application costs resonates with concerns about administrative burdens mentioned in the document. Legal and procedural requirements, such as jurisdiction consent or the designation of an agent for service of process in the U.S., may entail additional financial or resource allocations not covered by the initial estimates, thus impacting smaller or less resourceful entities disproportionately.

Furthermore, while financial estimates aim to project transparency and predictability in the application process, the uncertainty surrounding how detailed applications and ongoing compliance might actually affect organizations remains an unresolved issue. This lack of precise data concerning additional costs might lead stakeholders to question the benefits versus the costs of opting for an exemption rather than full registration.

Market and Competitive Dynamics

The document also hints at broader economic and competitive effects, such as enhancing market competition or encouraging cross-border trading. Although the financial references seem well-intended to project potential benefits of reduced costs in stimulating market activity, some stakeholders might feel these projections are overstated without adequate empirical data. There is an implicit assumption that reduced financial burdens will directly correlate with increased market participation and competition. However, the lack of granular data or case studies supporting these claims leaves room for skepticism regarding the document's projections about market benefits.

Overall, financial references in this rule attempt to underscore a reduction in costs for certain regulated entities, aligning with broader goals to ease market entry and compliance processes. However, nuances in cost estimation and their real-world implications remain topics warranting further scrutiny, especially concerning the potential broader impact on market structures and stakeholder engagement.