05.30.2014
By Terry Flanagan

Asian Exchanges Await CFTC Ruling on CCPs

Asian exchange groups are anticipating action by the U.S. Commodity Futures Trading Commission regarding recognition of foreign clearing organizations.

The CFTC is considering a rule making that will set forth certain standards for, and a process to permit, some types of clearing arrangements through foreign clearinghouses.

“ASX was the first (non-DCO applicant) clearinghouse to obtain no-action relief in February this year,” said Amanda Harkness, group general counsel at the Australian exchange operator. “We are ready to apply for an exempt DCO status once the CFTC has finalised its rulemaking.”

In a speech to the Futures Industry Association conference in March, acting CFTC chairman Mark Wetjen said that regulators need to establish a mutual recognition framework for foreign swap execution facilities and foreign derivatives clearing organizations.

The policy judgments are in some respects simplified by the widespread adoption of the Principles for Financial Market Infrastructures and the international dialogue on clearing. The PFMIs appear to reflect a consensus view on certain aspects of clearing regulation, and in general, stand in contrast to the more varied views on swap execution across the globe.

“CFTC staff have made good progress in developing the rule making framework for exempt DCO status,” said Harkness. “ASX strongly supports a DCO exemptive framework based on the PFMIs. We have a good understanding of how robust the PFMI standards are as a result of working closely with Australia’s regulators to achieve PFMI compliance.”

The exemption is needed so that Australian branches of U.S. swap dealers can use their bank balance sheets to service the customer franchise they have built in Australia for the purpose of clearing proprietary A$ IRS contracts.Today, this can happen because of no action relief granted to ASX by the CFTC in February this year.

Without the exemption, the Australian subsidiary of those U.S. swap dealers needs to have the balance sheet to support the local business.

“Typically, an Australian subsidiary will only have the balance sheet to support a much lower volume of local business,” said Harkness. “If the Australian branches can clear locally, these organisations are more competitive as they compete for the business of Australian end clients, which prefer to have their collateral held locally by an Australian domiciled and licensed clearing house. Those branches would provide valued liquidity to the A$ IRS market.”

ASX Clear (Futures) applied for recognition from the European Securities and Markets Authority in September 2013, and was the first (non-DCO applicant) clearing house to obtain no action relief from the CFTC in February this year.

The creation of an exempt DCO regime appears to be driven by the country equivalence assessment of the United States under Article 25 of EMIR.

“The EU authorities seem to be taking the position that if EU clearing systems cannot service U.S. persons without registering as DCOs then the U.S. is not considered equivalent because it does not provide similar access to the EU, where US clearing agencies would be able to service EU persons if they obtain third country CCP status under EMIR,” Eli Cohen, senior vice president, regulatory (legal), Singapore Exchange, told Markets Media.

There is no agreed global framework for recognizing CCPs in one country whose customers are legally subject to jurisdiction of another country. It’s the responsibility of each jurisdiction to develop its own framework for recognition of foreign clearing houses. Consistency among those frameworks is an important goal that has implications for the structure and functioning of OTC markets.

“Recognition by US and EU regulatory agencies of CCPs that service Asian-region markets, such as ASX Clear (Futures), is necessary to ensure that US and EU banks can continue to maintain and grow their customer franchises in those markets,” said Harkness. “Recognition will also facilitate the G20 objective of centralised clearing of OTC IRS contracts, and enhance choice in clearing services for such contracts.”

Featured image via Dollar Photo Club

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