Amendments to Subpart A of Part 39: General Provisions Applicable to DCOs
Subpart A of Part 39 consists of general provisions applicable to DCOs. The CFTC has adopted final amendments to Subpart A covering the provisions discussed below.
Definitions Under Section 39.2
Changes have been made to the following defined terms in Section 39.2:
Business day, which has been amended to apply to the entirety of Section 39 and clarify that federal holidays and dates when the CFTC is closed are not business days.
Customer, which has been amended to remove the definition of this term from Section 39.2 because this term has also been defined in Section 1.3.
Customer account or customer origin, which has been amended to modify the definition of this term in Section 39.2 because that term was defined in Section 1.3 after Section 39.2 was adopted.
Enterprise risk management has been added as a new term that:
means an enterprise-wide strategic business process intended to identify potential events that may affect the enterprise and to manage the probability or impact of those events on the enterprise as a whole, such that the overall risk remains within the enterprise’s risk appetite and provides reasonable assurance that the derivatives clearing organization can continue to achieve its objectives; and
is used extensively in Section 39.10(d), which requires a DCO to have a program of enterprise risk management that identifies and assesses sources of risk and their potential impact on the operations and services of the DCO and identify an enterprise risk officer who is an appropriate individual that exercises the full responsibility and authority to manage the DCO’s enterprise risk management function..
Fully-collateralized position, which has been amended to add the term "party," in addition to the term "counterparty," to make clear that the definition is intended to include both parties to a contract.
Key personnel, which has been amended to add chief information security officer (CISO) to the list of positions identified in the definition.
Procedures for Registration as a DCO Under Section 39.3
The following DCO registration procedures under Section 39.3 have been amended:
DCO application procedures under Section 39.3(a), amended to improve clarity and provide greater flexibility.
Stays of DCO application reviews under Section 39.3(b), amended to correct inaccurate language.
Requests for amended order of registration under Section 39.3(a)(2) for a registered DCO, amended to reflect current CFTC practice so that:
the CFTC will no longer require use of Form DCO to request an amended order of registration under Section 39.3(a)(2);
an applicant will only need to file amended exhibits and other information when filing a Form DCO to update a pending application under Section 39.3(a)(4); and
the CFTC is adopting a separate process for such requests under new Section 39.3(d).
DCO reinstatement registration procedures for dormant DCOs under renumbered Section 39.3(e), amended to correct inaccurate language by replacing "listing or relisting" with "accepting" to more accurately describe a DCO’s activities.
Requirements for a DCO requesting vacation of DCO registration under renumbered Section 39.3(f), amended to codify requirements for a DCO requesting vacation of its registration and provide greater transparency to any DCO that is considering vacating its registration.
Requests for transfers of DCO registrations and open interests requirements under renumbered Section 39.3(g), amended to simplify the requirements for a DCO to request a transfer of open interest and to separate the process from the procedures used to report a change to a DCO’s corporate structure or ownership.
Procedures for Implementing DCO Rules and Clearing New Products Under Section 39.4
The following DCO procedures under Section 39.4 have been amended to remove or correct certain references in connection with:
Requests for DCO rule approvals in Section 39.4(a), which have been amended to delete the reference to the applicant for registration, as it is unnecessary for an applicant to separately request approval of its own rules.
Requirements for a DCO seeking approval for a futures account portfolio margining program under Section 39.4(e), which have been amended to conform terminology to other provisions in Part 39 that distinguish between futures accounts and cleared swaps accounts.
Amendments to Subpart B of Part 39: Compliance with DCO Core Principles
Subpart B of Part 39 addresses compliance with core principles to address fully collateralized positions along with ten other core principles. The CFTC has adopted final amendments to Subpart B covering the provisions, discussed below.
Fully Collateralized Positions Under Part 39
The amendments adopted relating to fully collateralized positions, which, the CFTC states in the release, do not pose the full range of risks that the regulations are meant to address, include:
A new definition of "fully collateralized position" under Section 39.2 to mean a contract cleared by a DCO that requires the DCO to hold, at all times, funds in the form of the required payment sufficient to cover the maximum possible loss that a party or counterparty could incur upon liquidation or expiration of the contract.
Clarification that a DCO does not have to perform monthly stress tests on fully collateralized positions when computing the DCO's financial resources requirements under Section 39.11(c)(1)(i).
Clarification that a DCO does not need to include fully collateralized positions in the required calculation of liquidity of the DCO's financial resources under Section 39.11(e)(1)(iv).
New Section 39.12(a)(5)(v) to exclude non-futures commission merchant (FCM) clearing members that only clear fully collateralized positions from the periodic financial reporting of DCO participant eligibility under Sections 39.12 39.12(a)(5)(i) and (a)(5)(i)(B).
New Section 39.13(h)(3)(iii), which excludes clearing member accounts that hold only fully collateralized positions from the DCO stress testing requirements in Section 39.13(h)(3)(i) and (ii).
New Section 39.16(e), which provides that a DCO may satisfy the requirements of paragraphs (a), (b), and (c) of Section 39.16, which relate to a DCO’s default-management plan and procedures, by implementing rules that permit the DCO to clear only fully collateralized positions.
Amendment of Section 39.19(c)(1)(i), which provides that daily reporting by DCOs of information under Section 39.19 on initial margin (IM), daily variation margin (VM) payments, other daily cash flows, and end-of-day positions is not required for fully collateralized positions.
Compliance with DCO Core Principles Under Section 39.10
Amendments adopted for compliance with core principles under Section 39.10 include:
Amendments to Section 39.10(c), which permit greater flexibility in the reporting requirements applicable to the chief compliance officer (CCO) for DCOs engaged in substantial activities not related to clearing.
New Section 39.10(d), which requires each DCO to have an enterprise risk-management program and an identified enterprise risk officer (ERO) who has the full responsibility and authority to manage the DCO’s enterprise risk management function.
DCO Financial Resources Under Section 39.11
Amendments under Section 39.11 seek to more closely align the language of Core Principle B of Section 5b(c)(2) of the CEA (7 U.S.C. § 7a-1), which covers computation of the financial resources requirement, pursuant to which a DCO must maintain sufficient financial resources to meet its financial obligations to its clearing members, even if the clearing member to which the DCO has the greatest exposure defaults, in extreme but plausible market conditions.
As adopted, the final rule:
Eliminates the use of margin to satisfy the requirements of Section 39.11 because the required IM amount on deposit for the clearing member will be applied before determining the DCO's largest financial exposure in extreme but plausible market conditions.
Adds a new requirement that when stress tests produce losses in both customer and house accounts, a DCO must combine the customer and house stress test losses of each clearing member using the same stress test scenario and allows a DCO to net certain gains with certain losses only to the extent permitted by the DCO’s rules.
Adds requirements for determining a DCO's largest financial exposure net of the clearing member’s required IM amount without taking into account any excess collateral on deposit other than the required IM amount at a DCO.
Clarifies the requirements for a DCO to be sufficiently liquid in connection with liquidity of financial resources requirements to enable the DCO to fulfill its obligations as a central counterparty during a one-day settlement cycle by changing references to "daily settlement pay" in Section 39.11(e)(1)(ii) to "daily settlement variation pay" to clarify that additional calls for IM should be omitted from the calculation – only VM calls.
Changes references to “daily settlement pay” in Section 39.11(e)(1)(ii) to “daily settlement variation pay” to clarify that additional calls for IM should not be included in the financial resources calculation during a one-day settlement cycle.
Clarifies financial reporting by SIDCOs and Subpart C DCOs to encompass all financial resources requirements applicable to these entities under Part 39.
Requires that the quarterly financial statement filing by a DCO includes the DCO's balance sheet, income statement, and statement of cash flows prepared in accordance with US GAAP under amended Section 39.11(f)(1)(ii).
Requires annual DCO submission of a reconciliation with appropriate explanations of a DCO year-end balance sheet to last quarterly balance sheet when material differences exist under amended Section 39.11(f)(2)(iii)(A).
Clarifies DCO documentation requirements related to quarterly financial reporting under amended Section 39.11(f)(3).
Requires under an amended Section 39.11(f)(4) that quarterly financial reports be certified by a "responsible person" at the DCO.
A proposed requirement for balance sheet identification of assets allocated to satisfy financial resource requirements under amended Section 39.11(f)(1)(ii) was not included in the final rule.
DCO Participant and Product Eligibility Under Section 39.12
Section 39.12 relates to Core Principle C of Section 5b(c)(2) of the CEA (7 U.S.C. § 7a-1): participant and product eligibility. As adopted, the final rule:
Changes language that required a DCO to "adopt" or "establish" rules to simply "have" rules.
Revises Section 39.12(b)(2), which provides that a DCO shall adopt rules providing that all swaps with the same terms and conditions are economically equivalent within the DCO, to explicitly apply only to DCOs that clear swaps.
DCO Risk Management Under Section 39.13
Risk-management requirements under Section 39.13 are being amended in several ways, including:
Clarifying aspects of the DCO risk-management framework under Section 39.13(b) to make clear that a DCO is not only required to have a documented risk-management framework but to put the framework into action.
Limiting DCO exposure to potential default losses by amending Section 39.13(f) to require a DCO to limit its exposure to potential losses from defaults by clearing members through margin requirements and other risk control mechanisms reasonably designed to ensure that the DCO’s operations would not be disrupted and non-defaulting clearing members would not be exposed to unanticipated or uncontrollable losses.
Codification of existing CFTC practices for evaluation of cross-margining arrangements under new Section 39.13(i) with a DCO requirement to submit rules for approval to implement or modify any existing program.
Amending customer IM requirements at the DCO under Section 39.13(g) that are commensurate with the risks of each product and portfolio by including revisions requiring:
methodology and coverage for a range of risks;
independent validation of margin requirements on a regular annual basis;
determination of spreads and portfolio margins on a conceptual basis rather than theoretical basis;
back tests of IM requirements that capture changes in market risk factors;
gross customer margin collected on a gross basis only at the end-of-day settlement cycle;
customer IM requirements based on the type of customer account and by applying prudential standards at levels commensurate with the risk presented by each customer account; and
appropriateness of haircuts that a DCO applies to assets accepted in satisfaction of IM obligations on a monthly basis.
A proposed CFTC amendment to address other DCO risk-control mechanisms with risk limits on difficult-to-liquidate assets under Section 39.13(h) was not included in the final rule.
Treatment of Funds Under Section 39.15
The treatment of clearing member and customer funds (futures collateral) under Section 39.15 has been amended to provide the CFTC with "sufficient means" to determine whether customer funds held in a futures account will be adequately protected if cleared swaps, foreign futures, or foreign options are also held in the same account. As adopted, the final rule:
Permits a DCO to file rules for CFTC approval under Section 40.5, rather than request a CFTC order, to allow the DCO and its clearing members to commingle customer positions in futures, options, foreign futures, or foreign options, and swaps, or any combination thereof, and any money, securities, or property received to margin, guarantee or secure such positions at the DCO.
Requires prompt transfers of customer positions and related funds from one clearing member to another clearing member as necessary because, although a DCO may transfer positions from one clearing member to another, the DCO does not generally transfer funds.
Clarifies that Section 39.15(e), which applies to permitted investments of segregated customer funds, that the regulation applies to any investment of customer funds or assets, including cleared swaps collateral.
Streamlines the procedures for a request to commingle customer funds under Section 39.15(b)(2)(ii) and ensure that cleared swaps customer collateral receives the same safekeeping as other funds and assets invested by DCOs.
DCO Default Rules and Procedures Under Section 39.16
Amendments to default rules and procedures under Section 39.16 include amendments to provisions related to:
Section 39.16(c)(1), which now requires that the DCO include clearing members and participants in a test of its default-management plan on at least an annual basis to the extent the plan relies on their participation.
DCO default procedures, which now require a DCO to have procedures under Section 39.16(c)(2)(ii) that include public notice on the DCO website of a declaration of default rather than the proposed requirement for immediate public notice of a default.
DCO requirements for allocation of a defaulting clearing member's positions, which has been amended to provide that, under Section 39.16(c)(2)(iii)(C), the DCO shall not require a clearing member to bid for a portion of, or accept an allocation of, a defaulting clearing member’s positions that is not proportional to the size of the bidding or accepting clearing member’s positions in the same product class at the DCO.
Establishment of a new rule that was not included in the proposed rule, which provides, under Section 39.16(e), that a DCO may satisfy the requirements of paragraphs (a), (b), and (c) of Section 39.16, which relate to a DCO’s default-management plan and procedures, by having in place rules that permit the DCO to clear only fully collateralized positions.
A proposed amendment to Section 9.16(c)(1) to require each DCO to have a default committee that would be convened if of a default involving substantial or complex positions to help identify market issues with any action the DCO is considering was not adopted but remains under consideration by CFTC.
DCO Rule Enforcement Under Section 39.17
Section 39.17 requires a DCO to maintain adequate arrangements and resources for the effective monitoring and enforcement of compliance with its rules and the resolution of disputes. As adopted the amendments clarify the CFTC's expectation under Section 39.17(a)(1) that a DCO currently does, and will continue to, ensure that both the DCO and its members comply with the DCO's rules. The amendments also replace the words "risk management committee" with "an appropriate committee" in Section 39.17(b).
DCO Reporting Under Section 39.19
DCO reporting under Section 39.19 implements Core Principle J, which requires that each DCO provide to the CFTC all information that the CFTC determines to be necessary to conduct oversight of the DCO. Amendments to this section clarify certain existing requirements and adopt new reporting requirements. As adopted, the amendments:
Enhance consistency between Section 39.39 and Core Principle J set out in Section 5b(c)(2) of the CEA (7 U.S.C. § 7a-1), which that section was designed to implement. Core Principle J requires a DCO to report information required for CFTC oversight (7 U.S.C. § 7a-1(c)(2)); this includes, daily, quarterly, annual, and event-specific reports.
Clarify existing requirements related to the submission of DCO reports to the CFTC to simplify the text while retaining the originally intended flexibility by deleting the phrase "unless otherwise specified by the Commission or its designee" and the term "electronically."
Adding new Section 39.19(b)(2) to require that an employee of a DCO certify that such employee is duly authorized to make a submission on behalf of the DCO.
Clarify other existing requirements related to the submission of DCO reports to the CFTC covering:
daily reporting of information and securities positions;
audited year-end financial statements;
timing of reports;
decreases in financial or liquidity resources;
requests to clearing members to reduce positions;
changes in key personnel;
changes to legal name;
changes to liquidity funding arrangements;
changes to settlement bank arrangements;
settlement bank issues;
changes in depositories for customer funds;
changes to fiscal year;
changes to independent accounting firm;
major decisions of the board of directors;
margin model issues;
recovery and wind-down plans;
new products accepted for clearing; and
DCO Public Information Under Section 39.21
Public information requirements under Section 39.21, include the information deemed sufficient to enable market participants to identify and evaluate accurately the risks and costs associated with using the services of a DCO. Minor changes to these requirements are included in the amended rule. As adopted the amendments clarify:
The method of proper public disclosure by DCOs and DCO publication of information required under Section 39.21(c), which must be made available separately on the DCO’s website instead of posting the information in the DCO’s rulebook.
Requirements to publicly update information relating to a DCO's financial resource package size and composition each fiscal quarter or upon CFTC request.
Requirements under Section 39.21(c)(5) for a DCO to publicly disclose daily settlement prices, volume, and open interest for each contract, agreement, or transaction cleared or settled by the DCO, and removal of Section 39.21(d) and incorporating the Section 39.21(d) requirements into § 39.21(c).
Listing of swaps required to be cleared, including adopting a cross-reference to Section 50.3(a), which requires a DCO to make publicly available on its website:
a list of all swaps that the DCO will accept for clearing; and
identify which swaps on the list are required to be cleared under Section 2(h)(1) of the CEA and Part 50 of the CFTC's regulations.
DCO Governance and Fitness Standards, Requirements for Resolving Conflicts of Interest, and Composition of Governing Boards
DCO governance and fitness standards, requirements for resolving conflicts of interest, and composition of DCO governing boards under Sections 39.24, 39.25, and 39.26 have been amended, as discussed below, in the amendments to Subpart C (see Amendments to Subpart C of Part 39).
DCO Legal Risk Under Section 39.27
Section 39.27, which addresses DCO legal-risk issues has been amended by adding a subparagraph (3), which would require a DCO that provides clearing services outside the US to ensure on an ongoing basis that the memorandum items required to be included in Exhibit R: Legal Risk Considerations of Form DCO remains accurate and up to date. A DCO is also required to submit an updated memorandum to the CFTC promptly following all material changes to the analysis or content contained in the memorandum.
Amendments to Subpart C of Part 39: SIDCOs and Subpart C DCOs
Subpart C of Part 39 addresses SIDCOs and DCOs that elect to be subject to the provisions under Subpart C. Final amendments to provisions outside of Subpart C that affect SIDCOs and Subpart C DCOs include:
New governance standards set out in the amendments to Part 39, Subpart B that remove Section 39.32 from the current Subpart C and adopt new Sections 39.24, 39.25, and 39.26 into Subpart B.
New Sections 39.24, 39.25, and 39.26, which incorporate the same requirements as Section 39.32, addressing Core Principles O, P, and Q, which address governance arrangements, conflicts of interest, and composition of governing boards, respectively. These sections are generally designed to enhance risk management and controls by promoting transparency and making sure that the interest of a DCO's clearing members and customers are considered by the DCO. By incorporating these sections into Subpart B, these sections will apply to all DCOs as opposed to just SIDCOs and Subpart C DCOs.
Financial Resources for SIDCOs and Subpart C DCOs
Amendments to financial resource requirements for SIDCOs and Subpart C DCOs include amendments to:
Section 39.33(a)(1), which states that SIDCOs and Subpart C DCOs that are systemically important in multiple jurisdictions or are involved in activities with a more complex risk profile shall maintain financial resources sufficient to enable these entities to meet their financial obligations to their clearing members despite a default by two clearing members creating the largest combined loss to the DCO in extreme but plausible market conditions. The amended version would replace the phrase "largest combined loss" with "largest combined financial exposure" to achieve consistency with relevant CFTC provisions and the CEA.
Section 39.33(c)(1) by adding the phrase "in all relevant currencies" to clarify that the "largest aggregate liquidity obligation" means the total amount of cash, in each relevant currency, that the defaulted clearing member would be required to pay the DCO during the time taken to liquidate or auction the defaulted clearing member's positions, as reasonably modeled by the DCO.
Section 39.22(d) to additionally require a SIDCO with access to deposit accounts and related services at the Federal Reserve to use those services where practical.
Risk Management for SIDCOs and Subpart C DCOs
Amendments to risk-management requirements for SIDCOs and Subpart C DCOs include amendments to:
Section 39.36(a)(6) to clarify that a SIDCO or Subpart C DCO that is subject to the minimum financial resources requirement set out in Section 39.11(a)(1), rather than Section 39.33(a), should use the results of its stress tests to support compliance with that requirement.
Section 39.36(b)(2)(ii) to replace the words "produce accurate results" with "react appropriately" to more accurately reflect that the purpose of sensitivity analysis is to assess whether the margin model will react appropriately to changes of inputs, parameters, and assumptions.
Section 39.36(d) to clarify that an assessment by a DCO of the theoretical and empirical properties of its margin model for all products a DCO clears should be conducted "on at least an annual basis (or more frequently if there are material relevant market developments)".
Section 39.36(e) by adding the heading "independent validation" to the provision – though whether the annual DCO validation would be required to be conducted by an independent third party, as is implied by the amendment, remains unclear.
Additional Disclosure for SIDCOs and Subpart C DCOs
Amendments to the disclosure requirements for SIDCOs and Subpart C DCOs include amendments to:
Section 39.37(b)(2) to additionally require that a SIDCO or Subpart C DCO provide notice to the CFTC of any updates to its responses to the Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) disclosure framework following material changes to its system or environment no later than ten business days after the updates are made.
Section 39.37(c) to explicitly state that a SIDCO or a Subpart C DCO must disclose relevant basic data on transaction volume and values that are consistent with the standards set out in the CPMI-IOSCO Public quantitative disclosure standards for central counterparties.
Delegation of Authority of the CFTC Under Section 140.94
Section 140.94, which addresses organization, functions, and procedures of the CFTC, has been amended to provide the Director of the Division of Clearing and Risk of the CFTC with delegated authority to act on behalf of the CFTC regarding the following matters:
Review DCO registration applications.
Determine whether an application is materially complete.
Request additional information in support of an application.
Stay the running of the 180-day review period for an application.
Request additional information in support of a rule submission.
Amendments to Part 1 – General Regulations Under the CEA
Amendments to Part 1 of the CFTC regulations remove inapplicable provisions and clarify when certain requirements do not apply regarding: