Comment Text:
The CEA requires a DCO to comply with the DCO Core Principles and any requirement that the Commission imposes by rule or regulation. The CEA further provides that, subject to any rule or regulation prescribed by the Commission, a DCO has “reasonable discretion” in establishing the manner by which the DCO complies with each DCO Core Principle. (12) Currently, a DCO is required to comply with all Commission regulations that were adopted to implement the DCO Core Principles. The Commission is proposing regulations that would allow a non-U.S. clearing organization that seeks to clear swaps for U.S. persons, (13) including FCM customers, to register as a DCO and, in most instances, comply with the applicable legal requirements in its home country as an alternative means of complying with the DCO Core Principles.
A non-U.S. clearing organization would be eligible for this alternative compliance regime if:
(1) The Commission determines that the clearing organization's compliance with its home country regulatory regime would satisfy the DCO Core Principles; (14)
(2) the clearing organization is in good regulatory standing in its home country;
(3) the Commission determines that the clearing organization does not pose substantial risk to the U.S. financial system; and
(4) a memorandum of understanding (MOU) or similar arrangement satisfactory to the Commission is in effect between the Commission and the clearing organization's home country regulator. Each of these requirements is described in greater detail below.
There must be clear explanation, public notice, and the opportunity to challenge or seek further information about each of these requirements. The exhibits to be filed should be
A) Filed in a public docket with substantial notice, ie 90-120 days before becoming effective.
B) Supplied to the relevant Congressional committees, ie the House and Senate committees with oversight over such activities and regulation;
C) Submitted to the Federal Reserve and the Department of the Treasury overseeing foreign investment in the United States. Copies and notices of exemption requests should also be made public and subject to complaint or challenge during the notice and review period by any interested person or entity.
D) Describing the level and amount of derivatives clearing for both US originated and foreign originated derivatives.
E) Explaining any differences between the regulatory regime for the United States DCOs and the regulatory regime outside the United States as to size, length, or risk of derivatives subject to clearing.
F) Explaining and justifying any differences in reporting and event reporting for DCOs in the United States.
If fully comparable risk, transparency, reporting, and regulation requirements are not established for offshore DCOs, there is a risk first, that there will be tendency to seek the weakest regulatory regime available for DCO's (the Delaware corporations syndrome) in other countries; and second, that the ability to assess and manage Derivatives risk will be impeded in the event of a financial crisis. Therefore, the exceptions to US regulations for DCOs should be limited, and petitions for exemption by offshore DCO's should be well documented, made publicly available, and subject to challenge. The notice or public document should also include the memorandum of understanding regarding any offshore regulatory scheme. And those MOUs themselves should be publicly filed and subject to review by regulatory agencies, Congress, and interested individuals. The regulatory framework to reduce risk enacted in the aftermath of the Great Recession of 2008 and the Dodd-Frank reforms should not be substantially weakened by granting substantial new exceptions for derivatives clearing for offshore entities, based on a superficial claim of comparable regulatory scrutiny and compliance.
I find the following statement particularly troubling and do not support an offshore exemption which would allow such reduced compliance of reporting and event identification. "The DCO would also be held to certain ongoing and event-specific reporting requirements that are more limited in scope than the reporting requirements for existing DCOs."
An applicant for alternative compliance would be required to file only certain exhibits of Form DCO, (15) including a regulatory compliance chart in which the applicant would identify the applicable legal requirements (16) in its home country that correspond with each DCO Core Principle and explain how the applicant satisfies those requirements. Under the current registration regime, an applicant must demonstrate compliance with the DCO Core Principles and Part 39. Under the alternative compliance regime, an applicant must demonstrate: (1) That compliance with its home country requirements would satisfy the DCO Core Principles, and (2) compliance with those requirements. If the application is approved by the Commission, the DCO would be permitted to comply with its home country regulatory regime rather than Part 39 (with the exception of § 39.15, which concerns treatment of funds). Because the DCO would clear swaps for customers (17) through registered FCMs, the DCO would be required to fully comply with the Commission's customer protection requirements, (18) as well as the swap data reporting requirements in part 45 of the Commission's regulations. The DCO would also be held to certain ongoing and event-specific reporting requirements that are more limited in scope than the reporting requirements for existing DCOs.
