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Better Markets Applauds CFTC Decision Not to Encourage Regulatory Arbitrage through Expansive Exemptions for Foreign Clearinghouses

Earlier this week, the Commodity Futures Trading Commission (CFTC) finalized a framework for exempting certain foreign clearinghouses from U.S. derivatives clearing organization registration requirements. Joseph R. Cisewski, Senior Derivatives Consultant and Special Counsel for Better Markets, discusses the significance of the move.
 
The Dodd-Frank Act mandates and encourages the migration of significant derivatives risks to clearinghouses, which provide risk-management discipline throughout the derivatives markets and reduce systemic risks presented by individual financial institutions. The resulting concentration of risks in clearinghouses, however, has received significant international attention from central banks and other regulators.  They recognize that the significantly expanded derivatives clearing in the aftermath of the 2008 financial crisis requires comprehensive supervision and regulation of clearinghouses, clearing practices, and interconnected clearing members. 
 
Nevertheless, earlier this week, the CFTC finalized a framework for exempting certain foreign clearinghouses from U.S. registration (and therefore from much U.S. regulation and oversight). Although our comment letter to the proposal raised significant legal and policy issues that continue to be relevant and concerning, the CFTC’s final exemptive framework heeds our most critical concerns and contemplates a far more measured approach than the agency proposed in 2019. Most importantly, the CFTC’s final framework limits the exemption to certain foreign clearinghouses accepting non-customer (‘proprietary’) positions cleared directly or indirectly by U.S. clearing members, much as the CFTC has passively allowed for years pursuant to ad hoc staff actions. 
 
We commend the CFTC for abandoning the worst elements of its 2019 proposal and for its determination not to enable regulatory arbitrage, not to further complicate U.S. customer recovery efforts in the event of a clearing-member bankruptcy, and not to enact yet another regulation designed to support development of parallel derivatives markets outside of the United States. 
 
“Yet, the CFTC must give additional regulatory attention to the risks posed by proprietary clearing in exempted clearinghouses.  Although U.S. customers will not be permitted to clear through foreign unregistered clearing members and foreign unregistered clearinghouses (which is essentially what the CFTC put on the table last year), U.S. customers will continue to face risks associated with clearing firms directly or indirectly clearing their proprietary positions through exempted foreign clearinghouses. Even with substantial CFTC protections for U.S. customers—like required segregation of U.S. customer funds—direct and interaffiliate risks will remain and may be significant. 
 
“For this reason, in the coming months, we encourage the CFTC to use information gleaned from its new reporting requirements under the exemptive framework to publish a public report on (1) the extent and scope of proprietary clearing activities in exempted foreign clearinghouses; and (2) the nature and magnitude of risks posed by those activities to the U.S. customers of the relevant clearing firms and their affiliates. As part of this review, we encourage the CFTC to assess the adequacy of disclosures made by the relevant clearing members to their U.S. customers relating to these risks.”
 
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.com.

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