CFTC staff grants relief for Eurex to clear swaps

By Amy Leisinger, J.D.

On December 20, the CFTC staff issued three letters granting permission to Eurex Clearing AG to begin clearing swap transactions on behalf of U.S. futures commission merchant (FCM) customers. In the series of letters, the staff confirms Eurex’s compliance with applicable requirements, provides relief from certain CFTC regulations, and provides no-action relief allowing modifications to an acknowledgment letter necessary to deposit customer margin (CFTC Letter Nos. 18-30, 18-31, and 18-32).

FCM clearing. In the first letter, the CFTC’s Division of Clearing and Risk noted that the February 2016 order granting registration to Eurex as a derivatives clearing organization (DCO) required the organization to comply the Commission’s straight-through-processing requirements in Regulation 39.12(b)(7) before clearing certain swap transactions. The staff confirmed that Eurex has adequately demonstrated its ability to comply with the straight-through-processing requirements. Prior to this relief, Eurex could clear swap transactions for U.S. persons but not for customers of FCMs. The staff also approved certain rules submitted by Eurex.

Depositing margin collateral. The second letter, issued jointly by the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight, permits FCMs that are Eurex clearing members to deposit customer-owned securities as margin collateral for swap transactions with Clearstream Banking AG, a German central securities depository (CSD). CFTC regulations permit an FCM or DCO to hold customer funds deposited to margin with a foreign bank if the bank maintains capital in excess of $1 billion and the FCM or DCO holds U.S. dollars in the United States in segregated accounts on behalf of customers in an amount sufficient to meet all U.S. dollar obligations.

In its request for relief, Eurex explained that Clearstream does not maintain regulatory capital in excess of $1 billion as required and that an FCM holding customer securities denominated in U.S. dollars at Clearstream (outside the U.S.) does not constitute the FCM holding U.S. dollar denominated assets in the U.S. to meet its U.S. dollar obligations. However, Eurex noted, Clearstream operates and is regulated as a CSD and its banking activities are “purely ancillary” to its CSD operations. In the event of insolvency, any U.S. dollar-denominated securities deposited at Clearstream would be protected from the third-party creditor claims under German and Luxembourg law as they move through the custody chain back to the U.S., Eurex stated.

The staff highlighted Eurex’s representations that each of its FCM clearing members will establish segregated accounts at Clearstream to hold securities deposited by customers and that Clearstream would provide daily account balance information for each FCM customer account it maintains to the relevant self-regulatory organizations or the National Futures Association to qualify as a depository for customer funds. The staff granted the requested relief from the CFTC’s regulations subject to the certain conditions, including:

• The relief is limited to customer-owned securities as margin and does not extend to the holding of customer margin for futures contracts by Clearstream.
• Each Eurex FCM clearing member must provide each prospective Eurex clearing customer with a written disclosure statement describing the Eurex clearing process and associated risks.
• If an FCM clearing member of Eurex Clearing carries for another non-clearing FCM an account that includes swap positions cleared through Eurex, the clearing member must take steps to ensure that the non-clearing FCM has provided the disclosure statement to its customers.
• Eurex and its FCM clearing members may only accept customer-owned securities that are issued in, or by the governments of, Germany, France, United States, Canada, United Kingdom, and Japan.
• Eurex must at least annually conduct due diligence to determine that each entity in the custody chain for each of the relevant jurisdictions continues to be a bank with at least $1 billion in capital, a CSD, or a central bank in good regulatory standing. 

Acknowledgment modification. The third letter, the Division of Clearing and Risk, provides no-action relief permitting modifications to the acknowledgment letter that Eurex is required to obtain pursuant to previous no-action relief from the Deutsche Bundesbank in order to deposit customer margin in the form of cash at the Bundesbank. Eurex had requested that the Bundesbank provide an acknowledgment letter for customer funds that Eurex will deposit, but the Bundesbank, as the central bank of Germany, proposed to execute the letter modified with respect to the operations of a central bank. The division agreed that the proposed new language is sufficiently broad to take into account the information originally contemplated and stated that it would not recommend enforcement action against for executing the modified acknowledgment letter.

Commissioner statements. CFTC Chairman J. Christopher Giancarlo noted that the Commission is committed to ensuring that the staff takes a “considered, yet flexible approach” to applying the agency’s rules in cross-border circumstances and stated that he hopes regulators in other jurisdictions will take similar steps in appropriate circumstances. “Such shared efforts are essential to address harmful market fragmentation and to foster efficient financial markets to support global economic growth,” he said.

Commissioner Brian Quintenz, however, objected to the no-action relief, noting that, in 2017, the European Commission introduced legislation that did not acknowledge the commitment made to the CFTC with the cross-border CCP agreement the year before. Since then, he said, the EC has not provided any assurances on the status of the 2016 agreement so that the treatment of U.S. CCPs will not materially change. The commissioner did, however, commend the conditioning of the relief on the absence of any material increase in EU obligations imposed on U.S. DCOs.

The letters are CFTC Letter Nos. 18-30, 18-31, and 18-32.