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CFTC Exempts ASX Clear from DCO Registration

August 25, 2015

AUThe Commodity Futures Trading Commission, on Aug. 19, exempted ASX Clear (Futures) from the obligation to register as a derivatives clearing organization with regard to swaps, “including, but not limited to, interest rate swaps denominated in U.S. dollars, Euros, Japanese yen, British pounds, Australian dollars, and New Zealand dollars.”  This concludes a process that inspired one commenter to quote hedge fund manager Paul Singer.

ASX (Clear) is part of Australia’s ASX Group, a sizeable market operator created in 2006 when the Australian Stock Exchange merged with the Sydney Futures Exchange.

The Commodity Exchange Act, section 5b (h), provides for such an exemption, to the extent that the CFTC determines registration, with its attendant obligations, would be a redundant burden on the clearing organization involved, because it is subject to comparable comprehensive supervision by appropriate authorities in its home country.

An Unfolding Exemption Policy

What is perhaps even more important than the fact of the exemption, this is the first time in the history of the DCO registration mandate that the CFTC has issued an order of exemption. This gives the rest of the world some sense of what the extra-territorial impact of recent regulatory changes in the United States will, or won’t, be.  That has been a matter of some trepidation, since without exemption the requirement applies to anyone who clears swaps for a “U.S. person,” and since the CFTC has taken a broad view of who/what counts as a U.S. person.

The Korea Exchange and the Hong Kong OTC clearing house have petitioned for their own exemptions. The news regarding ASX may be comforting for them, and may ease negotiations that are now underway between officials of the U.S. and of the Eurozone over trans-Atlantic regulatory equivalence.

There are some strings (or “terms and conditions”) attached to the exemption for ASX.  The CFTC expects that the ADX will maintain rules for such swaps that provide that all swaps “with the same terms and conditions … submitted to ASX for clearing are economically equivalent within ASX and may be offset with each other within ASX, to the extent offsetting is permitted by ADX’s rules.”

Other Strings Attached

Another string: the ASX consents to service of process within the U.S. and must identify an agent within the U.S. to accept such service as may be issued on behalf of the CFTC or the U.S. Department of Justice, “in connection with any proceedings brought against, or any investigations relating to, ASX or any U.S. person or FCM that is a clearing member….”

Further, the ASX is expected to make its books and records available to the CFTC for inspection and copying upon request.

It is also expected that the petitioner will observe the principles for financial market infrastructures set out by IOSCO.

It was on June 3 that the CFTC requested public comment on ASX’s petition to this end.  It received just one comment in response to that request. This came from Emmanuel O. Aklode of LORE Exchanges, a cloud-based business communications firm.  That comment consisted in its entirely of one quotation, from Paul Singer, “Derivatives trading should be standardized and as much as possible moved to clearinghouses.”  This is surely not the first time the members of the CFTC have encountered that general sentiment. Indeed, it seems to crystalize movement in this area on a global basis since even before the GFC.

Inspiration from Fuller

I am not well acquainted with Mr. Aklode or with LORE Exchanges for that matter. But they do seem fond of the one-line inspiration quotation. The LORE Exchanges website prominently displays the following, from Buckminster Fuller, “Integrity is the essence of everything successful.”

Well … one hopes. As with much by Fuller, that quotation seems to speak to a cleaner world than the messy one that actually exists.   We should certainly hope, though, that the CFTC’s developing exemptions policy proceeds with integrity and that it succeeds in clarifying the international character of markets, also (while we are hoping) that it avoids the pitfalls of making business with “U.S. persons” an onerous burden for clearing houses that may have a choice.

Korea Exchange’s petition for the same exemption has also thus far elicited just one public comment. This is from Ryan Madigan Raleigh, who said: “While the CFTC has not issued a clearing requirement determination for Korea Exchange, the government of Korea has imposed mandatory clearing for certain transactions – this is not right as per my point of view.”