CFTC Staff Letter 15-54: Extension of No-Action Relief for Eurex Clearing and U.S. Clearing Members

Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5044
Facsimile: (202) 418-5547 jbandman@cftc.gov
Division of Clearing and Risk Jeffrey Bandman
Acting Director a
U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Letter No. 15-54
No-Action
September 30, 2015
Division of Clearing and Risk
Mr. Thomas Book, Chief Executive Officer
Mr. Oliver Haderup, Executive Director
Eurex Clearing AG
Mergenthalerallee 61
65760 Eschborn, Germany
Re: Extension of Time-Limited No-Action Relief with Regard to Sections 5b(a) and 2(h)(1)(A) of the Commodity Exchange Act and Implementing Regulations Thereunder Dear Mr. Book and Mr. Haderup:
This is in response to your letter dated September 21, 2015 (“Letter”), to the Division of Clearing and Risk (“Division”) of the Commodity Futures Trading Commission (“Commission” or “CFTC”) requesting a further extension of the no-action relief that the Division granted to Eurex Clearing AG (“Eurex Clearing”) in CFTC Letter 14-156 and that expires on September 30, 2015 (the “No-Action Relief”). 1 In CFTC Letter 14-156, the Division stated it would not recommend that the Commission take enforcement action against (1) Eurex Clearing for failure to register as a derivatives clearing organization (“DCO”) pursuant to the requirements of Section 5b(a) of the Commodity Exchange Act (“CEA”),2 or (2) clearing members of Eurex Clearing that are U.S. persons (each, a “U.S. Clearing Member”) for failure to clear certain interest rate swaps (“IRS”) through a registered or exempt DCO pursuant to the requirements of Section 2(h)(1)(A) of the CEA and the implementing regulations thereunder, as applicable. 3 You have requested that the No-Action 1 CFTC Letter No. 14-156 (Dec. 23, 2014) and its attachment, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-156.pdf. Letter No. 14-156 extended the no-action relief originally granted in CFTC Letter No. 13-44 (July 11, 2013). 2 7 U.S.C. § 7a-1(a). 3 7 U.S.C. § 2(h)(1)(A); 17 C.F.R. pt 50.

Mr. Thomas Book
Mr. Oliver Haderup
September 30, 2015
Relief be extended until the earlier of January 31, 2016, or the date upon which Eurex Clearing becomes registered as a DCO with respect to its IRS clearing business. 4 Eurex Clearing filed its initial application for DCO registration on May 17, 2011 and amended applications on September 14, 2012, September 21, 2012, and June 1, 2015. Subsequently, Eurex Clearing submitted additional materials, which further support its application, most recently on August 19, 2015. The review period for consideration of the application has been extended to January 31, 2016.5 Eurex Clearing requests the further extension of the No-Action Relief in order to maintain the status quo during the pendency of its application for registration. Eurex Clearing further states that such extension of the No-Action Relief is an appropriate means of promoting competition and enhancing choice in clearing services and is in the public interest. In view of the foregoing, the Division has decided to extend the No-Action Relief, subject to the conditions described below, until the earlier of the date on which Eurex Clearing becomes registered as a DCO with respect to its IRS clearing business or January 31, 2016. Extension of Grant of No-Action Relief Based on the facts presented and the representations you have made, the Division will not recommend that the Commission take enforcement action against (i) Eurex Clearing for failure to register as a DCO pursuant to the requirements of Section 5b(a) of the CEA, or (ii) U.S. Clearing Members for failure to clear IRS through a registered or exempt DCO, pursuant to the requirements of Section 2(h)(1)(A) of the CEA and the implementing regulations thereunder as applicable, subject to the following conditions:
(1) Product Scope. This relief is limited to IRS currently accepted for clearing by Eurex Clearing for U.S. Clearing Members and identified in the attachment to this letter; (2) Participant Scope. The relief applies to Eurex Clearing and to its prospective U.S. Clearing Members in connection with their proprietary6 IRS clearing 4 A list of IRS products offered for clearing by Eurex Clearing for U.S. Clearing Members is in the attachment to this letter. 5 By separate letter dated September 21, 2015, Eurex Clearing requested that the review period for its DCO application be extended until January 31, 2016. 6 The term “proprietary account” is defined in § 1.3(y) of the Commission’s regulations, 17 C.F.R. § 1.3(y). The relief granted herein to U.S. Clearing Members includes transactions of a parent or affiliate of a U.S. Clearing Member.

Mr. Thomas Book
Mr. Oliver Haderup
September 30, 2015 businesses (Eurex Clearing will not accept, and no Eurex clearing member will offer for clearing through Eurex Clearing, IRS on behalf of a U.S. customer7 ); (3) Limited Duration. The no-action relief shall expire at the earlier of: (i) January 31, 2016, or (ii) the date upon which Eurex Clearing becomes registered as a DCO with respect to its IRS clearing business;8 and (4) Reporting. If a U.S. Clearing Member clears through Eurex Clearing a swap (referred to as the “alpha swap”) that has been reported to a Commission￾registered swap data repository (“SDR”) pursuant to Part 45 of the Commission’s regulations,9 then Eurex Clearing must report to an SDR, pursuant to Part 45, data regarding the two swaps resulting from the novation of the alpha swap that had been submitted to Eurex Clearing for clearing (referred to as “beta” and “gamma” swaps). 10 7 The scope of the relief provided herein does not extend to customer clearing by U.S. Clearing Members or U.S. customer clearing by any clearing member of Eurex Clearing. The term “customer” is defined in § 1.3(k) of the Commission’s regulations, 17 C.F.R. § 1.3(k). 8 Should the Commission deny Eurex Clearing’s application for DCO registration, the Division will provide Eurex Clearing and its U.S. Clearing Members with guidance and, as appropriate, no-action relief to facilitate the orderly disposition of open positions. 9 See Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136 (Jan. 13, 2012) (adopting Part 45). 10 Pursuant to Commission Regulation 39.12(b)(6), during the clearing process, a swap submitted for clearing to a DCO (the alpha swap) is extinguished or terminated, and two new swaps (the beta and gamma swaps) are created. The DCO must then report the beta and gamma swaps to an SDR under Part 45 and associate the unique swap identifier (USI) of the alpha swap with the beta and gamma swap in order for the Commission to confirm that such alpha swap was cleared. See Statement of the Commission concerning CME Rule 1001 (March 6, 2013), page 6, available at:
http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/statementofthecommission.pdf. See also Commission Regulation 45.4(a) (“[R]eporting counterparties and [DCOs] required to report swap continuation data must do so in a manner sufficient to ensure that all data in the [SDR] concerning the swap remains current and accurate, and includes all changes to the primary economic terms of the swap occurring during the existence of the swap.”); 77 Fed. Reg. at 2153 (“[T]he final rule requires registered entities and reporting counterparties to report continuation data in a manner sufficient to ensure that the information in the SDR concerning the swap is current and accurate, and includes all changes to any of the primary economic terms of the swap.”); see also Commission Regulation 49.11 (Confirmation of data accuracy). In order to avoid duplicative reporting for such transactions, Eurex Clearing should have rules that prohibit the
Part 45 reporting of the beta and gamma swaps by the original counterparties to the alpha swap. These rules
should make it clear to market participants that Eurex Clearing is reporting the beta and gamma swaps as if it were a registered DCO under the Part 45 rules.

Mr. Thomas Book
Mr. Oliver Haderup
September 30, 2015
The position taken herein concerns enforcement action only and does not represent a legal conclusion with respect to the applicability of any provision of the CEA or the Commission’s regulations. In addition, the Division’s position does not necessarily reflect the views of the Commission or any other division or office of the Commission. Because this position is based upon the representations contained in the Letter and in Eurex Clearing’s DCO application, it should be noted that any different, changed, or omitted material facts or circumstances may require a different conclusion or render this letter void. Finally, as with all no-action letters, the Division retains the authority to condition further, modify, suspend, terminate, or otherwise restrict the terms of the no-action relief provided herein, in its discretion. Should you have any questions, please do not hesitate to contact Laura Astrada at (202) 418-7622, or Alicia Lewis, Special Counsel, at (202) 418-5862. Sincerely, Jeffrey Bandman Acting Director Attachment

ATTACHMENT A- Products Offered for Clearing by Eurex Clearing AG for U.S. Persons Interest Rate Swaps:
Products:
Single currency interest rate swaps ("IRS")
Forward rate agreements ("FRA")
Overnight index swap ("OIS"),

Single currency basis swaps

Zero coupon swaps

Spot and forward starts

Compounding -flat and straight (for IRS and basis swaps)

Linear interpolation of stub periods

Front and back stubs (for IRS and OIS)

Negative interest rates

Variable notional- amortizing and roller coaster (for IRS and basis swaps)

Variable index spread on floating rates that can differ period per period (IRS and basis swaps)

Fixed coupon rates that can differ period per period (IRS and basis swaps)

IMM - International Monetary Markets- roll dates

Currencies:
Euro, U.S. dollar, British pounds, Swiss franc, and Japanese yen Terms:
Swaps entered into under ISDA® 2000/2006 and German Master Agreements - standard swaps and forward rate agreement with standard day count and business day conventions, fee legs, constant nationals, front or back stubs and floating rate indexes for each currency. Type Currencies Matuntv Supported typas Other chamcterlstics IRS EUR, GBP, USD Up to 50 years Plain vanilla (fixed/float) Basis/tenor (floaUfloat) ISDA, German framework Constant nationals Front, end stubs, forward starts EUR (Eurlbor) and GBP (Libor), 1m, 3m, 6m, 12m USD, CHF and JPY (Libor) 1m, 3m, 6m Zero Coupon Variable notional- amortizing & roller coaster Negative Interest rates IMM roll dates Variable spreads &fiXed coupons ~C~mjlOUn~I(]L __ CHF, JPY Up to 30 years OIS EUR, GBP, USD, CHF, JPY Up to 30 years Plain vanilla (fixed/float) FRA EUR, GBP, USD, CHF, JPY Up to 2years Plain vanilla (fixed/float) ... _ ~~ 4