Extension of No-Action Relief for Korea Exchange Regarding Section 5b(a) of the Commodity Exchange Act

U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5000
Facsimile: (202) 418-5521 www.cftc.gov
Division of Clearing and
Risk
CFTC Letter No. 14-150
No-Action
December 18, 2014
Division of Clearing and Risk
Mr. Kiwon Kang
President & COO
Derivatives Markets Division
Korea Exchange, Inc.
825-3, beomil-dong, Dong-gu
Busan 601-720, Republic of Korea
Re: Extension of No-Action Relief with Regard to Section 5b(a) of the Commodity Exchange Act and Commission Regulations Thereunder Dear Mr. Kang:
This is in response to your letter dated December 5, 2014 (“Letter”) to the Division of Clearing and Risk (“Division”) of the Commodity Futures Trading Commission (“Commission”). In the Letter, you request that the Division extend the no-action relief granted to Korea Exchange, Inc. (“KRX”) by letter dated June 26, 2014, 1 from the derivatives clearing organization (“DCO”) registration requirement under Section 5b(a) of the Commodity Exchange Act (“CEA”). Pursuant to the no-action relief, KRX is permitted to clear Korean Won-denominated interest rate swaps (“KRW IRS”) for proprietary trades of U.S. clearing members. The relief is set to expire at the earlier of: (i) December 31, 2014; or (ii) the date on which the Commission either registers KRX as a DCO under Section 5b(a) of the CEA, or the Commission exempts KRX from registration pursuant to Section 5b(h) of the CEA. By letter dated November 26, 2014, the Division informed KRX that it was amenable to extending the no-action relief until December 31, 2015, subject to KRX notifying the Division, no later than December 15, 2014, that it will file by June 30, 2015: (i) a materially complete Form DCO application for registration as a DCO; or (ii) a petition for an exemption from registration. The Division’s letter also set forth the standards and procedures applicable to a petition for an exemption from registration.

1
CFTC Letter 14-87 (June 26, 2014).

Mr. Kiwon Kang
December 17, 2014
In the Letter, you represent that KRX will file, by June 30, 2015, a petition for an exemption from DCO registration. 2 Based on this representation, and in order to allow KRX the necessary time to prepare and file its petition, the Division will extend the no-action relief now in effect and will not recommend that the Commission take enforcement action against KRX for failure to register as a DCO pursuant to the requirements of Section 5b(a) of the CEA, subject to the following conditions:
(1) Product Scope. This relief is limited to clearing of KRW IRS swaps; (2) Participant Scope. The relief applies to KRX’s clearing of proprietary trades 3 of U.S. Clearing Members; (3) Reporting. If a clearing member clears through KRX 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, 4 then KRX 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 KRX for clearing (referred to as “beta” and “gamma” swaps); 5 and

2
Pursuant to an exemption, KRX would be authorized to clear only proprietary swaps positions for U.S. persons. In order to clear both proprietary and customer swaps positions for U.S. persons, KRX would have to register with the Commission as a DCO. 3 See 17 C.F.R. § 1.3(y) (definition of “proprietary account”). 4 See Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136 (Jan. 13, 2012) (adopting Part 45). 5 Pursuant to Regulation 39.12(b)(6), 17 C.F.R. § 39.12(b)(6), during the clearing process, a swap submitted for clearing to a registered DCO (the alpha swap) is extinguished or terminated, and two new swaps (the beta and gamma swaps) are created. The registered DCO must then report the beta and gamma swaps to an SDR under
Part 45 and associate the unique swap identifier of the alpha swap with the beta and gamma swaps 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 17 C.F.R. § 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.”). In order to avoid duplicative reporting for such transactions, KRX 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 KRX is reporting the beta and gamma swaps as if it were a registered DCO under the Part 45 rules.

Mr. Kiwon Kang
December 17, 2014
(4) Limited Duration. The no-action relief shall expire at the earlier of: (i) December 31, 2015 or (ii) the date upon which the Commission exempts KRX from registration as a DCO under Section 5b(h) of the CEA. 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, 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 Eileen Donovan, Acting Deputy Director, at (202) 418-5096, edonovan@cftc.gov; or Tad Polley, Acting Associate Director, at (312) 596-0551, tpolley@cftc.gov. Sincerely, Phyllis Dietz Acting Director