Shearman & Sterling LLP | FinReg | HM Treasury Confirms Equivalence of US Commodity Futures Trading Commission Regime for Central Counterparties
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  • HM Treasury Confirms Equivalence of US Commodity Futures Trading Commission Regime for Central Counterparties


    A U.K. statutory instrument has been published specifying that the US Commodity Futures Trading Commission regime for central counterparties is equivalent to the U.K. regime (which is set out under the U.K. European Market Infrastructure Regulation). The new SI — The Central Counterparties (Equivalence) (United States of America) (Commodity Futures Trading Commission) Regulations 2023 (with accompanying explanatory note) — will take effect from December 28, 2023. The CFTC equivalence decision will only apply to CCPs that are registered with the CFTC and have either been classified as systemically important by the CFTC or otherwise voluntarily comply with the CFTC requirements for systemically important CCPs.
    The equivalence determination in total covers six U.S. CCPs, two of which are systemically important (CME and ICE Clear Credit) and four of which are non-systemically important (Nodal Clear, Options Clearing Corporation, Minneapolis Grain Exchange and ICE Clear US). The equivalence determination imposes additional requirements for systemically important CCPs, discussed below. The determination does not cover CCPs registered with the U.S. Securities and Exchange Commission, and where a CCP that is covered by this decision is also registered with the SEC, the decision only applies to the clearing services provided under the CFTC’s regime. U.S. SEC-registered CCPs are: The Depository Trust Corporation, ICE Clear Credit, Options Clearing Corporation, National Securities Clearing Corporation and the Fixed Income Clearing Corporation.
    The U.K. has granted equivalence decisions for CCP regimes in a range of jurisdictions following Brexit, meaning U.K. businesses and trading venues can continue to use those clearing services after the end of the Temporary Recognition Regime, provided that the Bank of England grants the individual CCP concerned recognition status. Pending the BoE’s recognition decision, the six U.S. CCPs captured by the CFTC equivalence determination will remain in the temporary recognition regime, which allows CCPs that were entitled to provide services in the U.K. prior to the Brexit transition period to continue to do so. The TRR is set to expire on December 31, 2025 (the transitional period was recently extended by a year). It remains to be seen whether HM Treasury will grant equivalence for SEC-registered CCPs.
    U.S. Non-Systemic CCPs
    Non-systemic U.S. CCPs caught by the CFTC equivalence determination are those that have elected to become a “Subpart C” Derivatives Clearing Organization (noted on the CFTC register, currently Nodal Clear, Options Clearing Corporation, Minneapolis Grain Exchange and ICE Clear US, as mentioned above) and therefore voluntarily comply with the same requirements as systemically important CCPs under the CFTC regime. These CCPs are therefore able to provide services to U.K.-established businesses once granted recognition by the BoE.
    EU Equivalence for U.S. CCPs
    The EU has granted equivalence for both CFTC- and SEC-registered CCPs and so there is a longer list of U.S. clearing houses who have access to the EU market.  The European Securities and Markets Authority has granted recognition for eight U.S. CCPs: CME, ICE Clear Credit, Minneapolis Grain Exchange, ICE Clear US, Options Clearing Corporation, the Fixed Income Clearing Corporation, National Securities Clearing Corporation and Nodal Clear. All are Tier 1 CCPs for the purposes of EU EMIR, meaning they are deemed non-systemically important.
    U.S. Systemic CCPs
    ICE Clear Credit and the Chicago Mercantile Exchange are the only CCPs to have been classified as systemically important by the CFTC.
    The Principles for Financial Market Infrastructure require systemically important CCPs to take extra steps to minimize risk. The CFTC regime has implemented certain of the PFMI standards differently to U.K. EMIR. The CFTC’s implementation diverges from the U.K. in terms of: (i) anti-procyclicality; (ii) minimum liquidation period; and (iii) prefunded financial resources.
    For the determination of equivalence to apply, HM Treasury requires CFTC-registered CCPs whose failure could significantly affect the stability of U.K. markets (currently ICE Clear Credit and CME) to adopt, subject to exclusions for certain agricultural commodity derivative contracts, internal rules and procedures equivalent to U.K. EMIR in the three areas mentioned above in order to be recognized by the Bank of England. They must:
    • adopt one of the three measures set out in U.K. EMIR to address and limit procyclical changes in margin for all derivative contracts;
    • adopt a two-day liquidation period for derivative positions that are not traded over-the-counter, where the margin for these positions is collected on a net basis; and
    • hold a level of prefunded financial resources sufficient to cover the default of the two clearing members to which it has the largest exposures, under extreme but plausible market conditions.
    The explanatory note confirms that, in practice, CME and ICE Clear Credit have adopted equivalent rules and procedures in these areas.
    EU CCPs
    The U.K. granted equivalence to the EEA’s regime for CCPs in 2020. There are no additional requirements applicable to systemically important CCPs under this determination, unlike the CFTC equivalence determination. The Bank of England has so far recognized two EU CCPs, Cboe Clear Europe and Eurex Clearing.
    EU Equivalence for U.K. CCPs
    The EU has granted a temporary equivalence decision for U.K. CCPs which expires on June 30, 2025. ESMA has granted recognition to three U.K. CCPs: LCH, ICE Clear Europe and LME Clear.
    Rest of the World
    The U.K. recently granted equivalence decisions for the following regimes — there are no “additional” requirements applicable to these regimes, unlike the equivalence decision for systemically important CCPs under the CFTC’s regime:
    EU Equivalence for Rest of World CCPs
    The EU has granted equivalence for a range of overseas regimes outside the U.S. and U.K., capturing a far wider range of regimes than the U.K. so far. ESMA has recognized a CCPs within those third countries.