Industry Oversight
Clearing Organizations
Derivatives Clearing Organizations
A derivatives clearing organization (DCO) is a clearinghouse, clearing association, clearing corporation, or similar entity that enables each party to an agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties; arranges or provides, on a multilateral basis, for the settlement or netting of obligations; or otherwise provides clearing services or arrangements that mutualize or transfer credit risk among participants.
Any clearinghouse that seeks to provide clearing services with respect to futures contracts and options on such futures contracts traded on a designated contract market (DCM) must register with the CFTC as a DCO before it can begin providing such services. To obtain and maintain registration, a DCO must comply with the DCO core principles established in Section 5b, 7 USC § 7a-1, of the Commodity Exchange Act (CEA):
- Adequate financial, operational, and managerial resources.
- Appropriate standards for participant and product eligibility.
- Adequate and appropriate risk management capabilities.
- Ability to complete settlements on a timely basis under varying circumstances.
- Standards and procedures to protect member and participant funds.
- Efficient and fair default rules and procedures.
- Adequate rule enforcement and dispute resolution procedures.
- Adequate and appropriate systems safeguards, emergency procedures, and plan for disaster recovery.
- Obligation to provide necessary reports to allow the CFTC to oversee clearinghouse activities.
- Maintenance of all business records for five years in a form acceptable to the CFTC.
- Publication of clearinghouse rules and operating procedures.
- Participation in appropriate domestic and international information-sharing agreements.
- Avoidance of actions that are unreasonable restraints of trade or that impose anti-competitive burdens on trading.
How to Register as a Derivatives Clearing Organization
Criteria, procedures, and requirements for registration as a DCO are set forth in Section 5b of the CEA, 7 USC § 7a-1, and Part 39 of the CFTC’s regulations. Appendix A to Part 39 provides specific information on these requirements and guidance to applicants seeking to become registered DCOs.
Multilateral Clearing Organizations
A multilateral clearing organization (MCO) is a system utilized by more than two participants in which the bilateral credit exposures of participants arising from the transactions cleared are effectively eliminated and replaced by a system of guarantees, insurance, or mutualized risk of loss.
Section 409 of the Federal Deposit Insurance Corporation Improvement Act, 12 USC § 4422, provides that an MCO for over-the-counter derivatives may operate in the United States if, among other alternatives, the MCO is supervised by a foreign financial regulator that the CFTC, or one of several other United States financial regulators, has determined satisfies appropriate standards.