e9-18854

FR Doc E9-18854[Federal Register: August 6, 2009 (Volume 74, Number 150)]

[Notices]

[Page 39303-39305]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr06au09-37]

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COMMODITY FUTURES TRADING COMMISSION

RIN 3038-AC

Determination of Appropriateness of the Supervision by the

Bundesanstalt f[uuml]r Finanzdienstleistungaufsicht (BaFin), in

Conjunction With Deutsche Bundesbank (Bundesbank), Both of the Federal

Republic of Germany, With Respect to the Clearing Activities of Eurex

Clearing AG (Eurex)

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and Order.

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SUMMARY: The Commodity Futures Trading Commission (CFTC) is issuing an

order, pursuant to Section 409(b)(3) of FDICIA, stating that the

supervision provided by BaFin, in conjunction with the Bundesbank, with

respect to the clearing activities of Eurex satisfies appropriate

standards (the Order). The Order will permit Eurex to operate a

multilateral clearing organization (MCO) in the United States for any

over-the-counter (OTC) derivative instrument.

DATES: Effective Date: July 31, 2009.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate

Director, (202) 418-5092, rwasserman@cftc.gov, or Nancy Schnabel,

Attorney-Advisor, (202) 418-5334, nschnabel@cftc.gov, Division of

Clearing and Intermediary Oversight, Commodity Futures Trading

Commission, Three Lafayette Centre, 1151 21st Street, NW., Washington,

DC 20581.

SUPPLEMENTARY INFORMATION: Section 409(a) of FDICIA provides that, in

order to operate an MCO \1\ in the United States

[[Page 39304]]

for an OTC derivative instrument,\2\ a clearing organization must meet

one of several alternative requirements.\3\ Section 409(b)(3) of FDICIA

sets forth one such alternative.\4\ It states that a clearing

organization will qualify to operate such an MCO, if such clearing

organization is supervised by a foreign financial regulator that the

Comptroller of the Currency, the Board of Governors of the Federal

Reserve System, the Federal Deposit Insurance Corporation, the

Securities and Exchange Commission, or the CFTC, as applicable, has

determined satisfies appropriate standards.\5\

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\1\ Section 408(1) of FDICIA (12 U.S.C. 4421(1)) defines MCO to

mean ``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.''

\2\ Section 408(2) of FDICIA (12 U.S.C. 4421(2)) defines ``OTC

derivative instrument.''

\3\ 12 U.S.C. 4422(a).

\4\ 12 U.S.C. 4422(b)(3).

\5\ Section 409(b)(3) of FDICIA (12 U.S.C. 4422(b)(3)). The CFTC

has issued three previous orders, pursuant to Section 409(b)(3) of

FDICIA, determining that the supervision of a particular MCO by a

foreign financial regulator met appropriate standards. The foreign

financial regulators involved were (i) the Norwegian Banking,

Insurance and Securities Commission, (ii) the Alberta (Canada)

Securities Commission, and (iii) the United Kingdom Financial

Services Authority. See 67 FR 2419 (January 17, 2002), 71 FR 10958

(March 3, 2006), and 73 FR 44706 (July 31, 2008), respectively.

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Eurex, a central counterparty licensed by BaFin, has requested that

the CFTC determine that the supervision provided by BaFin, in

conjunction with the Bundesbank,\6\ with respect to Eurex's clearing

activities, satisfies appropriate standards in accordance with Section

409(b)(3) of FDICIA.\7\ Such a determination would permit Eurex to

operate an MCO in the United States for any OTC derivative

instrument.\8\

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\6\ The Bundesbank is the central bank of the Federal Republic

of Germany. See http://www.bundesbank.de/aufgaben/aufgaben.en.php.

\7\ See Letter, dated March 27, 2009, from Paul Architzel of

Alston & Bird LLP, submitted on behalf of Eurex, to David A.

Stawick, Secretary of the CFTC, with enclosure and appendices

thereto (collectively, the Application).

BaFin is authorized under the German Banking Act to (i)

supervise the operation of a ``credit institution'' conducting

``banking business'' (including a central counterparty) domiciled in

Germany, and to (ii) enforce compliance with applicable laws, rules

and regulations. Because clearing comprises ``banking business''

under the German Banking Act, BaFin has the authority to regulate

any entity engaged in the clearing of OTC derivative instruments.

BaFin undertakes such supervision with the assistance of Bundesbank.

See Sections 6 and 7 of the German Banking Act.

\8\ Currently, Eurex intends to clear as an MCO (i) OTC

derivative instruments that share common terms and conditions with

commodity contracts that are listed on the Eurex Deutschland

Exchange, and (ii) credit default swaps.

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In reviewing the request from Eurex, the CFTC primarily considered

three factors. First, the CFTC considered whether the German statutory

and regulatory regime applicable to Eurex clearing activities

substantially corresponds with the Commodity Exchange Act (the CEA)

including the core principles applicable to a derivatives clearing

organization (DCO), and the regulations promulgated thereunder (the

Regulations).\9\ In Germany, a central counterparty such as Eurex, is

regulated as a ``credit institution'' conducting ``banking business.''

\10\ Accordingly, the CFTC reviewed translated versions of the

following documents, among others: (i) The Gesetz [uuml]ber das

Kreditwesen (i.e., the German Banking Act); (ii) the guidance that

BaFin or Bundesbank provided on compliance therewith, including (A)

``Minimum Requirements for Risk Management'' (Circular 5/2007), (B)

Auditor's Report Regulation,\11\ (C) Principle I (Concerning the

Capital of Institutions), and (D) Principle II (Concerning Own Funds

and the Liquidity of Institutions); and (iii) the Bundesgesetzblatt

(i.e., the German Insolvency Statute); and (iv) Gesetz gegen

Wettbewerbsbeschr[auml]nkunge (i.e., the German Act Against Restraints

of Competition). The CFTC also reviewed an analysis provided by Eurex

regarding the correspondence between the German statutory and

regulatory regime and the core principles applicable to a DCO.

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\9\ See Section 5b(c)(2) of the CEA (7 U.S.C. 7a-1(c)(2)(A)-(N))

and Appendix A to Part 39 of the Regulations (17 CFR pt. 39, app.

A).

Section 409(b)(3) of FDICIA (12 U.S.C. 4422(b)(3)) does not

reference the supervision of the foreign financial regulator over

trading, and the CFTC has accordingly not reviewed BaFin or

Bundesbank supervision of trading in considering the Eurex request.

\10\ See Attachment to the Application entitled, ``Permit

according to Section 32 of the Banking Act, issued by BaFin to Eurex

as of December 18, 2006 (GZ: WA 22-K 5000-10119203/2006).''

\11\ The full title of the Auditor's Report Regulation is

``Regulation, as of December 17, 1998, governing the auditing of the

annual accounts and interim reports of credit institutions and

financial services institutions and auditing in accordance with

section 12(1) sentence 3 of the Act on Investment Companies as well

as the reports to be drawn up on these.''

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Second, the CFTC considered whether the supervision provided by

BaFin, in conjunction with Bundesbank, with respect to Eurex's clearing

activities, substantially corresponds with the supervision provided by

the CFTC with respect to the activities of a DCO. Accordingly, the CFTC

reviewed the manner in which BaFin, with the assistance of the

Bundesbank, conducts supervision of a credit institution (including a

central counterparty such as Eurex), both on an annual basis and

through special reviews.\12\ The CFTC also reviewed the manner in which

BaFin, as well as the Bundesbank, rely on external auditors of a credit

institution in conducting certain aspects of such supervision,

including the control which BaFin, as well as Bundesbank, exerts over

such external auditors.

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\12\ The division of responsibilities between BaFin and the

Bundesbank may be found in the Supervision Directive. See Attachment

to the Application entitled, ``Directive for Implementation and

Quality Assurance of the Current Supervision of the Credit and

Financial Service Institutions by the Deutsche Bundesbank.''

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Third, the CFTC considered whether the supervision provided by

BaFin, with the assistance of the Bundesbank, substantially comports

with the Principles and Objectives of Securities Regulation (the IOSCO

Principles), as developed by the International Organization of

Securities Commissions (IOSCO).

In reviewing the request from Eurex, the CFTC also considered

additional facts, such as (i) the risk management procedures

implemented by Eurex with respect to the clearing of credit default

swaps, and (ii) existing arrangements with BaFin to exchange

information regarding Eurex.\13\

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\13\ See Memorandum of Understanding, dated October 17, 1997,

between the Commission and the German Bundesaufsichtsamt f[uuml]r

den Wertpapierhandel (i.e., the predecessor of BaFin) Concerning

Consultation and Cooperation in the Administration and Enforcement

of Futures Laws (the Memorandum of Understanding), and the Side

Letter Relating to the Memorandum of Understanding, dated July 28,

2009 between the Commission and BaFin.

BaFin is also a signatory of the multilateral Declaration on

Cooperation and Supervision of International Futures Exchanges and

Clearing Organizations, and the IOSCO Multilateral Memorandum of

Understanding Concerning Consultation and Cooperation and the

Exchange of Information.

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As a matter of courtesy, the CFTC invited the other federal

financial regulators listed in Section 409(b)(3) of FDICIA to comment

on the Application. The CFTC also invited the public to comment on the

Application, by posting the Application on its Web site on May 13,

2009. The CFTC received no comments.

Based on its review, the CFTC has determined, pursuant to Section

409(b)(3) of FDICIA, that the supervision provided by BaFin, in

conjunction with the Bundesbank, with respect to the clearing

activities of Eurex satisfies appropriate standards. Accordingly, the

CFTC has issued this Order. Any material changes or omissions in the

facts and circumstances upon which this Order is based might require

the CFTC to reconsider this matter.

[[Page 39305]]

Issued in Washington, DC, on July 31, 2009.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E9-18854 Filed 8-5-09; 8:45 am]

Last Updated: August 6, 2009