7 USC 7a-1 - Derivatives clearing organizations

U.S Code last checked for updates: Apr 29, 2024

§ 7a–1.

Derivatives clearing organizations

(a)

Registration requirement

(1)

In general

Except as provided in paragraph (2), it shall be unlawful for a derivatives clearing organization, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a derivatives clearing organization with respect to—

(A)

a contract of sale of a commodity for future delivery (or an option on the contract of sale) or option on a commodity, in each case, unless the contract or option is—

(i)

excluded from this chapter by subsection (a)(1)(C)(i), (c), or (f) of section 2 of this title; or

(ii)

a security futures product cleared by a clearing agency registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); or

(B)

a swap.

(2)

Exception

(b)

Voluntary registration

(c)

Registration of derivatives clearing organizations

(1)

Application

(2)

Core principles for derivatives clearing organizations

(A)

Compliance

(i)

In general

(ii)

Discretion of derivatives clearing organization

(B)

Financial resources

(i)

In general

(ii)

Minimum amount of financial resources

Each derivatives clearing organization shall possess financial resources that, at a minimum, exceed the total amount that would—

(I)

enable the organization to meet its financial obligations to its members and participants notwithstanding a default by the member or participant creating the largest financial exposure for that organization in extreme but plausible market conditions; and

(II)

enable the derivatives clearing organization to cover the operating costs of the derivatives clearing organization for a period of 1 year (as calculated on a rolling basis).

(C)

Participant and product eligibility

(i)

In general

Each derivatives clearing organization shall establish—

(I)

appropriate admission and continuing eligibility standards (including sufficient financial resources and operational capacity to meet obligations arising from participation in the derivatives clearing organization) for members of, and participants in, the derivatives clearing organization; and

(II)

appropriate standards for determining the eligibility of agreements, contracts, or transactions submitted to the derivatives clearing organization for clearing.

(ii)

Required procedures

(iii)

Requirements

The participation and membership requirements of each derivatives clearing organization shall—

(I)

be objective;

(II)

be publicly disclosed; and

(III)

permit fair and open access.

(D)

Risk management

(i)

In general

(ii)

Measurement of credit exposure

Each derivatives clearing organization shall—

(I)

not less than once during each business day of the derivatives clearing organization, measure the credit exposures of the derivatives clearing organization to each member and participant of the derivatives clearing organization; and

(II)

monitor each exposure described in subclause (I) periodically during the business day of the derivatives clearing organization.

(iii)

Limitation of exposure to potential losses from defaults

Each derivatives clearing organization, through margin requirements and other risk control mechanisms, shall limit the exposure of the derivatives clearing organization to potential losses from defaults by members and participants of the derivatives clearing organization to ensure that—

(I)

the operations of the derivatives clearing organization would not be disrupted; and

(II)

nondefaulting members or participants would not be exposed to losses that nondefaulting members or participants cannot anticipate or control.

(iv)

Margin requirements

(v)

Requirements regarding models and parameters

Each model and parameter used in setting margin requirements under clause (iv) shall be—

(I)

risk-based; and

(II)

reviewed on a regular basis.

(E)

Settlement procedures

Each derivatives clearing organization shall—

(i)

complete money settlements on a timely basis (but not less frequently than once each business day);

(ii)

employ money settlement arrangements to eliminate or strictly limit the exposure of the derivatives clearing organization to settlement bank risks (including credit and liquidity risks from the use of banks to effect money settlements);

(iii)

ensure that money settlements are final when effected;

(iv)

maintain an accurate record of the flow of funds associated with each money settlement;

(v)

possess the ability to comply with each term and condition of any permitted netting or offset arrangement with any other clearing organization;

(vi)

regarding physical settlements, establish rules that clearly state each obligation of the derivatives clearing organization with respect to physical deliveries; and

(vii)

ensure that each risk arising from an obligation described in clause (vi) is identified and managed.

(F)

Treatment of funds

(i)

Required standards and procedures

(ii)

Holding of funds and assets

(iii)

Permissible investments

(G)

Default rules and procedures

(i)

In general

Each derivatives clearing organization shall have rules and procedures designed to allow for the efficient, fair, and safe management of events during which members or participants—

(I)

become insolvent; or

(II)

otherwise default on the obligations of the members or participants to the derivatives clearing organization.

(ii)

Default procedures

Each derivatives clearing organization shall—

(I)

clearly state the default procedures of the derivatives clearing organization;

(II)

make publicly available the default rules of the derivatives clearing organization; and

(III)

ensure that the derivatives clearing organization may take timely action—

(aa)

to contain losses and liquidity pressures; and

(bb)

to continue meeting each obligation of the derivatives clearing organization.

(H)

Rule enforcement

Each derivatives clearing organization shall—

(i)

maintain adequate arrangements and resources for—

(I)

the effective monitoring and enforcement of compliance with the rules of the derivatives clearing organization; and

(II)

the resolution of disputes;

(ii)

have the authority and ability to discipline, limit, suspend, or terminate the activities of a member or participant due to a violation by the member or participant of any rule of the derivatives clearing organization; and

(iii)

report to the Commission regarding rule enforcement activities and sanctions imposed against members and participants as provided in clause (ii).

(I)

System safeguards

Each derivatives clearing organization shall—

(i)

establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk through the development of appropriate controls and procedures, and automated systems, that are reliable, secure, and have adequate scalable capacity;

(ii)

establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allows for—

(I)

the timely recovery and resumption of operations of the derivatives clearing organization; and

(II)

the fulfillment of each obligation and responsibility of the derivatives clearing organization; and

(iii)

periodically conduct tests to verify that the backup resources of the derivatives clearing organization are sufficient to ensure daily processing, clearing, and settlement.

(J)

Reporting

(K)

Recordkeeping

Each derivatives clearing organization shall maintain records of all activities related to the business of the derivatives clearing organization as a derivatives clearing organization—

(i)

in a form and manner that is acceptable to the Commission; and

(ii)

for a period of not less than 5 years.

(L)

Public information

(i)

In general

(ii)

Availability of information

(iii)

Public disclosure

Each derivatives clearing organization shall disclose publicly and to the Commission information concerning—

(I)

the terms and conditions of each contract, agreement, and transaction cleared and settled by the derivatives clearing organization;

(II)

each clearing and other fee that the derivatives clearing organization charges the members and participants of the derivatives clearing organization;

(III)

the margin-setting methodology, and the size and composition, of the financial resource package of the derivatives clearing organization;

(IV)

daily settlement prices, volume, and open interest for each contract settled or cleared by the derivatives clearing organization; and

(V)

any other matter relevant to participation in the settlement and clearing activities of the derivatives clearing organization.

(M)

Information-sharing

Each derivatives clearing organization shall—

(i)

enter into, and abide by the terms of, each appropriate and applicable domestic and international information-sharing agreement; and

(ii)

use relevant information obtained from each agreement described in clause (i) in carrying out the risk management program of the derivatives clearing organization.

(N)

Antitrust considerations

Unless necessary or appropriate to achieve the purposes of this chapter, a derivatives clearing organization shall not—

(i)

adopt any rule or take any action that results in any unreasonable restraint of trade; or

(ii)

impose any material anticompetitive burden.

(O)

Governance fitness standards

(i)

Governance arrangements

Each derivatives clearing organization shall establish governance arrangements that are transparent—

(I)

to fulfill public interest requirements; and

(II)

to permit the consideration of the views of owners and participants.

(ii)

Fitness standards

Each derivatives clearing organization shall establish and enforce appropriate fitness standards for—

(I)

directors;

(II)

members of any disciplinary committee;

(III)

members of the derivatives clearing organization;

(IV)

any other individual or entity with direct access to the settlement or clearing activities of the derivatives clearing organization; and

(V)

any party affiliated with any individual or entity described in this clause.

(P)

Conflicts of interest

Each derivatives clearing organization shall—

(i)

establish and enforce rules to minimize conflicts of interest in the decision-making process of the derivatives clearing organization; and

(ii)

establish a process for resolving conflicts of interest described in clause (i).

(Q)

Composition of governing boards

(R)

Legal risk

(3)

Orders concerning competition

(d)

Existing derivatives clearing organizations

(e)

Appointment of trustee

(1)

In general

(2)

Assumption of jurisdiction

If the Commission applies for appointment of a trustee under paragraph (1)—

(A)

the court may take exclusive jurisdiction over the derivatives clearing organization and the records and assets of the derivatives clearing organization, wherever located; and

(B)

if the court takes jurisdiction under subparagraph (A), the court shall appoint the Commission, or a person designated by the Commission, as trustee with power to take possession and continue to operate or terminate the operations of the derivatives clearing organization in an orderly manner for the protection of participants, subject to such terms and conditions as the court may prescribe.

(f)

Linking of regulated clearing facilities

(1)

In general

(2)

Coordination

(g)

Existing depository institutions and clearing agencies

(1)

In general

A depository institution or clearing agency registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) that is required to be registered as a derivatives clearing organization under this section is deemed to be registered under this section to the extent that, before July 21, 2010—

(A)

the depository institution cleared swaps as a multilateral clearing organization; or

(B)

the clearing agency cleared swaps.

(2)

Conversion of depository institutions

(3)

Sharing of information

(h)

Exemptions

(i)

Designation of chief compliance officer

(1)

In general

(2)

Duties

The chief compliance officer shall—

(A)

report directly to the board or to the senior officer of the derivatives clearing organization;

(B)

review the compliance of the derivatives clearing organization with respect to the core principles described in subsection (c)(2);

(C)

in consultation with the board of the derivatives clearing organization, a body performing a function similar to the board of the derivatives clearing organization, or the senior officer of the derivatives clearing organization, resolve any conflicts of interest that may arise;

(D)

be responsible for administering each policy and procedure that is required to be established pursuant to this section;

(E)

ensure compliance with this chapter (including regulations) relating to agreements, contracts, or transactions, including each rule prescribed by the Commission under this section;

(F)

establish procedures for the remediation of noncompliance issues identified by the compliance officer through any—

(i)

compliance office review;

(ii)

look-back;

(iii)

internal or external audit finding;

(iv)

self-reported error; or

(v)

validated complaint; and

(G)

establish and follow appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues.

(3)

Annual reports

(A)

In general

In accordance with rules prescribed by the Commission, the chief compliance officer shall annually prepare and sign a report that contains a description of—

(i)

the compliance of the derivatives clearing organization of the compliance officer with respect to this chapter (including regulations); and

(ii)

each policy and procedure of the derivatives clearing organization of the compliance officer (including the code of ethics and conflict of interest policies of the derivatives clearing organization).

(B)

Requirements

A compliance report under subparagraph (A) shall—

(i)

accompany each appropriate financial report of the derivatives clearing organization that is required to be furnished to the Commission pursuant to this section; and

(ii)

include a certification that, under penalty of law, the compliance report is accurate and complete.

(k)

 So in original. No subsec. (j) has been enacted.

Reporting requirements

(1)

Duty of derivatives clearing organizations

(2)

Data collection and maintenance requirements

The Commission shall adopt data collection and maintenance requirements for swaps cleared by derivatives clearing organizations that are comparable to the corresponding requirements for—

(A)

swaps data reported to swap data repositories; and

(B)

swaps traded on swap execution facilities.

(3)

Reports on security-based swap agreements to be shared with the Securities and Exchange Commission

(A)

In general

(B)

Jurisdiction

(4)

Information sharing

Subject to section 12 of this title, and upon request, the Commission shall share information collected under paragraph (2) with—

(A)

the Board;

(B)

the Securities and Exchange Commission;

(C)

each appropriate prudential regulator;

(D)

the Financial Stability Oversight Council;

(E)

the Department of Justice; and

(F)

any other person that the Commission determines to be appropriate, including—

(i)

foreign financial supervisors (including foreign futures authorities);

(ii)

foreign central banks; and

(iii)

foreign ministries.

(5)

Confidentiality agreement

(6)

Public information

(Sept. 21, 1922, ch. 369, § 5b, as added Pub. L. 106–554, § 1(a)(5) [title I, § 112(f)], Dec. 21, 2000, 114 Stat. 2763, 2763A–396; amended Pub. L. 111–203, title VII, §§ 721(e)(6), 725(a)–(c), (e), (h), July 21, 2010, 124 Stat. 1671, 1685–1687, 1693, 1695; Pub. L. 114–94, div. G, title LXXXVI, § 86001(a), Dec. 4, 2015, 129 Stat. 1797.)

cite as: 7 USC 7a-1