As the year 2008 drew to a close, the Commodity Futures Trading Commission (“CFTC”) took action in several areas. CFTC approval was granted to several derivatives clearing organizations (“DCOs”), also colloquially known as central counterparties (“CCPs”): the Chicago Mercantile Exchange Inc.’s (the “CME’s”) Clearinghouse (to clear over-the-counter (“OTC”) credit default swaps (“CDSs”)); the International Derivatives Clearinghouse, LLC (“IDC”) (to clear OTC interest rate and/or currency derivatives, among other products); the Natural Gas Exchange Inc. (“NGX”) (to clear OTC energy products); and ICE Clear U.S. Inc. (to clear OTC agricultural swaps). In addition, the CFTC’s Office of the General Counsel issued no-action relief, permitting the offer and sale in the United States of the Korea Exchange’s (“KX’s”) futures contract based on the KOSPI 200 Stock Index, of late the KX’s most actively traded futures contract. Finally, the CFTC published a proposal to require that commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) file their disclosure documents electronically with the National Futures Association (“NFA”), which serves as the self-regulatory organization of the futures industry.
Expansion in the Ranks of Derivatives Clearing Organizations Credit Derivatives.
The President’s Working Group on Financial Markets (“PWG”) recently announced1 the execution by the Federal Reserve Board of Governors (“FRB”), the Securities and Exchange Commission (“SEC”) and the CFTC of a Memorandum of Understanding (“MOU”)2 regarding CDS CCPs.3 In order to promote the PWG’s goal of “facilitat[ing] the regulatory approval process and . . . promot[ing] more consistent regulatory oversight,” the MOU established a framework for the SEC, CFTC and FRB to consult each other and share information on issues related to CDS CCPs.4
On Dec. 23, 2008, the CFTC announced that the CME will clear certain CDS contracts through the CME’s clearinghouse, a registered DCO.5 The CME has certified that its CDS clearing will comply with the DCO Core Principles enumerated in Section 5b(c)(2) of the Commodity Exchange Act and Part 39 of the CFTC’s regulations.6
Prior to the CME’s certification, CFTC staff reviewed the CME’s plans to clear credit default swaps, including the CME’s planned risk management procedures, and notified the CME that the CFTC staff would not object to the certification. Pursuant to the above-mentioned MOU, the CFTC coordinated and consulted with the FRB and SEC staffs in reviewing the CME’s plans. The FRB approved the CFTC staff’s decision not to object to the CME’s certification.7
Interest Rate and Currency Derivatives. On Dec. 22, 2008, the CFTC announced that it had registered International Derivatives Clearinghouse LLC (“IDC”) as a DCO.8 IDC is authorized to clear futures contracts, options on futures contracts, commodity options and OTC interest rate and/or currency derivatives.9 In the IDC Order, the CFTC required IDC to impose original margin of at least the greater of (1) “the amount needed to cover price moves in the relevant tranche of Interest Rate Contracts, calculated using one or two-day intervals and on an absolute value basis, at a 99.7% confidence interval” and (2) “the amount reasonably needed to cover the largest one-day price move in the relevant tranche of Interest Rate Contracts during the preceding 125 trading days.” The IDC Order also requires IDC to maintain in its guaranty fund “a minimum of $80 million or such greater amount as IDC shall calculate in accordance with IDC rules or risk management procedures” and “ensure the fund is sufficient to cure any IDC losses resulting from the default of the IDC clearing member with the largest exposure to Interest Rate Contracts, calculated using the largest price move in Interest Rate Contracts over a one-day interval in the preceding two years.”
Energy Derivatives. On Dec. 12, 2008, the CFTC issued an order (“NGX Order”)10 granting Natural Gas Exchange Inc. (“NGX”) registration as a DCO pursuant to Section 5b(b) of the CEA.11 NGX operates a Canadian energy exchange and a physical clearing and settlement facility. The NGX Order authorizes NGX to clear cash and physically settled OTC derivatives on energy products that are exempt commodities.12
Agricultural Derivatives. Also on Dec. 12, 2008, the CFTC issued an order under Section 4(c)13 of the CEA (“ICE Order”) permitting ICE Clear U.S. Inc. (“ICE Clear”), the clearing organization for ICE Futures U.S. Inc. (“ICE Futures”), to clear certain OTC swap transactions involving coffee, sugar or cocoa (the “Ag Swaps”).14
The ICE Order also permits the Ag Swaps and related margin to be held with other property in accounts subject to the CEA’s/CFTC’s customer funds protection provisions. The ICE Order is the CFTC’s first order allowing any type of agricultural swap contracts to be cleared.15 The CFTC conditioned the ICE Order on ICE Futures, ICE Clear, ICE Futures floor members and futures commission merchants (“FCMs”) relying on the ICE Order complying with various margin, market oversight, reporting, recordkeeping and other requirements.
Approval of KOSPI 200 Futures for Offer and Sale in the U.S.
On Nov. 26, 2008, the CFTC’s Office of General Counsel issued a no-action letter permitting the offer and sale in the U.S. of the KX futures contract based on the KOSPI 200 Stock Index.16
The CEA, as amended by the CFMA, provides that the offer and sale in the U.S. of futures contracts based on a group or index of securities, including contracts traded on or subject to the rules of a foreign board of trade, is subject to the CFTC’s exclusive jurisdiction17 (with the exception of security futures products,18 over which the CFTC shares jurisdiction with the SEC).19
It has been the CFTC’s practice to evaluate the offer and sale of foreign exchange-traded broad-based security index futures contracts (and options thereon) in the U.S. through the no-action letter process. If a foreign exchange’s futures contract has been the subject of such a no-action letter, its option on that particular contract may also be offered or sold in the U.S. without any further regulatory action by the CFTC.20 If a foreign exchange intends to make that futures option available for trading through its U.S. computer terminals (U.S. direct access), however, the exchange must notify the CFTC’s Division of Market Oversight.21
Proposal to Make Mandatory Electronic Filing of CPO and CTA Disclosure Documents
On Nov. 26, in response to a petition from the NFA, the CFTC published a proposal to require that CPOs and CTAs file their CFTC-mandated disclosure documents electronically with the NFA (“Proposal”).22 The NFA has permitted CPOs and CTAs to file their disclosure documents via e-mail for some time and, while the vast majority of CPOs and CTAs already file their disclosure documents with the NFA via e-mail, the NFA has developed a new Web-based filing system that would be “significantly less resource intensive” than its current e-mail filing approach.23
To access the new filing system, CPOs and CTAs would use “the same designated login and password that they currently use for NFA’s Online Registration System.24
According to the Proposal:
NFA’s process for the electronic filing of Disclosure Documents will have two components. One of those components will require CPOs and CTAs to electronically submit their Disclosure Documents, as well as any amendments and supplements thereto. The other of these components will require CPOs and CTAs to enter from their Disclosure Documents certain key information on their operations and activities into a standardized form accessed through NFA’s Web site.25
The Proposal would not impact the delivery of disclosure documents to prospective investors.