Assessing CFTC concerns over Shanghai Clearing House

Today, Commissioner Summer K. Mersinger expressed concerns over the Commodity Futures Trading Commission’s Division of Clearing and Risk’s decision to issue a no-action letter that recommends that the CFTC not take any enforcement action regarding Shanghai Clearing House’s status as a non-registered Derivatives Clearing Organization (“DCO”).

A DCO acts as an exchange or board of trade.  It enables each party to an agreement or futures contract to substitute the credit of the DCO for the credit of the parties.  A DCO can also arrange netting of obligations between the parties to a derivatives contract.  It can also provide clearing services that transfers credit risk between parties to a derivatives contract.

Commissioner Mersinger is particularly concerned that for seven straight years the CFTC has granted Shanghai Clearing House extensions of relief that grant the clearinghouse permission to clear swaps for the proprietary accounts of Shanghai Clearing House members that happen to be U.S. persons.

Shanghai Clearing House describes itself as the only central clearing institution in the interbank market of China.  It provides registration, custody, clearing, settlement, delivery, margin management, and collateral management services for direct and indirect renminbi and foreign currency and derivative transactions.

7 USC 1b, in my opinion, appears to give Shanghai Clearing House an out should the CFTC down the road decide to bring an enforcement action.  Shanghai Clearing House could petition the Secretary of the Treasury to exempt foreign exchange swaps and foreign exchange futures from the definition of “swaps”, but given the geopolitical climate stemming from a potentially stronger Russia-China economic alliance, I don’t see Secretary Yellen going to bat for an exemption.

Alton Drew

26 July 2022