Designated Contract Market (DCM) are boards of trade that operate under the regulatory oversight of the US Commodity Futures Trading Commission (the CFTC) pursuant to Section 5 of the Commodity Exchange Act (CEA), 7 USC 7.
In the EU legal framework DCMs are treated as from 22 July 2016 as equivalent to EU regulated markets for the purposes of EMIR Regulation (see the Commission Implementing Decision (EU) 2016/1073 of 1 July 2016 on the equivalence of designated contract markets in the United States of America in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council).
Designated Contract Markets in the United States of America referred to in the Annex to the said Decision and, consequently, included in the ESMA's List of third-country markets considered as equivalent to a regulated market in the European Union are:
(a) Cantor Futures Exchange, L.P.
(b) CBOE Futures Exchange, LLC
(c) Chicago Board of Trade (Board of Trade of the City of Chicago, Inc.)
(d) Chicago Mercantile Exchange, Inc.
(e) Commodity Exchange, Inc.
(f) ELX Futures, L.P.
(g) Eris Exchange, LLC
(h) ICE Futures U.S., Inc.
(i) Minneapolis Grain Exchange, Inc.
(j) New York Mercantile Exchange, Inc.
(k) Nodal Exchange, LLC
(l) North American Derivatives Exchange, Inc.
(m) OneChicago LLC
(n) TrueEX LLC
(o) Nasdaq Futures, Inc.
Hence, products traded on DCMs subject to CFTC regulatory oversight no longer fall under the OTC derivative definition under EMIR Article 2(7) and no longer are subject to the EMIR obligations relevant to OTC derivatives (such as the inclusion within the calculation of the clearing threshold for non-financial counterparties).
Legally binding requirements for DCMs authorised in the USA are set forth in the CEA form of a principles-based legal framework for the operation of DCMs.
The CEA's requirements for DCMs include 23 Core Principles.
These principles have the force of law and DCMs must comply with them on an initial and ongoing basis.
A DCM must also comply with applicable CFTC regulations (CFR), which specify requirements for operating as a DCM.
In order to operate as a DCM an applicant must apply for designation with the CFTC and demonstrate compliance with the applicable provisions under the CEA as well as the CFTC regulations.
The CFTC has regulatory oversight authority over DCMs, pursuant to Sections 5 and 5h of the CEA, 7 USC 7 and 7 USC 7b-3.
In order to be designated by the CFTC, a DCM must comply with the 23 DCM Core Principles under the CEA and any requirements that the CFTC may impose by rule or regulation.
A DCM is required to be a trading facility which generally, under the CEA, means a multilateral system in which participants have the ability to execute transactions in accordance with non-discretionary rules.
DCMs must provide members with impartial access to their markets and services.
The access criteria must be impartial, transparent, and applied in a non-discriminatory manner.
In addition, the CEA and CFTC regulations subject DCMs to organisational requirements with regards to corporate governance, conflicts of interest policy, risk management, fair and orderly trading, trading system resilience, clearing and settlement arrangements, admission to trading and compliance monitoring, all of which must be complied with on an ongoing basis.
DCMs must establish rules governing their operations, including rules prohibiting abusive trade practices and enforce compliance with these rules.
These rules and any amendments thereto are assessed by the CFTC to ensure consistency with the CEA and CFTC regulations.
DCMs must have the capacity to detect, investigate and apply appropriate sanctions to any person that violates any DCM rule.
DCMs are permitted to use regulatory services of a third party for assistance in complying with applicable requirements under the CEA and CFTC regulations.
DCMs remain responsible for compliance with their statutory and regulatory obligations, even when using such a third party to provide regulatory services.
The CFTC has enforcement responsibilities with respect to DCMs.
Regular Rule Enforcement Reviews (RERs) are performed, which are designed to evaluate a DCM's compliance with statutory and regulatory requirements relating to trade practice surveillance, market surveillance, audit trail and DCM disciplinary programs.
Section 8(a)(1) of the CEA gives the CFTC broad power to conduct investigations to ensure compliance with the CEA and the CFTC regulations.
Pursuant to CEA Sections 5e, 6(b), 6b and 6c(a) the CFTC may also bring civil enforcement actions to enjoin violations of the CEA or CFTC regulations and obtain other equitable relief and monetary sanctions: bring administrative enforcement proceedings, suspend or revoke the designation of a DCM and make and enter against a DCM a cease and desist order from violating the CEA or CFTC regulations.
Section 6(c) of the CEA gives the CFTC power to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence and require the production of books, correspondence, memoranda and other records, for the purposes of enforcing the CEA or for purposes of any investigation or proceeding.
Commission Implementing Decision (EU) 2016/1073 of 1 July 2016 on the equivalence of designated contract markets in the United States of America in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council
Recitals 4 - 11
(4) DCMs are boards of trade that operate under the regulatory oversight of the Commodity Futures Trading Commission (the CFTC) pursuant to Section 5 of the Commodity Exchange Act (CEA), 7 USC 7. The legally binding requirements for DCMs authorised in the USA consist of the CEA, which together with the Commodity Futures Trading Commission's regulations (CFTC regulations) establish the legal framework for the operation of the DCM. Part 38 of the CFTC's regulations specifies the requirements for operating as a board of trade and sets out 23 core principles that DCMs must comply with on an initial and ongoing basis. The CFTC regulations require DCMs to operate a trading facility which generally, under the CEA, means a multilateral system in which participants have the ability to execute transactions in accordance with non-discretionary rules. DCMs must provide members with impartial access to their markets and services. The access criteria must be impartial, transparent, and applied in a non-discriminatory manner. In addition, CFTC regulations subject DCMs to organisational requirements with regards to conflicts of interest policy, risk management, trading and clearing and settlement arrangements, listing rules as well as monitoring of compliance. Under Core Principle 2 (17 CFR §38.150 (2015)) the board of trade must establish, monitor and enforce compliance with the internal rules of the DCM, including rules prohibiting abusive trade practices on it. To this end, it must have the capacity to detect, investigate and apply appropriate sanctions to any person that violates any internal rule of the DCM.
(5) The legally binding requirements applicable to DCMs authorised in the USA which are set out in the legal framework for the operation of DCMs deliver substantial results equivalent to those of the requirements laid down in Title III of Directive 2004/39/EC in the following areas: authorisation process, definitional requirements, access to the DCM, organisational requirements, requirements for senior management, admission of derivatives to trading, suspension and removal of derivatives from trading, monitoring of compliance and access to clearing and settlement arrangements.
(6) Under Directive 2004/39/EC, pre- and post-trade transparency requirements apply only to shares admitted to trading on regulated markets. As shares are neither traded nor admitted to trading on DCMs, the Commission considers that the assessment of those requirements is not relevant for the purposes of this Decision.
(7) It should therefore be concluded that the legally binding requirements for DCMs established in the USA deliver results equivalent to those of the requirements laid down in Title III of Directive 2004/39/EC.
(8) The DCMs operate under the supervision of the CFTC. The primary objective of the CFTC's compliance programme is to evaluate DCM compliance with applicable provisions of the CEA, including the 23 core principles with which DCMs must comply, and CFTC regulations implementing those core principles. To this end, the CFTC conducts examinations of a DCM's compliance with core principles and regulations relating to trade surveillance, market surveillance, audit trail, and DCM disciplinary programmes. Under the market surveillance programme, the CFTC monitors traders to ensure that they comply with provisions in the CEA and CFTC regulations. To this end, the surveillance programme monitors trading activity on DCMs, futures positions, swap transactions and swap positions in order to detect and prevent market abusive practices and to ensure compliance with the CEA and CFTC regulations. In addition, the market review programme reviews all DCM rule filings and the product review programme reviews DCM product terms and conditions filings; both programmes review the filings to ensure consistency with the CEA and the CFTC's regulations.
(9) The CFTC also has enforcement responsibilities. Under CEA Section 6b, the CFTC may issue an order directing the cessation of specified activities and impose civil or criminal penalties if a DCM is found to violate the CEA or the CFTC's regulations. Pursuant to CEA Section 6c(a)) the CFTC may also bring an action in US federal court against any registered entity or other person that violates provisions of the CEA as well as relevant CFTC rules, regulations and orders. DCMs assume certain supervisory responsibilities and are required to monitor and enforce compliance with the internal rules of each DCM. Under 'emergency powers' (CEA § 8a(9)) the CFTC is authorised to direct a DCM to take such action as, in the CFTC's judgment, is necessary to maintain or restore orderly trading in or liquidation of a given derivative contract. The DCMs are also required to have arrangements and resources for effective enforcement of its internal rules.
(10) It should therefore be concluded that DCMs are subject to effective supervision and enforcement in the USA on an ongoing basis.
(11) The conditions laid down in Article 2a of Regulation (EU) No 648/2012 should therefore be considered to be satisfied with respect to DCMs authorised in the USA.
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Commission Implementing Decision (EU) 2016/1073 of 1 July 2016 on the equivalence of designated contract markets in the United States of America in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council
Commission Implementing Decision (EU) 2017/2238 of 5 December 2017 on the equivalence of the legal and supervisory framework applicable to designated contract markets and swap execution facilities in the United States of America in accordance with Regulation (EU) No 600/2014 of the European Parliament and of the Council
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