CFTC Staff Issues an Advisory Related to Prime Brokerage Arrangements and Derivatives Clearing Organization Registration Requirements

On May 17, 2023, the U.S. Commodity Futures Trading Commission (CFTC) published a press statement to inform that its Division of Clearing and Risk (DCR) has issued an advisory (CFTC Letter No. 23-06) which is addressed at firms engaged in prime brokerage activities that „provide credit substitution on a centralized basis“. Therein, the Division urges such firms, particularly swap execution facilities (SEFs), to check for a possible registration requirement under the Commodity Exchange Act. According to the DCR, the requirement to register as a Derivative Clearing Organization (DCO) depends upon various factors. However, DCOs are typically defined as entities, facilities, or systems that „with respect to an agreement, contract, or transaction . . . enable each party to the agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the [DCO] for the credit of the parties.” In such respect, certain prime brokerage arrangements may satisfy the definition of a DCO, especially, if the prime broker is a centralized credit intermediary. Therefore, firms engaged in prime brokerage arrangements are recommended to review the regulatory requirements and to contact the Division in case of uncertainty about a possible registration requirement.