CFTC Open Meeting
Commodity Futures Trading Commission
Open Meeting
Tuesday, April 14, 2020
Key Topics & Takeaways
- The Commission unanimously approved all five measures under consideration.
Opening Statements
Chairman Heath P. Tarbert
After providing a brief overview of the agenda items, Tarbert emphasized that the Commission continues to focus on monitoring and responding to the impact of COVID-19 on the derivatives markets. He noted that consistent communication with all relevant stakeholders, market participants, Congress and other regulators has allowed the Commission to respond with the issuance of practical, targeted no-action relief where appropriate. Despite this focus on COVID-19 related items, Tarbert concluded that the Commission will at the same time continue completing previously initiated policy work and ongoing rulemakings.
Commissioner Brian D. Quintenz
Quintenz commended Commission staff and his fellow commissioners for their work in addressing both the challenges brought about by COVID-19 as well as continuing the policy work of the Commission.
Commissioner Rostin Behnam
Behnam emphasized the need for Commission flexibility in responding to public comment and market participant input throughout these uncertain times.
Commissioner Dawn DeBerry Stump
Stump spoke to the importance of teamwork and cooperation during this period of crisis, specifically highlighting the work done to produce the proposed revisions to the Part 190 Bankruptcy rules. She said that these revisions should not be viewed as a response to the current crisis as this is a proposal years in the making.
Commissioner Dan M. Berkovitz
Berkovitz outlined the critical role of the Commission in ensuring market operation continuity, integrity and stability during uncertain times. Berkovitz echoed the comments of his fellow commissioners in terms of making progress on the Commission’s rulemaking agenda while at the same time recognizing the extraordinary demands facing market participants. Tarbert then noted that the Commission will attempt to be as flexible as possible as it relates to comment deadlines to ensure that market participants are able to provide adequate input.
Presentations
Staff Presentation: Proposed Rule – Amendments to Part 190 Bankruptcy Regulations
Staff:
- Robert Wasserman, Division of Clearing and Risk
Wasserman explained that this proposal is in no way related to the COVID-19 crisis. Instead, the proposed measure represents the first comprehensive update of Part 190 rules since they were first enacted 37 years ago. He continued that the proposal is intended to build upon the Commission’s already robust set of governing rules and supervision programs for futures commission merchants (FCMs) and derivatives clearing organizations (DCOs), preserving significant portions of the existing regulation while also putting forth important changes. Wasserman stated that while the existing rules and standards have cultivated a strong FCM ecosystem and assisted these entities in withstanding various periods of market volatility, it is the Commission’s responsibility to ensure that rules are in place in order to adequately respond to the highly rare case of the bankruptcy of an FCM, as well as the possible bankruptcy of a DCO. Wasserman then summarized the major changes to Part 190 which include significant improvements to ensure customer protection, a modernized rule set that acknowledges the significant developments in technology as well as the shifts in the regulatory framework over the past three decades, a new section to enhance the clarity and transparency regarding the core concepts of Part 190, and a new subpart C to Part 190 that will establish in advance the approach to be taken in order to foster prompt action in the event of a Resolution of a DCO while also allowing the trustee appropriate discretion in dealing with this type of bankruptcy. In specifically discussing the proposal’s enhanced protection of customer property, Wasserman stated that the measure: 1) requires that shortfalls in property segregated for customers be made up from the FCM’s general assets; 2) clarifies that claims of public customers come before proprietary and affiliate claims; 3) states that public customers are entitled among themselves to a pro rata distribution based on their respective claims; and 4) fosters the policy preference for “porting” or transferring the positions of public customers, and those customers’ proportionate share of associated collateral, to a solvent FCM instead of liquidating those positions. He added that “porting” protects both customers as well as the markets by avoiding the forced liquidation of large amounts of positions. He commended the American Bar Association for their contribution to this rulemaking but emphasized that this is a Commission product through and through.
Q&A
Tarbert outlined his support for the proposal, specifically commending the proposal for furthering the “porting” preference as well as its enumeration of pro rata distribution. Tarbert echoed Wasserman’s comments that this bankruptcy treatment benefits both customers and markets, as well as furthers U.S. FCM competitiveness. He concluded that this is a forward-thinking proposal that significantly enhances clarity in addition to advancing the Commission’s goal of promoting the interests of all Americans.
Quintenz summarized his support for the proposal, specifically praising the measure for being a targeted, rational and transparent example of how Commission regulations can be simplified to reduce compliance burdens. Quintenz noted the importance of the decision to amend the definition of physically delivered property to include intangible commodities such as virtual currency, emphasizing that this will further provide legal certainty to the growing exchange-traded market for cleared, physically-settled, digital asset derivatives.
In elaborating on his support for the proposed measure, Behnam emphasized that changes in this proposal will further support the provisions of Part 190 that have worked in prior bankruptcies. He continued that these improvements represent important lessons learned following the bankruptcies of MF Global and Peregrine Financial Group. He encouraged market participants to request an extension of the 90-day comment period if necessary in order to ensure that the Commission receives the best comments.
Stump voiced her support for the proposed measure and asked a variety of questions regarding the interaction of the Commission’s bankruptcy regulations and resolution under Title II of Dodd-Frank. Wasserman responded that this proposal further establishes the counter-factual of “no-creditor worse off” and thereby adds clarity and transparency for market participants as it relates to both metrics.
Berkovitz spoke in support of the proposed measure as it addresses the disposition of customer property and further makes the bankruptcy process as effective as possible to protect, preserve, and return customer assets quickly in the event of an FCM or DCO bankruptcy. He specifically highlighted the importance of updated bankruptcy rules in order to reduce the probability and extent of potential disruptions, such as a “run on the market,” should an unfortunate event of a bankruptcy occur.
Final Vote: Proposed Rule – Amendments to Part 190 Bankruptcy Regulations
The proposed rule was approved unanimously.
Staff Presentation: Proposed Rule – Amendments to Compliance Requirements for Commodity Pool Operators on Form CPO-PQR
Staff:
- Joshua B. Sterling, Division of Swap Dealer and Intermediary Oversight (DSIO)
- Amanda Olear, DSIO
Sterling initiated the staff presentation by explaining that the proposal was a significant refinement of the CFTC’s current Form CPO-PQR in order to enhance registrant oversight through optimized data collection. Sterling noted that though CPO-PQR is detailed, the information that the Commission obtains through the form is less than a full picture and isn’t suited for the CFTC’s role as a market regulator. He continued that the data received from the form, which includes well over half a million responses to the 155 questions on the form, still does not give the Commission the information they need such as the operating terms of the pools. Additionally, he noted that the data received is aged, and not necessarily helpful because its stale. The proposal, Sterling noted, would use risk monitoring tools, swaps data from futures and options exchanges, and other means to see the entire risk profile of the CPO. The agency would pull in the trade data, understand how it is tied to registrants, and ultimately understand the risk profile of registrants much better, and in real time.
Olear then presented the specifics of the proposal. The proposal would eliminate pool specific reporting requirements in Schedules B and C (other than the pool schedule of investments), amend the existing information in Schedule A to request LEIs for CPOs and operated pools that have them, and eliminate questions relating to pool marketers and auditors. CPOs would be required to file this form quarterly and would be allowed to use the National Futures Association’s (NFA) form PQR in lieu of filing the Commission’s Form CPO-PQR. Form PF would no longer be accepted in lieu of the revised form CPO-PQR, and all CPOs would file the same form.
Q&A
Tarbert voiced support for the proposal and asked whether the CFTC was required by statute to adopt the form. Sterling noted that it was not. The Chairman then asked Sterling to provide more insight on what LEIs are and how requesting LEIs could help integrate data with other data sources. Sterling stated that LEIs are required for firms that enter into swaps, so that the firm can be associated with a particular transaction. He continued that if the CFTC has the LEI information of a certain CPO or pool it will help the Commission understand what transactions the CPO is entering into with different participants in the market as well as anticipate certain risks.
Quintenz issued his support for the proposal, noting specifically that the current form is not as usable as it should be. He continued by stating that the difficulty in answering the seemingly simple questions on the form grow more complex with the size of the pool. Quintenz then focused his questions on the usability of the data as well as the interaction of all the different forms a CPO could be required to fill out. On the usability of data, Quintenz noted that many questions in the current form, especially in Schedules B & C, are hard to aggregate across a CPO given different metrics used by different firms to respond. He then asked whether flexibility was being provided to CPOs to report using different metrics. Sterling responded that flexibility would be provided in the form based on assumptions/metrics. Quintenz then focused on the effectiveness of the data, asking how old the data would be when received by the CFTC and whether DSIO has relied on the data in the most recent period of stress. Sterling responded that the data is stale by 60 days and the data required by the form did not help inform the most recent market stress.
Quintenz then asked how DSIO will be able to use the data provided in the revised form to integrate it with other data currently being received by the Commission. Sterling responded that including LEIs would leverage data the Commission already has, and the division would be able to work with the SDR data to understand pool’s exposures, the type of instruments they use as well as the risks associated with the pools. Finally, Quintenz asked about how this revised form would interact with all the different forms a CPO could be required to fill out. Staff responded that there will be no difference between the CFTC’s revised form and the NFA’s revised form, and that nothing would be changing the status of Form PF which is filed with the SEC.
Behnam indicated his support for the proposal and asked Sterling on how the revised form would do a better job in a less costly way. Sterling noted that DSIO is looking to understand the direction of decisions that a given CPO is making, not necessarily what is going inside the fund. He continued that by drawing connections with broader data, one will be able to better understand where risk is flowing in markets. Behnam then emphasized that even though the data collected by the Commission in Form CPO-PQR is old, it still serves a purpose in identifying longer term trends within the CPO and that thinking needs to continue on this issue. Finally, Behnam asked if DSIO has a sense of how many CPOs and pools have LEIs at this point. Olear responded that it is difficult to say how much of the pool population has LEIs, but that it will eventually be readily available through data.
Stump supported the proposal and expressed her appreciation for the review of the usefulness of data as well as the move towards more tailored data requests.
Berkovitz outlined his support for the proposal noting that the data the Commission is seeking to eliminate has not been useful and has not fulfilled the intended purposes of collection. He asked Sterling to describe the information on the form that the CFTC will still be requiring firms to submit, and how the Commission is using that information. Sterling noted that the form will be keeping the schedule of investments, which gives a breakdown of investment portfolios by asset class – information that the NFA has historically collected.
Final Vote: Proposed Rule – Amendments to Compliance Requirements for Commodity Pool Operators on Form CPO-PQR
The proposed rule was approved unanimously.
Staff Presentation: Proposed Rule – Amendments to Part 50 Clearing Requirements for Central Banks, Sovereigns, IFIs, Bank Holding Companies, and CDFIs & Final Rule – Amendments to Part 23 Margin Requirements for the European Stability Mechanism
Staff:
- Clark Hutchison, Division of Clearing and Risk
Hutchison first discussed the proposed amendments to Part 50 before turning to the final rule amending Part 23. Regarding the proposed measure, Hutchison stated that the proposal would add new regulations to codify the Commission’s current treatment of swaps entered into by certain banks, sovereign entities, and international financial institutions. Additionally, this proposal would make permanent current no-action relief for swaps entered into by certain international financial institutions and would also re-propose, with minor changes, regulations published in August 2018 to exempt certain swaps entered into by bank holding companies, savings and loan holding companies, and community development financial institutions (CDFIs). He continued that Commission staff believes that the proposed measure is consistent with the way the clearing requirement is being administered today. He concluded that the proposal provides legal certainty and makes Part 50 easier to understand and apply.
Turning to the final rule amending the uncleared margin rule in Part 23, Hutchison said that this final rulemaking codifies relief provided by DSIO no-action letters with respect to the European Stability Mechanism. This rule adds the European Stability Mechanism to the list of entities excluded from the definition of financial end-user, effectively exempting uncleared swaps entered into by a swap dealer with the European Stability Mechanism from the uncleared margin rule. Staff believes that it is reasonable to treat these uncleared swaps similarly to those entered into by a swap dealer with multilateral development banks, which are exempt from the uncleared margin rule.
Comments on the proposed rule to Part 50 must be received on or before 60 days after date of publication in the Federal Register.
The final rule on amendments to Part 23 will become effective 30 days after date of publication in the Federal Register.
Q&A
Tarbert outlined his support for the proposed amendments to Part 50, praising the fact that it clarifies existing exemptions for primarily local institutions such as banks, savings associations, farm credit systems, and credit unions with total assets under $10 billion. He continued that by codifying existing exemptions, this proposal grants increased certainty to market participants.
Tarbert also spoke in support of the final rule amending the uncleared margin rule in Part 23, noting that the European Stability Mechanism is a source of stability, not instability.
Quintenz noted that he will be supporting both measures despite his previous pledge to either object or vote against any relief to the European Union until the CFTC-EC CCP Agreement’s clarity is restored. He continued that he looks forward to re-engaging with the Commission’s European counterparts regarding oversight of U.S. CCPs.
Berkovitz voiced his support for both measures, stating that he views both as confirming and codifying existing commission policy regarding the application of clearing and margin requirements to sovereign institutions. He concluded that the relative risk provided by the exempted classes is small and previous experience demonstrates that these are sound initiatives.
Final Vote: Proposed Rule – Amendments to Part 50 Clearing Requirements for Central Banks, Sovereigns, IFIs, Bank Holding Companies, and CDFIs
The proposed rule was approved unanimously.
Final Vote: Final Rule – Amendments to Part 23 Margin Requirements for the European Stability Mechanism
The final rule was approved unanimously.
Final Rule – Amendment to Part 160 Consumer Financial Information Privacy Regulation
Tarbert stated that the final rule requires the administrative, technical, and physical safeguards for customer data required under regulation 160.30 to be reasonably designed to achieve three objectives: 1) protect of the security and confidentially of customer records and information; 2) guard against threats or hazards to customer records and information; and 3) protect against unauthorized access to or use of customer records and information that could result in substantial harm or inconvenience to customers.
Final Vote: Final Rule – Amendment to Part 160 Consumer Financial Information Privacy Regulation
The final rule was approved unanimously.
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