Commodity Futures Trading Commission Open Meeting
Commodity Futures Trading Commission
Thursday, June 25, 2020
Key Topics & Takeaways
- The CFTC voted to approve the proposed rule on Electronic Trading Principles (4-1, Behnam Dissenting) as well as withdraw the CFTC’s Proposal on Regulation Automated Trading (3-2, Behnam and Berkovitz Dissenting).
- The CFTC voted unanimously to approve the final rule on Post-Trade Name Give-Up on Swap Execution Facilities (SEFs).
- The CFTC voted unanimously to approve the final rule on Exemption from the Swap Clearing Requirement for Certain Affiliated Entities – Alternative Compliance Frameworks for Anti-Evasionary Measures (Inter-Affiliate Exemption 50.52).
The CFTC voted unanimously to approve the proposed rule on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (Phase VI Compliance Date Extension).
Proposed Rule: Electronic Trading Risk Principles; Withdrawal of the proposed Rule and Supplemental Proposal for Regulation AT
- Dorothy D. DeWitt, Division of Market Oversight (DMO)
- Marilee Dahlman, DMO
- Joseph Otchin, DMO
DeWitt opened the staff presentation by introducing the notice of proposed rulemaking on Electronic Trading Risk Principles and explaining that this proposal has built on the prior work of the CFTC including feedback from staff, the Commission, and industry. Ultimately, DeWitt explained that these risk principles are aimed at ensuring designated contract markets (DCMs) take reasonable measures to address market disruptions as technology evolves. Dahlman then went into detail on the proposal’s risk-based principles for DCMs.
Dahlman explained that the risk-based principles are meant to address the prevention, protection, and mitigation of market disruptions on DCMs that may impact the ability of market participants to trade and manage risk. The three risk-based principles broadly require DCMs to (a) adopt and implement rules to prevent, detect, and mitigate market disruptions and system anomalies associated with electronic trading, (b) implement adequate risk controls to address the threat of market disruptions and system anomalies, and (c) require DCMs to provide prompt notice to CFTC of any significant disruption to trading platforms and provide timely information throughout the disruption. Dahlman explained that the principles will supplement existing Commission regulation of DCMs, building on existing requirements to conduct real-time monitoring while explicitly focusing on disruptions associated with electronic trading. The rule takes into consideration the need to balance flexibility for innovation with the need for clear regulatory requirements for DCMs to create rules for markets and market participants themselves to prevent disruptions.
On compliance, Dahlman noted that many DCMs have already implemented practices that would comply with these risk-based principles such as pre-trade risk controls and due diligence procedures. Specifically, she mentioned that industry has taken steps to address market disruptions as presented at the CFTC’s recent Technology Advisory Committee (TAC) meetings. Further, Dahlman noted that the risk-principles would not create any form of strict liability on the DCM should any disruption occur.
Otchin then presented the specific proposed amendments to Part 38 that would incorporate the risk-principles and further rationale for the Commission’s approach. Specifically, he highlighted that the risk-based principles would be consistent with the DCM core principles and allow both the Commission and DCM to conduct better oversight of electronic markets.
DeWitt then finished the staff presentation by stating that given the significant amount of time since the Reg AT proposal, the complexity of the issues, and the many negative comments from the industry, staff does not think it is appropriate to move forward with Reg AT at this time and recommended a withdrawal of the rule.
Chairman Tarbert began the Q&A session by asking what tools would be available to the Commission to make sure DCM’s principles reflect the rules. Dahlman responded that there are several tools including not issuing an order of designation if the DCM is not in compliance with the core principles, objecting to or staying for 90 days DCM rule certifications, denial of new rules requested by the DCM under Reg 40.5, and of course, referring any DCM not in compliance to the Division of Enforcement. Tarbert then remarked that derivatives markets have developed quite extensively over the last 20-30 years and there is a need to protect the resilience of markets while providing flexibility to evolve regulation as the market evolves. With respect to Reg AT, Tarbert stated that its biggest issue was the fact that it was overly prescriptive and had frozen in time some controls on trading.
Commission Quintenz stated that Reg AT’s proposed requirements were extremely prescriptive and the motion before the Commission to reject those policy responses was appropriate. Quintenz emphasized that he believed the Reg AT proposal was an unconstitutional overreach on intellectual property without a subpoena.
Commission Behnam, disagreeing with Tarbert and Quintenz, stated that the withdrawal of the Reg AT proposal was unconventional given it was voted on in a bipartisan Commission. He noted that although Reg AT was far from perfect, the Commission should take a fresh look at what was introduced and amend it as appropriate rather than withdraw the proposal. Behnam then asked whether the principles would require a lot of action from DCMs to comply with the risk principles, as it appears that it wouldn’t. Otchin responded that DMO does believe that may DCMs may determine, upon review, that they do not need to update their rules and controls at this time as they have already developed extensive tools to address these risks. Behnam then asked who at the Commission would be making the “objectively reasonable” determination with respect to the standard established within the risk principles for implementing and adopting electronic trading rules. DeWitt responded that it will be a Commission determination, and more specifically, it can be determined upon enforcement review and any rule is found to be unreasonable it will result in a deficiency finding.
Behnam finished his line of questioning on the NPRM by asking whether DMO thinks the Commission creates further risk and confusion by choosing not to define certain terms such as ‘market disruption’ within the NPRM. Otchin responded that DMO chose to not define certain terms to allow for them to evolve over time and that the NPRM does include a general discussion of these terms in context of today’s markets to provide DCMs with guidance on applying the risk principles.
Commission Stump stated her support for the rule and noted that the markets the CFTC regulate have become increasingly electronic, and as a result, market infrastructure providers have implemented a host of measures with respect to CFTC regulations.
Commissioner Berkovitz stated that while he supported the Electronic Trading Risk Principles NPRM he did not support withdrawing the Reg AT proposal. He noted that although the proposal leaves certain issues unaddressed, the proposal recognizes the need to update the Commission’s regulations to keep pace with the Commission’s long-overdue re-engagement in this area. With respect to the Reg AT proposal, he emphasized that the notice of withdrawal reflects a belief that there is nothing of value in Reg AT, which is not true. Berkovitz then asked why a new rule is necessary if the Commission already requires certain risk principles for DCMs, and separately, since many DCMs are already in compliance and would not establish new rules and controls. Dahlman responded that while the Commission already has risk-principles within its regulations, DMO believes there is a need for specific risk-principles that address electronic trading. Staff emphasized that they want to make it clear that the disruptions they are targeting are more than extreme price movements. Berkovitz then questioned the need for more principles-based regulation if the Commission already has principles-based regulation governing DCMs.
Chairman Tarbert responded that he believes the NPRM is additive, rather than unnecessary, and emphasized that the Commission is providing specificity without being too prescriptive. With respect to the withdrawal, he noted that the Commission isn’t rejecting everything in Reg AT and the reason for the withdrawal is based on the fact that the industry is so far removed from a Reg AT proposal that its best to start over.
Commission Quintenz again stated his support for the proposal on the basis that the principles-based approach would allow trading to evolved while providing requirements to enhance risk-controls and rules alongside that evolution. He noted that DCMs have already adopted rules to address these risks because they are incentivized to do so. In terms of industry practice, he noted that the CFTC’s TAC has explored risks associated with electronic trading and noted that it’s obvious both DCMs and market participants take these risks seriously and have made significant progress in addressing them.
Commissioner Behnam emphasized that the preamble makes it clear that the Commission is not asking DCMs to do anything different than what they do. If that’s the case, argued Behnam, what is the point of the proposal. He stated that he believes the rules could be too broad in terms and too vague in their interpretation and that this lack of clarity could lead to government overreach.
The Commission voted to approve the Notice of Proposed Rulemaking on a 4-1 vote, with Behnam dissenting
The Commission voted to withdraw Reg AT on a 3-2 vote, with Behnam and Berkovitz dissenting.
Final Rule: Post-Trade Name Give-Up on Swap Execution Facilities
- Dorothy d. DeWitt, DMO
- Vincent A. McGonagle, DMO
- Israel J. Goodman, DMO
- Aleko Stamoulis, DMO
- Roger Smith, DMO
DeWitt presented the Commission’s Final Rule on Post-Trade Name Give-Up on Swap Execution Facilities (“Name Give-up”). DeWitt began by explaining the pre-Dodd Frank origins of Name Give-Up noting that at the time, many firms trading in the OTC markets needed to know their counterparties’ identities to manage certain risks. She noted that given the advent of central clearing, many market participants have questioned the need for Name Give-Up and that many of these parties have focused on the issue of potential information leakage for those trades intended to be cleared. DeWitt then explained that the Commission’s final rule would prohibit Name Give-up for swaps executed, pre-arranged, or pre-negotiated anonymously on or pursuant to the rules of a SEF and intended to be cleared.
Stamoulis then explained the technical modifications to Part 37 of the CFTC regulations in accordance with the final rule, including two key modifications to the original NPRM. First, he noted the final regulation was revised to clarify that the ban applies to swaps that are pre-arranged or pre-negotiated anonymously, and second, that there is a limited exception for certain package transactions. In terms of implementation, Stamoulis explained the implementation schedule as follows: (1) the compliance deadline for swaps subject to the trade execution requirement under Section 2(h)(8) of the CEA is November 1, 2020; and (2) the compliance deadline for swaps not subject to the trade execution requirement is July 5, 2021.
Chairman Tarbert stated that it is a fundamental principle of exchange trading that a buyer and seller have no reason to know, and in fact do not know, each other’s identities. He emphasized that this proposal levels the playing field for counterparties, and studies show that anonymity not only creates fairer markets but could increase liquidity and competition.
Commissioner Quintenz stated that while he will vote in favor of the final rule, he has still holds some concerns. He noted that he is supporting the final rule because it adopts an important exception from the prohibition, as well as an incremental approach that will give the Commission and market participants time to transition into compliance, observe the impact of the final Rule, and make adjustments in the future, if necessary.
Commissioner Behnam agreed with and supported the final rule. He asked whether staff had any thoughts on the ability of firms to evade the prohibition in the context of package transactions. McGonagle responded that within the proposal the Commission makes reference to the CFTC’s anti-evasion authority and went through enforcement provision designed to make sure transactions are structured in compliance with the act.
Commission Stump then stated her request that a study be conducted on how the changes made in this proposal will impact market liquidity. In terms of details, she noted that the study will occur 1 year after implementation on Made Available to Trade (MAT) swaps, and that the Commission must utilize the data to make sure the rule is appropriate.
Commissioner Berkovitz noted his support for the proposal stating that it will lead to fair and equitable trading in the swaps market. With respect to the implementation dates, Berkovitz asked whether the distinguished markets are so operationally distinct that staggered compliance dates are necessary. Stamoulis responded that DMO spoke with a lot of market participants and SEFs about issues relating to the implementation and the staggered compliance dates were informed by those discussions.
The Final Rule was unanimously approved on a 5-0 vote.
Final Rule: Exemption from the Swap Clearing Requirement for Certain Affiliated Entities – Alternative Compliance Frameworks for Anti-Evasionary Measures (Inter-Affiliate Exemption 50.52)
- Clark Hutchinson, Division of Clearing and Risk (DCR)
- Sarah E. Josephson, DCR
- Melissa D’Acry, DCR
After an introduction by Hutchinson, D’Arcy presented the Commission’s final rule on the Exemption from the Swap Clearing requirement for Certain Affiliated Entities – Alternative Compliance Frameworks for Anti-Evasionary Measures. D’Arcy explained that the final rule adopts amendments to the CFTC’s inter-affiliate exemption conditions under CFTC regulation 50.52, which exempts certain affiliated entities within a corporate group from the swap clearing requirement under the applicable provisions of the CEA. She noted that the amendments would make permanent certain temporary alternative compliance frameworks intended to make an anti-evasionary condition workable for international corporate groups in the absence of foreign clearing regimes determined to be comparable to CFTC requirements.
Chairman Tarbert supported the Final Rule noting that from a policy perspective, the rule advances the goals of the CFTC’s swap clearing requirements by making anti-evasionary provision of the inter-affiliate exemption workable for cross-border corporate groups.
Commissioner Quintenz also supported the final rule stating that it provides legal certainty to swap counterparties electing the inter-affiliate exemption from the Commission’s requirement that certain interest rate swaps and credit default swaps be cleared. Quintenz stated that he supports the policy, made permanent by the final rule, that permits variation margin to be exchanged by affiliated counterparties in lieu of clearing swaps with foreign counterparties. He noted that the rule serves as an example of the Commission appropriately deferring to foreign regulatory regimes in order to reduce compliance burdens and promote market liquidity internationally.
Commissioner Behnam concurred with the adoption of amendments to the exemption from the swap clearing requirement for certain affiliated entities within a corporate group. He noted that he supports the rule because it provides legal certainty, benefits from careful analysis and consideration of the data as well as the global regulatory landscape as it has developed, and leaves in place critical tools for Commission monitoring, oversight, and enforcement.
Commissioner Stump was supportive of codifying longstanding no-action relief. Stump emphasized the importance of staff no-action by stating that on occasion staff must issue relief or take action that allows the Commission the appropriate time and experience to evaluating these issues.
Commissioner Berkovitz supported the final rule making permanent the alternative compliance frameworks for certain swaps involving the foreign affiliates of US firms and their non-US counterparties. He believes this rule upholds the Dodd-Frank Act’s clearing mandate, deters evasion, and protects against systemic risk from swaps executed overseas by foreign affiliates.
The Final Rule was unanimously approved on a 5-0 vote.
Proposed Rule: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (Phase VI Compliance Date Extension)
- Joshua B. Sterling, Division of Swap Dealer and Intermediary Oversight (DSIO)
- Warren Gorlick, DSIO
- Carmen Moncada-Terry, DSIO
Gorlick presented the Commission’s proposal to delay the final phase of the implementation schedule of the margin requirements for uncleared swaps for swap dealer and major swap participants (UMR) by one year. Specifically, he noted that the CFTC is proposing to delay Phase VI of the implementation schedule of the UMR from September 1, 2021 until September 1, 2022. In his discussion, he noted the recent regulator action by the CFTC, IOSCO and the Basel Committee internationally, and in the US with respect to the margin requirements. The Commission is proposing to delay the final phase of the margin requirements in accordance with BCBS-IOSCO’s April 2020 delay of the recommended implementation schedule due to COVID-19.
Chairman Tarbert, Commissioners Behanm and Quintenz, each issued their support for the proposal noting prior comments. However, Commission Behnam noted that while he supports the proposal, he will not support any further relief absent truly compelling facts and lockstep agreement with the prudential regulators responsible for establishing margin requirements for swap dealers and major swap participants within their respective jurisdictions.
Commissioner Stump supported the proposal and noted that she hopes the Commission will soon consider addressing the recommendation from the CFTC’s Global Markets Advisory Committee’s (GMAC) Subcommittee on Margin that were published last month.
Commissioner Berkovitz supported the proposal but emphasized his concerns with continually delaying the implantation schedule of the UMR.
The Proposed Rule was unanimously approved in a 5-0 vote.
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