December 20, 2017
Mr. David Van Wagner, Chief Counsel
Division of Market Oversight
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
Re: Proposal to Revise Part 40
Dear Mr. Van Wagner:
The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG” or “AMG”)1 provides the following proposal to amend Part 40 of the regulations promulgated by the Commodity Futures Trading Commission (“CFTC” or the “Commission”).2
AMG believes that the current process for registered entities to propose new and amended rules does not sufficiently take into account the Commission’s policies and the impact of new rules and rule changes upon market participants. As such, we believe the Commission should strengthen both its process for rule change certifications and Commission review of new and amended rules.
I. Existing Rule Certification and Review Process Is Insufficient to Advance Commission Policies and Protect Market Participants from Registered Entity Rule Changes Motivated by Commercial Purposes
Under Part 40 of the Commission’s regulations as amended in 2011 in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the Commission aimed to provide a tiered review process for new rules, rule amendments, and changes to contractual terms prescribed by designated contract markets (“DCMs”), registered swap execution facilities (“SEFs”), registered derivatives clearing organizations (“DCOs”), and registered swap data repositories (“SDRs”) (collectively, “registered entities”).3For non-material changes to agricultural contracts, minor changes, and changes to non-agricultural contracts, the Commission provided methods for registered entity self-certification. At the same time, the Commission sought to maintain oversight over important rule changes, which were material changes to a term or condition of a contract for future delivery of an enumerated agricultural commodity listed in Section 1a(9) of the Commodity Exchange Act of 1974, as amended (“CEA” or the “Act”), 4 or an option on such a contract or commodity, in a delivery month having open interest.
As we noted in our comment with respect to Project KISS,5 AMG has observed that, notwithstanding the Commission’s objective to maintain oversight over important rule changes, in practice, Part 40’s exception for less important rule changes has swallowed the rule, leaving little that is reviewed or capable of challenge by the Commission. Over time, more changes—even those affecting agricultural contracts—have been submitted for certification with a mere 10 business days for market participants to react, and no formal process to allow market participants to object to a submission or meaningful legal standard by which registered entities are bound to consider such objections. Typically, registered entity decisions to adopt or modify rules by certification are made by the registered entity’s board or a committee, with market participants only learning that a rule has been adopted or amended after the registered entity has self certified the rule or amendment to the Commission, and it is posted on the Commission’s website.
Even when objections can be raised and considered, unless the rule or rule amendment presents a clear conflict between the rule or contractual change and the CEA—a low bar for registered entities to pass—the Commission’s regulations do not give the Commission or its staff the power to halt the change. Rules or rule amendments presenting novel or complex issues or potential inconsistencies with the Act can be stayed for up to 90 days and put out for public comment but, again, this standard has not been tied to the overall policy objectives of the Commission. Moreover, the stay has rarely been invoked by the Commission. On only a handful of occasions since 2011 when Part 40 was amended into its current form has the Commission stayed registered entity rules for further review and solicited public comment. Such limited invocation of the stay and review provisions does not reflect meaningful oversight or opportunity for the public to comment on material rules or rule changes.
1 SIFMA AMG brings the asset management community together to provide views on policy matters and to create industry best practices. SIFMA AMG’s members represent U.S. and multinational asset management firms whose combined global assets under management exceed $39 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS, and private funds such as hedge funds and private equity funds.
2 7 U.S.C. § 1, et seq.
3 See Provisions Common to Registered Entities, 76 Fed. Reg. 44,776 (July 27, 2011).
4 7 U.S.C. 1a(9).
5 See Letter from Timothy Cameron and Laura Martin, SIFMA AMG to Christopher Kirkpatrick, Secretary, CFTC, dated Sept. 29, 2017, available at: https://www.sifma.org/resources/submissions/sifmaamg-comments-on-cftcs-project-kiss/.