I. Introduction

I dissent from today’s conflicts of interest and equity ownership transfer proposal (Proposed Rule). For nearly two years, in Commodity Futures Trading Commission (Commission or CFTC) public meetings, speeches, and engaged conversations with my fellow Commissioners, staff, and diverse market participants, I have advocated for the Commission to address two critical gaps in our regulations: incomplete and disparate conflicts of interest rules as well as Commission rules governing the transfer of ownership interests in a registered entity.[1]

In the Commission’s December 2023 open meeting, I expressly stated that I cannot support the Commission in permitting conflicts-laden market structures without effective regulation.[2] It is imperative to note that today’s Proposed Rule will not address the conflicts of interest that I and many others have advocated for the Commission to address.

The Proposed Rule is materially incomplete. The Proposed Rule ignores conflicts of interest in novel segments of our markets where the Commission lacks visibility and the market lacks the benefit of robust regulatory oversight.

At best, today’s Proposed Rule is window dressing, supplementing long-established and well-developed conflicts requirements in heavily regulated markets. At worst, it creates confusion. While the Commission could have used this rulemaking to address endemic conflicts of interest in emerging markets such as cryptocurrency or digital asset markets, this Proposed Rule does not address these deeply concerning, pernicious conflicts of interest.

In these areas lacking conflicts rules, we have witnessed how relaxed conflicts of interest and equity transfer rules may undermine market integrity and market stability in deeply concerning ways. Although it was not regulated by the CFTC, the collapse of FTX poignantly illustrates both of these concerns – the absence of conflicts of interest regulation and weak equity interest transfer rules resulted in billions of dollars of customer losses.

The Proposed Rule undermines harmonization of conflicts regulations across our markets. Over a century ago, in passing the Grain Futures Act and, later, the Commodity Exchange Act (CEA), Congress expressly emphasized the necessity of governing conflicts of interest and registration standards in the oversight of the derivatives markets.

In 2010, in the wake of the financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and expressly tasked the Commission with introducing clearing infrastructure regulation in the bespoke, bilateral over-the-counter (OTC) swaps market. In 2011, the Commission adopted a rule proposal to establish conflicts of interest regulations for derivatives clearing organizations (DCOs), derivatives contract markets (DCMs) and swap execution facilities (SEFs).[3] This proposal was withdrawn. In an approach that splintered the proposed rule and may have stymied harmonization, the Commission proceeded with separate, disparate conflicts of interest final rulemakings. It adopted conflicts requirements in 2012 for DCMs, in 2013 for SEFs, and in 2020 for all DCOs.[4]

This fractured approach has led to entrenched challenges and resulted in different rules for different registrants.

While some tailoring may be appropriate to acknowledge differences in market design and the role and obligation of registrants, the Commission should not permit weaker conflicts rules in certain segments of our markets. It is imperative that any final rule governing conflicts address conflicts of interest comprehensively across our existing regulatory landscape.

Conflicts of interest have the potential to create governance risks. Governance plays a critical role in operational, market, credit and general risk management decision-making. Any post-mortem of the financial crisis offers dozens of illustrations regarding the potential for conflicts of interest to trigger the very types of disruption that may undermine enterprise risk management, market stability and integrity, and potentially generate risks that may be antecedents to systemic crises. Because we know well the consequences of failing to introduce effective risk management and governance regulation, the Commission must act now.

I have repeatedly called on the Commission to initiate a rulemaking that addresses the conflicts of interest that may arise from adopting vertically integrated market structures. This concern is intimately connected with the previously articulated concern. The CFTC’s enforcement actions filed in the wake of FTX’s bankruptcy detail the potential for a market participant to interface with retail market participants through a series of affiliated-entities that share a common ownership structure among the exchange market maker, broker dealer, and custodian. These concerns, coupled with a marked uptick in the number of registered market participants operating under our supervision and oversight that have formally adopted a similar market structure to offer retail market participants access to novel asset classes, should prompt the Commission to act within our existing authority and as part of this conflicts rulemaking.  

In an increasing number of instances, businesses with no history of operating in derivatives markets, no track record of compliance with federal financial market regulations, and limited evidence of corporate governance and risk management infrastructure have expressed interest in acquiring or have acquired CFTC-registered entities. Some may conclude that it is cheaper to purchase a business licensed to operate in our markets than to engage with the Commission in the rigorous and extensive licensing application process.

It is important for the Commission to carefully consider regulations governing equity interest transfers and ensure that anyone acquiring a registered market participant is prepared to comply with the entire regulatory regime applicable to CFTC-registered firms. Similar to the proposed conflicts of interest rules, I am concerned that the Commission’s actions are not commensurate with the risks presented by emerging market conditions.

For these reasons and as explained below, I dissent from the Commission’s decision to adopt the Proposed Rule.

II.            Background of the Proposed Rule

I support the Commission’s efforts to enhance the integrity of the decision-making process of SEFs and DCMs and reduce conflicts of interest. The Proposed Rule seeks to ensure that conflicts of interest are mitigated for DCMs and SEFs. The Commission proposes enhancing conflicts of interest requirements to ensure that DCMs and SEFs identify, manage, and resolve conflicts related to “market regulation functions.” In the Proposed Rule, the Division of Market Oversight (DMO) identifies a set of issues that the Commission has carefully considered addressing for over a decade. I deeply respect and appreciate the tireless efforts and expertise of the Commission staff.

I applaud the staff’s identification of and focus on addressing conflicts of interest in the self-regulatory functions of DCMs and SEFs. The carefully developed rule text seeks to impose heightened governance fitness and structural standards to ensure that a DCM and SEF board of directors and disciplinary panels incorporate independent and expert perspectives.

For almost two decades, I have advocated for the Commission to enhance conflicts regulations. The Proposed Rule reflects a thoughtful commitment to addressing an area of conflicts that has not received sufficient attention. The Commission is also proposing to strengthen the notification requirements with respect to changes in the ownership or corporate or organizational structure of a SEF or DCM.

The Commission is proposing:

• new rules to implement DCM Core Principle 15 (Governance Fitness Standards) that are consistent with the existing Guidance on compliance with DCM Core Principle 15;
• new rules to implement DCM Core Principle 16 (Conflicts of Interest) that are consistent with the existing Guidance on, and Acceptable Practices in, compliance with DCM Core Principle 16;
• new rules to implement SEF Core Principle 2 (Compliance with Rules) that are consistent with the existing DCM Core Principle 15 Guidance;
• new rules to implement SEF Core Principle 12 (Conflicts of Interest) that are consistent with the existing DCM Core Principle 16 Guidance and Acceptable Practices;
•  new rules under Part 37 of the Commission’s regulations for SEFs and Part 38 of the Commission’s regulations for DCMs that are consistent with existing conflicts of interest and governance requirements under Commission Regulations 1.59 and 1.63;
• new rules for DCM chief regulatory officers (CROs);
• amendments to certain requirements relating to SEF chief compliance officers (CCOs); and
• new rules for SEFs and DCMs relating to the establishment and operation of a Regulatory Oversight Committee (ROC).

I thank the staff for their constructive engagement and cooperation with my office. DMO staff addressed and incorporated my comments into the Proposed Rule, which materially improve and strengthen both the conflicts of interest and governance requirements. Through coordinated efforts with my office, we have made our markets stronger and safer by:

• extending the instances in which conflicts of interest may arise to relationships that an officer or member of its board of directors, committees, or disciplinary panels has with an affiliate of the subject of any matter being considered;[5]
• extending the fitness requirements to any person who owns 10 percent or more of the SEF or DCM and who, either directly or indirectly, through agreement or otherwise, in any other manner, may control or direct the management or policies of the SEF or DCM;[6]
• incorporating questions relating to the definition of “material” and “non-public information” to ensure the Commission adequately captures all relevant information subject to the trading prohibition against using and disclosing material non-public information;
• maintaining the definition of “pool investment vehicle,” which is important because the SEF and DCM has the ability to grant an exemption from the trading prohibition where an employee is participating in pooled investment vehicles and the employee has no direct or indirect control with respect to transactions executed for or on behalf of such vehicles; and[7]
• codifying the Commission’s existing statutory authority to suspend or revoke the registration of a SEF or DCM and make and enter a cease and desist order but only if a change in the ownership or corporate or organizational structure of the SEF or DCM actually results in the failure of the SEF or DCM to comply with the CEA or any Commission regulations or order and only to the extent permitted under the Commission’s existing statutory authority.[8]

Section 5h of the CEA sets forth requirements for SEFs.[9]  To be registered and maintain registration with the Commission, a SEF must comply with 15 core principles and any requirement that the Commission may impose by rule or regulation pursuant to Section 8a(5) of the CEA.[10] Similarly, Section 5 of the CEA sets forth requirements for DCMs.[11] The CEA requires that to be designated and maintain designation by the Commission, a DCM must comply with 23 core principles, and any requirement that the Commission may impose by rule or regulation pursuant to Section 8a(5) of the CEA.[12]

Section 8a(5) authorizes the Commission to make and promulgate rules and regulations that, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA.[13] As noted in the Preamble to the Proposed Rule, the CEA contains a finding that the transactions subject to the CEA are affected with a “national public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities,” and among the CEA’s purposes are to serve the aforementioned public interests through a system of “effective self-regulation of trading facilities.”[14]

A SEF or DCM has reasonable discretion to establish the manner in which it complies with a particular core principle unless the Commission adopts more prescriptive requirements by rule or regulation. In the Proposed Rule, the Commission is prescribing heightened requirements for SEFs and DCMs.

III.          Limitations of the Conflicts Rules

Robust governance and conflicts of interest frameworks are critical to insulating SEFs, DCMs, and DCOs from serving their commercial or pecuniary interests or the interests of their members or owners at the expense of the public interest. SEFs, DCMs, and DCOs, as self-governing organizations, are tasked with the important responsibility of governing the derivatives market and fostering market integrity. The Commission’s enabling statute, the CEA, makes plain that the CEA serves the public interests through a system of effective self-regulation of trading facilities, clearing systems (clearinghouses), market participants and market professionals under the oversight of the Commission.[15]

A SEF’s or DCM’s decision-making process encompasses a broad range of regulatory functions, including certain self-regulatory obligations that may be influenced or captured by other interests of their decision-makers. The Commission is proposing enhanced requirements for identifying, managing, and resolving conflicts of interest related to a SEF’s or DCM’s “market regulation functions.” Under the existing conflicts of interest framework, both SEFs and DCMs are subject to a respective core principle (DCM Core Principle 16 and SEF Core Principle 12) to minimize and have a process to resolve conflicts of interest in their decision-making processes.[16]

Under the Proposed Rule, SEFs and DCMs will be required, by regulation, to establish a process for identifying, managing, and resolving actual and potential conflicts of interest that may arise between and among any of the SEF’s or DCM’s “market regulation functions” and its commercial interests as well as the interests of its management, members, owners, customers, market participants, other industry participants, and other constituencies.

Specifically, both SEFs and DCMs are required to establish a ROC, a standing committee of the board consisting of only public directors with the duty to assist in minimizing actual and potential conflicts of interest, oversee the DCM’s regulatory program, supervise the CRO, and prepare an annual report assessing the self-regulatory functions for the Commission (among other responsibilities). The DCM is required to designate a CRO that will have responsibilities for the “market regulations function,” and a SEF is required to designate a CCO or a senior officer with responsibility over compliance with the CEA. The CRO and CCO must report to the board or a senior officer. SEFs and DCMs must also limit the use or disclosure of material non-public information by certain decision-makers, employees, and owners.

Notwithstanding my general support for the conflicts regulation that the Proposed Rule advances, I am unable to support the conflicts provisions in the Proposed Rule for several reasons.

First, the Proposed Rule is incomplete. The Proposed Rule does not introduce updated conflicts of interest rules for DCOs. The Commission should be taking a comprehensive approach to addressing conflicts of interest across our various market structures to avoid potential inconsistencies, contradictions, and inefficiencies.

Second, last year in a series of public statements and speeches, I stated clearly and unequivocally to the Commission that I cannot support continuing to chip away at the margins of our conflicts rules with a weak, piecemeal approach.[17] The conflicts regulation ignores the significant need for conflicts regulation for certain market participants adopting vertically integrated market structures. I repeat my call for the Commission to commit to engage in a public rulemaking with formal notice and comment period on vertically integrated structures.[18]

A.           Failure to Address Conflicts of Interest for DCOs

The Commission should adopt an enhanced conflicts of interest rulemaking for DCOs. DCOs are central to the resiliency of the derivatives markets. Since the passage of the Dodd-Frank Act, significant volumes of over-the-counter derivatives transactions have been mandatorily or voluntarily cleared at DCOs. There is a greater concentration of risk in the clearing system today than 13 years ago.

In the Preamble to the Proposed Rule, DMO cited to an article I published prior to serving at the CFTC as a Commissioner that explores how CCP boards of directors face persistent and pernicious conflicts of interest that impede objective risk oversight. The preamble acknowledges my view that:

While clearinghouses and exchanges are private businesses, these institutions provide a critical, public, infrastructure resource within financial markets. The self-regulatory approach adopted in financial markets presumes that clearinghouses and exchanges will provide a public service and engage in market oversight. The owners of exchanges and clearinghouses may, however, prioritize profit-maximizing strategies that de-emphasize or conflict with regulatory goals.[19]

It is imperative that, to the extent the Commission advances the Proposed Rule, it also adopts well-tailored governance reforms to address conflicts and prevent DCO owners’ self-interested commercial incentives or other institutional constraints from triggering systemic risk concerns.

DCOs are subject to Core Principle P regarding conflicts of interest.[20] CFTC Regulation 39.25 implements DCO Core Principle P and is essentially identical in all material respects to the existing SEF and DCM Core Principles and implementing regulations on conflicts of interest. A DCO is also required to establish and enforce rules to minimize conflicts of interest in the decision-making process, establish a process for resolving conflicts of interest, and have procedures for identifying, addressing, and managing conflicts of interest involving their members.[21]

The Commission has improved the conflicts requirements for DCMs and SEFs but did not propose parallel revised rules for DCOs. For example, the Proposed Rule introduces common scenarios in which a conflict of interest may arise and imposes requirements to document conflicts of interest determinations.[22]

At a minimum, the DCO regulations should make clear that DCOs are held to parallel standards, which are common across our financial markets. DCOs are integral to the stability of our financial markets, and the Commission should advance more specific rules to assist DCOs in identifying, managing, and resolving conflicts of interest in their decision-making process. It is the prerogative of the Commission. Although DCOs have reasonable discretion in establishing the manner by which they comply with each DCO core principle, the Commission can, and should, reasonably limit that discretion by prescribed well-tailored rules and regulations. The Commission needs to press forward by considering this proposed rule for future parallel regulations, for DCOs in particular.[23]

B.           Weak Governance Requirements

Weak governance structures may create systemic risk concerns. DCM and SEF boards of directors and governing committees’ must be both experts and of good moral standing and must also be insulated from commercial pressures. The Commission is proposing governance fitness and structural requirements to ensure that SEF and DCM governing bodies adequately incorporate an independent perspective and that those making governance decisions are of good repute.

The Commission is harmonizing the fitness standards for DCMs and SEFs in respect of their officers, members of its board of directors, committees, disciplinary panels, and dispute resolution panels (or anyone performing functions similar to the foregoing), members of the DCM, any other person with direct access to the DCM, and any person who owns 10 percent or more of the SEF or DCM and who, either directly or indirectly, through agreement or otherwise, in any other manner, may control or direct the management or policies of the SEF or DCM. These requirements are sweeping.

The low public director threshold allows the board to be controlled by interested directors. I remain concerned that the number of public directors comprising the board and ultimately the ROC should be higher than 35% to ensure that the board is not run primarily by individuals that have a material relationship with the SEF or DCM. The Commission has set out Acceptable Practices to minimize conflicts of interest, which include having at least 35% public directors on the board of directors and executive committees. However, there are contemporary or emerging ways for determining independence—even more heightened standards than those proposed today—but DMO made minor tweaks around definitions. 35% is not, in my view, the proper threshold, and it should be higher.

C.           Commit to a Conflicts Rulemaking on Vertical Integration

It is essential that we address related issues across our markets with consistency and efficiency. This is why the Commission must take a whole-of-division approach to addressing deep-seated conflicts of interest concerns, instead of its piece-meal and fragmented approach. I have repeatedly called for the Commission to initiate a comprehensive rulemaking process across all market infrastructures—DCOs, SEFs, and DCMs—to address inherent conflicts of interest issues that arise in vertically integrated structures, including, most recently, in my statement on the Bitnomial DCM application where I outlined numerous important Commission conflicts of interest regulations.[24]

A Rulemaking on Vertical Integration is Essential

The need for regulatory intervention cannot be overstated. As the Proposed Rulemaking notes, we have recently observed an increase in the number of SEFs and DCMs that are part of corporate families that also have other Commission registrants and other market participants trading on those platforms. In 2021, Commission staff identified several SEFs and three DCMs that were in the same corporate family as intermediaries that also traded on the SEF or DCM. Such organizational structures increase the risk of conflicts of interest.

The Commission’s request for comment and staff advisory are helpful initial steps. On June 28, 2023, Commission staff issued a Request for Comment on the Impact of Affiliations Between Certain CFTC-Regulated Entities (RFC on Vertical Integration) to better understand a broad range of potential issues that may arise if a DCO, DCM, or SEF is affiliated with an intermediary that uses its platform.[25] On December 18, 2023, the Commission issued a staff advisory on affiliations between a DCM, DCO, or a SEF and an intermediary, such as an FCM, or other market participant, such as a trading entity, to remind them of their regulatory obligations.[26]

While I am happy to see a note that the Commission anticipates proposing regulations that will address issues identified as a result of the RFC on Vertical Integration, including additional concerns raised by commenters about the conflicts of interest relating to market regulation functions posed by affiliations, it is unacceptable that the note is buried in a footnote that fails to provide a clear and unambiguous commitment to undertake a rulemaking.

Industry comments related to SEFs and DCMs with affiliated trading members highlight the urgent need for a regulatory response. Many of the comments to the Vertical Integration RFC echo my concerns, and it is particularly disappointing that the Commission is delaying a resolution of the matter when certain questions in the RFC on Vertical Integration directly implicate the narrowly-defined “market regulation functions.”

A Piecemeal Approach Risks Inconsistencies and Contradictions

The Proposed Rule’s significant gaps are likely to demand future rulemakings addressing them. For example, the Proposed Rule is silent on the sharing of certain key executive functions and other key personnel, which is not an unusual operating model for vertically integrated structures. [27]

While the Proposed Rule requires a DCM’s CRO and an SEF’s CCO to report to the board of directors or a senior officer of the DCM or SEF, it does not require that the CCO report to the ROC, which is comprised of only public directors.[28]  The ROC oversees the CRO and CCO, although the ROC would not supervise the CRO’s or CCO’s day-to-day activities. A member of the board, including a shared officer—e.g., the chief executive officer—may have supervisory authority over the CRO and CCO. This raises the question of whether the Commission has adequately insulated the CRO and CCO from commercial pressures when a CRO or CCO is required to make decisions about a member that is affiliated with the DCM or SEF. Compounding this issue, the Commission is allowing the CRO and CCO to be paid based on the profits of the DCM or SEF, which could create perverse incentives. The Proposed Rule requires only 35% public directors on the board of directors, which codifies an Acceptable Practice but raises key industry concerns that a majority of the board may be non-public directors with a material relationship to the SEF or DCM.

If the Commission initiates a future rulemaking to address these shortcomings, the piecemeal approach could lead to inconsistencies and contradictions—or worse, an amendment to the Proposed Rule shortly following adoption by the Commission and possibly implementation by the industry.

I am disappointed that the Commission has elected to proceed with the Proposed Rule in this piecemeal fashion without initiating a formal rulemaking to establish effective conflicts rules in the context of vertically integrated structures.[29]

While I commend the efforts of DMO, the Commission needs to go farther. With respect to a change in ownership or corporation or organizational structure of the SEF or DCM, a SEF or DCM does not have the ability to comply with the CEA and Commission regulations in connection with such a change. The Commission should have the ability to veto or object to such change.

But, as stated, the Commission’s piecemeal approach to regulating the derivatives market leaves key issues unaddressed.

When FTX collapsed, I called for parallelism and for the Commission to exercise authority to approve an acquisition of a registrant. Under the existing rules the DCMs and SEFs are only required to provide the Commission with notice of an equity interest transfer. I believe the Commission has the inherent right to approve or object to a transfer that would result in a breach of the DCMs and SEFs’ statutory and regulatory obligations. The Commission also has the right to suspend, revoke, or enter a cease and desist order should the DCM or SEF be in violation of a statutory or regulatory requirement following an equity interest transfer and certain other organizational changes. 

IV.             Failure to the Conflicts Rules to Adequately Reinforce the
           Commission’s Right to Take Regulatory Action Upon a Change
           of Ownership

Since the early months of my tenure as a Commissioner, I have raised questions regarding the disparate engagement with registrants in our formal licensing application process and in two instances that involve a change of control in the ownership of a registered entity: (1) transfer of title or designation and (2) equity interest transfers.

I welcome the Commission’s efforts to address the disparate regulations that govern the three ways to gain access to our markets as a registered entity. I find, however, that the Proposed Rule advances and codifies deficiencies in the Commission’s engagement in a change of control and reinforces an antiquated understanding of markets. The Proposed Rule also overlooks interest in purchasing the reputational benefit of asserting that a business is a CFTC-regulated entity.

In any instance in which an applicant seeks to register with the CFTC, a party seeks to transfer a designation, or a party seeks to acquire a controlling percentage of the equity interest in a licensed registrant, the CFTC must be confident that the party assuming control over a registrant will continue to comply with our regulations and would have been approved if it had been an initial application.

While the Commission retains the authority to suspend or revoke the registration of or impose a cease and desist order on a business that fails to comply with the CEA and Commission regulations, our regulations should clearly state that the Commission will object to a transfer of ownership in such circumstances or has an outright approval right.

With respect to a change in ownership or corporate or organizational structure of the SEF or DCM, if a SEF or DCM (or DCO) demonstrates that it will fail to comply with the CEA and Commission regulations in connection with such a change, the Commission should object to such a change.

New Equity Transfer Provisions

Commission Regulation 38.5(c)(1) currently provides that a DCM must file with the Commission a notification of each transaction it enters into involving the transfer of ten percent or more of the equity interest in the DCM.[30] The regulation does not indicate that Commission approval is required for the acquisition. Similar provisions apply to SEFs in CFTC Regulation 37.5(c), but the threshold that triggers a notice event is fifty percent or more of the equity interest of the SEF. Under Regulation 37.5(c) a SEF must also certify as to its compliance with the CEA and Commission regulations.[31] DMO staff review the relevant notifications.

The Commission proposes to amend CFTC Regulations 37.5(c) and 38.5(c) to:

• ensure the Commission receives timely and sufficient information in the event of certain changes in the ownership or corporate or organizational structure of a SEF or DCM;
• clarify what information is required to be provided and the relevant deadlines;
• conform to similar existing and proposed requirements applicable to DCOs; and
• impose a certification requirement.

The Proposed Rule emphasizes the importance of disclosures related to the ownership structure of registrants. In our registration process, staff carefully evaluates significant volumes of data regarding an entity that seeks to be licensed by and subject to the Commission’s authority. The disclosures enable the Commission to assess whether the entity demonstrates the requisite ability to comply with our regulation.

The Proposed Rule acknowledges the significant business organizational shifts in our markets. First, while many, market participants were organized as cooperative structures, demutualization and an increase in private businesses (many publicly-traded companies) has altered the market landscape. In addition to a transformation in how risks and default risks are managed, this approach has led to significant consolidation in some contexts.

A ten percent change in the equity ownership may create a notable difference in governance and risk management decision-making authority within a firm. Finally, our regulations note that an asset purchase may have the same effect as an equity interest transfer. Regulations require registrants to notify the CFTC if substantially all of the assets of the SEF or DCM are transferred to another legal entity.

Limitations of the Equity Transfer Provisions

The Commission must state that it has the regulatory authority to take traditional and well-recognized regulatory action in the context of a change in the ownership or corporate or organizational structure of a SEF or DCM. From as early as 2022, I have raised alarms with respect to the Commission’s explicit and express authority under Commission regulations to engage in a robust dialogue with a registrant planning a significant equity interest transfer.[32] The Proposed Rule fails to fully address my concerns.

I have strongly advocated for necessary changes that will harmonize requirements applicable to DCOs, SEFs, and DCMs. The Proposed Rule harmonizes the regulation applicable to these registered entities and provides enhanced uniform disclosures, certifications, and disclosure.

I am deeply concerned that some may mistakenly interpret the Proposed Rule to indicate that the Commission has no explicit or express legal authority set out in the Proposed Rule to take regulatory action upon disclosure of an acquisition of our registrant where the Commission believes that the registrant will no longer comply with the CEA or Commission regulations.

In addition to this concern, I strongly believe that the Commission has missed an opportunity to ensure that all entities entering in our markets are subject to the same rules whether they are acquiring a significant equity interest in a registered entity or registering as a registrant. The best method of addressing these twin concerns is to first clarify the Commission’s existing authority and to ensure that across our markets the equity interest transfer regulations are similar and that these regulations involve inquiries as robust and effectively enforced as disclosures provided at the time that an entity registers with the Commission.

A disclosure requirement, without the regulatory authority to act upon that disclosure, would be vacuous. It should be expressly clarified that if the CFTC determines that there is an issue after disclosure with a change in equity ownership, it also has regulatory authority over that change.

Objecting to a Change in Equity Ownership

As part of the registration process, SEFs and DCMs are required to demonstrate, prior to registration, compliance with the CEA and related core principles. An entity seeking designation as a SEF or DCM must include ownership information in its Form DCM or Form SEF application. This authority is parallel to the authority the Commission exercises when a registered entity experiences a change of control.

The Proposed Rule should clarify that the Commission may object to a proposed change in ownership or corporate or organizational structure for SEFs and DCMs if such change could result in a failure of a registrant to comply with the CEA or Commission regulations. In parallel to the Commission’s authority to grant registration is the Commission’s authority to revoke registration.

Approving a Change in Ownership

The Proposed Rule should state that the Commission has an approval right in the event of a change in ownership or corporate or organizational structure to the same extent the approval right the Commission exercises at the time of registration. Rule text that explicitly states the same would clarify the Commission’s authority for market participants.

For example, certain prudential regulations are consistent with this understanding. The Office of the Comptroller of the Currency (OCC) requires that any party seeking to acquire control of a national bank give notice of such change to the OCC. Upon the filing of such notice, the OCC has the power to disapprove (i.e., object to) such changes set out in the notice.[33] Similarly, under FINRA Rule 1017, a member is required to file an application with FINRA for approval of a 25% change in equity ownership of the member.

Enjoining a Change in Equity Ownership

The Proposed Rule clarifies the Commission’s authority to issue a cease and desist order to enjoin a change in ownership or corporate or organizational structure for SEFs and DCMs if such change results in a failure to comply with the CEA and Commission regulation.

The Commission has the authority to enjoin or restrain violations of the Commodities rules and regulations. For example, the CEA expressly empowers the Commission to issue cease and desist orders or to enjoin or restrain violations.[34] The Proposed Rule clarifies that the Commission has the power to act to enjoin or restrain a transfer if a change in the requisite equity interest results in a failure of a registrant to conform and adopt a culture of compliance with our regulatory framework.

Suspending, Revoking, or Vacating a Registration Designation

Operating pursuant to Commission registration is a privilege granted by statute and enforced and monitored by the Commission. The Proposed Rule clarifies that the Commission has the power to approve a registration as well as the power to suspend, revoke or vacate a registration designation.[35] 

Pursuant to Commission Regulation 37.3(b)(6), the Commission approves the registration application of an entity to be designated as a SEF or DCM. In considering that approval, the Commission evaluates whether the ownership of that entity would affect that entity’s ability to comply with the CEA and Commission regulations. The Commission should not differentiate between the its power to consider the entity’s ownership in the registration process to become a SEF or DCM, and the regulatory authority over such equity ownership changes in the Proposed Rule.

In the Proposed Rule, the Commission has the right to suspend, revoke or vacate the registration of a DCM or SEF if, following a review of the information provided to the Commission in connection with the notification of a change in ownership or corporate or organization structure, the Commission determines that the SEF or DCM fails to comply with the CEA and the Commission’s regulations. Because conceptually, a change in ownership would constitute a change in the Form SEF application (Exhibit A), the Commission has the ability to determine whether the SEF or DCM should maintain its designation.

The power of the Commission to effectively vacate a registration can be found in the express statutory language of the CEA. For example, the CEA expressly grants the power to impose rules or regulations with respect to a SEF or DCM registrant maintaining its registration in accordance with core principles such as conflicts of interest.[36] Second, the CEA expressly not only empowers the Commission to approve or deny the registration application of a DCM applicant, but also the power to effectively vacate (i.e., suspend or revoke) a SEF or DCM designation or registration upon a showing that the registrant has failed to comply with Commission rules and regulations.[37]

The Commission already has the express regulatory power to vacate the registration or a SEF or DCM upon their request,[38] as well as the power to suspend, revoke, or vacate a registration in circumstances when a registrant is no longer in compliance with Commission rules.

V.             Conclusion

In a Bloomberg Markets: The Close interview on January 27, 2023, I raised concerns that the auction of LedgerX in the FTX bankruptcy raised questions about the regulatory framework governing LedgerX’s activities.[39]  The events leading to FTX’s bankruptcy and the CFTC enforcement action against FTX revealed the urgent need for development of clear, robust, and effective conflicts of interest and equity interest transfer regulations. 

On October 25, 2021, through a Delaware company doing business as West Realm Shires Services Inc. (West Realm Shires), FTX.US acquired LedgerX. A little over a year later, on November 11, 2022, FTX and more than 100 FTX affiliates filed a petition seeking bankruptcy protection.

When FTX collapsed, I called for the Commission to exercise its authority to take up rulemaking on conflicts of interest and equity interest transfers to enable the Commission to exercise greater visibility into the activities of certain market participants and to ensure a clear, parallel set of rules applied when an entity registers to become part of our markets and when someone acquires an entity licensed to operate in our markets.

I believe the Commission should adopt parallel conflicts regulations across our markets and must adopt conflicts rules that effectively govern conflicts among affiliated-entities. I believe that the Commission has notable authority with respect to any entity seeking to acquire a controlling equity interest in a business in our markets, including the authority to suspend, revoke, or enter a cease and desist order should the ownership change result in a violation of a statutory or regulatory requirement or if the registrant is no longer able to comply with our regulations. I would like to see the Commission go farther and adopt a rulemaking that gives the Commission the right to approve or object to a change in ownership or corporate or organizational structure to the same extent.

I would like extend my sincere gratitude to the DMO team, including Rachel Berdansky, Swati Shah, Marilee Dahlman, Jennifer Tveiten-Rifman, David Steinberg, Lillian Cardona, Caitlin Holzem, and Rebecca Mersand.