Public Statements & Remarks

Concurring Statement of Commissioner Rostin Behnam Regarding Exemption from Derivatives Clearing Organization Registration; Final Rule

November 18, 2020

I respectfully concur with the Commodity Futures Trading Commission’s final rule regarding policies and procedures that it will follow with respect to granting exemptions from derivatives clearing organization (DCO) registration pursuant to authority under section 5b(h) of the Commodity Exchange Act (CEA)[1] (the Final Rule).  The Final Rule, with limited exceptions, codifies the policies and procedures followed by the Commission in issuing the four exempt DCO orders which currently limit clearing organizations organized outside of the United States to clearing only proprietary swap positions of U.S. persons and futures commission merchants, and not customer positions (exempt DCOs).  Critical to my vote today, the Final Rule prohibits the clearing of U.S. customer positions at an exempt DCO.[2]

I supported the Commission’s 2018 notice of proposed rulemaking[3] as a means to promote transparency and accountability as well as a positive step towards increased cross-border cooperation and deference to our foreign regulatory counterparts.  However, I was unable to support the Commission’s 2019 supplement to the 2018 Proposal,[4] which proposed permitting exempt DCOs to clear swaps for U.S. customers through foreign intermediaries that would be wholly outside the Commission’s direct regulation and oversight.  As articulated more fully in my dissent,[5] the 2019 Supplemental Proposal was not the product of internal consensus and its brief history and questionable timeline signaled a lack of appropriate scrutiny and evaluation of the critical financial, market, consumer protection, and systemic risk issues raised by diverging from the customer protection model provided by the CEA and U.S. Bankruptcy Code.  It was and remains my view that if the Commission believes it is appropriate to provide U.S. customers with greater access to non-U.S. swap markets, then we can and should engage in a more careful analysis of options, assessment of alternatives, and evaluation of consequences consistent with the Administrative Procedure Act.[6]  As the Commission is declining to adopt the 2019 Supplemental Proposal at this time, I am comfortable with supporting the Final Rule.

One area in which I will remain vigilant is with regard to the Commission’s reliance on the Principles for Financial Market Infrastructures (PFMI) framework as the benchmark for making the comparability determination with respect to a foreign jurisdiction’s supervisory and regulatory scheme required by CEA section 5b(h).  I believe that the Commission’s reliance on the PFMIs as providing a comprehensive framework for DCO supervision that is comparable to the statutory and regulatory requirements applicable to registered DCOs, with a particular focus on the DCO Core Principles,[7] is within its discretion under CEA section 5b(h).  However, I am concerned that the Commission’s decision to limit its reference to the PFMIs as they existed in 2012 may lead to untenable divergence in the future should the Commission determine to incorporate subsequent amendments or revisions to the PFMIs or related interpretations and guidance into its own regulatory and supervisory DCO oversight.  Alternatively, I am concerned that maintaining a static definition of the PFMIs to provide exempt DCOs with greater regulatory certainty with regard to their ongoing eligibility for the exemption could negatively impact the Commission’s consideration regarding whether to adopt or incorporate future changes to the PFMIs or related interpretations and guidance into its regulatory regime.  However, I am reassured that the Commission explicitly reserves the ability to incorporate future amendments to the PFMIs into the Final Rule’s PFMI definition in § 39.2.  As well, because the Commission also maintains broad discretion to condition an exemption on any facts and circumstances it deems relevant under new § 39.6(b)(8), I believe the Commission has clear discretion and authority to make appropriate changes with regard to its consideration of exempt DCO eligibility criteria and ongoing compliance to maintain comprehensive application of and adherence to comparable regulatory and supervisory standards.

My decision to support the Final Rule is largely based on the Commission’s determination to move forward with the 2018 Proposal without adopting the 2019 Supplemental Proposal.  However, I remain supportive of the Commission’s endeavor to explore ways to adapt and—if appropriate—seek to adjust the current intermediary structure established under the CEA and Commission regulations to better accommodate both U.S. customer demand for increased access to clearing in foreign jurisdictions and evolving global swaps market structures.  I remain open and look forward to the possibility of further discussing the regulatory and policy issues raised during this rulemaking.

[1] 7 U.S.C. 7a-1(a).

[2] See Final Rule at II.B.2.a. and §39.6(b)(1).

[3] Exemption from Derivatives Clearing Organization Registration, 83 FR 39923 (proposed Aug. 13, 2018) (the 2018 Proposal).

[4] Exemption from Derivatives Clearing Organization Registration, 84 FR 35456 (proposed July 23, 2019) (the 2019 Supplemental Proposal).

[5] See Appendix 4—Dissenting Statement of Commissioner Rostin Behnam, Supplemental Proposal, 84 FR at 35476-35478.

[6] Id. at 35476.

[7] See CEA section 5b(c)(2), 7 U.S.C. 7a-1(c)(2).