Opening Statement of Commissioner Kristin N. Johnson Regarding Open Commission Meeting on June 7
June 07, 2023
Good morning. Thank you, Chairman, and welcome to everyone joining us in person and virtually. Today we will consider a final rule on Governance Requirements for Derivatives Clearing Organizations (DCOs), a proposed rule on DCOs Recovery and Orderly Wind-down Plans and a proposed rule on Amendments to Part 17 Large Trader Reporting Requirements, and a proposed order/request for comments on European Union Non-Bank Swap Dealer Capital Comparability Determination. I will share my remarks on the respective proposals in greater detail following staff presentations.
I want to express my gratitude to the Division of Clearing and Risk, the Division of Market Oversight, and the Market Participants Division for their efforts to introduce the proposed and final rules that we will consider. I also want to thank Adrien Andersen, Bruce Fekrat, and Matt Rowland in my office for their assistance in preparing for today’s meeting.
The final and proposed rules on the agenda of our meeting today illustrate two pillars that frame CFTC market regulation and secure the foundation of market integrity against the threat of systemic risks—governance and risk management. As is often true, an illustration may prove useful.
Succession, Hunger Games, and Game of Thrones
A recent television series launched in 2018 by HBO and innocently titled “Succession” follows the story of an imperial CEO Logan Roy and his three adult children, each seeking to be named the successor of their family’s television and media enterprise. While an exaggerated expression of the age-old issue of succession—an issue that may pose a challenge for even the most storied and iconic businesses, the series indisputably illustrates the exceptional importance of effective corporate governance and risk management mechanisms. As a former associate serving in the mergers and acquisitions group of a large New York law firm, I am able to attest that certain elements of the storyline are not only likely, but possibly common during significant moments in the life of high-performing businesses.
Fashioned as a “Hunger Games” -styled contest in New York City, competition among Kendall, Shiv, and Roman Roy fluctuated from mere sibling rivalry to a scene reminiscent of Gladiator (Russell Crow meets Joaquin Phoenix) or Game of Thrones or maybe House of Dragons. While the battle among the Roy family yields exceptional entertainment, it also reveals truths well-established by our experience regulating markets for almost half a century and decades of academic study. If you are among those too erudite or professional to follow a television series, allow me to state the issues differently.
Governance and Risk Management
For my entire professional career (as a business person, lawyer, and academic), I have continuously championed regulatory efforts to reinforce these two pillars—governance and risk management. Working in tandem, governance and risk management protect the most vulnerable customers in our markets, and ensure the safety, soundness, resilience and orderly recovery of the largest and most sophisticated market participants. Governance and risk management support orderly, fair, and transparent markets and aid the Commission’s efforts to identify and address foreseeable concerns that almost inevitably plague most businesses.
Conflicts-of-Interest, Cybersecurity Threats, and Risk Management Programs
Macroeconomic conditions and inflationary pressures demonstrate the significant need for timely development, refining, and implementation of well-tailored, thoughtful governance and risk management rules. Beyond the rules considered today, my office is working intimately with Commission staff and the Commission to advance conflicts-of-interest and cybersecurity rulemakings as well as better-tailored risk management regulations for swap dealers and futures commission merchants, including potential amendments to the Risk Management Program (RMP) requirements in CFTC Regulations 23.600 and 1.11. I believe that the Commission’s recent advanced notice of proposed rulemaking and request for comment will offer vital insights for refining these regulations including thoughtful analyses of best practices and regulatory approaches for addressing cyber-risks arising from adoption of and adaptation to increasing dependence on technology and reliance on critical third- and fourth-party service providers.
New Market Structures, Segregation of Customer Funds, Vertical Integration
Further, in a recent statement, I encouraged the critical efforts outlined in a timely advisory released by the Director of the Division of Clearing and Risk on behalf of the Commission that presents a path to address the need for clear and effective regulation for non-intermediated DCO’s that honors the principle of same risks, same rules. In particular, I have and will continue to advocate for introduction of segregation of customer funds or separation of customer property regulation for the DCOs that adopt this market structure, as well as conflicts of interest regulation. I am hopeful that the Commission will also carefully explore the implications of vertical integration, particularly in areas characterized by new or evolving market structures.
On March 8, 2023, we held our second Market Risk Advisory Committee meeting and examined many of these issues. On July 10, 2023, we will hold our next meeting and I hope that MRAC will continue to recommend pathways for Commission action under its existing authority to address these concerns.
The rule-making efforts of the Commission today reflect several years of multi-faceted, multi-lateral stakeholder dialogues across industries and jurisdictions to refine and enhance governance and risk management rules that protect customers by preserving and segregating their funds, reducing asymmetries of information, mitigating conflicts of interest, improving transparency, strengthening enterprise and market integrity, and reducing the likelihood of disorderly liquidation and the contagion that market or counterparty credit risk may trigger in the context of the failure of a systemically important DCO or several significant DCOs.
When the Governance Requirements for DCOs rules were first proposed in August of last year, I highlighted the central role played by DCOs in the reforms put in place by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). DCOs are entrusted under the Dodd-Frank Act reforms with maintaining the integrity of the derivatives markets through comprehensive and prudent risk mitigation practices. DCO Core Principle O, added by Dodd-Frank, expressly directs DCOs to establish governance arrangements that “permit the consideration of the view of owners and participants,” a principle that is at the heart of the rulemaking we adopt today.
As sponsor of the Commission’s Market Risk Advisory Committee (MRAC), I am pleased to support this final rule, which arises out of recommendations made by MRAC’s Central Counterparty (CCP) Risk and Governance Subcommittee in February of 2021. While commenters took issue with some of the specific details of the rule, as addressed in the rulemaking and as I will discuss further later in the agenda, I think it is safe to say that there was general agreement with the intent of the rule. Moreover, I believe that the rule as finalized appropriately addresses the issues raised by the comments and is consistent with our goals of making our markets safer and more resilient. Ensuring that DCOs hear from and take into consideration a broader diversity of informed views about risk furthers the goals set out by the Dodd-Frank Act and will help to better manage risk in our markets.
Proposed Rule: Derivatives Clearing Organizations Recovery and Orderly Wind-down Plans
I have already recognized the critical role that DCOs play in our markets by providing important settlement services, taking on counterparty risk, and standing as financial guarantors in the event of a customer or clearing member default. In addition to the risk management reforms addressed by the final rule on governance requirements, it is also essential that DCOs have recovery and orderly wind-down plans to prevent significant market disruption and limit widespread risk to our financial system. Dodd-Frank Section 805 introduced a collaborative, multi-agency framework of rulemaking and supervision for systemically important DCOs (SIDCOs).
Today, the Commission—in consultation with the FDIC, Federal Reserve, and SEC—takes the next step in proposing additional guidance that encompasses all DCOs. The Division of Clearing and Risk has thoughtfully crafted proposed rules which will guide SIDCOs, Subpart C DCOs, and all other DCOs in updating or crafting wind-down plans and in some instances, recovery plans.
The proposed rules include enumerated elements that must be included in recovery and wind-down plans, establish certain testing requirements, amend the notice and timing requirements, and specify certain categories of information the Commission may seek from SIDCOs and Subpart C DCOs for resolution planning. Further, the proposed rules create specific requirements for non-SIDCOs and not Subpart C DCOs to create and maintain orderly wind-down plans. I believe the proposed rules, as currently drafted, would effectively facilitate transparency between DCOs and the CFTC as well as provide a foundation for quick, efficient, and effective action in instances of market instability and risk to DCOs operations.
While I support the proposal, I look forward to carefully considering the comments we receive to determine the best path forward to protect our markets through the stability of DCOs. I am hopeful the comments submitted in response to the proposal will answer some of the explicit questions set out in the release text as well as support the drafting of a final rule that creates clarity for DCOs and our markets.
Proposed Rule: Amendments to Part 17 Large Trader Reporting Requirements
The Commission’s large trader reporting system has been foundational to protecting market integrity and the price discovery and hedging utility of futures contracts for commercial end-users. Despite technology-based formatting limitations, the large trader reporting system has admirably supported the Commission’s market surveillance programs for decades and may perfectly capture the adage—if it isn’t broken, don’t fix it.
Today the Commission is not attempting to fix a broken system but instead is proposing technological improvements to a time tested and reliable framework for surveilling market activity and proposing measured extensions of important reporting fields and requirements. I commend staff for bringing to the Commission a thoughtful proposal for modernizing large trader reports and proposing a compliance period that is commensurate with how ingrained the large trader reporting framework is within the technology stacks of reporting firms.
Proposed Order/Request for Comments: European Union Non-Bank Swap Dealer Capital Comparability Determination
The proposed capital comparability order for registered nonbank swap dealers (SDs) organized and domiciled in France and Germany is now the third order before the Commission since I began my term of service. I support the issuance of this order because it furthers our efforts to coordinate and harmonize regulation with our counterpart regulators internationally while still fulfilling the purpose of our capital and financial reporting requirements—ensuring the safety and soundness of our markets.
The effort by staff to evaluate the comparability of requirements in the EU, as applicable to SDs organized and domiciled in France and Germany, is commendable, and reflects this Commission’s commitment to avoiding unnecessary burdens on market participants, collaborating with international partners, and safeguarding our markets. As with our prior comparability determinations, I look forward to hearing from commenters as to whether we have properly honored these commitments with the proposed order here.
Thank you again for joining us. I look forward to hearing from the Commission staff and my fellow Commissioners.
 Succession (Home Box Office Inc. June 3, 2018 – May 28, 2023).
 The Hunger Games (Lionsgate Films 2012).
 Game of Thrones (Home Box Office Inc. April 17, 2011 – May 19, 2019).
 House of Dragons (Home Box Office Inc. August 21, 2022 to present).
 17 C.F.R. §23.600.
 17 C.F.R. §1.11.
 Dodd-Frank Wall Street Reform and Consumer Protection Act, No. 111-203, 124 Stat. 1376 (2010).
 7 U.S.C. §7a-1(c)(2)(O).
 Section 805 of the Dodd-Frank Act, 12 U.S.C. 5464.
 Notice of Proposed Rulemaking on Derivatives Clearing Organizations Recovery and Orderly Wind-down Plans; Information for Resolution Planning, p. 5-6 (Jun. 7, 2023), (hereinafter “NPRM on DCO Recovery and Orderly Wind-down Plans”).
 Notice of Proposed Rulemaking, Large Trader Reporting Requirements at 14 (Jun. 7, 2023), (hereinafter “Large Trader Proposal”).
 See Large Trader Proposal at 34.