Public Statements & Remarks

Remarks of DSIO Director Joshua B. Sterling Before the ABA Securities Association

What’s Going On: Our Division’s Measured Approach to Key Derivatives Market Issues for Bank-Affiliated CFTC Registrants

September 26, 2019


Good afternoon.  I wish to thank the ABA Securities Association for inviting me to participate in this important conversation, and for the thoughtfulness displayed by its excellent staff in organizing today’s program.

It’s no great insight to say that bank-affiliated firms that are registered with the CFTC operate in a complex, multi-dimensional environment.  They operate what are often global businesses under different, and often competing, regulatory requirements.  Those requirements can change quite a bit, which can have a cascading effect on systems, personnel, and other resources, all of which can drive up the cost of doing business.  And, while all the rigorous efforts to comply with the law are continuing, your firms remain focused – as they should – on the important imperative of serving your customers, counterparties, and clients.

We recognize these challenges, while you equally recognize our unique role in being singularly‑focused on your firms’ derivatives markets activities.  There are limitations to thinking about those activities in isolation from your other businesses, which makes it all the more imperative that we work together to see the full picture.

Our role in overseeing your businesses is vital, both given the scale of your derivatives market activities and because of the deep connection between derivatives markets and the broader economy.  Through smart, focused and effective regulation, we aim to do our part in helping your firms maintain the remarkable comparative advantage that our strong financial system affords the United States.

Before I continue, please note that these remarks reflect solely my personal views and not those of the Commission or its staff.

With our time together today, I’d like to touch on a few key areas that I believe are top of mind for bank-affiliated registrants.

Capital Requirements – Harmonization with the SEC and Moving to Final Rules

The Commodity Exchange Act (CEA) requires that we both meet with the Securities and Exchange Commission (SEC) on capital (and margin) requirements and, to the maximum extent practicable, establish comparable capital and margin requirements.[1]  This made great sense, of course.  We had a very productive consultative process with the SEC leading up to their adopting final capital rules for security-based swap dealers.[2]

In this regard, I wish to thank personally the efforts of Commissioner Quintenz and his terrific staff in facilitating this critical interagency dialogue.  The results achieved speak for the positive effect that he and his team had on the process.

Their final rules reflect the fruits of these efforts, as they attempted to align their rules with ours to a great extent.  Some differences will clearly remain, however, given the differences in the dealing activities under our regimes and the differences among firms dealing in swaps on the one hand and security-based swaps on the other.

So, what then about the CFTC’s swap dealer capital and financial reporting rule?

The Commission originally issued a proposal in 2011, which was followed by a comprehensive re‑proposal in 2016 based on important feedback that we received.[3]  The 2016 proposal is focused on three core concepts:

  • First, recognize existing capital structures and frameworks;
  • Second, permit the use of capital models for market and credit risk; and
  • Third, recognize foreign domiciled swap dealers.

We have carefully reviewed the comments filed on this latest proposal.  On the whole, the Commission’s overall approach has been well-received.  So, as we develop a final set of rules for the Commission’s consideration, we expect to build on these concepts.

To that end, we are nearly finished thinking through the SEC’s final rules.  We will wrap up this process shortly in the coming weeks.  Given the passage of time since our 2016 release, we anticipate recommending that the Commission re-open the comment period to ask some very directed questions focused on getting our rules right.  We will be very pleased if these coming next steps lead to final rules being adopted next year.

To keep to this ball moving down the proverbial field, I encourage you to respond quickly and comprehensively to the request for comment once it is released.

The Supplemental Leverage Ratio – Taking a Coordinated Approach to Basel Developments

For several years now, the Commission’s leadership has taken a strong and helpful position in highlighting the impact that the supplemental leverage ratio has had on the derivatives markets – specifically, the cleared markets.  I think those efforts were well-worth the candle, and it was right for a derivatives market regulator to focus on this particular issue given our unique focus.

The BCBS’s June release is certainly a testament to the Commission’s work, which recognizes the exposure‑reducing impact that client cleared margin has on banking entities and the financial system as a whole.[4]  The Committee’s decision is a clear indication that they are committed to fine-tuning bank capital requirements appropriately, while re-affirming the G20’s commitment to encourage the further growth of cleared products as a response to failings in uncleared markets during the financial crisis.[5]

As always, we will continue to work with our counterparts at the federal banking regulators to assist them as they consider making revisions to their rules and the impact that any changes may have on the derivatives markets and its participants.  From my perspective, it will be very important to consider, with respect to futures and cleared swap transactions, the potential cushioning effect of customer margin deposits in estimating the scope of possible losses to a futures commission merchant (FCM) resulting from a customer default.

Uncleared Margin: Thinking Through Phase 5 Implementation Carefully, from all Perspectives

The Commission’s uncleared margin rule implements the initial margin requirements in five separate phases, from September 1, 2016, through September 1, 2020, depending on the size of the swap dealer’s portfolio of non-cleared swaps and the counterparty’s portfolio of non-cleared swaps.[6]  This schedule is consistent with an internationally agreed‑upon framework promulgated by the BCBS and IOSCO.

The swaps industry has raised concerns about certain operational difficulties associated with the exchange of initial margin, given the large number of relatively small counterparties encompassed in the rule’s fifth phase.  In recognition of these difficulties, and consistent with work being taken at the international level to revise the existing framework, the Commission has already undertaken certain measures to address possible “congestion” when Phase 5 begins in September 2020, and is contemplating further efforts as well.

I would like to highlight a few particular examples of these efforts:

Practical Approach to the $50 Million Threshold.

In July 2019, CFTC staff issued an Advisory to clarify that documentation requirements pertaining to uncleared swaps will not apply until a firm exceeds a $50 million IM threshold for uncleared swaps between a particular SD and counterparty.[7]

Without this guidance, some firms would have incurred the expense of preparing to exchange initial margin even though they would never actually be required to do so, since their initial margin amounts would remain below the $50 million threshold.  Even for firms that will eventually cross the $50 million threshold, the Advisory provides partial relief as they may avoid having to document during the 2020 “congestion” period.

Extension of the Compliance Date for Uncleared Margin Requirements.

The Commission is considering whether to allow swaps involving certain smaller counterparties an additional year to implement initial margin requirements.  In recognition of developments with our colleagues at the banking regulators, we expect to recommend that the Commission amend its compliance schedule to add a sixth phase of compliance for certain smaller entities that are currently subject to the Phase 5 compliance deadline.

Smaller entities would be those, in each case, with an average aggregate notional amount (AANA) of swaps from $8 billion up to $50 billion.  The existing requirement, by contrast, would require compliance by all counterparties with an AANA from $8 billion to $750 billion no later than September 1, 2020.  The deadline for this additional phase, if proposed and adopted, would be September 1, 2021.

Brexit, Legacy Contracts, and Libor.

Uncleared swaps that were entered into before the relevant compliance dates under the CFTC’s uncleared margin rules are not subject to margin rules for the life of the swap.  However, where a swap is amended or replaced for either regulatory or business reasons, a formerly “grandfathered” swap could become an in-scope swap where margin rules would apply, absent any CFTC action.  This issue has come up in a number of different contexts, including the following:

  • Brexit.  In the event of a “no-deal” Brexit, affected swap dealers will likely need to effect legal transfers of uncleared swaps that were entered into before the relevant compliance dates under the CFTC margin rules.  In April 2019, the CFTC published an interim final rule that maintains the “legacy status” of swaps that were executed prior to the relevant compliance dates if those swaps are legally transferred solely as a result of a no-deal Brexit.[8]
  • Legacy Swaps.  In June 2019, the CFTC issued no-action relief that permits certain amendments to legacy swaps, including amendments to reduce notionals and participate in compression exercises.[9]
  • LIBOR.  LIBOR is being supported by a voluntary agreement through 2021, but as you are all aware, there is an ongoing industry effort to transition to an alternative reference rate.  In March 2019, BCBS and IOSCO issued a statement explaining that amendments to legacy derivative contracts pursued solely for the purpose of addressing interest rate benchmark reforms do not require the application of margin requirements.[10]  Industry participants have requested that the CFTC and the U.S. banking regulators, consistent with the views already expressed by the international regulatory bodies, propose changes to the uncleared margin rules to ensure that changes to legacy swaps to address benchmark reform would not affect the legacy status of those swaps under U.S. margin rules.  My staff is working with the banking regulators to address this concern.

Investment of FCM Customer Funds

My staff is considering an industry request to permit FCMs to invest customer margin funds in an expanded list of permitted investments.[11]  The requested relief would expand on a 2018 Commission Order that granted derivatives clearing organizations (DCOs) an exemption from CFTC Rule 1.25 to allow them to invest customer funds in foreign sovereign debt, but did not extend the relief to FCMs.[12]  At the time that the DCO relief was granted, the Commission noted that FCMs are a separate class of registrants with different regulatory obligations and that the Commission would need to consider relief for FCMs on its own terms.  We are undertaking that review presently, in light of the request that we do so.  I think it makes great sense to align FCM and DCO requirements in this regard.

DSIO Update: Using Our Five Building Blocks to Enhance Operational Effectiveness

In my remarks to the DC Bar Association yesterday, I laid out in detail the goals and plans for DSIO during my tenure.[13]  While I commend that speech to you for further consideration, I wish to flag a few highlights for you.

The organizing principles for DSIO are to be purposeful in our actions and to provide certainty in the law to all market participants.  These principles are important, because they promote some important values of the CFTC – namely:

  • to strengthen the resilience and integrity of our markets,
  • to enhance the regulatory experience for market participants, and
  • to be tough on those who break our rules.

Our Five Building Blocks provide the mechanisms for carrying out our mission.  Each building block reflects a core piece of a complete regulatory program that will further these values.  The building blocks are our Examination Program, Reporting Program, Guidance Program, Enforcement Referral Program, and Rulemaking Program.  These Programs are linked, and interact with each other, toward the common goal of making better use of facts to produce better law.

Of particular note:

  • Our Examination Program will commence in the first quarter of 2020 with targeted thematic reviews of select large swap dealers and commodity pool operators (CPOs), to understand better how the big shops approach key compliance issues like risk management and risk reporting.  The thematic reviews will not duplicate or replace NFA’s ongoing efforts.
  • Our Reporting Program will seek to streamline the use of data to produce more effective results.  In this spirit, we fully support the efforts of Commissioner Stump under her Data Protection Initiative and expect to coordinate closely with her and her staff moving forward.[14]
  • Our Guidance Program will take the facts we gather and provide more general guidance to registrants on a more frequent basis than in the past.  The trade-off is an expected reduction in our issuance of one-off letter relief, as a matter of good government and regulatory economy.
  • Our Enforcement Referral Program will see us take a more focused approach to referrals, so that our coordination efforts with the Division of Enforcement become more programmatic.  Our colleagues in Enforcement should reinforce our oversight function by holding registrants accountable, and we should support Enforcement by flagging potential problems that we encounter.
  • Our Rulemaking Program will take facts gathered under our other high-functioning programs and use them to evaluate whether to propose rule amendments based on what we see in the markets.  We are also improving our rulemaking process to ensure that we take a linear path to get to the end result.

It is a new day rising in DSIO.  We look forward to improving our processes, so that we can be more effective in helping to strengthen our markets and broader financial system in which your firms operate.

* * * * *

In closing, I invite you to come talk to us.  Tell us what you see and what you think.  Every data point and anecdote you offer will help. Leave nothing out. 

And, please, invite us to come speak with you.  We need to be out in the world if we are to have any chance to do our best work.

My world-class staff and I look forward to working with you.

Thank you for your time.


[1] CEA § 4s(e)(3)(D); 7 U.S.C. § 6s(e)(3)(D).

[2] Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, 84 FR 43872 (August 22, 2019), available at

[3] Capital Requirements of Swap Dealers and Major Swap Participants, 76 FR 27802 (May 12, 2011), available at; Capital Requirements of Swap Dealers and Major Swap Participants, 81 FR 91252 (Dec. 16, 2016), available at

[4] Basel Committee on Banking Supervision (BCBS), Leverage ratio treatment of client cleared derivatives (June 26, 2019), available at

[5] G20 Leaders’ Statement, “Framework for Strong, Sustainable and Balanced Growth,” The Pittsburgh Summit (Sep. 24-25, 2009)at 9 (“All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties . . . .”), available at

[6] 17 CFR 23.161.

[7] CFTC Letter No. 19-16 (July 9, 2019), available at

[8] Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12065 (Apr. 1, 2019), available at

[9] CFTC Letter No. 19-13 (June 6, 2019) (providing relief with respect to (i) a swap that is amended but not a material way, (ii) a swap resulting from the exercise of a swaption that is itself a legacy swap, (iii) the remaining portion of a swap following a partial termination, (iv) the remaining portion of a swap following a partial novation, and (v) a new swap resulting from a multilateral compression exercise consisting solely of legacy swaps), available at

[12] Order Granting Exemption From Certain Provisions of the Commodity Exchange Act Regarding Investment of Customer Funds and From Certain Related Commission Regulations, 83 FR 35241 (July 25, 2019), available at