Public Statements & Remarks

Statement of Commissioner Caroline D. Pham on Effective Self-Regulation and Notice of Proposed Rulemaking to Amend Part 40 Regulations

July 26, 2023

I support the Notice of Proposed Rulemaking regarding Amendments to Provisions Common to Registered Entities under Part 40 of the CFTC’s Regulations (Part 40 Proposal) because it is important to continuously improve our rules and do good housekeeping.[1]  I appreciate that this Part 40 Proposal is “intended to clarify, simplify and enhance the utility of the Part 40 regulations for market participants and the Commission,” as stated in the preamble.  I would like to thank Rachel Kaplan Reicher, Steven Benton, and Nancy Markowitz of the Division of Market Oversight (DMO) and Eileen Chotiner of the Division of Clearing and Risk (DCR), as well as Jeannette Curtis and Phil Raimondi, for their work on the Part 40 Proposal.  I appreciate the staff working with me to make revisions and address my concerns.

The Product Review Branch and Market Review Branch of DMO, and the Risk Surveillance Branch and Clearing Policy Branch of DCR, together with support from the Chief Counsel’s office of each division, handle Part 40[2] submissions.  In fiscal year 2022, DMO reviewed 1,145 product filings and 1,054 rule filings. DCR reviewed 320 rule filings.  These reviews are foundational to the oversight of our markets.

Accordingly, the Part 40 Proposal is intended to improve processes for review of product and rule submissions in order to use CFTC staff resources more effectively, particularly in light of increasing volumes of filings related to binary options.  The sizeable increase in listing of new binary option contracts is unsustainable, and I encourage taking a serious look at how to address this problem.  Efforts could include a staff roundtable or rulemaking on the listing and trading of binary options and appropriate customer protections.

Effective Self-Regulation

The Part 40 Proposal provides a good opportunity to examine the CFTC’s regulatory framework and the role of self-regulation.  Part 40 was established pursuant to the Commodity Futures Modernization Act of 2000 and has been in place since 2001.[3]  Part 40 created a new framework for the certification and approval of new products, rules, and rule amendments that are submitted to the CFTC by registered entities[4] such as designated contract markets (DCMs), swap execution facilities (SEFs), derivatives clearing organizations (DCOs), and swap data repositories (SDRs).  It was again amended in 2011 pursuant to the Dodd-Frank Act.[5]  The Part 40 Proposal preamble states that Part 40 “govern[s] how registered entities submit self-certifications, and requests for approval, of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions.”

As I have noted before, the Commodity Exchange Act[6] (CEA or Act) mandates that the Commission serve the public interest through our oversight of “a system of effective self-regulation of trading facilities, clearing systems, market participants and market professionals.”[7]  Part 40 is the cornerstone of effective self-regulation in our derivatives markets because it sets forth the standards for listing new contracts and issuing or amending rules for registered entities, including those that are self-regulatory organizations (SROs) and have rulebooks that are enforceable against SRO members.  The penalties for violating SRO rules can be severe, including fines, suspension, or revocation of membership.

Our system of self-regulation works because our SROs take their role seriously in upholding the CFTC’s regulatory framework and ensuring market integrity.[8]  Self-regulation is effective when it is cooperative.  I commend DCMs, SEFs, DCOs, and SDRs that recognize and support the efforts of our DMO and DCR staff, and I urge these registered entities to do their best to assist staff and make the review process as efficient as possible.

Existing Checks and Balances on Self-Regulation

Notwithstanding the important role of SROs in the CFTC’s regulatory framework, the Commission must be able to exercise oversight of registered entities’ new products and new rules or rule amendments.  That is why our existing Part 40 regulations include checks and balances on self-certification and Commission approval or non-approval for product and rule filings.

Stay of self-certification or extension of review period

For example, regarding new products, under Rule 40.2 the Commission can stay the self-certification of a new product in circumstances involving a false certification, or a petition to alter or amend the contract terms and conditions pursuant to Section 8a(7)[9] of the CEA.[10]  Under Rule 40.3, new products can be submitted to the Commission for review and approval, and the review period can be extended if the product raises novel or complex issues.[11]

Similarly, regarding new rules or rule amendments submitted under Rule 40.5 for Commission review and approval, the Commission can extend the review period for (1) novel or complex issues, (2) major economic significance, (3) incomplete submissions, and (4) not responding completely to CFTC questions in a timely manner.[12]  And under Rule 40.6, the Commission can stay the self-certification of new rule or rule amendment filings involving (1) novel or complex issues, (2) inadequate explanation, or (3) potential inconsistency with the CEA or CFTC regulations.[13]

These checks and balances are integral to the Commission’s oversight of SROs, and I support DMO and DCR staff’s use of all these provisions to extend or stay the review period if any of these criteria have been met—especially if there are, as applicable, incomplete submissions, inadequate explanation, or for not responding completely to CFTC questions in a timely manner. Registered entities must ensure that they dot their i’s and cross their t’s, and show their work, when submitting product or rule filings.

Non-approval of new products or new rule or rule amendments

I want to emphasize that the existing Part 40 regulations provide for Commission non-approval of new products, or new rule or rule amendments, submitted for review under Rule 40.3 or 40.5, respectively.[14]  Obviously, a product or rule will not be approved if it violates or is inconsistent, respectively, with the CEA or CFTC regulations.[15]  The Commission can determine that “it will not, or is unable to approve” the product or rule, including for form and content requirements for submission, because the product “violates, appears to violate or potentially violates but which cannot be ascertained from the submission,” or the rule or rule amendment “is inconsistent or appears to be inconsistent” with the CEA and CFTC regulations.[16]

These standards and criteria grant the Commission and CFTC staff considerable discretion in conducting reviews of product and rule filings for approval or non-approval.  Again, I support the Commission issuing a notice of non-approval if any of these criteria have been met.

Delegation of authority

A hallmark of our American system of government is the constitutional law doctrine of separation of powers among the legislative, executive, and judicial branches of government.[17]  This doctrine ensures that each branch of government will provide checks and balances upon another branch’s exercise of power for encroachment or aggrandizement.  I believe that this approach of checks and balances to defend against the over-concentration of power is especially prudent in regards to administrative agencies, who wield the authority to impose obligations on the public or withdraw previously-granted entitlements.  These regulatory agencies must be fair and just in the exercise of the administrative power, which is derived from both the legislative branch and the executive branches of government.

The self-regulatory framework set forth in the CEA and CFTC regulations reflects the scales of justice in the balance between a free, and safe, society.  I caution against any attempt to put a thumb on the scale which would upset this delicate balance, including further delegations of authority by the Commission to the staff.[18]

It is a truism that the heads of administrative agencies are a step removed from the will of the people,[19] because agency heads are not directly elected, but are instead appointed by the President with the advice and consent of the Senate.  Therefore, this sentiment rings even more true with respect to the delegation of authority by the Commission to the staff, who though are dedicated public servants, are even more attenuated from the will of the people.  Like liberty, both the public trust and delegations of authority by the Commission, “once lost, is lost forever.”[20]

Other Part 40 issues

Finally, good process produces good outcomes, and there are other issues in Part 40 that should be addressed.[21]  I hope that the Commission does not wait another 12 years to fix them.

Derivatives Markets and the Real Economy

The CFTC is uniquely positioned at the intersection of the real economy and financial markets.  Derivatives are inextricably linked to the underlying reference asset, and our derivatives markets span the breadth of agricultural products and other goods and articles, services, rights, and interests in the stream of commerce and financial markets.[22]

Because of the importance of derivatives markets to the real economy—in order to facilitate risk management and price discovery for farmers and ranchers, all the way to the largest Fortune 100 companies—the Commission is mandated to serve this “national public interest” through our oversight of a system of effective self-regulation.[23]

This statutory mandate is intentional, and coupled with the mandate to promote responsible innovation and fair competition,[24] the message is clear:  Derivatives markets should enable growth and progress for commercial enterprise and free markets through providing a release valve for risk transfer as part of the engine of the real economy.

Growth and progress is how the United States and the American people have achieved the largest economy in the world, with the deepest and most liquid capital markets.  This is why America is the land of opportunity—why I stand for growth, progress, and access to markets—and why the Commission must preserve the balance in our system of effective self-regulation in the derivatives markets.

I look forward to public comment on the Part 40 Proposal.

[1] Statement of Commissioner Caroline D. Pham on Risk Management Program for Swap Dealers and Futures Commission Merchants Advance Notice of Proposed Rulemaking, U.S. Commodity Futures Trading Commission (June 1, 2023),

[2] 17 C.F.R. Part 40.

[3] A New Regulatory Framework for Trading Facilities, Intermediaries and Clearing Organizations, 66 FR 42255 (Aug. 10, 2001).

[4] 17 C.F.R. § 1.3.

[5] Provisions Common to Registered Entities, 76 FR 44776 (July 27, 2011).

[6] 7 U.S.C. § 1 et seq.

[7] See Concurring Statement of Commissioner Caroline D. Pham Regarding the CFTC Request for Information on Climate-Related Financial Risk, U.S. Commodity Futures Trading Commission (June 2, 2022),

[8] See Statement of Commissioner Caroline D. Pham Regarding Request for Comment on the Impact of Affiliations Between Certain CFTC-Regulated Entities, U.S. Commodity Futures Trading Commission (June 28, 2023),

[9] 7 U.S.C. § 12a(7). This section authorizes the Commission, in certain circumstances, “to alter or supplement the rules of a registered entity insofar as necessary or appropriate by rule or regulation or by order.”

[10] 17 C.F.R. § 40.2(c).

[11] 17 C.F.R. § 40.3(d).

[12] 17 C.F.R. § 40.5(d).

[13] 17 C.F.R. § 40.6(c)(1).

[14] 17 C.F.R. § 40.3(e) and 17 C.F.R. § 40.5(e).

[15] 17 C.F.R. §§ 40.3(b), (e) and 17 C.F.R. §§ 40.5(b), (e).

[16] Id.

[17][T]he accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elective, may justly be pronounced the very definition of tyranny.James Madison, The Federalist No. 48 (Feb. 1, 1788),

[18] See generally James Madison, The Federalist No. 51 (Feb. 8, 1788) (“But the great security against a gradual concentration of the several powers in the same department, consists in giving to those who administer each department the necessary constitutional means and personal motives to resist encroachments of the others.”),

[19] Cf. The general will, or volonté générale. Jean-Jacques Rousseau, Article VI, Declaration of the Rights of Man and of the Citizen (1789).

[20] The full quotation is: “But a Constitution of Government once changed from Freedom, can never be restored. Liberty once lost is lost forever.”  “John Adams to Abigail Adams, 7 July 1775,” Founders Online, National Archives,

[21] See Walt Lukken, FIA CEO, Open letter to CFTC Chairman Giancarlo regarding the listing of cryptocurrency derivatives (Dec. 7, 2017), and Dissenting Statement of Commissioner Caroline D. Pham Regarding the Review and Stay of KalshiEX LLC’s Political Event Contracts, U.S. Commodity Futures Trading Commission (Aug. 26, 2022),  

[22] 7 U.S.C. § 2(1). There are some important exceptions and ongoing legal debate as to the outer limits of the definition of a “commodity” under the CEA. See CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492, 498 (D. Mass. 2018) (citing CFTC v. McDonnell, 287 F. Supp. 3d 213, 228 (E.D.N.Y. 2018)).

[23] 7 U.S.C. § 5(a). See Concurring Statement of Commissioner Caroline D. Pham Regarding the CFTC Request for Information on Climate-Related Financial Risk, U.S. Commodity Futures Trading Commission (June 2, 2022),

[24] 7 U.S.C. § 5(b). See Concurring Statement of Commissioner Caroline D. Pham Regarding the CFTC Request for Information on Climate-Related Financial Risk, U.S. Commodity Futures Trading Commission (June 2, 2022),