It has been a great honor to serve the American people as the 14th Chairman and Chief Executive of the CFTC as well as one of the agency’s five commissioners. Leading the men and women of the CFTC these last 17 months has been an extraordinary privilege but, like all good things, it must come to an end. Today, I am announcing that I intend to resign my position as Chairman early next year.

I am immensely proud of the agency’s accomplishments in our pursuit to be the global standard for sound derivatives regulation. During my tenure, we have held 20 open meetings, more than the previous 7 years combined; we have vigorously protected the integrity of our markets and set numerous enforcement records; we have successfully concluded negotiations with the EU and UK to build stronger relationships with our regulatory counterparts overseas; we have promoted responsible fintech innovation and declared Ether a commodity; we have seen more than 1,000 new products self-certified to trade on our markets; we have taken strides to deliver more value for taxpayers and be an even better place for our employees to work; we have enhanced our agency’s diversity, with more women and people of color serving in senior leadership roles than ever before; and so much more. We have done all of this with the interests of everyday Americans in mind—including our nation’s farmers and ranchers who rely on derivatives to hedge their risk. With the agenda I laid out last year now complete, the Commission can fully turn its focus to the unwritten future.

A majority of our work has taken place in the midst of COVID-19—a global pandemic that is testing the strength of our markets and our ability to adapt. Amid historic volatility, the CFTC has provided a steady hand and watchful eye while our markets act as shock absorbers. There is no doubt in my mind this has been the CFTC’s “finest hour” during our celebrated 45-year history.   

Of course, none of these achievements would have been possible without the hard work of the CFTC’s dedicated career public servants, our Executive Leadership Team, and my personal staff within the Office of the Chairman.  I also owe a deep debt of gratitude to my fellow Commissioners, who I am proud to call not just colleagues, but also friends. Together we have advanced 40 final rules and 21 proposals—nearly 90 percent of them on a bipartisan basis. The partisan divisions in Washington may run deep, but the Commission’s historically collegial atmosphere has continued uninterrupted. 

I am truly grateful to our President and his Administration for their confidence and the opportunity to serve.  I am also humbled by the broad, bipartisan support of my leadership and agenda across both houses of Congress during my tenure. Finally, I am most deeply appreciative for my wife and two young boys, who have supported me—and my long hours—every step of the way.

I respectfully support the Commodity Futures Trading Commission’s (the Commission or CFTC) final rule amending Part 190 of its regulations, which governs bankruptcy proceedings of commodity brokers.  First and foremost, I want to thank Commission staff for all of their hard work on the final rule.  This is the first major update of the CFTC’s existing Part 190 since 1983, when it was originally implemented by the Commission.[1] 

The final rule is the product of years of staff analysis and engagement with market participants, including the Part 190 Subcommittee of the Business Law Section of the American Bar Association, which provided a detailed submission of suggested model Part 190 rules in response to a prior Commission request for information.[2]  Several agency Chairs going back many years deserve recognition and thanks for pushing to update Part 190 and starting this process.  Customer protections are at the heart of the Commodity Exchange Act, and it is imperative that the Commission have clear rules that direct how proceedings occur during a commodity broker bankruptcy. 

The revision is designed to recognize the many changes in our industry over the past 37 years.  Most importantly, it is informed by the Commission’s experience with past bankruptcies. More recently, the MF Global bankruptcy in 2011 was the eighth largest corporate bankruptcy in American history.[3]  It gave the Commission first hand experience with what worked, what did not, and what could be improved.  

I was a lead advisor during the U.S. Senate’s investigation of the MF Global bankruptcy, and during the Senate investigation, I learned the intricate contours of Part 190, its relationship to the Bankruptcy Code, and how the larger puzzle of creditors, customers, and equity holders, among others, fits together.  It was during those frenzied days that I truly appreciated the regulatory principle that customer margin is sacrosanct property.  Because of my experience during those few months, I have made customer protections an absolute priority in my time as a Commissioner. Having spoken with many market participants throughout the MF Global bankruptcy proceedings, including those whose money disappeared in the days immediately following, customer protection is my most pressing responsibility.

Just a few months later in early 2012, the bankruptcy of Peregrine Financial Group (PFG), the catastrophic culmination of a fraudulent scheme by a futures commission merchant (FCM) involving over $220M in customer funds,[4] further laid bare the strengths and weaknesses of the Commission’s bankruptcy regime.  Important lessons have been learned, both in terms of what works and what does not, and I believe today’s final rule implements the lessons learned in both of those events, and those that preceded them.   

Many of the changes to Part 190 in today’s final rule further support provisions that have worked in prior bankruptcies.  One of the themes of this refresh is clarity.  The goal is to be as clear as possible about the Commission’s intentions regarding Part 190 in order to enhance the understanding of Designated Clearing Organizations (DCOs), FCMs, their customers, trustees, and the public at large.  Changes in this final rule will foster the longstanding and continuing policy preference for transferring (as opposed to liquidating) the positions of public customers – an important customer protection aimed at preserving the status quo/asset value.  Other changes further support existing requirements including that shortfalls in segregated property should be shored up from the FCM’s general assets, and that public customers are favored over non-public customers.  The new provisions provide trustees with enhanced discretion based upon prior positive experience, and codify practice adopted in past bankruptcies by requiring FCMs to notify the Commission of their intent to file for voluntary bankruptcy.

Other changes address what has not worked or become outdated.  In light of lessons learned from MF Global, the Commission is enacting changes to the treatment of letters of credit as collateral, both during business as usual and during bankruptcy, in order to ensure that customers who post letters of credit as collateral have the same proportional loss as customers who post other types of collateral. 

The final rule also addresses a number of changes that have naturally occurred in our markets since the original Part 190 finalization in 1983.  The Commission is promulgating a new subpart C to part 190, specifically governing the bankruptcy of a clearing organization.  As DCOs have grown in importance over time, including being deemed systemically important by the Financial Stability Oversight Council following the financial crisis[5], the Commission believes that it is imperative to have a clear plan in place for exactly how a DCO bankruptcy would be resolved.  The final rule also addresses changes in technology over the past 37 years, and the movement from paper-based to electronic-based means of communication – a lesson learned from the PFG bankruptcy.    

In many ways, this final rule is exactly how the rulemaking process should work.  It looks retrospectively at major relevant events, and applies important lessons learned regarding what works in the existing Part 190 rules, what does not, and what can be improved.  But it also looks forward in a sense, recognizing changes in market structure and thinking ahead to the possibility of the bankruptcy of a clearing organization.  This is a stark contrast to the risk principles final rule that we consider today.  While the bankruptcy final rule looks back at the Commission’s past experiences with MF Global and PFG, the risk principles final rule seems to ignore past events.  While the bankruptcy final rule looks ahead and plans for the possibility of addressing a DCO bankruptcy, the risk principles final rule ignores future events such as climate change. 

My only concern regarding the bankruptcy rule, and it is a relatively small one, is one of timing.  The proposal for this rule was issued this past April.[6]  The comment period just closed on July 13.  The Commission then issued a supplemental notice of proposed rulemaking in September.[7]  That comment period ended October 26.  Particularly for a rule of this size and intricacy, the time that staff had to review and analyze the comment letters and draft the final rule and preamble has been incredibly short.  Staff has worked tirelessly on this rule to get to the finish line.  However, I think both the Commission and the public might well have benefited from more time for review and reflection before issuing such an important rule. 

On that note, I would like to close by again thanking staff for all of their hard work in producing this refresh of the Commission’s part 190 rules to provide important customer protections. 

[1] Bankruptcy, 48 FR 8716 (March 1, 1983). 

[2] 82 FR 23765 (May 3, 2017). The ABA Submission can be found at: https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61331&SearchText; the accompanying cover note (ABA Cover Note) can be found at: https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61330&SearchText. 

[3] John Gapper and Isabella Kaminska, Downfall of MF Global, Financial Times, Nov. 4, 2011, available at https://www.ft.com/content/2882d766-06fb-11e1-90de-00144feabdc0.

[4] See Press Release Number 6300-12, CFTC, CFTC Files Complaint Against Peregrine Financial Group, Inc. and Russell R. Wasendorf, Sr., Alleging Fraud, Misappropriation of Customer Funds, Violation of Customer Fund Segregation Laws, and Making False Statements (July 10, 2012), https://www.cftc.gov/PressRoom/PressReleases/6300-12.

[5] https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm

[6] Bankruptcy Regulations, 85 FR 36000 (June 12, 2020).  https://www.cftc.gov/LawRegulation/FederalRegister/proposedrules/2020-08482.html.

[7] Bankruptcy Regulations, 85 FR 60110 (September 24, 2020).  https://www.cftc.gov/LawRegulation/FederalRegister/proposedrules/2020-21005.html

More than two years ago, in November 2018, the Commission voted to propose a comprehensive overhaul of the existing framework for swap execution facilities (SEFs).[1]  Today, the Commission issues two rules finalizing aspects of the SEF Proposal and a withdrawal of the SEF Proposal’s unadopted provisions.  This is the final step in a long road.  Last month, the Commission finalized rules emanating from the SEF Proposal regarding codification of existing no-action letters regarding, among other things, package transactions.[2]  Today’s final rules and withdrawal complete the Commission’s consideration of the SEF Proposal.

Back in November 2018, I expressed concern that finalization of the SEF Proposal would reduce transparency, increase limitations on access to SEFs, and add significant costs for market participants.[3]  I also noted that, while the existing SEF framework could benefit from targeted changes, particularly the codification of existing no-action relief, the SEF framework has in many ways been a success.  I pointed out that the Commission’s work to promote swaps trading on SEFs has resulted in increased liquidity, while adding pre-trade price transparency and competition.  Nonetheless, I voted to put the SEF Proposal out for public comment, anticipating that the notice and comment process would guide the Commission in identifying a narrower set of changes that would improve the current SEF framework and better align it with the statutory mandate and the underling policy objectives shaped after the 2008 financial crisis.[4]  More than two years and many comment letters later, that is exactly what has happened.  The Commission has been precise and targeted in its finalization of specific provisions from the SEF Proposal that provide needed clarity to market participants and promote consistency, competitiveness, and appropriate operational flexibility consistent with the core principles. 

In addition to expressing substantive concerns about the overbreadth of the SEF Proposal, I also voiced concerns that we were rushing by having a comparatively short 75-day comment period.[5]  In the end, the comment period was rightly extended, and the Commission has taken the time necessary to carefully evaluate the appropriateness of the SEF Proposal in consideration of its regulatory and oversight responsibilities and the comments received.  I think that the consideration of the SEF Proposal is an example of how the process is supposed to work.  When we move too quickly toward the finish line and without due consideration of the surrounding environment, we risk making a mistake that will impact our markets and market participants. 

Finally, I would like to address the Commission’s separate vote to withdraw the unadopted provisions of the SEF Proposal.  In the past, I have expressed concern with such withdrawals by an agency that has historically prided itself on collegiality and working in a bipartisan fashion.[6]  In the case of today’s withdrawal, the Commission has voted on all appropriate aspects of the SEF Proposal through three rules finalized during the past month.  The Commission has voted unanimously on all of these rules, including today’s decision to withdraw the remainder from further consideration.  While normally a single proposal results in a single final rule, in this instance, multiple final rules have been finalized emanating from the SEF Proposal.  This could lead to confusion regarding the Commission’s intentions regarding the many unadopted provisions of the SEF Proposal.  Under such circumstances, I think it is appropriate to provide market participants with clarity regarding the SEF Proposal.  Accordingly, I will support today’s withdrawal of the SEF Proposal.  But rather than viewing it as a withdrawal of the SEF Proposal, I see it as an affirmation of the success of the existing SEF framework and the careful process to markedly improve the SEF framework in a measured and thoughtful way. 

[1] Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018) (the SEF Proposal).

[2] Swap Execution Facility Requirements (Nov. 18, 2020),
 https://www.cftc.gov/PressRoom/PressReleases/8313-20.

[3] Statement of Concurrence of Commissioner Rostin Behnam Regarding Swap Execution Facilities and Trade Execution Requirement, 
https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement110518a.

[4] Id.

[5] Id.

[6] Rostin Behnam, Commissioner, CFTC, Dissenting Statement of Commissioner Rostin Behnam Regarding Electronic Trading Risk Principles (June 25, 2020), 
https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement062520b

I would like to start by thanking DMO staff for their tireless work on this rule.  While the Risk Principles are short, that is not reflective of the work that has been done by staff to produce them.  This is the same DMO staff that worked on the much broader “Regulation AT”,[1] and I appreciate all of their work over many years.

Last June, I stated in my dissent to the Electronic Trading Risk Principles proposal[2] that I strongly support thoughtful and meaningful policy that addresses the ever-increasing use of automated systems in our markets.[3]  The proposal regarding Electronic Trading Risk Principles did not achieve this.  Far from utilizing over a decade of experiences that should have profoundly shaped how we address operational risks that are consistently unpredictable and have wide-ranging impacts, today’s final rule changes only a single word from the proposal aimed at codifying the status quo.  Accordingly, I respectfully dissent.

A little over ten years ago, on May 6, 2010, the Flash Crash shook our markets.[4]  The prices of many U.S.-based equity products, including stock index futures, experienced an extraordinarily rapid decline and recovery. In 2012, Knight Capital, a securities trading firm, suffered losses of more than $460 million due to a trading software coding error.[5]  Other volatility events related to automated trading have followed with increasing regularity.[6]  In September and October 2019, the Eurodollar futures market experienced a significant increase in messaging.[7]  According to reports, the volume of data generated by activity in Eurodollar futures increased tenfold.[8]  A lesson of these events is that under stressed market conditions, automated execution of a large sell order can trigger extreme price movements, and the interplay between automated execution programs and algorithmic trading strategies can quickly result in disorderly markets.[9] 

Recent events further amplify that in increasingly interconnected markets, which are informed by growing access to real-time data and information, we do not always know how and where the next market stress event will materialize.  This past April 20, the May contract for the West Texas Intermediate Light Sweet Crude Oil futures contract (the “WTI Contract”) on the New York Mercantile Exchange settled at a price of -$37.63 per barrel. The May Contract’s April 20 negative settlement price was the first time the WTI Contract traded at a negative price since being listed for trading 37 years ago. 

While the unusual fact that the price went significantly negative grabbed the headlines, the precipitousness of the price move was every bit as significant.  The price dropped more than $39 between 2:10 and 2:30 p.m. on April 20.  Overall, the price dropped $58.05 from the open of trading to its low on April 20, breaking its historical relationship with other petroleum-based contracts including the Brent Crude futures contract.  The WTI price moved more in 20 minutes than it does most years.  A contract that had never experienced a 10% move in a single day fell by more than 300% in a brief 20-minute period.  All of the contributing factors have yet to be accounted for, but one thing is certain—these were stressed market conditions.  An already oversupplied global crude oil market was hit with an unprecedented reduction in demand caused by the COVID-19 pandemic.[10]  Under stressed market conditions, automated trading has the potential to quickly make an already volatile situation even worse.

Technology glitches have continued to impact our markets.  Just yesterday, a large retail broker that was significantly impacted by the events of April 20 suffered a significant failure in data storage.[11]  Recent technology glitches overseas have hampered our international colleagues as well, handcuffing markets for extended periods of time without clear explanation.  In Japan this past September, the Tokyo Stock Exchange shut down for a day due to technical glitches in equities trading.[12]  Luckily, this glitch happened to coincide with all other Asian markets being closed and occurred the day after the first Presidential debate.  But this only emphasizes the outsized impact that a technical issue could have during volatile market conditions.  One can imagine what would have happened if the glitch had occurred the day before, during the leadup to the debate.[13] 

Just last month, Australia’s stock exchange lost an entire day of trading due to a software problem impacting trading of multiple securities in a single order.[14]  This discrete issue was enough to lead to inaccurate market data that necessitated shutting down the exchange for an entire trading day.[15] 

As we consider today’s final rule, there is a tendency to think that something is better than nothing, and that today’s risk principles—if nothing else—demonstrate the Commission’s belief that mitigating automated trading risk is important.  However, I continue to question whether these Risk Principles improve upon the status quo, or even do anything of marginal substance relative to the status quo.[16] 

The preamble seems to go to great lengths to make it clear that the Commission is not asking DCMs to do anything.  The preamble states at the very outset that the “Commission believes that DCMs are addressing most, if not all, of the electronic trading risks currently presented to their trading platforms.”[17]  The preamble presents each of the three Risk Principles as “new”, but then goes on to describe all of the actions already taken by DCMs that meet the principles.  If the appropriate structures are in place, and we have dutifully conducted our DCM rule enforcement reviews and have found neither deficiencies nor areas for improvement, then is the exercise before us today anything more than creating a box that will automatically be checked?  

The only potentially new aspect of these Risk Principles is that the preamble suggests different application in the future, as circumstances change.  As I said in regard to the proposal, the Commission seems to want it both ways:  we want to reassure DCMs that what they do now is enough, but at the same time the new risk principles potentially provide a blank check for the Commission to apply them differently in the future.[18] 

We do not know what the next external event to stress market conditions will be, but one likely possibility is climate change.  In establishing new rules for automated trading, I would have liked the Commission to have taken a more fulsome look at both the events of April 20, the COVID-19 pandemic more broadly, and the potential impacts of climate change on our automated markets.  The recently published Interim Staff Report on the events of April 20 provides a stark example of what can happen to automated markets under times of economic stress. 

The April 20 price plummet triggered both dynamic circuit breakers and velocity logic—exactly the type of risk controls discussed in the proposal that preceded the Electronic Trading Risk Principles proposal, commonly referred to as “Regulation AT.”  Regulation AT was formally withdrawn at the Chairman’s direction and without my support.  Further troubling, it was withdrawn before Commission staff had any meaningful opportunity to consider whether and how the risk controls in either Regulation AT or the Electronic Trading Risk Principles as proposed performed during trading around April 20. There was arguably no better test case, and yet we charged forward without looking back.  If the risk controls were effective, we should consider whether more specific risk controls along these lines should be part of the Electronic Trading Risk Principles, in order to be certain that all DCMs are prepared to maintain orderly trading during such a confluence of events.  If they are not, we should consider whether stronger risk controls are necessary.

I also think the Risk Principles would be improved if they were informed by a consideration of the possible impacts of climate change. The preamble states “The principles-based approach provides DCMs with flexibility to address risks to markets as they evolve, including any idiosyncratic events.”  Referring to events such as climate change as “idiosyncratic” downplays their impact and places regulators and DCMs in a purely reactive posture.  While we cannot know for certain what the next external event that causes stressed market conditions will be, that does not mean that we should remain idle until it hits.  As we will continue to experience unanticipated and unprecedented events that will impact our markets and the larger U.S. economy, I am concerned that a policy of simply checking a box will do nothing more than shield DCMs from public scrutiny and fault for the fallout. 

So often we hear that the markets have evolved from a technological and innovative standpoint at an exponential rate as compared to their regulators.  Rulemakings like this provide our greatest opportunity to proactively close that gap.  We need to be proactive.  Being proactive means studying the incidents of the past, like the Flash Crash, Knight Capital, and most recently April 20 so that we can recognize the precursors of events to come.  Instead of just reacting, we can predict, prepare for, and possibly prevent the next crisis event.

Again, while there is a temptation to advance this rule under the theory that something is better than nothing, in this case I do not think that the final rules add anything at all beyond the opportunity to take a victory lap.  In other words, the theme in this case is that nothing is better than something.  I believe that we can, and should, do better.  Therefore, I cannot support today’s final rule. 

[1] Regulation Automated Trading, Proposed Rule, 80 FR 78824 (Dec. 17, 2015); Supplemental Regulation AT NPRM, 81 FR 85334 (Nov. 25, 2016).

[2] Rostin Behnam, Commissioner, CFTC, Dissenting Statement of Commissioner Rostin Behnam Regarding Electronic Trading Risk Principles (June 25, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement062520b. 

[3] The Commission’s Office of the Chief Economist has found that over 96 percent of all on-exchange futures trading occurred on DCMs’ electronic trading platforms.  Haynes, Richard & Roberts, John S., “Automated Trading in Futures Markets – Update #2” at 8 (Mar. 26, 2019), available at https://www.cftc.gov/sites/default/files/2019-04/ATS_2yr_Update_Final_2018_ada.pdf.

[4] See Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEF to the Joint Advisory Committee on Emerging Regulatory Issues (Sept. 30, 2010), available at http://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/staff-findings050610.pdf.

[5] See SEC Press Release No. 2013-222, “SEC Charges Knight Capital With Violations of Market Access Rule” (Oct. 16, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539879795.

[6] For a list of volatility events between 2014 and 2017, see the International Organization of Securities Commissions (IOSCO) March 2018 Consultant Report on Mechanisms Used by Trading Venues to Manage Extreme Volatility and Preserve Orderly Trading (IOSCO Report), at 3, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD607.pdf.

[7] See Osipovich, Alexander, “Futures Exchange Reins in Runaway Trading Algorithms,” Wall Street Journal (Oct. 29, 2019), available at https://www.wsj.com/articles/futures-exchange-reins-in-runaway-trading-algorithms-11572377375.

[8] Id.

[9] Id. at 6.

[10] Interim Staff Report, Trading in NYMEX WTI Crude Oil Futures Contract Leading Up to, on, and around April 20, 2020 (Nov. 23, 2020), https://www.cftc.gov/PressRoom/PressReleases/8315-20.

[11] See Platt and Stafford, “Trading Outages Strike Again for US Retail Brokers,” Financial Times (Dec. 7, 2020), available at https://www.ft.com/content/cb99dc6f-a73e-41af-91fb-21a4aa606265.

[12] See Dooley, Ben, “Tokyo Stock Market Halts Trading for a Day, Citing Glitch,” The New York Times (Sep. 30, 2020), available at https://www.nytimes.com/2020/09/30/business/tokyo-stock-market-glitch.html.

[13] Id.

[14] See “Software Glitch Halts Trading on Australia’s Stock Exchange, to Reopen Tuesday,” Reuters (Nov. 15, 2020), available at https://www.reuters.com/article/us-asx-trading/software-glitch-halts-trading-on-australias-stock-exchange-to-reopen-tuesday-idUSKBN27W020.

[15] Id.

[16] See Behnam, supra note 2.

[17] Final Rule at 4.

[18] See Behnam, supra note 2.

I am pleased to support today’s final rule amending the Commission’s regulations governing the bankruptcy proceedings of commodity brokers.[1]  This rulemaking makes the first comprehensive change to these regulations since they were first issued in 1983.  I commend both Chairman Tarbert for his leadership in continuing the Commission’s rulemaking agenda and former Chairman Giancarlo for laying the groundwork for this important rulemaking when he launched the CFTC’s Project KISS initiative.[2] 

I am pleased that today’s final rule carefully took into consideration comments from FCMs, DCOs, asset managers and other market participants.  I would like to highlight a few aspects of today’s final rule.  The rulemaking reaffirms the special treatment the U.S. Bankruptcy Code affords to the customer account of an insolvent commodity broker, so that customers’ positions can promptly be transferred.[3]  The Commission is, for the first time, issuing rules specific to an insolvent DCO, which are similar to the rules applicable to an insolvent FCM.  Next, taking advantage of the Commission’s experience with a few insolvent FCMs over the past decades, the final rule provides deference to the trustee that a U.S. Bankruptcy Court appoints to oversee the proceedings of an insolvent commodity broker.  This increased deference is intended to expedite the transfer of customer funds.  In response to comments from the asset management community, the final provisions provide additional guidance on how a trustee should balance various interests in seeking to protect public customers.[4]  In light of the Commission’s experience from the bankruptcy of MF Global in 2011, the new bankruptcy rules generally treat letters of credit equivalently to other collateral posted by customers, so that the pro rata distribution of customer property in the event of a shortfall in the customer account will apply equally to all collateral.  The final rule also reflects experience from MF Global by dividing the delivery account into “physical delivery” and “cash delivery” account classes.  Property other than cash is generally easier to trace, so it should have the benefit of a separate account class.  Finally, the final rule’s revised treatment of the “delivery account,” applicable in the context of physically-settled futures and cleared swaps, will apply not only to tangible commodities, as is currently the case, but also to digital assets.  This amendment will provide important legal certainty to the growing exchange-traded market for cleared, physically-settled, digital asset derivatives.

I acknowledge that the asset management community has raised concerns with certain existing DCO rules that would be recognized in the bankruptcy of an FCM or DCO.  I would support an on-going dialogue between the DCOs and their members and customers on resolution and resiliency concerns.

[1] Part 190 of the Commission’s regulations (17 C.F.R. 190).

[2] CFTC Requests Public Input on Simplifying Rules, https://www.cftc.gov/PressRoom/PressReleases/pr7555-17.

[3] 11 U.S.C. § 761 et seq.

[4] Reg. 190.00(c)(3)(i)(C).

Nearly two thousand years ago, the Stoic philosopher and statesman Seneca the Younger observed that “every new beginning comes from some other beginning’s end.”  This remains as true today as it was then, and as it was in the 1990s when the band Semisonic built a song around it. 

I vote today in support of withdrawing the remaining unadopted portions of the November 2018 Swap Execution Facilities (SEF) and Trade Execution Requirement proposal (SEF Proposal).  With the beginning of a new SEF landscape based on other rules we are announcing today, it is appropriate to bring that proposal—which was itself a beginning of sorts—to an end. 

The SEF Proposal, which was championed by my predecessor Chairman Chris Giancarlo, was comprehensive in that it sought to codify staff no-action relief and otherwise resolve operational concerns of SEFs and market participants.  It also set forth structural reforms to the SEF regime beyond these operational fixes.  The SEF Proposal reflected a great deal of time, effort, and thought, and resulted in several rules ultimately adopted by the Commission.  I am grateful indeed for Chairman Giancarlo’s thought leadership and the path that the SEF Proposal set our agency upon.

In particular, our Commission yesterday adopted from the SEF Proposal: (1) two exemptions, pursuant to Commodity Exchange Act (CEA) section 4(c), from the trade execution requirement in CEA section 2(h)(8); and (2) final rules related to audit trail requirements for post-trade allocations, SEF financial resource requirements, and SEF chief compliance officer requirements.  With respect to the unadopted portions of the SEF Proposal, the feedback received from market participants and the public made clear that moving forward would require significantly more work and a re-proposal of the rules.  Therefore, I believe it is appropriate to withdraw those unadopted elements.  Doing so is also consistent with our Commission’s reasoning for withdrawing Regulation AT a few months ago—we can start a new beginning only once we have ended the prior beginning. 

I support today’s final rule requiring designated contract markets (DCMs) to adopt rules that are reasonably designed to prevent, detect, and mitigate market disruptions or system anomalies associated with electronic trading. It also requires DCMs to subject all electronic orders to pre-trade risk controls that are reasonably designed to prevent, detect and mitigate market disruptions having a “material” effect on its participants and to provide prompt notice to the Commission in the event the platform experiences any material market disruptions that meet a higher threshold of being “significant”.

I believe all DCMs have already adopted regulations and pre-trade risk controls designed to address the risks posed by electronic trading. As I have noted previously, many—if not all—of the risks posed by electronic trading are already being effectively addressed through the market’s incentive structure, including exchanges’ and firms’ own self-interest: DCMs through their interest in operating markets with integrity, and firms through their interest in not exposing their or their customers’ funds to huge losses in a matter of minutes through algorithmic operational error. Both exchanges and firms have been leaders in implementing best practices around electronic trading risk controls. Therefore, today’s final rule merely codifies principles underlying existing market practice of DCMs to have reasonable controls in place to mitigate electronic trading risks.

Significantly, the final rule puts forth a principles-based approach, allowing DCM trading and risk management controls to continue to evolve with the trading technology itself. As we have witnessed over the past decade, risk controls are constantly being updated and improved to respond to market developments. In my view, these continuous enhancements are made possible because exchanges and firms have the flexibility and incentives to evolve and hold themselves to an ever-higher set of standards, rather than being held to a set of prescriptive regulatory requirements which can quickly become obsolete. By adopting a principles-based approach, the final rule provides exchanges and market participants with the flexibility they need to innovate and evolve with technological developments. DCMs are well-positioned to determine and implement the rules and risk controls most effective for their markets. Under the rule, DCMs are required to adopt and implement rules and risk controls that are objectively reasonable. The Commission would monitor DCMs for compliance and take action if it determines that the DCM’s rules and risk controls are objectively unreasonable. Importantly, the Appendix to the final rule points out that a DCM will be held to a standard of reasonableness and not to how other DCMs implement the rule.  Any horizontal review across DCMs of rules or risk controls would only inform objectively unreasonable determinations, not create a baseline set of specific risk controls that become de-facto regulatory requirements.

The Technology Advisory Committee (TAC), which I am honored to sponsor, has explored the risks posed by electronic trading at length. In each of those discussions, it has become obvious that both DCMs and market participants take the risks of electronic trading seriously and have expended enormous effort and resources to address those risks.

For example, at one TAC meeting, we heard how the CME Group has implemented trading and volatility controls that complement, and in some cases exceed, eight recommendations published by the International Organization of Securities Commissions (IOSCO) regarding practices to manage volatility and preserve orderly trading.[1] At another TAC meeting, the Futures Industry Association (FIA) presented on current best practices for electronic trading risk controls.[2] FIA reported that through its surveys of exchanges, clearing firms, and trading firms, it has found widespread adoption of market integrity controls since 2010, including price banding and exchange market halts. FIA also previewed some of the next generation controls and best practices currently being developed by exchanges and firms to further refine and improve electronic trading systems. The Intercontinental Exchange (ICE) also presented on the risk controls ICE currently implements across all of its exchanges, noting how its implementation of controls was fully consistent with FIA’s best practices.[3] These presentations emphasize how critical it is for the Commission to adopt a principles-based approach that enables best practices to evolve over time. 

I believe the final rule issued today adopts such an approach and provides DCMs with the flexibility to continually improve their risk controls in response to technological and market advancements. Because this rule allows for flexible implementation and effectively places that burden on the market participants with the most aligned and motivated interests, I believe this rule will stand the test of time and serve as a paradigm of the CFTC’s mission statement: sound regulation that promotes the integrity, resilience, and vibrancy of the U.S. derivatives market.

[1] Meeting of the TAC on March 27, 2019, Automated and Modern Trading Markets Subcommittee Presentation, transcript and webcast available at, https://www.cftc.gov/PressRoom/Events/opaeventtac032719 

[2] Meeting of the TAC on Oct. 3, 2019, Automated and Modern Trading Markets Subcommittee Presentation, transcript and webcast available at, https://www.cftc.gov/PressRoom/Events/opaeventtac100319 

[3] Id.

When our Commission considered the proposal to amend the CFTC’s bankruptcy rules in Part 190,[1]  I noted that, in his 1926 novel The Sun Also Rises, Ernest Hemingway offered what is perhaps the best chronicle of the anatomy of a typical bankruptcy.  In the novel, the character Mike Campbell is asked how he went bankrupt.  He answers: “two ways . . . gradually and then suddenly.”[2]

As Hemingway’s dialogue succinctly describes, bankruptcies often come on unexpectedly.  A business’s relatively minor financial or operational troubles may be exacerbated by a sudden crisis—whether a firm-level issue, or a national or even global event.  Many catalysts for insolvency are entirely unpredictable.  We must therefore be prepared with a bankruptcy regime that fosters a swift and equitable resolution to protect customer funds and promote financial stability.

Background on the CFTC’s Bankruptcy Regime

Part 190 of the CFTC’s rules, which addresses commodity broker[3] bankruptcies, was finalized in 1983.  Since that time, the commodity broker bankruptcy process and the state of the industry have gradually changed.  Yet in the nearly four decades since, Part 190 has never been comprehensively updated.  This regime is intended to protect customer funds, but having antiquated rules does not help achieve that goal. 

CFTC staff has accordingly embarked on a process of updating Part 190 over the last several years, when a then-healthy economy made bankruptcies relatively unlikely.  Now that we find ourselves in the midst of the COVID-19 pandemic and its economic ramifications, the fruits of our investment arguably could have not been better timed. The good news is that during 2020, U.S. derivatives markets and their participants have weathered the volatility associated with the coronavirus pandemic admirably.  But as I just noted, we cannot know for certain what the future holds—for bankruptcy often comes “gradually and then suddenly.”  We must therefore be prepared for all contingencies.

Accordingly, I am pleased to support today’s final rule to update Part 190 for the 21st century.[4]  The final rule is a product of both hard work by CFTC staff and Commissioners as well as contributions from external stakeholders and subject matter experts, including a subcommittee of the American Bar Association.  The final rule promotes the CFTC’s core values in a number of ways, particularly the values of clarity and forward thinking.  It also furthers the agency’s strategic goal of regulating our derivatives markets to promote the interests of all Americans.[5]

Clarity for Customers and Creditors

The final rule serves our core value of clarity by incorporating key principles and actual practice as they have evolved in commodity broker bankruptcies and related judicial decisions in the years since 1983.

A new introductory section of the rule enumerates certain “core concepts” of commodity broker bankruptcies.  This section is intended to offer a readily understandable primer on relevant law, policy, and practical considerations in this area, thereby providing a common mental framework for brokers, customers, bankruptcy trustees, courts, and the public.  Among other things, this section provides an overview of the various classes of customer segregated accounts held by a commodity broker; the priority of public customers over insiders; the requirement of pro rata distribution; and the preference to transfer rather than liquidate open positions.

The final rule codifies a number of approaches and practices that have proven necessary or desirable in commodity broker bankruptcies in the intervening years since 1983.  For example, the final rule authorizes a bankruptcy trustee to treat a broker’s customers in the aggregate for certain purposes, rather than handling each customer’s account on a bespoke basis.  This aggregate treatment has in practice proven unavoidable in more recent commodity broker bankruptcies, which have required disposition of hundreds of thousands of derivatives contracts—on behalf of thousands or tens of thousands of customers—within days or even hours.  By making clear that such aggregate disposition of accounts is permissible and may even be more likely to occur than the alternative, the final rule provides greater clarity on potential outcomes for trustees, brokers, and customers.

For example, the final rule expressly permits the trustee—following consultation with CFTC staff—to determine whether to treat open positions of public customers in a designated hedging account as specifically identifiable property (requiring the trustee to solicit and comply with individual customer instructions), or instead transfer or “port” all such positions to a solvent commodity broker where possible.  This provision recognizes that requiring the trustee to identify hedging accounts and provide account holders the opportunity to give individual instructions is often a resource-intensive endeavor, which could interfere with the trustee’s ability to act in a timely and effective manner to protect all the broker’s customers.[6]

The final rule also includes explicit rules governing the bankruptcy of a clearinghouse, otherwise known as a derivatives clearing organization or DCO.  Since its inception, Part 190 has contemplated only a “case-by-case” approach with no corresponding rules to spell out what would happen in the event of a DCO bankruptcy.  While such a bankruptcy is extremely unlikely, it is important to provide ex ante clarity to DCO members and customers as to how it would be handled.  The final rule favors following the DCO’s existing default management and recovery and wind-down rules and procedures, but gives the trustee discretion to apply them reasonably and practicably.  This allows the bankruptcy trustee to take advantage of and adapt an established “playbook,” rather than being forced either to follow a rigid, “one-size-fits-all” framework or to form a resolution plan in a matter of hours during the onset of a crisis.  The final rule also gives legal certainty to DCO actions taken in accordance with a recovery and wind-down plan filed with the CFTC by precluding the trustee from voiding any such action.   

I support codifying these and other practices within our rules in order to provide greater transparency and predictability to brokers, customers, and other key stakeholders regarding permissible and expected procedures in a bankruptcy scenario.

Forward Thinking on Future Insolvencies

The final rule updates a number of provisions to reflect changes in financial technology since Part 190 was enacted 37 years ago.  The enhanced discretion discussed above would in many cases help the trustee to account for the increase in transaction execution and processing speed, as well as the potential for large and unpredictable market moves given the rise of global trading and the 24-hour trading cycle.  In addition, the final rule acknowledges digital assets as a physically deliverable asset class, in light of the listing of a number of physically delivered “virtual currency” derivatives contracts.

The final rule also reflects advances in communications technology.  For example, under the final rule, notice of a bankruptcy filing and related filed documents will be provided to the CFTC by electronic rather than paper means.  Furthermore, required customer notice procedures no longer include publication in a “newspaper of general circulation” in light of the downward trend in newspaper readership.  The final rule similarly recognizes changes from paper-based to electronic recording of documents of title.

Promoting the Interests of All Americans

Protection of customer funds is the lynchpin of the commodity broker bankruptcy regime of Part 190.  The final rule includes a number of measures to enhance those protections, including by buttressing provisions already in place under existing law and regulation.  In doing so, the final rule seeks to ensure that the CFTC’s bankruptcy regime works for the derivatives market participants it was meant to serve—particularly public brokerage customers, with a special emphasis on customers using derivatives to hedge their commercial risks.

For example, the final rule reinforces the bankruptcy priority of public broker customers over “non-public” customers (e.g., the broker’s proprietary and affiliate accounts).  It also strengthens the CFTC’s longstanding position that shortfalls in segregated customer assets should be made up from the broker’s general estate.  As a result, our final rule makes clear that the CFTC’s bankruptcy regime is complementary to relatively recently-enacted customer protection rules for day-to-day broker operations.[7]

The final rule also furthers the preference—consistent with Subchapter IV of the Bankruptcy Code[8]—for transferring or “porting” customer positions to a solvent broker, rather than liquidating those positions.  Porting of positions protects the utility of customer hedges by avoiding the risk of market moves between liquidation and re-establishment of the customer’s hedging position.  It also mitigates the risk that liquidation itself will cause such market moves.  Among other measures, the grant of trustee discretion as to whether to treat hedging positions as specifically identifiable property will serve these objectives by facilitating porting of such positions en masse, promptly and efficiently, along with other customer property.

Conclusion

While updates to the CFTC’s bankruptcy rules have been years in the making, I believe today’s final rule was well worth the wait.  The commodity broker resolution regime of Part 190 is respected throughout the world for its effectiveness and efficiency.  In addition, Part 190 is important to the continued global competitiveness of American exchanges, clearinghouses, and market intermediaries.  The final rule further enhances these features of our regime. Through its focus on promoting customer protection, clarity, and forward thinking, I believe the final rule will position us well for this decade and beyond.

[1] Bankruptcy Regulations, 85 FR 36000 (June 12, 2020).                                 

[2] See Statement of Chairman Heath P. Tarbert in Support of Long-Awaited Updates to the CFTC’s Bankruptcy Regime (Apr. 14, 2020), available at Statement of Chairman Heath P. Tarbert in Support of Long-Awaited Updates to the CFTC’s Bankruptcy Regime | CFTC.

[3] The term “commodity broker” may refer either to a futures commission merchant (FCM) or a derivatives clearing organization (DCO). 11 U.S.C. 101(6).

[4] After considering comments that were received on the original proposal, our Commission subsequently issued a Supplemental Proposal that withdrew §§ 190.14(b)(2) and (3), and proposed other revisions to § 190.14.  See Bankruptcy Regulations, 85 FR 60110 (Sept. 24, 2020) (Supplemental Proposal).  However, in light of comments raised on the Supplemental Proposal, as well as the original proposal, our Commission concluded that, at this point, it should engage in further analysis and development before proposing this, or any other, alternative approach.  Such further analysis and development will better enable the CFTC to propose, in detail, a solution that is effective, and that mitigates any attendant concerns.    

[5] See Remarks of CFTC Chairman Heath P. Tarbert to the 35th Annual FIA Expo 2019 (Oct. 30, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opatarbert2 (outlining the CFTC’s strategic goals).

[6] The final rule also grants the trustee appropriate discretion in other respects—for example, by allowing the trustee to modify the customer proof of claim form as needed for a particular bankruptcy.

[7] 17 C.F.R. § 1.23 (enacted in 2013 and revised in 2014) (requiring an FCM to contribute its own funds as “residual interest” to top up shortfalls in customer segregated accounts in the ordinary course of business).

[8] Statutory authority for Part 190 includes Subchapter IV of Chapter 7 of the Bankruptcy Code.

The mission of the CFTC is to promote the integrity, resilience, and vibrancy of U.S. derivatives markets through sound regulation.  We cannot achieve this mission if we rest on our laurels—particularly in relation to the ever-evolving technology that makes U.S. derivatives markets the envy of the world.  What is sound regulation today may not be sound regulation tomorrow.  

I am reminded of the paradoxical observation of Giuseppe di Lampedusa in his prize-winning novel, The Leopard: 

“If we want things to stay as they are, things will have to change.”[1]

While the novel focuses on the role of the aristocracy amid the social turbulence of 19^th century Sicily, its central thesis—that achieving stability in changing times itself requires change—can be applied equally to the regulation of rapidly changing financial markets.  

Today we are voting to finalize a rule to address the risk of disruptions to the electronic markets operated by futures exchanges.  The risks involved are significant; disruptions to electronic trading systems can prevent market participants from executing trades and managing their risk.  But how we address those risks—and the implications for the relationship between the Commission and the exchanges we regulate—is equally significant.  

The Evolution of Electronic Trading 

A floor trader from the 1980s and even the 1990s would scarcely recognize the typical futures exchange of the 21^st Century.  The screaming and shouting of buy and sell orders reminiscent of the film Trading Places has been replaced with silence, or perhaps the monotonous humming of large data centers.  Over the past two decades, our markets have moved from open outcry trading pits to electronic platforms.  Today, 96 percent of trading occurs through electronic systems, bringing with it the price discovery and hedging functions foundational to our markets.  

By and large, this shift to electronic trading has benefited market participants.  Spreads have narrowed,[2] liquidity has improved,[3] and transaction costs have dropped.[4]  And the most unexpected benefit is that electronic markets have been able to stay open and function smoothly during the COVID-19 lockdowns.  By comparison, traditional open outcry trading floors such as options pits and the floor of the New York Stock Exchange were forced to close for an extended time.  Without the innovation of electronic trading, our financial markets would almost certainly have seized up and suffered even greater distress. 

But like any technological innovation, electronic trading also creates new and unique risks.  Today’s final rule is informed by examples of disruptions in electronic markets caused by both human error as well as malfunctions in automated systems—disruptions that would not have occurred in open outcry pits.  For instance, “fat finger” orders mistakenly entered by people, or fully automated systems inadvertently flooding matching engines with messages, are two sources of market disruptions unique to electronic markets. 

Past CFTC Attempts to Address Electronic Trading Risks 

The CFTC has considered the risks associated with electronic trading during much of the last decade.  Seven years ago, a different set of Commissioners issued a concept release asking for public comment on what changes should be made to our regulations in light of the novel issues raised by electronic trading.  Out of that concept release, the Commission later proposed Regulation AT.  For all its faults, Regulation AT drove a very healthy discussion about the risks that should be addressed and the best way to do so.  

Regulation AT was based on the assumption that automated trading, a subset of electronic trading, was inherently riskier than other forms of trading.  As a result, Regulation AT sought to require certain automated trading firms to register with the Commission notwithstanding that they did not hold customer funds or intermediate customer orders.  Most problematically, Regulation AT also would have required those firms to produce their source code to the agency upon request and without subpoena. 

Regulation AT also took a prescriptive approach to the types of risk controls that exchanges, clearing members, and trading firms would be required to place on order messages.  But this list was set in 2015.  In effect, Regulation AT would have frozen in time a set of controls that all levels of market operators and market participants would have been required to place on trading.  Since that list was proposed, financial markets have faced their highest volatility on record and futures market volumes have increased by over 50 percent.[5]  Improvements in technology and computer power have been profound.  Of course, I commend my predecessors for focusing on the risks that electronic trading can bring.  But times change, and Regulation AT would not have changed with them.  Consequently, our Commission formally withdrew Regulation AT this past summer.[6] 

An Evolving CFTC for Evolving Markets 

In withdrawing Regulation AT, the CFTC has consciously moved away from registration requirements and source code production.  But in voting to finalize the Risk Principles, the CFTC is committing to address risk posed by electronic trading while strengthening our longstanding principles-based approach to overseeing exchanges. 

The markets we regulate are changing.  To maintain our regulatory functions, the CFTC must either halt that change or change our agency.  Swimming against the tide of developments like electronic markets is not an option, nor should it be.  The markets exist to serve the needs of market participants, not the regulator.  If a technological change improves the functioning of the markets, we should embrace it.  In fact, one of this agency’s founding principles is that CFTC should “foster responsible innovation.”[7]  Applying this reasoning alongside the overarching theme of The Leopard leads us to a single conclusion:  As our markets evolve, the only real course of action is to ensure that the CFTC’s regulatory framework evolves with it.   

The Need for Principles-Based Regulation 

So then how do we as a regulator change with the times while still fulfilling our statutory role overseeing U.S. derivatives markets?  I recently published an article setting out a framework for addressing situations such as this.[8]  I believe that principles-based regulations can bring simplicity and flexibility while also promoting innovation when applied in the right situations.  Such an approach can also create a better supervisory model for interaction between the regulator and its regulated firms—but only so long as that oversight is not toothless. 

There are a variety of circumstances in which I believe principles-based regulation would be most effective.  Regulations on how exchanges manage the risks of electronic trading are a prime example.  This is about risk management practices at sophisticated institutions subject to an established and ongoing supervisory relationship.  But it is also an area where regulated entities have a better understanding than the regulator about the risks they face and greater knowledge about how to address those risks.  As a result, exchanges need flexibility in how they manage risks as they constantly evolve. 

At the same time, principles-based regulation is not “light touch” regulation.  Without the ability to monitor compliance and enforce the rules, principles-based regulation would be ineffective.  Principles-based regulation of exchanges can work because the CFTC and the exchanges have constant interaction that engenders a degree of mutual trust.  The CFTC—as overseen by our five-member Commission—has tools to monitor how the exchanges implement principles-based regulations through reviews of license applications and rule changes, as well as through periodic examinations and rule enforcement reviews.  

Monitoring compliance alone is not enough.  The regulator also needs the ability to enforce against non-compliance.  Principles-based regimes ultimately give discretion to the regulated entity to find the best way to achieve a goal, so long as that method is objectively reasonable.  To that end, the CFTC has a suite of tools to require changes through formal action, escalating from denial of rule change requests, to enforcement actions, to license revocations.  The CFTC consistently needs to address the effectiveness and appropriateness of these levers to make sure the exchanges are meeting their regulatory objectives. And given that exchanges will be judged on a reasonableness standard, it must be the Commission itself—based on a recommendation from CFTC staff[9]—who ultimately decides whether an exchange has been objectively unreasonable in complying with our principles.  

Final Rule on Risk Principles for Electronic Trading 

This brings us to today’s finalization of the Risk Principles that were proposed in June of this year. The final rule, which we are adopting by-and-large as proposed, centers on a straightforward issue that I think we can all agree is important for our regulations to address.  Namely, the Risk Principles require exchanges to take steps to prevent, detect, and mitigate market disruptions and system anomalies associated with electronic trading. 

The disruptions we are concerned about can come from any number of causes, including: (i) excessive messages, (ii) fat finger orders, or (iii) the sudden shut off of order flow from a market maker.  The key attribute of the disruptions addressed by the Risk Principles is that they arise because of electronic trading.  

To be sure, our current regulations do require exchanges to address market disruptions. But the focus of those rules has generally been on disruptions caused by sudden price swings and volatility.  In effect, the Risk Principles expand the term “market disruptions” to cover instances where market participants’ ability to access the market or manage their risks is negatively impacted by something other than price swings.  This could include slowdowns or closures of gateways into the exchange’s matching engine caused by excessive messages submitted by a market participant.  It could also include instances when a market maker’s systems shut down and the market maker stops offering quotes.  

As noted in the preamble to the final rule, exchanges have worked diligently to address emerging risks associated with electronic trading.  Different exchanges have put in place rules such as messaging limits and penalties when messages exceed filled trades by too large a ratio.  Exchanges also may conduct due diligence on participants using certain market access methods and may require systems testing ahead of trading through those methods.  

It is not surprising that exchanges have developed rules and risk controls that comport with our Risk Principles.  The Commission, exchanges, and market participants have a common interest in ensuring that electronic markets function properly.  Moreover, this is an area where exchanges are likely to possess the best understanding of the risks presented and have control over how their own systems operate.  As a result, exchanges have the incentive and the ability to address the risks arising from electronic trading.  Principles-based regulations in this area will ensure that exchanges have reasonable discretion to adjust their rules and risk controls as the situation dictates, not as the regulator dictates. 

The three Risk Principles encapsulate this approach.  First, exchanges must have rules to prevent, detect, and mitigate market disruptions and system anomalies associated with electronic trading.  In other words, an exchange should take a macro view when assessing potential market disruptions, which can include fashioning rules applicable to all traders governing items such as onboarding, systems testing, and messaging policies.  Second, exchanges must have risk controls on all electronic orders to address those same concerns.  Third, exchanges must notify the CFTC of any significant market disruptions and give information on mitigation efforts.  

Importantly, implementation of the Risk Principles will be subject to a reasonableness standard.  The Acceptable Practices accompanying the Risk Principles clarify that an exchange would be in compliance if its rules and its risk controls are reasonably designed to meet the objectives of preventing, detecting, and mitigating market disruptions and system anomalies.  The Commission will have the ability to monitor how the exchanges are complying with the Principles, and will have avenues to sanction non-compliance. 

Framework for Future Regulation 

I hope that the Risk Principles we are adopting today will serve as a framework for future CFTC regulations.  Electronic trading presents a prime example of where principles-based regulation—as opposed to prescriptive rule sets—is more likely to result in sound regulation over time.  Through thoughtful analysis of the regulatory objective we aim to achieve, the nature of the market and technology we are addressing, the sophistication of the parties involved, and the nature of the CFTC’s relationship with the entity being regulated, we can identify what areas are best for a prescriptive regulation or a principles-based regulation.[10]  In the present context, a principles-based approach—setting forth concrete objectives while affording reasonable discretion to the exchanges—provides flexibility as electronic trading practices evolve, while maintaining sound regulation.  In sum, it recognizes that things will have to change if we want things to stay as they are.[11]  

I concur in issuing the final rule that revises certain provisions of the Commission’s regulations to reflect recent changes to the CFTC’s administrative structure (Final Rule).  The Final Rule changes dozens of references to various CFTC divisions and offices and the respective directors thereof, as well as certain addresses of CFTC offices, in accordance with the realignment. 

The realignment was undertaken at the Chairman’s direction.  Approval of the reorganization itself is not the subject of the Final Rule, and such approval has not otherwise been requested of the Commission.[1]  Rather, the Final Rule is necessary to change delegation authorities and reference the appropriate officials or offices for filings, notices, and other correspondence.  As a Commissioner, I have a ministerial duty to maintain the accuracy of our regulations and therefore I concur in adoption of the Final Rule.

[1] Accordingly, my approval of the Final Rule should not be viewed as approval of the reorganization itself.