I am pleased to support today’s final rule amending the CFTC’s Part 50 rules, which implement the swap clearing requirement of section 2(h)(1) of the Commodity Exchange Act (the Clearing Requirement).  The final rule concurrently achieves two ends—it demonstrates the CFTC’s evolving philosophy on comity and deference towards our international counterparts while alleviating unnecessary regulatory burdens on small domestic institutions that look nothing like Wall Street banks.

First, today’s final rule creates new regulations 50.75 and 50.76, which codify existing exemptions from the Clearing Requirement for swaps entered into with certain central banks, sovereign entities, and international financial institutions.  Just as we would not expect a foreign regulator to impose clearing requirements on the United States Treasury or the Federal Reserve for entering into swaps on behalf of our government, the CFTC will not impose similar requirements on other nation’s finance ministries and central banks.  The same is true for multilateral governmental institutions such as the World Bank Group and the International Monetary Fund.  Mutual respect and a two-way-street must be the cornerstone of our international regulatory relations.

Second, the final rule establishes new regulations 50.77, 50.78, and 50.79, which exempt from the Clearing Requirement certain swaps entered into by small bank holding companies, savings and loan holding companies, and community development financial institutions.  In addition, the final rule clarifies existing exemptions for banks, savings associations, farm credit systems, and credit unions with total assets of less than $10 billion.  These entities are the engines of the real economy, providing financial support to American communities, businesses, and families.  While exempting these entities from the Clearing Requirement makes sense in normal times, doing so is especially critical now.  As we continue to manage the fallout of the COVID-19 (coronavirus) pandemic, it is particularly important that the CFTC advance our strategic goal of regulating the derivatives markets to promote the interests of all Americans.[1]  Today’s final rule is a step in that direction.

In the regular course of administering the Commodity Exchange Act (CEA) and Commission regulations, CFTC staff often receive inquiries from the public seeking guidance or clarification on how Commission rules and regulations may apply to specific facts and circumstances.[1]  Staff may respond to such inquiries through a variety of communications, including no-action, interpretive, and exemptive letters, as well as guidance and advisory statements (collectively, Staff Letters).  Staff Letters vary in scope and format.  For instance, a Staff Letter may simply convey an enforcement position, or it may articulate an explicit interpretation of applicable law and Commission regulations as they relate to a particular scenario.  In all cases, the views articulated in Staff Letters (with the exception of exemptive letters) are informal and advisory, and the statements are not binding on the Commission itself.[2]

Because they do not necessarily reflect the views or opinions of the Commission and are not subject to public notice-and-comment procedures, as Chairman, I direct CFTC staff to ensure that Staff Letters are limited to those circumstances that are not suitable for a general rulemaking.[3]  In other words, Staff Letters should supplement, rather than replace, rulemakings.

As part of my continued commitment to providing transparency about CFTC business,[4] I believe it is appropriate to issue this directive to CFTC staff publicly.  It is important that the public understand the guidelines I am setting forth for CFTC staff to follow—and the rationale behind them—when considering whether, and the manner in which, Staff Letters should be used to address public requests for relief, interpretation, or guidance.[5]

No-Action Letters

A no-action letter is a statement issued by a division or office that it will not recommend enforcement action with respect to a proposed transaction or activity for failure to comply with a specific provision of the CEA or Commission rule, regulation, or order (together, regulations).  Although it is not binding on any other division or office, or the Commission itself, a no-action letter is binding on the issuing division or office.  A no-action letter may be relied upon only by the addressee of the letter.[6]  If the addressee of the letter complies with all conditions stated in the no-action letter, the issuing division or office would not recommend enforcement action based solely on the conduct described in the letter, unless the no-action letter is revoked or the division or office provides an adequate explanation of why the no-action letter is not applicable.  The public at large—other than the addressee—may not rely upon the letter, but they may look to the letter as instructive of the views of the issuing division or office with regard to the particular scenario.

Generally, I believe no-action relief should be limited to the following circumstances:[7]

·     Transitional Compliance Relief.  Market participants may experience operational or other difficulties that impede timely compliance with the CEA or a new or amended Commission regulation.  In such cases, targeted, time-limited relief may be appropriate.

·     “Square Peg” Relief.  Market participants’ transactions or activities may raise a unique issue that is not contemplated by the CEA or CFTC regulations, or the application of CFTC regulations to a transaction or activity may lead to unintended consequences.  No-action relief tailored to either of these narrow circumstances may be appropriate.

·     Extraordinary Circumstances.  Market participants may face challenges in complying with the CEA or CFTC regulations during a market crisis or another extraordinary circumstance.  Time-limited no-action relief from the CEA or CFTC regulations may be necessary to avoid significant market disruptions.

To be clear, a no-action letter should not establish a new policy.  CFTC staff are hereby instructed to consider whether rulemaking would be a more appropriate vehicle for responding to an inquiry where a situation is encountered on a repeated basis and has industry-wide implications.

Interpretive Letters

An interpretive letter is a written statement with respect to a specific provision of a Commission regulation, provided in the context of a proposed transaction or activity.[8]  It is the vehicle by which staff explains its interpretation of ambiguous terms in the regulation.

Like a no-action letter, an interpretive letter is binding on only the issuing division or office.  But, unlike a no-action letter, an interpretive letter may be relied upon by the public.  Notably, however, an interpretive letter it is not binding on the public.  Thus, for example, if the question or situation covered by the interpretive letter arises, the public could take a different approach without necessarily being in violation of the underlying requirement(s).

It is important that an interpretive letter be derived from the specific statutory provision or regulation; it may be used to add meaning or gloss to the underlying requirement(s).  As with a no-action letter, an interpretive letter should not set new policy or otherwise alter the rights and obligations of any person.  Were that to be the case, rulemaking would be more appropriate than using an interpretive letter.

Staff Guidance, Advisories, and FAQs

Staff guidance, advisories, and FAQs communicate staff’s expectation regarding how regulated parties may comply with a particular requirement, or inform regulated parties about staff’s regulatory priorities.  They represent the view of only the issuing division or office, and are not binding on any other division or office, the Commission itself, or the public.  Failure to conform to guidance, an advisory, or an FAQ does not necessarily mean that the party is in violation of the applicable regulation.

Staff guidance, advisories, and FAQs should not set new policy, but rather explain how the law would apply to a unique circumstance or market event.  In essence, staff guidance should advise the public prospectively of the manner in which staff proposes to implement the underlying provision of the CEA or Commission regulation.  As with no-action relief, CFTC staff are hereby instructed to consider whether rulemaking would be a more appropriate vehicle.

Exemptive Letters

An exemptive letter is a written grant of relief issued by a division or office when the Commission itself has exemptive authority that has been delegated to the staff.[9]  As opposed to other Staff Letters, an exemptive letter binds the Commission.  Only the addressee of the letter may rely upon the relief.  As is the case for other Staff Letters, an exemptive letter addresses unique facts and circumstances set forth in the letter.  Although the public may not rely upon the letter, they may look to the letter as instructive of the views of the issuing division or office with regard to the particular course of conduct, and as a basis for understanding the views of the Commission.

An exemptive letter may include conditions that are traceable to the relevant regulation. For example, an exemptive letter may be conditioned upon the addressee meeting certain criteria or complying with alternative measures to mitigate a regulatory gap.  However, as this is outside the rulemaking process, the staff should take care not to set conditions that effectively amend existing regulations.  CFTC staff are hereby instructed that, in the event a potential exemptive letter would provide relief that could be applicable to parties other than the requestor, or the conditions of relief are broader than existing regulations, rulemaking would be more appropriate.

Conclusion

One of the CFTC’s core values is clarity:[10] to provide transparency to market participants about our rules and processes.  Staff Letters give a measure of clarity, but we generally serve our markets best when the Commission itself acts with the benefit of public input and dialogue.  Public input is particularly important when novel or complex issues are involved.  As a result, I believe that rulemaking should be the agency’s default policymaking vehicle.

Accordingly, CFTC staff are instructed to limit Staff Letters to the relatively narrow sets of circumstances described in this directive, and to use the notice-and-comment rulemaking process for all other policymaking initiatives.  These guidelines shall remain in effect until augmented, amended, or withdrawn by myself, the Commission, or any future Chairman or Commission.

[1] The procedures for requesting exemptive, no-action and interpretive letters are found in section 140.99 of the Commission’s regulations at title 17, Code of Federal Regulations, 17 C.F.R. § 140.99.

[2] Depending on the type of relief, it may be binding only on the issuing division or office.  Such relief would also be binding on a successor division in the event of an agency reorganization.

[3] Rulemaking may also be appropriate for Commission exemptive action pursuant to section 4(c) of the CEA, 7 U.S.C. § 6(c).  See 63 Fed. Reg. 3285 (Jan. 22, 1998); 63 Fed. Reg. 68,175 (Dec. 10, 1998).  Exemptions under CEA section 4(c) are outside the scope of this document.

[4] Statement of Chairman Heath P. Tarbert Before the December 10, 2019 Open Meeting: Tripling Down on Transparency, https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121019.

[5] The CFTC may issue Staff Letters in response to requests from trade associations or groups that represent similarly situated persons – i.e., persons or entities that share the same or substantially the same facts and circumstances.

[6] A request for a no-action letter may be made on behalf of a beneficiary.  “Addressee” as used here means the beneficiary of the no-action letter.

[7] As noted earlier, the CFTC may issue no-action letters in response to requests from trade associations or groups that represent similarly situated persons.

[8] Distinctions between interpretive letters and other Staff Letters may be blurred at times.  Some letters advising no-action positions may be based on staff’s interpretation of the CEA or Commission regulations.

[9] Exemptive letters should cite to the delegating authority.  Exemptions issued under CEA section 4(c) are not covered here.

[10] https://www.cftc.gov/About/AboutTheCommission.

I support today’s final rule on customer margin requirements for security futures (Final Rule), issued jointly with the Securities and Exchange Commission (SEC).  The Final Rule ensures that margin requirements for unhedged security futures will be consistent regardless of the type of customer account in which they are held.  The Final Rule presents no new risks to the financial system, and is an overdue effort to align margin requirements for security futures.[1]

Unhedged security futures held in a “portfolio margin” account have been subject to a 15 percent minimum margin amount since certain securities self-regulatory organizations (SROs) launched portfolio margining pilot programs starting in 2007.[2]  In contrast, prior to this Final Rule, such unhedged security futures held in a futures account or in a securities customer account that is not subject to portfolio margining were subject to a 20 percent margin requirement.  This structure produced disparate treatment of security futures based solely on the customer account class in which they were held.

The Final Rule addresses this disparate treatment with no increased risks to the financial system.  It brings all unhedged security futures to the same 15 percent margin requirement, consistent with existing margin requirements for security futures and equity options held in portfolio margin accounts that have been in place for over a decade.

I support the two Commissions’ efforts in today’s Final Rule to address one aspect of trading in security futures, consistent with the CFMA’s statutory requirements.  Unfortunately, these efforts are too late to be of any near-term benefit.  Notably, the only U.S. derivatives exchange that offered security futures products discontinued trading in September, 2020.

I look forward to continuing to work with staff and my fellow Commissioners at both the CFTC and the SEC on a viable margin regime for security futures going forward.

I thank my fellow Commissioners at the CFTC and the SEC, as well as staff of the two agencies, for their work on this Final Rule.

[1] Congress established a framework for the trading and joint regulation of security futures in the Commodity Futures Modernization Act of 2000 (CFMA).   Among other requirements, the CFMA specified that customer margin requirements for security futures products must be consistent with the margin requirements for comparable options traded on a registered securities exchange, and that the initial and maintenance margin levels must not be lower than the lowest level of margin, exclusive of premium, required for any comparable exchange-traded options.

[2] Portfolio margining allows a broker-dealer to combine certain of a customer’s securities and security futures positions held in a securities account for purposes of determining the margin requirements for those positions. Such portfolio margining began with a 2007 pilot program pursuant to the rules of CBOE Exchange.  The program became permanent in 2008.  FINRA adopted its own portfolio margining rules in 2010.  Portfolio margining for security futures is not available in a futures customer account.  Thus, prior to this Final Rule, the 15 percent treatment available to security futures held in a portfolio margined account was unavailable to security futures held in a futures account.

CFTC Chairman Heath Tarbert and SEC Chairman Jay Clayton, thank you both for calling this meeting.  I am honored to join my fellow CFTC and SEC Commissioners to participate in the first-ever joint SEC and CFTC open meeting to consider and vote on rulemaking initiatives.  Both items on today’s agenda showcase the hard work and cooperation between CFTC and SEC staff and remind us of how critical these staff and Commission-level relationships are to ensuring a rationalized regulatory framework for firms and products spanning both the derivatives and securities markets.

While the U.S. dual regulatory framework between the derivatives and securities markets naturally poses challenges, I would suggest that it has also created significant opportunities.  Securities and derivatives markets serve very different purposes but both work, in their own way, to promote a vibrant economy and long-lived individual financial security.  One is predominantly for capital raising, debt issuance, and wealth creation, whereas the other serves as a way to mitigate risk by facilitating efficient hedging.  They shouldn’t be regulated the same way, and in the United States, they certainly are not.  But, given economies of scale, many financial firms are engaged in both markets and products can cross jurisdictional lines or be highly correlated with instruments in the other marketplace: a futures contract on a security is an example of that, while the dividing line between swaps and security-based swaps is another.  This logical convergence is why it is so critical our two agencies have a cooperative, consistent, and comprehensive dialogue on each of our markets and the areas of overlapping interest.  Today’s meeting is the preeminent expression of that dialogue, one which I have personally witnessed behind the scenes in countless settings.  That is why I am so happy and proud to partake today.

I would like to take a special moment to thank SEC Commissioner Hester Peirce, who has been my invaluable partner in advancing SEC-CFTC harmonization efforts and coordination. Commissioner Peirce has brought intellectual heft and ideological conviction, coupled with open mindedness, to our efforts, and she has done so with a rare combination of tenacity and grace.  It has been an absolute pleasure to work with you to not only attempt, but to actually achieve, greater regulatory consistency for swaps and security-based swaps across a panoply of areas.  I believe we have made significant progress in harmonizing the capital, margin, and segregation regimes for dually registered broker-dealers and futures commission merchants, as well as security-based swap dealers and swap dealers.

You have also worked with me and the talented staff of both our agencies to encourage further alignment of the regulatory and real-time reporting requirements of swaps and security-based swaps, to facilitate coordinated examinations of dual registrants, and to explore portfolio margining possibilities for both cleared and uncleared products.  We’ve been able to keep our commitment to talk both regularly or suddenly.  We’ve been able to champion each other’s positions within our own agencies.  We’ve never declared any policy area out of bounds.  And we’ve established trusted lines of communication between our staffs and with each other’s Chairmen.  Speaking of, I am incredibly grateful to SEC Chairman Jay Clayton and former CFTC Chairman Chris Giancarlo for developing this role and thinking of me for it. Additionally, I am specifically grateful to SEC Chairman Jay Clayton for not only his openness to my thinking in our harmonization discussions but also for the relationship we have developed.  Lastly, I am incredibly grateful to CFTC Chairman Heath Tarbert for allowing me to continue to serve in this capacity, for taking the personal initiative when needed to move tough issues across the finish line, and for his personal friendship.

Joint Final Rule: Customer Margin Rules Relating to Security Futures

I am pleased to support today’s final rule lowering the minimum margin requirement to hold security futures, from 20% to 15% of a position’s market value.[1]  The lower margin requirement would apply to security futures held in a futures account and to positions held in a securities account not subject to portfolio margin rules.  The new margin requirement would be consistent with the current margin requirements both for security futures positions held in a securities account subject to portfolio margin rules and for exchange-traded equity options. 

I note that today’s final rule indicates that OneChicago, the only exchange that has listed security futures in the United States, has recently discontinued trading operations.  This underscores the determinative impact statutory provisions can have on the viability of both products and whole business lines.  The Securities Exchange Act requires security futures to be margined comparably to options traded on an exchange registered with the SEC.[2]  While the intent of that provision is understandable, the economics underlying it appear to be severely sub-optimal.  Today’s lowering of the required minimum margin, consistent with the Securities Exchange Act, should make trading this product more cost effective than it has been, but it still may not be sufficiently cost effective to make the product economically viable.  From that perspective, I hope policy makers revisit this provision, to ensure its ultimate effect is consistent with its intent. I believe financial markets policy should appropriately balance concerns of safety and soundness with promoting a range of innovative products, and more can certainly be done in that regard on this issue.

Finally, as I noted above, this rule serves as a positive example of productive cooperation between the CFTC and the SEC, and I hope that additional joint actions arise in the future.

Request for Comment: Portfolio Margining of Uncleared Swaps and Non-Cleared Security-Based Swaps

I am proud to support today’s request for comment, which marks the beginning of the agencies’ consideration of ways to implement a portfolio margining regime for uncleared swaps and non-cleared security-based swaps.  Portfolio margining can lead to efficiencies in margin calculation by appropriately accounting for the impact offsetting positions have on a portfolio’s actual risk profile.  This, in turn, gives firms and customers additional capital that can be deployed elsewhere.  However, given the differences between the regulatory regimes for swaps and security-based swaps, it also implicates incredibly important legal and policy considerations.  This request for comment solicits critical feedback from market participants on how portfolio margining could impact the safety and soundness of firms, result in competitive advantages for certain types of registrants, and raise questions about how collateral would be treated in the event of bankruptcy.  In order to make an informed decision about if, and how, portfolio margining should be implemented for uncleared swaps and non-cleared security-based swaps, we need thoughtful feedback on these complex questions.  I encourage all interested parties to provide written comments, including data wherever possible, in order to further the agencies’ understanding of the various options presented in the request for comment.

[1] Amended CFTC regulation 41.45(b) and SEC rule 242.403(b).

[2] Section 7(c)(2)(B) of the Securities Exchange Act.

I am pleased to be a part of today’s Joint Open Meeting of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).  I commend:

• Chairmen Tarbert and Clayton for holding this Meeting to provide transparency into our work in jointly addressing issues of mutual interest to both our agencies;
• Commissioner Quintenz at the CFTC and Commissioner Peirce at the SEC for laying the groundwork for this Joint Meeting through their efforts to harmonize the regulatory regimes of the agencies, as these harmonization efforts benefit not only those we regulate, but also the public we all serve; and
• The staff of the agencies for putting before us a Joint Final Rule that will lower the margin level for an unhedged security futures position from 20% to 15%, which I firmly believe is sound public policy.

And yet, while I don’t want to rain on today’s parade, I nevertheless feel compelled to express a few regrets.

I regret, for example, that the Commissions did not take the common-sense step of reducing the security futures margin level from 20% to 15% years ago.  After all, OneChicago, the only U.S. exchange that made a long-term effort to develop a market for security futures, asked us to take this step 12 years ago in 2008.  And the self-regulatory organization rules establishing a 15% margin level for unhedged security futures held in a securities portfolio margin account (with which the action we are taking will align) have been in effect for at least 10 years since 2010.  I appreciate that the global financial crisis and the ensuing regulatory focus on swaps and other reforms diverted attention from security futures.  But it is nonetheless disappointing that it took the Commissions a decade to take the step we take today–and even more disappointing given that OneChicago did not survive to see it, as it discontinued all trading operations about a month ago on September 21.

I also regret that the adopting release does not recognize the unique circumstances presented by the recent exit of OneChicago and the fact that no U.S. exchange currently lists security futures for trading, and thus issues opinions on hypothetical questions that I do not believe we should be addressing here.  By way of background, when the Commissions proposed to reduce the margin level of an unhedged security futures position from 20% to 15%, we also requested comment on whether there are any other risk-based margin methodologies that could be used to prescribe margin requirements for security futures.[1]  In response, OneChicago urged the Commissions to permit the use of risk-based margin models for security futures–similar to what is done for other futures contracts.  I am in complete agreement that we should not adopt such a sweeping change to the manner in which margin is calculated for security futures based solely on the response to a single request for comment in a proposal designed to address a wholly different type of margin calculation rule.

Unfortunately, though, the adopting release goes further, and rejects OneChicago’s arguments regarding the Commissions’ authority to adopt risk-based margining for security futures.  Some of these arguments are fact–based, and thus a future change in facts could yield a different conclusion, which is appropriate.[2]  But the adopting release also rejects OneChicago’s interpretive arguments that the Commissions can adopt risk–based margining for security futures even absent a change in factual circumstances.[3]  I think that is unfortunate, for three reasons.

First, I do not believe that we should be offering advisory opinions on interpretive questions that, in light of the demise of OneChicago, no CFTC- or SEC–registered exchange is currently asking.  In my view, these hypothetical questions are not material given the circumstances before us, and should therefore be left to future CFTC and SEC Commissioners, to be decided in the context of a live request to list and trade security futures.

Second, risk-based margining for security futures is permitted in Europe, and while factors other than margin requirements may influence demand for security futures, its rejection in the adopting release creates a potential competitive disadvantage for U.S. exchanges vs. their international counterparts.  The Commodity Exchange Act (CEA) specifies that one of its purposes is “to promote responsible innovation and fair competition among boards of trade, other markets and market participants.”[4]  The interpretation in the adopting release fails to fulfill that purpose.

Third, it should be remembered that the trading of security futures on U.S. exchanges before the year 2000 was prohibited due to jurisdictional disputes over the treatment of products that have attributes of both SEC–regulated securities and CFTC–regulated derivatives.  In the Commodity Futures Modernization Act of 2000 (CFMA), Congress repealed that prohibition and permitted security futures to trade on U.S. exchanges pursuant to a framework of joint regulation by the CFTC and the SEC.[5]  Yet, the rejection of risk-based margining in the adopting release risks stifling the very security futures market that the CFMA intended to promote.

Nevertheless, it is my sincere hope that while the reduction in margin level for an unhedged security futures position from 20% to 15% may have come too late for OneChicago, it will incentivize another U.S. exchange to launch security futures.  And in that event, it is my further hope that the Commissions will bring an open mind to any interpretive arguments the exchange may advance if it requests recognition of risk-based margining for its contracts.

In the meantime, I support the Joint Final Rule that is before us.

[1] Customer Margin Rules Relating to Security Futures, 84 Fed. Reg. 36434, 36441 (July 26, 2019).  The proposing release also asked commenters, if their answer to this question was yes, to “please identify the margin methodologies and explain how they would meet the comparability standards under the [Securities] Exchange Act [of 1934].”  Id.

[2] The Securities Exchange Act of 1934 (Exchange Act) provides that margin levels for security futures must, among other things, be:  i) consistent with the margin requirements for comparable options traded on any exchange registered pursuant to Section 6(a) of the Exchange Act; and ii) not lower than the lowest level of margin, exclusive of premium, required for any comparable exchange-traded options.  See Sections 7(c)(2)(B)(iii)(I)-(II) of the Exchange Act (emphasis added).  The adopting release concludes that risk-based margining for security futures is inappropriate, in part, because it would substantially deviate from how margin requirements are calculated for exchange-traded equity options at this time.  If risk-based margining were permitted for such equity options in the future, then risk-based margining for security futures might follow, too.

[3] OneChicago’s interpretive arguments included that: i) the Commissions’ reading of Sections 7(c)(2)(B)(iii)(I)-(II) of the Exchange Act as focusing on margin levels is incorrect; and ii) security futures contracts are not “comparable” to equity options and, therefore, the “consistent with” and “not lower than” margin restrictions in Sections 7(c)(2)(B)(iii)(I)-(II) of the Exchange Act do not apply.

[4] CEA Section 3(b), 7 U.S.C. § 5(b) (emphasis added).

[5] Commodity Futures Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 (2000).

Good morning.  I would like to start by thanking Chairman Tarbert, Chairman Clayton, my fellow CFTC commissioners, the commissioners from the Securities and Exchange Commission (SEC), and all of the staff from both agencies.

It is good to be together to finalize a joint final rule and issue a joint request for comment.  Cooperatively working on issues when we are mandated to do so is the floor.  When our agencies choose to go beyond that, engaging one another to explore, collaborate, and harmonize our policies and regulations to bring consistency to our agencies’ oversight with respect to similar products, practices, market participants, and intermediaries, we provide the highest service to our markets and the American public.  And I am proud to be a part of that effort.

While today’s meeting is historical for the voting that will take place, a little more than 11 years ago, the CFTC and SEC held the first joint public meeting in the history of the two agencies.[1]  President Obama had called upon the agencies to make recommendations via a report to Congress to further harmonize regulation of futures and securities.[2]  Following two days of public meetings, the CFTC and SEC issued a joint report on regulatory harmonization [3] making 20 recommendations to enhance enforcement powers, strengthen market and intermediary oversight, and improve operational coordination.  Among other things, the joint report reviewed and analyzed risk-based portfolio margining and bankruptcy/insolvency regimes, which are relevant to both matters before us today.[4]

Upon issuance of the joint report, then CFTC Chairman Gensler remarked that the agencies had risen above the usual challenges, coming together “…to offer meaningful recommendations to improve our oversight of the financial markets.”[5] challenges” of differences between our regulations and the marketplaces we oversee, varying regulatory priorities and legislative agendas, and of course, varying points of view.  As we find ourselves meeting virtually due the ongoing COVID-19 pandemic, our senses are heightened as we recover from economic turmoil and pockets of historic market volatility.  Now, perhaps more than ever, we must prioritize and promote regulatory activities and policies that will benefit the American public.

I am pleased to be supporting both items on today’s agenda.  First, we will vote on a joint final rule that reduces the minimum margin requirements for security futures that are held in a futures account or in a securities account that is not subject to portfolio margin rules.  This rule is intended to align such margin requirements with those of comparable exchange-traded equity options.  At this time, there are no security futures contracts listed for trading on U.S. exchanges since the only U.S. exchange that had offered trading in such products discontinued operations last month.  Nevertheless, the agencies are moving forward towards harmonization that is intended to prevent competitive distortions, and is unlikely to result in under-margining for security futures positions should trading resume.

I believe the joint final rule goes to great lengths in its parsing of statutory language and addressing questions, concerns, and alternatives raised by commenters.  In supporting this final rule, I believe it is important to highlight a point emphasized throughout the preamble: the 15% margin requirements being established represent the floor.  If security futures trading resumes, futures commission merchants (FCMs), derivatives clearing organizations (DCOs), and other security futures intermediaries, may charge additional margin above the 15% minimum level required, as well as take other appropriate actions if it would be prudent to manage and protect against increased risk, to preserve their financial integrity, and to protect customers.[6]  I believe that the CFTC’s regulatory regime for FCMs and DCOs provides appropriate incentives and flexibility to manage and mitigate risk, and am pleased to support today’s final rule. As well, for the vast majority of futures contracts (energy, softs, precious and base metals, livestock, etc.), the margin level generally sits between 3% and 12%. [7]  Although this data point should not be determinative of what any contract’s margin requirement should be as it relates to the individual product’s risk profile, I believe the range clearly indicates that the 15% level, in the case of today’s rule, remains conservative.  I look forward to monitoring any developments in this space to ensure results are as predicted and based on the best available data.  If outcomes, through economic analysis, surveillance, or market monitoring, prove otherwise, I’ll be ready to take action immediately.

Second, we will vote on the issuance of a request for comment on potential ways to implement portfolio margining of uncleared swaps and non-cleared security-based swaps.  As a commissioner who often comments on the importance of process, I am pleased that the commissions are beginning here.  At the highest level, portfolio margining is where our two sets of margin rules intersect.  It sounds simple, but there is much to reconcile in terms of calculation, collection, protection in the event of a default, and much more.  The questions focus on drawing out the various considerations and notable differences in our respective margin rules identified by staff at our agencies with a goal of advancing a program, even though we are in the very nascent stages of policy development.

I believe beginning with a request for comment is an important first step because it builds accountability by promoting greater transparency and engagement with the commissions throughout the decision-making process, and supports the highest levels of collaboration.  I look forward to the comments and will be especially interested in hearing about new approaches, tools, practices and processes that may contribute to our deliberations, with an emphasis on financial stability, market resiliency and integrity, and customer protections as we move forward in our own process.

Again, I would like to thank Chairmen Tarbert and Clayton for bringing us together today.  And I would like to thank the staff of both agencies for their incredible efforts these past few months in particular as they keep us moving forward as thoughtful, cooperative, and collaborative regulators.

It is an honor to be here today at what is a historic moment.  This is the first ever joint open meeting of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to vote on a final rule in our shared 45-year history.  Despite the close relationship between our two agencies and the jurisdictional overlap between certain of the products we regulate, we have never formally gathered together—in this case virtually—to adopt a joint rule.  I am happy that with today’s meeting this is no longer the case.  I hope coming together today will bode well for future relations between our agencies.  I want to thank Chairman Clayton and the rest of the Commissioners—both at the SEC and the CFTC—for making this joint meeting happen.

Historical Background

Since the 1930s, securities and futures products have been subject to separate regulatory regimes in the United States.  This is because, at their core, the SEC and the CFTC monitor different markets with different market participants.  While certain securities markets, such as securities options, facilitate the transfer of risk, the SEC is primarily focused on capital formation.  By contrast, the CFTC concentrates its efforts on risk mitigation, with a specific focus on America’s agricultural and energy producers—the farmers, ranchers, distributors, refineries, and end users of financial products who traditionally have been the core focus of the CFTC.[1]

Indeed, the unique capital formation role of certain securities markets has informed the manner in which our two regimes have developed and, in part, explains differences between the regulatory structures of the SEC and the CFTC.[2]  This distinction is also reflected in our Commissions’ reporting lines to Congress.  While the banking and financial services committees have jurisdiction over the SEC, the CFTC falls under the jurisdiction of the agriculture committees.  The characteristics of the markets we regulate go a long way toward explaining how the two agencies are overseen, and why we sometimes take a different approach to regulation—or at least see regulatory issues through different lens.

I recognize some critics have maintained that the U.S. financial regulatory system is fragmented, inefficient, and too often plagued with petty turf battles.[3]  Some have even maintained that the United States has a “Balkanized structure of financial regulation,”[4] which gives rise to a “crazy-quilt structure of fragmented authority.”[5]  It is quite true that, in contrast with the United States, many countries have only one market regulator, not two.[6]  Some countries even have a single consolidated market and prudential regulator.  And our federalist system in which states have separate authority over and above the federal government also likely appears bizarre relative to most countries.

However, we must keep in mind that the United States has the biggest, deepest, and most liquid financial markets in the world.  Accordingly, it is appropriate that we have two market regulators—one, the SEC, that focuses on capital formation and another, the CFTC, that focuses on risk-mitigating hedging.  Rather than being a crazy-quilt of fragmented authority, there is a compelling logic to our regulatory structure.

Importance of Continued Communication and Collaboration

It is true that in the past there have been instances where our agencies have disagreed over the characterization of products, for example, whether a particular product is a security or a futures contract.  This has led, in some cases, to the point of litigation.[7]  It was inevitable that disputes and friction have arisen, and I expect that will continue to be true in the future.  After all, brothers and sisters do fight!  Given the complexity of modern financial products, we are often forced to decide, in the unforgettable words of Judge Easterbrook of the Seventh Circuit Court of Appeals, “whether tetrahedrons belong in square or round holes.”[8]

Although litigation may have been a way to give market participants clarity on how products are regulated, our agencies also have a history of cooperation to resolve jurisdictional disputes.  Most notably for today’s meeting, the SEC and CFTC Chairmen signed the Shad-Johnson Accord in 1981, which provided for joint jurisdiction over single stock futures and narrow-based stock indices, with broad-based indices remaining under the CFTC’s exclusive jurisdiction.[9]  The Shad-Johnson Accord was subsequently codified by Congress through amendments to the CEA and the federal securities laws,[10] and then later revised substantially in the Commodity Futures Modernization Act of 2000 (CFMA).[11]  The CFMA established the structure for joint regulation by the SEC and CFTC of the trading of U.S. futures on single securities as well as on narrow-based security indexes.

In the last decade, since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),[12] our agencies have tried hard to work together because we know the American people are depending on us.  We have held joint roundtables on a variety of topics important to market participants,[13] and established the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues.[14]  We have also generally consulted and coordinated on the implementation of Title VII of the Dodd-Frank Act.  In the past year, we have continued the tradition of collaboration,[15] while taking it to the next level.  Going forward, in those few specific areas with a potential for overlap or conflict, I believe we should be all the more conscious of our need to work together.  Continued communication and coordination between the SEC and the CFTC will benefit both agencies as we confront the opportunities and challenges presented by our evolving markets.

Today, we are going to talk about two topics that are emblematic of the overlapping jurisdiction of our two agencies and that demonstrate our mutual commitment to regulatory clarity.  These important issues are right at the intersection of SEC-CFTC jurisdiction: Security Futures Margin and Portfolio Margining.

Security Futures Margin—Jumpstarting the Market

We are considering whether to adopt rule amendments to align the minimum margin required on security futures with other similar financial products.  This rule has been in the works for a long time.  Since the CFMA lifted the ban on trading security futures and established a framework for the joint regulation of these products by our Commissions, this market has admittedly struggled to develop.  For those of you who do not know, the market for securities futures has not taken off in the United States as it has in other jurisdictions, such as Europe.

I am pleased to support this rule because it represents our joint effort to do what we can, under the current statutory scheme, to make regulation of the security futures market more efficient by adjusting the margin requirements.  My hope is that the final rule will be the first of a number of steps we can take to help jumpstart this market.  The goal should be to create a regulatory regime for security futures that will enable these products to flourish in the United States as they do elsewhere in the world.

Portfolio Margining Request for Comment

Today we are also considering whether to publish a request for comment on all aspects of the portfolio margining of uncleared swaps, non-cleared security-based swaps, and related positions—including on the merits, benefits, and risks of portfolio margining these types of positions, and on any regulatory, legal, and operational issues associated with portfolio margining them.  Portfolio margining is of central importance to market participants who are dually-registered with the SEC and the CFTC and have customers who hold positions in separate accounts without the ability to cross-margin the positions.

This request for comment is actually the direct result of efforts by SEC Chairman Clayton and my predecessor, former CFTC Chairman J. Christopher Giancarlo.  Chairmen Clayton and Giancarlo asked the staffs of the SEC and CFTC to conduct market outreach and seek further input from the public regarding these issues surrounding portfolio margining.[16]  I am pleased to support this request for comment because I think it will enable our respective staffs to prepare a thoughtful recommendation on actions our two Commissions may take to facilitate portfolio margining.

Conclusion

I want to close by again thanking Chairman Clayton and the rest of the Commissioners—both at the SEC and the CFTC—for participating in this joint meeting.  It is a sign of our close and continued communication and collaboration, which I trust will extend long into the future.  Finally, I hope we do not have to wait another 45 years to get together again!

[1] See Heath P. Tarbert, Why the CFTC is the Most Important Regulator You’ve Never Heard Of, Fox Bus. (Jul. 29, 2019), available at: https://www.foxbusiness.com/financials/why-the-cftc-is-the-most-important-regulator-youve-never-heard-of.  The Commodity Exchange Act (CEA), which has been amended and expanded numerous times since 1936, is the primary federal statute governing U.S. derivatives markets.  In 1974, Congress amended the CEA and created the CFTC as a new independent federal regulatory agency.  In so doing, Congress transferred authority over the futures markets previously exercised by the Commodity Exchange Authority—the CFTC’s predecessor agency in the Department of Agriculture—to the CFTC.  See U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Capital Markets (Oct. 2017) (“Treasury Report”) at 112, available at: https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.

[2] See A Joint Report of the SEC and the CFTC on Harmonization of Regulation (Oct. 16, 2009), available at:  https://www.cftc.gov/sites/default/files/stellent/groups/public/@otherif/documents/ifdocs/opacftc-secfinaljointreport101.pdf.

[3] See, e.g., Mark Frederick Hoffman, Decreasing the Costs of Jurisdictional Gridlock: Merger of the Securities and Exchange Commission and the Commodity Futures Trading Commission, University of Michigan Journal of Law Reform (1995), available at: https://repository.law.umich.edu/mjlr/vol28/iss3/8/; Roberta Romano, The Political Dynamics of Derivative Securities Regulation, The Yale Journal of Regulation (1997), available at: https://digitalcommons.law.yale.edu/yjreg/vol14/iss2/2/; Kai Kramer, Aren’t We Still in the “Garden of the Forking Paths”?  A Comment on Consolidation of the SEC and CFTC, Houston Business and Tax Law Journal (2004), available at: https://heinonline.org/HOL/LandingPage?handle=hein.journals/houbtalj4&div=12&id=&page=; Commissioner Elisse B. Walter, “Principles to Help Guide Financial Regulatory Reform,” Remarks Before the Institute of International Bankers (Mar. 2, 2009), available at: https://dart.deloitte.com/USDART/ov-resource/df80c3f1-3f20-11e6-95db-fd72c9dd5c99.html; U.S. Government Accountability Office (GAO), Clearer Goals and Reporting Requirements Could Enhance Efforts by CFTC and SEC to Harmonize Their Regulatory Approaches, Report to Congressional Committees, GAO-10-410 (Apr. 2010), available at: https://www.gao.gov/products/GAO-10-410.

[4] See Commissioner Elisse B. Walter, “Principles to Help Guide Financial Regulatory Reform,” supra note 3.

[5] See John C. Coffee Jr. & Hillary A. Sale, Redesigning the SEC: Does the Treasury Have a Better Idea? (Working Paper 08-51) (Nov. 2008), available at:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1309776.

[6] See, e.g., Treasury Report, supra note 1 (The division between the SEC and CFTC, which regulate securities and derivatives markets, respectively, is a unique feature of the U.S. financial regulatory system.  By contrast, other major market centers typically have a single markets regulator with jurisdiction over both securities and derivatives markets. In recent years, regulation of U.S. securities and derivatives markets has increasingly overlapped as financial products and the market participants who trade them have converged.).

[7] See, e.g., Board of Trade of the City of Chicago vs. Securities and Exchange Commission, 677 F.2d 1137 (7^th Cir. 1982); Chicago Mercantile Exchange vs. Securities and Exchange Commission, 883 F.2d 537 (7^th Cir. 1989); Board of Trade of the City of Chicago vs. Securities and Exchange Commission, 187 F.3d 713 (7^th Cir. 1999).

[8] Chicago Mercantile Exchange vs. Securities and Exchange Commission, 883 F.2d at 539.

[9] The Shad-Johnson Jurisdictional Accord, among other things, prohibited futures trading on single stocks, as well as on stock indexes that did not meet specific requirements.  See GAO, CFTC and SEC Issues Related to the Shad-Johnson Jurisdictional Accord, GAO/GGD 00-89 (Apr. 2000), available at: https://www.gao.gov/new.items/gg00089.pdf.

[10] See Futures Trading Act of 1982, Pub. L. No. 97-444, 96 Stat. 2294 (1983); Act of Oct. 13, 1982, Pub. L. No. 97-303, 96 Stat. 1409.

[11] Commodity Futures Modernization Act of 2000, Pub. L. No. 106-554, app. E, 114 Stat. 2763.

[12] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).  The author served as Special Counsel to the U.S. Senate Banking Committee from 2009-2010 during the debates leading up to enactment of the Dodd-Frank Act.

[13] A list of Dodd-Frank Public Roundtables is available at: https://www.cftc.gov/LawRegulation/DoddFrankAct/Dodd-FrankPublicEvents/index.htm.

[14] See Press Release, Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues to Meet on Monday, May 24, 2010 (May 17, 2010).  See also Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues, 77 Fed. Reg. 27444 (May 10, 2012).

[15] Here I particularly want to mention former SEC Chairman Mary Shapiro, who was previously Chairman of the CFTC.  Her experience at both the SEC and the CFTC gave her a unique perspective on the relationship between the two agencies that greatly facilitated communication between the agencies.

[16] See SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo, Joint Statement on CFTC-SEC Portfolio Margining Harmonization Efforts (June 27, 2019), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/jointcftcsecportfoliomargining062719.

I am pleased to support the agency’s revitalized approach to position limits.  The rulemaking finalized today follows four proposals since the passage of the Dodd-Frank Act[1]and is, by far, the strongest of them all.  I commend Chairman Tarbert for his leadership in completing this rulemaking.  I am very pleased that today’s final rule echoes the key policy points I outlined in my remarks before the 2018 Commodity Markets Council State of the Industry Conference.[2]  The new position limits regime will provide commercial market participants with sufficient flexibility to hedge their risks efficiently and will promote liquidity and price discovery.

Today’s rule promotes flexibility, certainty, and market integrity for end-users–farmers, ranchers, energy producers, transporters, processors, manufacturers, merchandisers, and all who use physically-settled derivatives to risk manage their exposure to physical goods.  The rule includes an expansive list of enumerated and self-effectuating bona fide hedge exemptions and spread exemptions, and a streamlined, exchange-centered process to adjudicate non-enumerated bona fide hedge exemption requests. I am pleased that the rule seriously considered the usability of hedging exemptions, and I thank Commissioner Stump for her leadership on that point.

In contrast to the Commission’s failed proposed rulemakings in 2011, 2013, and 2016, this rule is the most true to the CEA in many significant respects.  It requires, as has long been the Commission’s practice, a necessity finding before imposing limits.  It includes economically equivalent swaps.  And, perhaps most importantly, it balances the interests among promoting liquidity, deterring manipulation, and ensuring the price discovery function of the underlying market is not disrupted.[3]  The confluence of these factors occurs most acutely in the spot month for physically-settled contracts.  In the spot month, price convergence is exceptionally vulnerable to potential manipulation or disruption due to outsized positions.  By establishing position limits for non-legacy contracts only in the spot month, the rule elegantly balances the countervailing policy interests enumerated in the statute.

Responding to the Public’s Concerns

Through staff’s serious consideration of over 70 public comments, the final rule significantly improves on what appears in the proposal.  Examples of modifications based on public comment include considerations of gross hedging, price risk, the pass-through swap exemption, spot month limits for natural gas and cotton, a special non-spot single-month limit for cotton, spread exemptions, and the Commission’s review of exchange-granted non-enumerated hedge exemptions.

With regard to enumerated bona fide hedges, the final rule took into account several suggestions from commenters.  The proposed enumerated hedges were already a significant improvement upon previously proposed hedge exemptions (for example, eliminating a mandatory “five-day rule”[4] and no longer conditioning cross-commodity hedging on a needlessly rigid quantitative test).  Now, under the final rule, the enumerated hedges will be even more practical.  For example, the final rule makes clear that a hedger with only an unfixed-price cash commodity sale or purchase, but not an offsetting pair, may rely on one of the three anticipatory hedges, provided that the other elements of such hedge are also met, even though the hedger is ineligible to elect the hedge for a pair of unfixed-price sale and purchase transactions.[5]  The final rule also makes clear that the new anticipatory merchandising hedge can be used both by integrated energy firms and by firms that limit their business to merchandising.  Furthermore, the final rule permits the anticipatory merchandising hedge to now be used in connection with storage hedges.

I support the final rule’s determination to delay by two years two important elements that will require significant changes in the marketplace: the imposition of position limits on swaps economically equivalent to the referenced futures contracts and the required unwinding of previously elected risk management exemptions.[6]  It is prudent to allow for additional time for financial entities to adjust to these significant new policies.

Necessity Finding

Today’s rule correctly premises new limits on a finding that they are necessary to diminish, eliminate, or prevent the burden on interstate commerce from extraordinary price movements caused by excessive speculation (necessity finding) in specific contracts, as Congress has long required in the CEA and its legislative precursors since 1936.[7] I am pleased that the rule complies with the District Court’s ruling in the ISDA-position limits litigation: that the Commission must decide whether Section 4a of the CEA mandates the CFTC set new limits or only permits the CFTC to set such limits pursuant to a necessity finding.[8] As the District Court noted, “the Dodd-Frank amendments do not constitute a clear and unambiguous mandate to set position limits.”[9] I agree with the rule’s determination that, when read together, paragraphs (1) and (2) of Section 4a demand a necessity finding.

Section 4a(a)(2)(A) states that the Commission shall establish limits “in accordance with the standards set forth in paragraph (1) of this subsection.”[10] Paragraph (1) establishes the Commission’s authority to, “proclaim and fix such limits on the amounts of trading… as the Commission finds are necessary to diminish, eliminate or prevent [the] burden” on interstate commerce caused by unreasonable or unwarranted price moves associated with excessive speculation. This language dates back almost verbatim to legislation passed in 1936, in which Congress directed the CFTC’s precursor to make a necessity finding before imposing position limits.  The Congressional report accompanying the CEA from the 74th Congress includes the following directive, “[Section 4a of the CEA] gives the Commodity Exchange Commission the power, after due notice and opportunity for hearing and a finding of a burden on interstate commerce caused by such speculation, to fix and proclaim limits on futures trading ...”[11]  In its ISDA opinion, the District Court noted the following: “This text clearly indicated that Congress intended for the CFTC to make a ‘finding of a burden on interstate commerce caused by such speculation’ prior to enacting position limits.”[12]

I support the rule’s view that the most natural reading of Section 4a(a)(2)(A)’s reference to paragraph (1)’s “standards” is that it logically includes the “necessity” standard.  Paragraph (1)’s requirement to make a necessity finding, along with the aggregation requirement, provide substantive guidance to the Commission about when and how position limits should be implemented.

If Congress intended to mandate that the Commission impose position limits on all physical commodity derivatives, there is little reason it would have referred to paragraph (1) and the Commission’s long established practice of necessity findings. Instead, Congress intended to focus the Commission’s attention on whether position limits should be considered for a broader set of contracts than the legacy agricultural contracts, but did not mandate those limits be imposed.

Setting New Limits “As Appropriate”

The rule determines that position limits are necessary to diminish, eliminate, or prevent the burden on interstate commerce posed by unreasonable or unwarranted prices moves that are attributable to excessive speculation in 25 referenced commodity markets that each play a crucial role in the U.S. economy.  Conversely, the rule also finds that the contracts on which the referenced limits are placed are the only contracts which met the necessity finding.  The rule explicitly states that no other contracts met this test.

I am aware that there is significant skepticism in the marketplace and among academics as to whether position limits are an appropriate tool to guard against extraordinary price movements caused by extraordinarily large position size. Some argue there is no evidence that excessive speculation currently exists in U.S. derivatives markets.[13]  Others believe that large and sudden price fluctuations are not caused by hyper-speculation, but rather by market participants’ interpretations of basic supply and demand fundamentals.[14]  In contrast, still others believe that outsized speculative positions, however defined, may aggravate price volatility, leading to price run-ups or declines that are not fully supported by market fundamentals.[15]

In my opinion, one thing is predominately clear: position limits should not be viewed as a means to counteract long-term directional price moves.  The CFTC is not a price setting agency and we should not impede the market from reflecting long term supply and demand fundamentals. A case in point is palladium, the physically-settled contract which has seen the largest sustained price increase recently,[16] and which has also seen its exchange-set position limit decline four times since 2014 to what is now the smallest limit of any contract in the referenced contract set.[17]  Nevertheless, between the start of 2018 and the end of 2019, palladium futures prices rose 76%.[18]  Taking these conflicting views and facts into account, it is clear the Commission correctly stated in its 2013 proposal, “there is a demonstrable lack of consensus in the [academic] studies” as to the effectiveness of position limits.[19]

With that healthy dose of skepticism, and in strict accordance with the balance of factors which Dodd Frank added to the CEA for the Commission to consider, I think the rule appropriately focuses on the time period and contract type where position limits can have the most positive, and the least negative, impact-the spot month of physically settled contracts-while also calibrating those limits to function as just one of many tools in the Commission’s regulatory toolbox that can be used to promote credible, well-functioning derivatives and cash commodity markets.

Because of the significance of these 25 core referenced futures contracts to the underlying cash markets, the level of liquidity in the contracts, as well as the importance of these cash markets to the national economy, I think it is appropriate for the Commission to protect the physical delivery process and promote convergence in these critical commodity markets.  Further, the limits issued today are higher than in the past, notably because the rule utilizes current estimates of deliverable supply-numbers which haven’t been updated since 1999.[20]

Taking End-Users Into Account

Perhaps more than any other area of the CFTC’s regulations, position limits directly affect the participants in America’s real economy: farmers, ranchers, energy producers, manufacturers, merchandisers, transporters, and other commercial end-users that use the derivatives market as a risk management tool to support their businesses.  I am pleased that today’s rule takes into account many of the serious concerns that end-users voiced in response to this rulemaking’s proposal, and in response to the CFTC’s previous four unsuccessful position limits proposals.

 Importantly, and in response to many comments, this rule, for the first time, expands the possibility for enterprise-wide hedging,[21] (including additional clarification provided in the proposal in response to comments), establishes an enumerated anticipated merchandising exemption,[22] eliminates the “five-day rule” for enumerated hedges,[23] and no longer requires the filing of certain cash market information with the Commission that the CFTC can obtain from exchanges.[24]  Regarding enterprise-wide hedging–otherwise known as “gross hedging”–the rule will provide an energy company, for example, with increased flexibility to hedge different units of its business separately if those units face different economic realities.  The final rule eliminates the requirement that exchanges document their justifications when allowing gross hedging; clarifies that market participants are not required to develop written policies or procedures that set forth when gross versus net hedging is appropriate; and clarifies that gross hedging is permissible for both enumerated and non-enumerated hedges.[25]

With respect to cross-commodity hedging, today’s rule completely rejects the arbitrary, unworkable, ill-informed, and frankly, ludicrous “quantitative test” from the 2013 proposal.[26]  That test would have required a correlation of at least 0.80 or greater in the spot markets prices of the two commodities for a time period of at least 36 months in order to qualify as a cross-hedge.[27]  Under this test, longstanding hedging practices in the electric power generation and transmission markets would have been prohibited.  Today’s rule not only shuns this Government-Knows-Best approach, it also establishes new flexibility for the cross-commodity hedging exemption, allowing it to be used in conjunction with other enumerated hedges, such as hedges of anticipated merchandising transactions.[28]  For example, an energy marketer anticipating buying and selling jet fuel to supply airports will be eligible for a hedge exemption in connection with trading heating oil futures, a commonly-used cross-commodity hedge for jet fuel.

Bona Fide Hedges and Coordination with Exchanges

For those market participants who employ non-enumerated bona fide hedging practices in the marketplace, the final rule creates a streamlined, exchange-focused process to approve those requests for purposes of both exchange-set and federal limits.  I am pleased that commenters were generally supportive of the proposed process.  As the marketplaces for the core referenced futures contracts addressed by the proposal, the DCMs have significant experience in, and responsibility towards, a workable position limits regime.  CEA core principles require DCMs and swap execution facilities to set position limits, or position accountability levels, for the contracts that they list in order to reduce the threat of market manipulation.[29]  DCMs have long administered position limits in futures contracts for which the CFTC has not set limits, including in certain agricultural, energy, and metals markets.  In addition, the exchanges have been strong enforcers of their own rules: during 2018 and 2019, CME Group and ICE Futures US concluded 32 enforcement matters regarding position limits.

As part of their stewardship of their own position limits regimes, DCMs have long granted bona fide hedging exemptions in those markets where there are no federal limits.  Today’s final rule provides what I believe is a workable framework to utilize exchanges’ long standing expertise in granting exemptions that are not enumerated by CFTC rules.[30]  This rule also recognizes that the CEA does not provide the Commission with free rein to delegate all of the authorities granted to it under the statute.[31]  The Commission itself, through a majority vote of the five Commissioners, retains the ability to reject an exchange-granted non-enumerated hedge request within 10 days of the exchange’s approval.[32]  The Commission has successfully and responsibly used a similar process for both new contract listings as well as exchange rule filings, and I am pleased to see the final rule expand that approach to non-enumerated hedge exemption requests that will limit the uncertainty for bone fide commercial market participants.

Limits on Swaps

The CEA requires the Commission to consider limits not only on exchange-traded futures and options, but also on “economically equivalent” swaps.[33]  Today’s final rule provides the market with far greater certainty on the universe of such swaps than the previous proposed rulemakings.  Prior proposals failed to sufficiently explain what constituted an “economically equivalent swap,” thereby ensuring that compliance with position limits was essentially unworkable, given real-time aggregation requirements and ambiguity over in-scope contracts.  In stark contrast, today’s rule narrows the scope of “economically equivalent” swaps to those with material contractual specifications, terms, and conditions that are identical to exchange-traded contracts.[34]  For example, in order for a swap to be considered “economically equivalent” to a physically-settled core referenced futures contract, that swap would also have to be physically-settled, because settlement type is considered a material contractual term.  I believe the narrowly-tailored definition included in today’s rule will provide market participants with clarity over those contracts subject to position limits. I think it is prudent that the final rule took commenters’ concerns about updating compliance systems into account by delaying for an additional year, beyond the general compliance date of January 1, 2022, that is until January 1, 2023, the imposition of position limits on economically equivalent swaps.

Conclusion

During my confirmation hearing in front of the Senate Committee on Agriculture, Forestry and Nutrition on July 27, 2017, I was asked to directly commit to finalizing a position limits rule.  My response was brief, but unquestionable: “Yes, I commit to support finalizing a position limits rule.”  Making such a commitment to a committee of the U.S. Congress in sworn testimony is something I take very seriously, second only to taking my oath to defend the Constitution of the United States.  With today’s vote, I am very pleased to have made good on that commitment three years in the making and am even more proud of the product with which I was able to fulfill it.