I support the Commission’s Order sanctioning Sukarne for exceeding the Chicago Mercantile Exchange’s spot month position limit in the June 2020 live cattle futures contact (Order).  This action reflects the CFTC’s commitment to monitoring derivatives trading, particularly in markets such as livestock futures that are experiencing historic volatility.  Where appropriate, the Commission will enforce federal and exchange-set position limits, which are critical to prevent unwarranted price volatility and market manipulation. 

I do not agree, however, with the civil monetary penalty imposed by the Commission in this case.  A primary purpose for imposing sanctions for violations of the Commodity Exchange Act (Act) is to deter market participants from committing similar violations.  See, e.g., Reddy v. CFTC, 191 F.3d 109, 123 (2d Cir. 1999) (citing In re Miller, CFTC No. 92–4, 1998 WL 107577, at *6 (Mar. 12, 1998)); Miller v. CFTC, 197 F.3d 1227, 1236 (9th Cir. 1999); In re Crossfeld, CFTC No. 89-23, 1996 WL 709219, at *12-13 (Dec. 10, 1996) (“[C]ivil money penalties should be sufficiently high to deter future violations, that is, to make it beneficial financially for a respondent to comply with the requirements of the Act and Commission regulations rather than risk violations.”) (quotations and alterations omitted). 

A few months ago, the CFTC’s Division of Enforcement publicly issued penalty guidance, in which it stated its intent to “deter misconduct before it happens.”  Civil Monetary Penalty Guidance, CFTC Rel. No. 8165-20 (May 20, 2020), available at https://www.cftc.gov/PressRoom/PressReleases/8165- 20.  The Division committed to deter misconduct by being “tough on those who break the rules while striving for fair and consistent outcomes in doing so.” 

In my view, today’s Order does not accomplish either of these objectives.  Sukarne held 500 live cattle futures contracts despite a spot month limit of 300 contracts—an excess of 200 contracts above the limit.  At today’s prices, the $35,000 penalty is less than the cost of a single live cattle futures contract.   A $35,000 penalty for such a violation thus represents a small fraction of the cost of doing business.  It is neither sufficient to meaningfully deter future position limit violations, nor is it consistent with recent Commission precedent involving similar facts.  See, e.g., In re Elephas Invest. Mgmt. Ltd., CFTC No. 19-09, 2019 WL 2903308 (July 2, 2019) (imposing $160,000 civil monetary penalty for one-day inadvertent violation of spot month position limit in soft red winter wheat futures contract). 

I am pleased to support these amendments to part 45 regulatory reporting, which hopefully represent the beginning of the end of this agency’s longstanding efforts to collect and utilize accurate, reliable swap data to further its regulatory mandates.

There is frequently a trade-off between being first and being right. That is especially true when it comes to regulation and specifically true when it comes to the CFTC’s historical approach to data reporting.  Although the CFTC was the first regulator in the world to implement swap data reporting requirements, it did so only in a partial, non-descriptive, and non-technical fashion, which has led to the fact that, even today – more than 10 years after Dodd Frank – the Commission has great difficulty aggregating and analyzing data for uncleared swaps across swap data repositories (SDRs).

Since the CFTC first implemented its swap data reporting requirements, the CFTC has continued to lead global efforts to reach international consensus on those reporting requirements so that derivatives regulators can finally get a clear picture of the uncleared swaps landscape.  I would like to recognize the diligent efforts of DMO staff to finally get us over the finish line.

Today’s amendments to part 45 regulatory reporting will provide the Commission with the homogeneous data it needs to readily analyze swap data for both cleared and uncleared swaps across jurisdictions.  The final rule eliminates unnecessary reporting fields and implements internationally agreed to “critical data elements” (CDE fields) consistently with the detailed technical standards put forth by CPMI-IOSCO.[1]

The final rule also provides reporting counterparties with a longer time to report trades accurately to an SDR by moving to a “T+1” reporting timeframe for swap dealer (SD), derivatives clearing organization (DCO), and swap execution facility (SEF) reporting parties, and a “T+2” reporting timeframe for non-SD/DCO/SEF reporting counterparties.  I have long supported providing additional time for market participants to meet their regulatory reporting obligations given it is a matter of being right, not first.  A later regulatory reporting deadline will help counterparties report the trade correctly the first time, instead of reporting an erroneous trade that then needs to be corrected later.  This change also more closely harmonizes the CFTC’s and ESMA’s reporting deadlines.

For the first time, the final rule also requires SD reporting counterparties to report daily margin and collateral information for uncleared swaps to the Commission.  However, the final rule would not require DCO reporting parties to report margin and collateral information with respect to cleared swaps.  Instead, the Commission will continue to rely on the comprehensive margin and collateral data reported by DCOs pursuant to part 39.  Importantly, in order to alleviate burdens on small reporting counterparties, non-SD/MSP reporting counterparties are not required to report valuation, margin, or collateral information to the Commission.

Although this final rule implements the lion’s share of regulatory reporting requirements, it is not quite the capstone of the Commission’s reporting efforts.  The CDE technical guidance did not harmonize many data elements that are relevant to the physical commodity and equity swap asset classes.  More work remains to be done with respect to how certain data elements should be reported, including how the prices and quantities of physical commodity swaps should be reported and how swaps on customized equity baskets should be represented.  I know DMO will continue to play an active role through CPMI-IOSCO’s CDE governance process to ensure that additional guidance and specificity are provided regarding the data elements for these asset classes.

I support the CFTC’s efforts to adopt the CDE fields – the most basic data elements that are critical to the analysis and supervision of swaps activities – in a manner identical to other jurisdictions’ reporting fields.  Over time and through cooperative arrangements with other jurisdictions, global aggregation and measurement of risk, including counterparty credit risk, can become a reality.  However, as the Commission moves closer to achieving its goal of global data harmonization, in my opinion, it should keep in mind that the benefits of harmonization should always be balanced against the burdens and practical realities facing reporting counterparties.  I think the final rule before us today strikes an appropriate balance on this point.

The part 190 rulemaking supplemental notice of proposed rulemaking (Supplemental NPRM) addresses a potential unintended outcome of the original NPRM identified in a number of comments on the proposal.  These comments stated that certain provisions in the original proposed rule related to the bankruptcy of a derivatives clearing organization (DCO) could have significant, unintended and detrimental impacts on various market participants with contracts cleared at the DCO.  The Supplemental NPRM presents new, alternative provisions governing DCO bankruptcy that are intended to avoid these impacts.  In issuing the Supplemental NPRM, the Commission seeks public comment on these alternative provisions.  

I support the issuance of this Supplemental NPRM because it will provide all interested persons with an opportunity to comment on the alternative provisions formulated by the Commission.  This alternative approach was not set forth in the proposal.  Providing the public with notice and opportunity to comment on rules being considered by the Commission is not only a basic legal requirement for agency rulemaking, but it is sound public policy as well.  Public input from all interested persons is critical to sound regulation. 

Under the Administrative Procedure Act, the provisions in a final rule must be reasonably foreseeable and a logical outgrowth of the provisions in the proposal.[1]  The NPRM must contain more than a passing reference or question about an issue; the proposal must be sufficiently descriptive for members of the public to evaluate and comment on the approach being considered.  The Supplemental NPRM meets that standard.

I look forward to reviewing all perspectives on these alternative provisions. 
 

[1] See, e.g., Idaho Farm Bureau Fed’n v. Babbitt, 58 F.3d 1392, 1402-03 (9th Cir. 1995).