Today’s notice of proposed rulemaking (“NPRM”) is necessitated as a result of global policy and domestic regulatory considerations to address the impact of the COVID-19 pandemic on potential market disruption that could result from a large number of entities simultaneously coming into compliance with the initial margin (or “IM”) requirements of the CFTC Margin Rule.[1]  In our attempts to remain consistent with revisions to the BCBS/IOSCO international framework’s implementation schedule, we have now created an additional compliance phase, moving from five to six, and postponing full compliance by one year to September 1, 2021.[2]  This seems reasonable, save for the fact that our last action to provide relief for those who would have to come into compliance in September of this year has resulted in a reuniting of phases five and six, reintroducing the same set of concerns regarding potential market disruptions we sought to avoid.  Accordingly, we are here today with a new NPRM to further postpone the compliance date for the final phase, phase six, to September 1, 2022.

I will support the NPRM today because it is, at this time, being presented as the swiftest means to establish a realistic compliance deadline for which we will hold covered entities accountable.  The circumstances of the COVID-19 pandemic are significant cause for concern, and I believe the Commission has responded with workable, targeted solutions aimed at ensuring our policies remain intact when the rigor of our regulations prove too burdensome to balance with competing overarching financial stability concerns.

However, as I have maintained throughout this process, delaying IM requirements as a means to provide temporary, targeted relief to address increased market volatility seems counterintuitive.[3]  Moreover, as we continue to prolong compliance, we inevitably invite further requests for deferral of an indefinite nature.  As the ten year anniversary of the Dodd-Frank Act[4] approaches, we cannot presume that the risks this core-reform seeks to address have morphed into anything of lesser concern, and I will not support any further relief absent truly compelling facts and lockstep agreement with the prudential regulators responsible for establishing margin requirements for swap dealers and major swap participants within their respective jurisdictions.

I will vote in favor of today’s final rule to prohibit post-trade name give-up practices for swaps executed, pre-arranged, or pre-negotiated anonymously on or pursuant to the rules of a swap execution facility (SEF) and intended-to-be-cleared (Final Rule).

As I have noted previously, I have concerns about the government banning an established trading practice that has evolved from natural market forces to support swaps liquidity provision.  Client swap activity is inherently dealer and relationship-sourced.  That is why the name-disclosed Request for Quote (RFQ) model has been highly favored over the anonymous Central Limit Order Book (CLOB) model in the client market.  Although the Final Rule predicts that the ban on name give-up will result in increased participation and competition in the dealer-to-dealer market, I remain concerned that banning post-trade name give-up will negatively impact dealers’ ability to hedge efficiently on existing inter-dealer platforms, which will ultimately lead to a degradation in the pricing and liquidity provision of swaps trading on dealer-to-client platforms.  I am also doubtful that new entrants into the wholesale market will use the advantages of that participation to add any meaningful liquidity in the client market, making it even less certain that the benefits of enhanced competition hoped for in this Final Rule will be passed through to end-users.

Despite my concerns, I am supporting the Final Rule because it adopts an important exception from the prohibition, as well as an incremental approach that will give the Commission and market participants time to transition into compliance, observe the impact of the Final Rule, and make adjustments in the future, if necessary.

For example, the Final Rule includes a significant exception for package transactions that include a component transaction that is not a swap intended-to-be-cleared.  The exception would include U.S. Treasury swap spread package trades involving an intended-to-be-cleared swap and a U.S. Treasury security component.  These package transactions are rarely traded on dealer-to-client platforms, but make up a significant portion of volume on dealer-to-dealer platforms.  Recognizing this important difference between markets is a small but necessary accommodation to ensure package trades can continue to be efficiently executed in light of this mandated change to market trading protocols.

The Final Rule also adopts staggered compliance deadlines, with the most liquid swaps coming into compliance first, and less liquid swaps becoming subject to the ban in July 2021.  In the interim, the Commission plans to conduct a preliminary study of the Final Rule’s impact on SEF trading by July 2021, with a further study to be conducted by July 2023.  These studies will allow the Commission to assess if the ban on post-trade name give-up is, in fact, increasing competition and liquidity on SEFs, as the ban is intended to do. If a more fulsome analysis reveals that the ban has not yielded its expected benefits, or may not be appropriate for certain products given their liquidity profile, I expect further adjustments will be made to maintain a well-functioning swaps market.

Lastly, I would like to thank staff of the Division of Market Oversight for working with my staff to incorporate many of my comments into the Final Rule.

I support today’s final rule making permanent the alternative compliance frameworks for certain swaps involving the foreign affiliates of U.S. firms and their non-U.S. counterparties.  The final rule upholds the Dodd-Frank Act’s clearing mandate, deters evasion, and protects against systemic risk from swaps executed overseas by foreign affiliates.  The final rule, which adopts the rule as proposed, [1] codifies existing practice and addresses anti-evasion provisions governing inter-affiliate swaps that the Commission first issued in 2013 and later extended through staff no-action letters.

Commission regulations provide a limited, conditional “Inter-Affiliate Exemption” from clearing for swaps between certain affiliate counterparties, including U.S. firms and their foreign affiliates.  Notably, the Inter-Affiliate Exemption includes an important “Outward-Facing Swaps Condition” to prevent U.S. firms from routing swaps through foreign affiliates to evade the Commission’s clearing requirement.[2]  The Outward-Facing Swaps Condition allows outward-facing swaps to be cleared pursuant to a comparable and comprehensive foreign clearing regime.

Where the Commission has not made a comparability determination, the alternative compliance frameworks permit the foreign affiliate to exchange full, daily variation margin for the swap with its U.S. affiliate or its non-U.S. counterparty, rather than clearing the outward-facing swap.  The alternative compliance frameworks preserve the competitiveness of the foreign affiliates of U.S. firms without importing significant risks into the U.S.  Today’s final rule makes the alternative compliance frameworks permanent, with certain modifications.[3]

I support the final rule’s emphasis on clearing, anti-evasion, and systemic risk.  The final rule also expands the jurisdictions subject to one of the alternative compliance frameworks to include additional jurisdictions that have adopted and implemented their respective domestic clearing mandates.  By extending and making permanent the alternative compliance frameworks, the final rule addresses the lack of comparability determinations for foreign clearing regimes, while ensuring the continued operation of anti-evasion and anti-systemic risk provisions in the Commission’s rules.

I thank staff of the Division of Clearing and Risk for their work on this final rule and for their effective cooperation with my office.

[1] Exemption From the Swap Clearing Requirement for Certain Affiliated Entities – Alternative Compliance Frameworks for Anti-Evasionary Measures, 84 FR 70446 (Dec. 23, 2019).

[2] The Outward-Facing Swaps Condition requires the foreign affiliates of U.S. firms to clear their outward-facing swaps if such swaps are subject to the Commission’s clearing requirement and entered into with unaffiliated counterparties in foreign jurisdictions.  

[3] The original alternative compliance frameworks expired in 2014, but have been repeatedly extended through no-action letters. 

I support today’s adoption of amendments to the exemption from the swap clearing requirement for certain affiliated entities within a corporate group.  The amendments that update the conditions for the exemption incorporate several years of observation and analysis to build upon its utility within the global regulatory landscape, while affirming the Commission’s appropriate use of its public interest authority under section 4(c) of the Commodity Exchange Act.  It can be tempting to use somewhat fluid and undeniably desirable objectives such as the promotion of responsible economic and financial innovation and fair competition to support all manner of regulatory changes.  And I have not hesitated to highlight my own concerns for the imprudent use of 4(c) exemptive authority.  However, I am pleased that when it comes to the risks associated with U.S firms entering into uncleared swaps with non-U.S. affiliates or evading the clearing requirement altogether, the Commission has consistently demonstrated that its reliance on the 4(c) authority provides the checks to ensure that the policy and outcomes remain legally sound and rational.

I support today’s final rule, as I did the proposal, because it provides legal certainty, benefits from careful analysis and consideration of the data as well as the global regulatory landscape as it has developed, and leaves in place critical tools for Commission monitoring, oversight, and enforcement.[1]  However, I am mindful that guardrails put firmly in place by today’s amendments as a substitute for clearing outward-facing swaps may produce additional risk to external creditors and/or third parties, and that there may be an increased likelihood of risk to the financial system resulting from the availability of the exemption.  While I encouraged interested parties to comment on this aspect of the exemption—the alternative compliance framework—the Commission did not receive any responsive comments.[2]  Without comments, the Commission’s findings and conclusions remain neither vigorously supported nor expressly undermined, and we will continue to discharge our regulatory responsibilities, remaining quick to respond as we closely monitor the data and global regulatory developments to ensure that the exemption does not add unnecessary and preventable risk to the U.S. financial system.

I thank staff from the Division of Clearing and Risk for their thoughtful responses to my questions, and for making edits that reflect my comments and suggestions.

As we have previously stated,[1] it is a fundamental principle of exchange-style trading systems that the buyer and seller of a given financial instrument have no reason to know—and do not know—one another’s identity.[2]  This levels the playing field for counterparties of all sizes and types by allowing traders to enter and exit the market without exposing their trading positions and strategies.[3]  As a result, markets with pre- and post-trade anonymity are generally not only fairer, but also feature greater liquidity, a more diverse set of market participants, and greater competition.[4]

In the swaps market, a number of swap execution facilities (“SEFs”) provide for post-trade disclosure of the name of the counterparty, a practice that is known as “name give-up.”  This protocol is a vestige of the pre-Dodd-Frank era, when few swaps were centrally cleared and market participants needed to know their counterparty’s identity to manage the associated credit risk.  Given the advent of central clearing, many have appropriately questioned the continuing need for post-trade name give-up for cleared swaps.  Others have gone further, criticizing the practice as anticompetitive, an obstacle to broad and diverse participation on SEFs, and potentially inconsistent with numerous provisions of the Commodity Exchange Act (“CEA”) and Commission regulations.

In 2019, after considering responses to a request for comment on the issue,[5] the Commission issued a proposed rule (“Proposal”) to restrict name give-up such that trades that are executed anonymously on-SEF and cleared would remain anonymous after execution.[6]  Public comments on the Proposal reflected a variety of differing viewpoints and interests.  The agency carefully considered all comments in crafting the final rule we voted to approve today.

We believe the final rule reflects a balanced approach, is workable, and will improve overall market vibrancy.  The rule prohibits name give-up for swaps that are executed anonymously and intended to be cleared.  However, it does not apply to swaps that are not intended to be executed anonymously, such as trades done via a name-disclosed request for quote.  The rule also includes a limited exception for package transactions[7] with at least one component that is an uncleared swap or a non-swap instrument.  This exception reflects current technological and operational realities that require counterparty disclosure for the non-swap or non-cleared swap component of such trades.[8] In addition, the rule includes a phased implementation schedule to allow SEFs and market participants time to adjust to the changes.

We believe the rule’s fundamental objective—protecting trading anonymity where it is possible to do so—is key to two statutory goals for the SEF regime: (1) promoting swaps trading on SEFs[9] and (2) promoting fair competition among market participants, including through impartial access to a SEF’s trading platform.[10]  Indeed, we hope the rule will help attract a diverse set of additional market participants who have been deterred from trading on these platforms by the practice of post-trade name give-up, but remain interested in bringing liquidity and competition to SEFs.

The issue of name give-up can be a bit of a lightning rod, sometimes inciting passionate disagreements between stakeholders.  We and CFTC staff stand ready to work with market participants and market operators to resolve any new issues that may arise as the rule is implemented.  We hope that all parties to this debate can constructively move forward together toward the goals of sound derivatives regulation and robust financial markets.

I respectfully dissent as to the Commission’s decision to finalize additional revisions to the Volcker Rule.  As we approach the ten year anniversary of the Dodd-Frank Act, [1] and cautiously begin mapping a path out of the current pandemic, I believe it is a good time to reflect on the lessons learned from the 2008 financial crisis, the efficacy of our responses, and whether our objectives have changed, or just our perspective.  One of the many critically important provisions of the Dodd-Frank Act is the Volcker Rule.  The Volcker Rule, in simple terms, contains two basic prohibitions:  (1) banking entities may not engage in proprietary trading; and (2) banking entities cannot have an ownership interest in, sponsor, or have certain relationships with a covered fund.

Last September, the Commission, along with other Federal agencies (the “Agencies”), [2] approved changes that significantly weakened the prohibition on propriety trading by narrowing the scope of financial instruments subject to the Volcker Rule. [3]   I did not support those changes. [4]   Today, the Commission, again in tandem with the Agencies, completes the dismantling that began in 2018, [5] and votes to significantly weaken the prohibition on ownership of covered funds.  Again, I cannot support these changes.

I voted against the 2018 proposal, and earlier this year, voted against the proposal that strikes the final blow today. [6]   In voting against the 2020 proposal, I quoted the late Paul Volcker’s letter to the Chairman of the Federal Reserve, which he penned last September, when the Agencies approved the changes breaking down the proprietary trading prohibition. [7]  Mr. Volcker warned that the amended rule “amplifies risk in the financial system, increases moral hazard and erodes protections against conflicts of interest that were so glaringly on display during the last crisis.” [8]   Mr. Volcker’s words apply equally well to the changes that the Commission finalizes today regarding covered funds—particularly the erosion of the existing protections regarding conflicts of interest.

As the tenth anniversary of the Dodd-Frank Act sadly coincides with a different kind of crisis, I think it is critical to take a hard look at how far we have come in ten years, and how well markets have adapted to carefully crafted policy intended to create a more resilient financial system.  Chipping away, particularly at a time of great uncertainty, risks a reversion to the past, when in fact, we should only be looking forward.

The Volcker covered funds final release (“Covered Funds Rule”) adopts with only minor changes the rule amendments as proposed by the agencies in January of this year (“the Proposal”).  I voted against[1] the Proposal because the agencies had only superficially considered the additional risks that banks would incur under the loosened regulations.  Nothing in the Covered Funds Rule final release dispels this concern.  Therefore I dissent from the final release.

Congress enacted the original Volcker rule after the 2008 financial crisis to protect American taxpayers from again having to bailout banks that are insured by the FDIC or have access to Federal Reserve Bank financial support.  This goal was to be achieved by preventing the government-supported banks from undertaking risky proprietary trading activities and from owning hedge funds or private equity funds.  The new Covered Funds Rule, together with the rollbacks in the Volcker proprietary trading regulations adopted in 2019,[2] will undermine many of the risk-reducing benefits of the original Volcker rule.

The original Volcker covered funds regulations were not perfect.  The foreign public funds exception and the so called “super 23A” provisions governing activities banks can undertake with covered funds needed careful adjustments.  However, the Covered Funds Rule goes much, much further.  It creates broad new exclusions from the covered funds definition with inadequate analysis as to whether these activities were intended to be permitted under the statute or pose serious risk to the banks and the United States financial system.

I addressed some of these new exclusions in more detail in my dissenting statement on the Proposal.[3]  Of these, the new “venture capital funds” exclusion perhaps best illustrates the extent to which the Covered Funds Rule undermines the very purpose of the Volcker rule.  Venture capital serves an important function in our financial markets by providing needed capital to startup companies.  But venture capital investing is very risky.  One study found that about 75% of venture capital-backed firms in the United States did not return capital to investors.[4]  Another article on venture capital noted that “VC funds haven’t significantly outperformed the public markets since the late 1990s, and since 1997 less cash has been returned to VC investors than they have invested.”[5]  This is exactly the type of risky private equity fund[6] investing by government-supported banks that Congress intended the Volcker rule to curtail. 

In adopting the Covered Funds Rule, the agencies failed to analyze any data or other information that lays out the risks of venture capital investing.  The agencies simply exclude venture capital funds from Volcker regulation.  The Covered Funds Rule makes, at best, a weak case that venture capital investments promote and protect the safety and soundness of banking entities and the United States financial system by allowing banks to diversify investments.  The weakness of that assertion is clear when one considers that allowing any investments in hedge funds and private equity funds would do the same, and yet that risk taking activity is precisely what Congress prohibited.

The banking industry does not need to take on the additional risks permitted by the Covered Funds Rule to be successful.  U.S. banks have performed well in recent years.  Recent Global League Tables ranking global banks by amount of banking business activity shows that three or four U.S. banks are ranked among the top five banks in the world in almost every table, including the tables for foreign markets banking.[7]  While many factors impact banking success, the relative strength of U.S. banks internationally belies suggestions that the new laws and regulations adopted in the wake of the 2008 financial crisis are hurting the competitiveness of U.S. banks.  We should recognize, rather than undermine, the success of U.S. banks since the 2008 financial crisis and adoption of the Dodd-Frank Act in 2010. 

To date, U.S. banks also have performed well during the Covid-19 pandemic.  But our financial system continues to face many extraordinary risks from the effects of the pandemic.  In the middle of this latest shock to our financial system, we should not be rushing out a final rule that permits greater risk taking by banks.  Rather, we should take stock of the data available to us, and make carefully reasoned, incremental changes that are consistent with the Congressional intent for the Volcker rule.

[1] Dissenting Statement of Commissioner Dan M. Berkovitz Regarding Volcker Covered Funds Proposal (Jan. 30, 2020), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement013020.

I support issuing for public comment the proposed rule on Electronic Trading Risk Principles (“Proposed Rule”).  The Proposed Rule is a limited step to address potential market disruptions arising from system errors or malfunctions in electronic trading.  Although it leaves important issues unaddressed, the Proposed Rule recognizes the need to update the Commission’s regulations to keep pace with the speed, interconnection, and automation of modern markets.  I support the Commission’s long-overdue re-engagement in this area.

While I support issuing the Proposed Rule for public comment, I do not support withdrawing the proposed rule known as Regulation Automated Trading (“Reg AT”).[1]   The notice of withdrawal reflects a belief that there is nothing of value in Reg AT.  That is simply not true.  Reg AT was a comprehensive approach for addressing automated trading in Commission regulated markets.    Certain elements of Reg AT attracted intense opposition and may have been a bridge too far.  However, I applaud that proposal’s efforts to identify the sources of risk and implement meaningful risk controls.  I believe the comments received on Reg AT are worth evaluating going forward.

The Proposed Rule would codify in part 38 of the Commission’s regulations three “Risk Principles” applicable to electronic trading on designated contract markets (“DCMs”).  Risk Principle 1, for example, would require DCMs to implement rules applicable to market participants to prevent, detect, and mitigate market disruptions and system anomalies.  Risk Principle 2 would also require DCMs to implement their own pre-trade risk controls.  While worthwhile as statements of principle, these proposed requirements are drafted in terms that may ultimately prove too high-level to achieve the goal of effectively preventing, detecting, and mitigating market disruptions and system anomalies.  This concern is discussed in greater detail below, and I look forward to public comment on the issue.

The Proposed Rule includes Acceptable Practices in Appendix B to part 38, which provide that a DCM can comply with the Risk Principles through rules and risk controls that are “reasonably designed” to prevent, detect, and mitigate market disruptions and system anomalies.  The Proposed Rule specifies that reasonableness is an objective measure, and that a DCM rule or risk control that is not “reasonably designed” would not satisfy the Acceptable Practices or the Risk Principles.  As the Proposed Rule indicates, the Commission will monitor DCMs’ compliance with the Risk Principles.  In this regard, the Commission has multiple oversight activities at its disposal, including market surveillance activities, reviews of new rule certifications and approval requests, and rule enforcement reviews.

The Proposed Rule is also clear on the fundamental division of authority under the Commodity Exchange Act (“CEA”) between DCMs and the Commission.  Amendments to the CEA made through the Commodity Futures Modernization Act (“CFMA”) in the year 2000 introduced the core principle regime and provided DCMs with flexibility in establishing how they comply with a core principle.[2]   Ten years later, however, learning from the 2008 financial crisis and the excesses of deregulation, the Dodd-Frank Act overhauled the CEA, including in its treatment of the core principle regime.[3]   Specifically, section 735 of the Dodd-Frank Act made clear that a DCM’s discretion with respect to core principle compliance was circumscribed by any rule or regulation that the Commission might adopt pursuant to a core principle.[4]   I am able to support today’s Proposed Rule for publication in the Federal Register because of improvements that clarify the respective authorities between a DCM and the Commission.  Under the CEA, the Commission is the ultimate arbiter of whether a DCM’s rules and risk controls are reasonably designed, under an objective standard.  I thank the Chairman for his efforts at building consensus in this regard.

The Proposed Rule overlaps with existing requirements in part 38 of the Commission regulations, including regulation 38.255, which requires DCMs to “establish and maintain risk control mechanisms to prevent and reduce the potential risk of price distortions and market disruptions . . . .”[5]   While the Proposed Rule and Risk Principle 2 are more explicit with respect to electronic trading, they may add little to existing requirements and practices regarding the risk controls that DCMs build into their own systems.  Indeed, the Proposed Rule provides numerous examples of specific risk controls at major DCMs that likely already meet this requirement, and of disciplinary actions taken by DCMs against market participants related to electronic trading. Although the Commission articulates a need for updating its risk control requirements, the fact that the Risk Principles as proposed are likely to have no practical effect undermines the usefulness of this exercise.

The Proposed Rule possibly may be of greater benefit in with respect to Risk Principle 1 and its requirement that DCMs implement risk control rules applicable to their market participants.  Market participants, who originate orders via systems ranging from comparatively simple automated order routers to nearly autonomous algorithmic trading systems, are crucial focal points for any adequate system of risk controls.  An effective system of risk controls must therefore include controls at multiple stages in the life cycle of an automated order submitted to an electronic trade matching engine.  Although Risk Principle 1 could benefit from greater rigor, it is nonetheless a critical recognition that market participants have an important role in any effective risk control framework.   

I look forward to public comments on additional measures that the Commission should consider for effective risk controls across the ecosystem of electronic and algorithmic trading.  My support for any final rule that may arise from this proposal is conditioned upon a thorough articulation of the technology-driven risks present in today’s markets, and a concomitant regulatory response that will meaningfully address such risks.  In a market environment where the vast majority of trading is now electronic and automated, inaction is a luxury that we can ill-afford.

Although the Proposed Rule may be characterized as a “principles-based” approach, in fact the Risk Principles are not a new approach to the regulation of risks from electronic trading.  The current regulation establishing requirements on DCMs to impose risk controls—Regulation 38.255—is principles-based.  Regulation 38.255 states:  “The designated contract market must establish and maintain risk control mechanisms to prevent and reduce the potential risk of price distortions and market disruptions, including, but not limited to, market restrictions that pause or halt trading in market conditions prescribed by the designated contract market.”   One might ask, therefore, why do we need another principles-based regulation when we already have a principles-based regulation?  The preamble to the Proposed Rule notes the “overlap” between Regulation 38.255 and the proposed Risk Principles, and states “it is beneficial to provide further clarity to DCMs about their obligations to address certain situations associated with electronic trading.”   In other words, the principles-based regulations previously adopted by the Commission are not prescriptive enough to address the risks currently posed by electronic trading.  I fully agree.  Although I am voting today to put out this proposal for public comment, I am not yet convinced—and I look forward to public comment on whether—the principles-based regulations proposed today are in fact sufficiently detailed or comprehensive to effectively address those risks.

I thank the staff of the Division of Market Oversight for their work on the Proposed Rule and for their patience as the Commission worked through multiple iterations of this proposal.  I also thank the Chairman for his engagement and effort to build consensus.  I believe that the Proposed Rule is a much better regulatory outcome because of the extensive dialogue and give-and-take that led to the rule before us today.

I strongly support thoughtful and meaningful policy that addresses the use of automated systems in our markets. [1]   As Chris Clearfield of System Logic, a research and consulting firm focusing on issues of risk and complexity remarked, “In every situation, a trader or a piece of technology might fail, or a shock might trigger a liquidity event.  What’s important is that structures are in place to limit—not amplify—the impact on the overall system.” [2]  Any rule that we put forward should both minimize the potential for market disruptions and other operational problems that may arise from the automation of order origination, transmission or execution, and create structures to absorb and buffer breakdowns when they occur.  Unfortunately, today’s proposal regarding Electronic Trading Risk Principles does not meaningfully achieve this, and thus I respectfully dissent.

I support today’s proposal that would require 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 would also require DCMs to subject all electronic orders to pre-trade risk controls that are reasonably designed to prevent, detect and mitigate market disruptions and to provide prompt notice to the Commission in the event the platform experiences any significant disruptions. 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 in implementing best practices. Therefore, today’s proposal merely codifies the existing market practice of DCMs to have reasonable controls in place to mitigate electronic trading risks.    

Significantly, the proposal 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. It is my view that 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 proposal would provide 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 proposed rule, DCMs would be 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.  

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. We also heard from the Futures Industry Association (FIA) about current best practices for electronic trading risk controls. 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. 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 proposal 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. I look forward to comment on the proposal.  

It is also long overdue for the Commission to withdraw the Regulation Automated Trading Proposal and Supplemental Proposal (Regulation AT NPRMs).  The Regulation AT NPRMs would have required certain types of market participants, based purely on their trading functionality, strategies or market access methods, to register with the Commission, notwithstanding that they did not act as intermediaries in the markets or hold customer funds.  Moreover, the NPRMs proposed extremely prescriptive requirements for the types of risk controls that exchanges, futures commission merchants, and trading firms would be required to implement. Lastly, by withdrawing these NPRMs, the market and public can finally consider as dead the prior Commission’s significant, and likely unconstitutional, overreach on accessing firms’ proprietary source code and protected intellectual property without a subpoena.   

In my view, the Regulation AT NPRMs were poorly crafted and flawed public policy that failed to understand the true risks of the electronic trading environment and the intrinsic incentives that exchanges and market participants have to mitigate and address those risks. I am pleased the Commission is officially rejecting the policy rationales and regulatory requirements proposed in the Regulation AT NPRMs and is instead embracing the principles-based approach of today’s proposal.