Statement of Chairman Heath P. Tarbert in Support of Protecting Customer Records and Information

April 14, 2020

I support the final rule amending regulation 160.30, which requires firms registered with the CFTC to protect their customers’ records and information.  By requiring the firms we regulate to adopt policies and procedures relating to administrative, technical, and physical safeguards for customer data, the final rule targets security hazards to customer data and specifies required protections against unauthorized access.  As I mentioned when this rule was proposed, giving customers in our markets comfort that efforts are being taken to protect their sensitive information is key to ensuring that our derivatives markets promote the interests of all Americans.[1] 

-CFTC-

[1] See Statement of Chairman Heath P. Tarbert Before the November 5, 2019 Open Meeting (Nov. 5, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement110519.

Statement of Chairman Heath P. Tarbert in Support of Margin Relief for the European Stability Mechanism

April 14, 2020

I am pleased to support today’s final rule codifying relief from the Margin Rule for the European Stability Mechanism (“ESM”).[1]  The Margin Rule requires the posting of initial and variation margin for uncleared swaps entered into by certain swap dealers, major swap participants, and “financial end user[s].”[2]  Today’s final rule will amend the definition of “financial end user” in Regulation 23.151 to exclude the ESM from the requirements of the Margin Rule. 

As I explained when this amendment was proposed last October,[3] the ESM provides financing and bond purchases to support Eurozone member states, serving similar functions as a multilateral development bank.  Given that multilateral development banks and related entities[4] are excluded from the Margin Rule, it makes good sense to codify the same relief for the ESM.[5]  This is especially true given the ESM’s role in the market.  As its name suggests, the ESM is an agent of stability and does not raise concerns about risk in the derivatives markets.  Codifying the ESM’s relief from the Margin Rule is particularly important as Europe responds to the financial fallout of the global coronavirus pandemic.

Erasmus observed long ago that “humility is wisdom.”  Keeping that perspective is especially important when it comes to financial regulatory areas where nations have implemented a common set of core principles internationally.  Those internationally-shared frameworks serve as a baseline, and national regulators have necessarily tailored their specific rules to the unique attributes of their own domestic markets.  But we should be humble, and indeed wise enough, to resist the temptation to insist that a foreign counterpart adopt domestic regulations on a rule-by-rule basis.  Cross-border derivatives regulation that utilizes comity and deference can enable the effective implementation of the post-crisis G20 derivatives regulatory reforms. 

As I have stated before, were financial regulators to insist that their counterparts overseas import each other’s specific rules wholesale, it would lead to an absurd result ad infinitum.[6]  Just as the G20, Financial Stability Board, and various standard-setting bodies were established to prevent a global race to the bottom, their work is also meant to prevent nations from forcing the complete strictures of their domestic regimes onto others.  For example, the Principles for Financial Markets Infrastructure (“PFMI”) represent international standards for, among other things, central counterparties and trade repositories.  All of the G20 nations have adopted the PFMI, providing an opportunity for meaningful dialogue with both the European Commission and the European Securities and Markets Authority regarding the status of American and European central counterparties.

Those discussions are ongoing and have been productive.  In particular, we are working toward a potential cooperative framework for the supervision of central counterparties engaged in international markets.  With an eye to this progress, I believe today’s final amendments to the Margin Rule are appropriate.  I am encouraged by the tone of the dialogue and the commitment of our EU counterparts to reach a mutually beneficial arrangement that will stand the test of time.  I believe such an arrangement for the supervision of third country central counterparties would entail a great degree of regulatory deference and international comity alongside extensive information sharing and regular communications between supervisory authorities.  I look forward to continuing to engage with our European colleagues to advance our shared interests in a robust and resilient transatlantic derivatives market.  In that context, I am pleased to support today’s final rule to exclude the ESM from the Margin Rule.[7]
 

-CFTC-

Statement of Support by Commissioner Brian D. Quintenz Regarding Amendments to the Clearing Exemption for Swaps; the Final Rule Excluding the European Stability Mechanism from CFTC Margin Requirements; and Related No-Action Relief

April 14, 2020

In March 2018, I articulated my approach to our current regulatory relationship with our European counterparts in light of their refusal to stand by or re-affirm their 2016 commitments in the CFTC’s and European Commission’s common approach to the regulation of cross-border central counterparties (CCPs) (CFTC-EC CCP Agreement).[1]  Specifically, I believe that the absence of the agreement’s re-affirmation in the European Market Infrastructure Regulation 2.2 (EMIR 2.2) directly implied the agreement’s abrogation.[2]  I therefore vowed that I would either object to or vote against any relief provided to, or requested by, European Union authorities until the agreement’s clarity was restored. Since that time, I have consistently voted against, or objected to, any regulation or relief that provides special accommodations to European entities, including the proposed exemption from margin requirements for the European Stability Mechanism (ESM) that the Commission seeks to finalize today.[3]

However, the unprecedented devastating economic and social impacts of COVID-19 across the globe warrant a reprieve from that position.  In the United States, financial regulators have acted swiftly, decisively, and boldly to mitigate economic disruptions and support market liquidity, including providing regulatory relief where necessary.  I am very proud of the CFTC’s decisive response to the COVID-19 pandemic, which promoted the full functioning of derivatives markets despite the extraordinary challenges facing exchanges, clearinghouses, and market intermediaries as a result of social distancing.[4]  I know the Commission, under the strong leadership of Chairman Heath P. Tarbert, is committed to providing any additional relief necessary to ensure that U.S. markets remain accessible.

Our European counterparts are engaged in the same epic struggle as we are to lessen the extraordinary economic and social harms of this pandemic.  Although I remain committed to ensuring the terms of the CFTC-EC CCP Agreement are ultimately upheld, I also recognize that issue is one facet of a much broader, deeper bond we share with the European Union—a relationship that has been grounded in goodwill, trust, and partnership.  Many of the European institutions affected by the rules and no-action relief before the Commission today are likely to be central to the European Union’s COVID-19 economic recovery efforts. As a result, I believe it is appropriate to support the items before the Commission today, which, by providing relief from CFTC clearing and margin requirements, may bolster the ability of EU institutions to provide critical financial assistance to their economies, businesses, and citizens.

For example, the European Commission, ESM, and European Investment Bank (EIB) are working in concert to take unprecedented actions at the European level to complement national measures to mitigate the impacts of COVID-19.[5]  The ESM has many economic tools at its disposal, including making loans to Eurozone member states, purchasing the bonds of Eurozone members, providing precautionary credit lines that can be drawn upon if needed, and directly recapitalizing financial institutions.[6]

Similarly, the EIB, the lending arm of the European Union, and the European Investment Fund (EIF), which specializes in finance for small and medium sized businesses, are also working together to respond to COVID-19.  Together, the EIB and the EIF have proposed a plan to provide immediate financing to combat the health and economic effects of the pandemic.[7]  Each of these EU institutions may seek to enter into swaps subject to the CFTC’s clearing or uncleared margin requirements in order to hedge the risks associated with these lending and investment activities.  Accordingly, I support today’s measures that provide relief from those requirements, thereby freeing up additional capital that can be immediately deployed in the European economy.

When the present hardship caused by COVID-19 abates, I look forward to re-engaging with our European counterparts on the critical issue of the oversight of U.S. CCPs.  I believe the possibility still exists for a successful implementation of EMIR 2.2 that fully respects the CFTC’s ultimate authority over U.S. CCPs, and I am committed to doing everything in my power to achieve this outcome.

Amendments to Swap Clearing Requirement Exemptions Under Part 50

I am pleased to support this proposal, which codifies existing relief, from the Commission’s requirement that certain commonly traded interest rate swaps and credit default swaps be cleared following their execution.[8]  The new exemptions could be elected by several classes of counterparties that may enter into these swaps, namely:  sovereign nations; central banks; “international financial institutions” of which sovereign nations are members; bank holding companies, and savings and loan holding companies, whose assets total no more than $10 billion; and community development financial institutions recognized by the U.S. Treasury Department.  Today’s proposal notes that many of these entities have actually relied on existing relief, electing not to clear swaps that are generally subject to the clearing requirement.

I strongly support the policy of international “comity” described in the proposal, recognizing that sovereign nations and their instrumentalities should generally not be subject to the Commission’s regulations.  I trust that by proposing this relief, the United States, the Federal Reserve, and other U.S. government instrumentalities will receive the same treatment in foreign jurisdictions.  As noted above, this policy is timely in light of the current projects the ESM, the EIB, and the EIF are currently undertaking in response to the pandemic.  I am pleased that the Commission can provide flexibility to these entities at this time when entering into swaps with U.S. swap dealers.  To this end, I also support the decision of the Division of Clearing and Risk to extend the current, time-limited no-action relief provided to the ESM[9] pending the finalization of the amendments to part 50.  I note that the EIB, EIF, other international financial institutions, central banks, and sovereign entities currently have relief that is not time-limited.[10]

As for the bank holding companies, savings and loan holding companies, and community development financial institutions that would be provided relief pursuant to this proposal, I am hopeful that the Commission will ultimately finalize this relief, which it first proposed for these entities in 2018.[11]  However, I note that these entities currently have relief pursuant to no-action letters issued in 2016 that have no expiration dates.[12]

Final Rule Excluding the European Stability Mechanism from CFTC Margin Requirements for Uncleared Swaps

I support today’s final rule that would exempt a swap between the European Stability Mechanism and a swap dealer from the Commission’s margin requirements applicable to uncleared swaps.  This rule is premised on the same policy of international comity referenced in today’s proposed exemption from the swap clearing requirement.  I would like to highlight that the EIB, EIF, and the other international financial institutions referenced by the proposed exemption from the swap clearing requirement, as well as sovereign entities and central banks, are already exempted from the Commission’s margin requirements for uncleared swaps pursuant to Commission regulations.[13]  Finally, I am pleased that the Division of Swap Dealer and Intermediary Oversight is today extending previously granted, time-limited no-action relief to the ESM,[14] pending the effective date of today’s final rule.
 

Concurring Statement of CFTC Commissioner Rostin Behnam Regarding Amendments to Compliance Requirements for Commodity Pool Operators and Form CPO-PQR

April 14, 2020

I respectfully concur with the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) issuance of a proposed rule (the “Proposal”) to amend Regulation 4.27 and Form CPO-PQR.  In devising the Proposal, Commission staff judiciously evaluated several years of returns on the Commission’s collection of detailed data from commodity pool operators (CPOs)—data anticipated to provide valuable insights to both the Commission and the Financial Stability Oversight Counsel (FSOC) as we collectively moved into a new era of Wall Street reform on the heels of the 2008 financial crisis.  In my view, the general conclusion that the Proposal elucidates: the information collected in the current Form CPO-PQR as well as its frequency of collection is simply not fit for purpose. 

The determination to bring seven years of data collection aimed at supporting the goals of the Dodd-Frank Act[1] to an abrupt end may, in this particular instance, be an appropriate revision.  The Proposal intends to markedly reduce the Commission’s collection of granular, pool-specific data from a significant population of CPOs.  However, the evidence suggests that the challenges of working with such data have undercut its potential value.  Therefore, any data loss should not undermine the Commission’s oversight or FSOC’s current monitoring efforts.  At this point in time, the Commission should take the opportunity to make strategic, programmatic and disciplined changes.

In terms of the data and the transactions the Commission thought possible within our Form CPO-PQR database, results have been mixed.  The Proposal aims to make targeted corrections, without forgoing the possibility of future adjustments should the Commission later determine that additional data collection would support regulatory initiatives or would be responsive to FSOC requirements to fulfill statutorily mandated duties and initiatives aimed at identifying and monitoring risks to financial stability.[2]  

The 2008 financial crisis exposed numerous weaknesses in the U.S. financial regulatory framework.  Unfortunately, many were at the expense of main street Americans.  The legislative response was swift and effective in reforming our nation’s financial regulatory regime.  One of the more pressing needs that the Dodd-Frank Act addressed relates to data collection and analysis as a tool to monitor, surveil and detect financial market risk.  All with the intention of anticipating and catching stability and resiliency concerns before it is too late.  As all U.S. regulators continue to adapt to the new framework – even a decade later – adopting reforms quickly in some cases, and more gradually in others, we all collectively continue to learn and develop better practices at data collection and analysis.  Although not perfect, our regulatory purpose and mission is clear, and the importance of efficient and effective data to fulfilling our statutory mandate cannot be understated.  As we all are experiencing the evolution of the nation’s tech economy, it is hard to ignore the engine of its success: data.  This is the world we live in, and policymakers and regulators alike must keep pace while exercising appropriate discipline in collecting, handling, and managing data.

This Proposal focuses on the Commission’s data needs in support of CPO and commodity pool oversight.  The Proposal seeks to account for: (1) other data streams, regulatory initiatives, and risk surveillance programs that support the Commission’s monitoring of CPO and commodity pool activities as enhanced by improvements to the Commission’s data integration and analysis capabilities; (2) the Commission’s statutory obligations to make data available to the FSOC and the impact of the proposed amendments on FSOC’s monitoring abilities; (3) the duties of CPOs that are dually registered with the Securities and Exchange Commission (SEC) as private fund advisors and are required to file Form PF as well as the scope of current Form PF; (4) the data elicited by the National Futures Association’s (NFA’s) Form PQR, a form comparable to Form CPO-PQR filed by all CFTC-registered CPOs, regardless of size, used to support NFA’s risk-based examination program for CPOs; and (5) reduced reporting burdens and increased filing efficiencies for affected CPOs.  I appreciate the Commission’s and its staff’s ongoing engagement with the SEC and FSOC, as well as with NFA, throughout the drafting of this Proposal and am encouraged that discussions are ongoing.  I also appreciate staff’s consideration and inclusion of several of my suggested edits to this Proposal. 

I support issuance of the Proposal; however, I am concerned that in proposing to amend Regulation 4.27(d) to no longer accept Form PF filing in lieu of the proposed revised Form CPO-PQR, less data may be collected on Form PF from dually regulated CPOs.[3]  Should the Proposal be finalized in its current form, FSOC may receive less data from certain CPOs who have been reporting information on commodity pools that are not private funds in the data they report on Form PF in lieu of filing Form CPO-PQR for such pools, as currently permitted under Regulation 4.27(d).  To the extent the Proposal may have the side-effect of undermining ongoing FSOC surveillance and monitoring efforts by eliminating the incentivized reporting of CFTC-pool only information on Form PF, I urge members of the public to respond to related requests for comment embedded in the Proposal.[4]  Notwithstanding my concerns, I am pleased that, to the extent the interests of the SEC and FSOC may be impacted, each has had and continues to have ample opportunity to weigh-in.  Moreover, should the FSOC determine that it requires additional data from dually regulated CPOs or CPOs generally; it has authority to request such data submissions directly from the Commission or, alternatively, consult with the SEC—and more indirectly, with the CFTC—regarding the form and content of Form PF.[5] 

I would like to close by again thanking staff for all of their hard work on this important Proposal, specifically in these difficult and unique times, and look forward to considering comments from the public. To that end, if needed, I encourage market participants to request an extension of the comment period.  As we all continue to endure the challenges of new realities at home and in the workplace as a result of the Covid-19 pandemic, I firmly believe the Commission needs to be as flexible as necessary to accommodate market participants and the general public in their efforts to provide us with the best comments to rulemakings.  I have made my position clear on what and how the Commission should be allocating its resources during these unprecedented times. 
 

-CFTC-

[1] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”).

[2] See Proposal at I.  Not only is the Commission among those agencies that could be asked to provide information necessary for the FSOC to perform its statutorily mandated duties, but the FSOC may issue recommendations to the Commission regarding more stringent regulation of financial activities that FSOC determines may create or increase systemic risk.  See Dodd-Frank Act §§ 112(d)(1), 120; See also Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, 76 FR 71128, 71129 (Nov. 16, 2011); Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 FR 11252, 11253 (Feb. 24, 2012).

[3] See Proposal at III.C.

[4] See Proposal

[5]  See note 2.

Statement of Support by Commissioner Brian D. Quintenz Regarding Amendments to Compliance Requirements for Commodity Pool Operators on Form CPO-PQR

April 14, 2020

I support today’s proposal that would simplify and streamline the reporting obligations of commodity pool operators (CPOs) on Form CPO-PQR.  The proposal would eliminate much of existing Schedules B and C, which together contain roughly 72 distinct questions, if one includes all the separately identifiable subparts.  Many of these questions are challenging for CPOs to calculate precisely and require numerous underlying assumptions that vary from firm to firm, making it difficult, if not impossible, for the Commission to perform an apples-to-apples comparison across the commodity pool industry.

Moreover, in my opinion, many of these questions are more academic than pragmatic in nature – information that may be nice for the Commission to have, but data that is certainly not necessary for the Commission to effectively oversee commodity pools and the derivatives markets.  For example, under the proposal, the Commission would no longer request information about the geographical breakdown of a pool’s investments or the aggregate value of a pool’s derivatives positions—the latter of which provides almost no insight into a pool’s actual risk because it does not take into account collateral.  I would also note that large pools file the Form CPO-PQR within 60 days of the end of a calendar quarter.  This means that by the time Commission staff receives the information on the form, it is already stale and out-of-date, which seriously diminishes its utility for purposes of real-time monitoring of risk or market activity.

Importantly, the proposal retains questions regarding a pool’s schedule of investments, which contains information that is critical for the National Futures Association’s and the Commission’s supervision and examination programs for CPOs.  The proposed revisions to Form CPO-PQR would also align the Commission’s form with the NFA’s Form PQR, which will simplify the filing process for CPOs and ensure the Commission has the same visibility as the NFA into the operations of CPOs.  I am also pleased the proposal would require CPOs and their operated pools to include their legal entity identifiers (LEIs), to the extent they have LEIs due to their swap trading activity.  The inclusion of LEIs will enable the Commission to aggregate the information reported on the Form CPO-PQR with the swap data information reported to the Commission under Part 45.  Over time, I hope this will provide the Commission with a greater understanding of how a CPO’s swap activities complement its other investment activities.

The proposal also requests comment on whether there are ways the Commission could clarify or refine its instructions for completing the Form CPO-PQR. I encourage market participants to take a close look at the form’s instructions and related frequently asked questions documents to determine if the filling process can be simplified.

In closing, I would like to thank the Division of Swap Dealer and Intermediary Oversight for its hard work in advancing this important proposal.

Statement of Commissioner Rostin Behnam Regarding Part 190 Bankruptcy Regulations

April 14, 2020

I respectfully support the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) issuance of a proposed rule (the “Proposal”) to amend Part 190 of its regulations, which govern bankruptcy proceedings of commodity brokers.  First and foremost, I want to thank Commission staff for all of their hard work on this Proposal.  If finalized, it will be the first major update of the CFTC’s existing Part 190 since 1983, when it was originally implemented by the Commission.[1]

The Proposal is not a response to current market conditions, nor is it a proposal that has only recently been considered; it is the product of years of staff analysis and engagement with market participants, including the Part 190 Subcommittee of the Business Law Section of the American Bar Association, which submitted detailed suggested model Part 190 rules in response to a prior Commission request for information.[2]  Several agency Chairs going back many years deserve recognition and thanks for pushing to update Part 190 and starting this process.  Customer protections are at the heart of the Commodity Exchange Act, and it is imperative that the Commission have clear rules that direct how proceedings occur during a commodity broker bankruptcy.  The Commission, market participants, customers, and the public will benefit greatly from this Proposal, and I am proud to have contributed to this effort.

The revision is designed to recognize the many changes in our industry over the past 37 years.  The Commission finalized the existing part 190 the same year that the movie Trading Places debuted – when futures trading, so distinctly depicted in the film, occurred exclusively in oval trading pits, and markets were less global, less complex, and less sophisticated.  To paraphrase former CFTC Chairman Giancarlo, Part 190 is an analog regulation applying to what has since become a digital world.[3]

More personally, I was a lead advisor during the U.S. Senate’s investigation of the 2011 MF Global bankruptcy, the eighth largest corporate bankruptcy in American history.[4]  During the Senate investigation, I learned the intricate contours of Part 190, its relationship to the Bankruptcy Code, and how the larger puzzle of creditors, customers, and equity holders, among others, fits together.  It was during those frenzied days that I truly appreciated the regulatory principle that customer margin is sacrosanct property.  As a Commissioner since 2017, I have made customer protections an absolute priority in part because of my experience during those few months.  Having spoken with many market participants throughout the bankruptcy proceedings, including those whose money disappeared in the days immediately following, customer protection is my most pressing responsibility.

The strengths and weaknesses of the Commission’s bankruptcy regime were further laid bare just a few months later in early 2012 following the bankruptcy of Peregrine Financial Group (“PFG”) – a second blow in short order.  Important lessons have been learned, both in terms of what works and what does not, and I believe today’s Proposal is a positive step to addressing both.

There are a number of changes in today’s proposal that are intended to further support provisions of Part 190 that have worked in prior bankruptcies.  One of the themes of this refresh is clarity.  The goal is to be as clear as possible about the Commission’s intentions regarding Part 190 in order to enhance the understanding of Designated Clearing Organizations (“DCOs”), Futures Commission Merchants (“FCMs”), their customers, trustees, and the public at large.  Changes in this proposal would foster the longstanding and continuing policy preference for transferring (as opposed to liquidating) the positions of public customers – an important customer protection.  Other changes further support existing requirements including that short falls in segregated property should be shored up from the FCM’s general assets, and that public customers are favored over non-public customers.  The proposal also grants trustees enhanced discretion based upon prior positive experience, and codifies practice adopted in past bankruptcies by requiring FCMs to notify the Commission of their intent to file for voluntary bankruptcy.

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

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

I am hopeful that the 90 day comment period will allow sufficient time for the public to digest this extensive Proposal and provide fulsome comments.  There can be no higher demand of market participants and the general public than to assist and guide the Commission in its duty, especially for one as important as this Proposal; it is absolutely critical.

If needed, I encourage market participants to request an extension of the comment period.  As we all continue to endure the challenges of new realities at home and in the workplace as a result of the Covid-19 pandemic, I firmly believe the Commission needs to be as flexible as necessary to accommodate market participants and the general public in their efforts to provide us with the best comments to rulemakings.  I have made my position clear on what and how the Commission should be allocating its resources during these unprecedented times.[6]

As we propose bankruptcy rules that would provide important customer protections, I note with approval that today we are also finalizing another rule related to customer protection.  Rule 160.30 re-establishes longstanding detailed requirements for Commission registrants to adopt policies and procedures to address administrative, technical and physical safeguards for the protection of customer records and information.

I would like to close by again thanking staff for all of their hard work in producing this refresh of the Commission’s part 190 rules to provide important customer protections, and look forward to considering comments from the public as the Commission considers this critically important rule.

-CFTC- 

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

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

[3] See Address of CFTC Commissioner J. Christopher Giancarlo to the American Enterprise Institute:  21^st Century Markets Need 21^st Century Regulation (Sep. 21, 2016), https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-17,

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

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

[6] Statement of Commissioner Rostin Behnam Regarding COVID-19 and CFTC Digital Assets Rulemaking (March 24, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement032420; Statement of Commissioner Rostin Behnam Regarding CFTC’s Extension of Currently Open Comment Periods in Response to the COVID-19 Epidemic (April 10, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement041020

Statement of Chairman Heath P. Tarbert in Support of Proposed Amendments to the Part 50 Clearing Requirement

April 14, 2020

I am pleased to support today’s proposal to amend 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 proposed Part 50 amendments would create new regulations 50.75 and 50.76, which would codify existing exemptions from the Clearing Requirement for swaps entered into with certain central banks, sovereign entities, and international financial institutions.[1]

Separately, today’s proposal would create new regulations 50.77, 50.78, and 50.79, which would exempt from the Clearing Requirement certain swaps entered into by small bank holding companies, savings and loan holding companies, and community development financial institutions.[2]  The proposal also provides a compliance schedule setting forth all the past compliance dates for the 2012 and 2016 swap clearing requirement rules and contemplates certain technical amendments to various other provisions within Part 50. 

Together, these amendments to the Clearing Requirement would clarify existing exemptions for banks, savings associations, farm credit systems, and credit units with total assets under $10 billion.[3]  While these entities are small, they play outsized roles in supporting the U.S. economy.  These are not Wall Street banks, but primarily local institutions that support American communities, businesses, and families.  Clarifying their relief from the Clearing Requirement advances the CFTC’s strategic goal of regulating the derivatives markets to promote the interests of all Americans.[4]

In addition, today’s proposed amendments to the Clearing Requirement will significantly reduce costs and regulatory burdens for entities that pose little or no systemic risk to the United States—i.e., foreign governmental institutions on the one hand, and small domestic lenders on the other.  By codifying existing exemptions, the Commission will give certainty to market participants by etching their clearing exemptions—now fragmented among various no-action letters—into the text of our Part 50 rules.  Doing so is especially important in these challenging times: more than ever, certainty will help our market participants continue to perform their important functions.  Today’s proposed amendments to the Clearing Requirement take an important step in that direction.   

[1] The majority of the entities covered by the proposed rule were previously identified in the preamble to the 2012 End-User Exception final rule as entities that should not be subject to the Clearing Requirement.  See End-User Exception to the Clearing Requirement for Swaps, 77 FR 42560 (Jul. 19, 2012).  Four international financial institutions covered by the proposed amendment separately obtained staff no-action letters concerning the clearing requirement.  See CFTC Letter No. 13-25 (June 10, 2013) (providing no-action relief to the Corporación Andina de Fomento); CFTC Letter No. 17-57 (Nov. 7, 2017) (providing no-action relief to Banco Centroamericano de Integración Económica); CFTC Letter No. 17-59 (Nov. 7, 2017) (providing no-action relief to the North American Development Bank); and CFTC Letter No. 17-58 (Nov. 7, 2017) and CFTC Letter No. 19-23 (Oct. 16, 2019) (providing no-action relief to the European Stability Mechanism).

[2] In 2018, the Commission proposed to exempt these entities from the Clearing Requirement, but today we are supplementing that earlier proposal with technical amendments to the rule text, and we are soliciting additional public comment.  See Amendments to Clearing Exemption for Swaps Entered Into by Certain Bank Holding Companies, Savings and Loan Holding Companies, and Community Development Financial Institutions, 83 FR 44001 (Aug. 29, 2018). 

[3] See proposed new regulations 50.77, 50.78, and 50.79.

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

Statement of Chairman Heath P. Tarbert in Support of Revising Form CPO-PQR

April 14, 2020

The esteemed 19th century mathematician Charles Babbage asked “if you put into the machine the wrong figures, will the right answers come out?”[1]  Baggage foresaw what would evolve in the 20th century as the “garbage-in, garbage-out” predicament—a potential pitfall now only magnified in the 21st century by the combination of computing technology and vast amounts of data.  Since becoming Chairman, I have prioritized improving the CFTC’s approach to collecting data.  As a federal agency, we must be selective about the data we collect, and then make sure we are actually making good use of the data for its intended purpose. 

This issue has arisen in a number of contexts here at the CFTC.  For example, we recently proposed amendments to our swap data reporting rules, which cover both regulatory reporting and the disclosure of certain swap transaction data to the public at large.[2]  The purpose of those amendments is to simplify the swap data reporting process to ensure that market participants are not burdened with unclear or duplicative reporting obligations that do little to reduce market risk or facilitate price discovery.  If those amendments are adopted, the CFTC will no longer collect data that does not advance our oversight of the swaps markets.[3]  And we will start collecting additional data that does. 

Today we are engaged in a similar exercise.  We are considering amendments to the compliance requirements for commodity pool operators (“CPOs”) on Form CPO-PQR.  These amendments reflect the CFTC’s reassessment of the scope of Form CPO-PQR and how it aligns with our current regulatory priorities.  By refining our approach to data collection, today’s amendments—in conjunction with our current market surveillance efforts—would enhance the CFTC’s ability to gain more timely insight into the activities of CPOs and their operated pools.  At the same time, the amendments would reduce reporting burdens for market participants. 

Background on Form CPO-PQR

Form CPO-PQR requests information regarding the operations of a CPO, and each pool that it operates, in varying degrees of frequency and complexity, depending upon the assets under management (“AUM”) of both the CPO and the operated pool(s).  When adopting Form CPO-PQR in 2012, the Commission determined that form data would be used for several broad purposes, including:

• increasing the CFTC’s understanding of our registrant population;
• assessing the market risk associated with pooled investment vehicles under our jurisdiction; and
• monitoring for systemic risk.[4]

For the majority of more pool-specific questions on Form CPO-PQR, the Commission believed the incoming data would assist the CFTC in monitoring commodity pools to identify trends over time. For example, the CFTC would get information regarding a pool’s exposure to asset classes, the composition and liquidity of a pool’s portfolio, and a pool’s susceptibility to failure in times of stress.[5]

Shortcomings of Form CPO-PQR

Seven years of experience with Form CPO-PQR, however, have not born out that vision.  To begin with, in an effort to take into account the different ways CPOs maintain information, the Commission has allowed CPOs flexibility in how they calculate and present certain of the data elements.  As a result, it has been challenging, to say the least, for the CFTC to identify trends across CPOs or pools using Form CPO-PQR data.  In addition, taking into account the volume and complexity of the data it was requesting, the Commission decided not to require the data to be provided in real-time, but instead mandated only post hoc quarterly or annual filings. 

As the CFTC staff has reviewed the data over the years, it has become apparent that the disparate, infrequent, and delayed nature of CPO reporting has made it difficult to assess the impact of CPOs and their operated pools on markets.  This is largely because conditions and relative CPO risk profiles may have changed, potentially significantly, by the time Form CPO-PQR is filed with the CFTC.  This was not entirely unforeseen.  When Form CPO-PQR was adopted, some criticized the rulemaking, raising concerns about whether the information gathered would enable the CFTC to monitor commodity pools for systemic risk effectively.[6]  They likewise questioned whether the CFTC even had the resources to do so and in fact would do so.[7]

Sound Regulation Means Collecting Information We Intend to Use

What we need is not over-regulation or even de-regulation, but rather sound regulation.[8]  In the midst of the coronavirus pandemic, when we are facing the greatest economic challenge since the 2008 financial crisis, and possibly since the Great Depression, the fact that we are asking market participants to put all this time and effort into providing us data that is difficult to integrate with the CFTC’s other more timely and standardized data streams is not sound regulation.  Frankly, it is wasteful and an example of bad government. 

My colleague Commissioner Dan Berkovitz recently made the following observation: “In addition to obtaining accurate data, the Commission must also develop the tools and resources to analyze that data.”[9]  He is spot on.  I believe the converse is also true.  We should not collect data we cannot use effectively.  In the case of Form CPO-PQR, this means not requiring market participants to provide information that the CFTC has neither the resources nor the ability to analyze with our other data streams.  Our credibility as a regulator is strengthened when we honestly admit that our regulations ask for data that we both have not used effectively and have no intention of using going forward.  That is what we are doing today.

Alternative Sources of Data Are Available to the Commission

Although we would be eliminating some components of Form CPO-PQR—those required data that the CFTC has not used in meeting its mission—Form CPO-PQR is not our only source of data regarding commodity pools.  The CFTC has devoted substantial resources to developing other data streams and regulatory initiatives designed to enhance our ability to surveil financial markets for risk posed by all manner of market participants, including CPOs and their operated pools.  These data streams include extensive information related to trading, reporting, and clearing of swaps.  Importantly, most of the transaction and position information the CFTC uses for our surveillance activities is available on a more timely and frequent basis than the data received on the current iteration of Form CPO-PQR.  Furthermore, CFTC programs to conduct surveillance of exchanges, clearinghouses, and futures commission merchants already include CPOs and do not rely on the information contained in Schedules B and C of Form CPO-PQR.

Taken together, the CFTC’s other existing data efforts have enhanced our ability to surveil financial markets, including with respect to the activities of CPOs and the pools they operate.  In general, the CFTC’s alternate data streams provide a more  timely, standardized, and reliable view into relevant market activity than that provided under Form CPO-PQR.  The proposal contemplates a revised Form CPO-PQR that would be more easily integrated with these existing and more developed data streams.  This would enable the CFTC to oversee and assess the impact of CPOs and their operated pools in a way that is both more effective for us and less burdensome for those we regulate.

Legal Entity Identifiers Are Something We Need

Our proposal does more than simply eliminate certain data collections.  It would also require the collection of an additional piece of key information:  legal entity identifiers (“LEIs”) for CPOs and their operated pools.  LEIs are critical to understanding the activities and interconnectedness within financial markets.  Although LEIs have been around since 2012 and authorities in over 40 jurisdictions have mandated the use of LEI codes to identify legal entities involved in a financial transaction,[10] this would be a new requirement for Form CPO-PQR.  The lack of LEI information for CPOs and their operated pools has made it challenging to align the data collected on Form CPO-PQR with the data received from exchanges, clearinghouses, swap data repositories, and futures commission merchants.  As a result, we cannot always get a full picture of what is happening in the markets we regulate. 

The Commission is therefore proposing to amend Form CPO-PQR to include a question seeking the LEIs of both CPOs and the operated pools.  The inclusion of LEIs within this smaller data set on the amended Form CPO-PQR should enable the CFTC to synthesize the various data streams on an entity-by-entity basis more efficiently and accurately.  Inclusion of LEIs may also permit better use of swap data repository and other data to illuminate any risks inherent in pools and pool families.

In addition, the proposal would better align Form CPO-PQR with Form PQR of the NFA, which all CPOs must file quarterly and which the NFA may revise to include questions regarding LEIs.  Under these circumstances, we could permit a CPO to file NFA Form PQR in lieu of our Form CPO-PQR as revised.  In doing so, we would offer CPOs greater filing efficiencies without compromising our ability to obtain relevant data.

Data Sharing with the OFR Could be Improved

The Dodd-Frank Act established the Office of Financial Research (“OFR”) nearly a decade ago to look across our financial system for risks and potential vulnerabilities.[11]  It was contemplated that the OFR would have access to data from other U.S. financial regulators.  Yet to date, the CFTC has shared none of the Form CPO-PQR data with the OFR, largely because of the shortcomings outlined above. 

Another benefit of today’s proposal is that we intend to share with the OFR the information collected on Form CPO-PQR once it is revised.  To this end, we are presently in the process of negotiating a memorandum of understanding with the OFR, which will allow us for the first time to provide the information we collect regarding CPOs. 

Conclusion

For these reasons, I am pleased to support the Commission’s proposal to amend the compliance requirements for CPOs on Form CPO-PQR.  Form CPO-PQR as revised would focus on the collection of data elements that can be used with other CFTC data streams and regulatory initiatives to facilitate oversight of CPOs and their pools.  The proposal would reduce data collection requirements for market participants, while mandating disclosure of LEIs by CPOs and their operated pools.  Focusing on enhancing data collection by the agency is no doubt tedious.  Nonetheless, I am convinced it leads to smarter regulation that helps promote the integrity, resilience, and vibrancy of U.S. derivatives markets.
 

[1] Charles Baggage, Passages from the Life of a Philosopher (London 1864).

Statement of Support by Commissioner Quintenz Regarding Part 190 Bankruptcy Regulations – Notice of Proposed Rulemaking

April 14, 2020

I am pleased to support today’s proposal to amend the Commission’s regulations governing the bankruptcy proceedings of commodity brokers.[1]  This proposal makes the first comprehensive change to these regulations since they were first issued in 1983.  It marks another important step in Chairman Tarbert’s agenda to update and make more efficient several critical areas of the Commission’s regulations.  I note that today’s proposal was not hastily prepared in response to the market events surrounding the COVID-19 pandemic.  Commission staff has been considering these amendments since 2017, when a subcommittee of the American Bar Association (ABA) requested that the Commission update the part 190 bankruptcy regulations.[2]  The ABA provided its proposal in response to the CFTC’s Project KISS initiative, which generally requested input from the public on how the Commission’s regulations could be simplified to reduce compliance burdens.[3]  I commend former Chairman Giancarlo for launching Project KISS because it is important for agencies periodically to review their regulations, some of which may not have been amended for many years, to ensure they are as targeted, rational, and transparent as possible, in light of new developments in the markets they affect.  I am pleased that the Commission’s rulemaking work continues despite the new challenges the agency is facing in light of the pandemic.

I would like to highlight a few aspects of today’s proposal.  First of all, the proposal reaffirms the special treatment the U.S. Bankruptcy Code affords to the customer account of an insolvent commodity broker, so that customers’ positions can promptly be transferred.[4]  The Commission is proposing new rules for an insolvent DCO, which are similar to the rules applicable to an FCM.  These rules take into account Title II of the Dodd-Frank Act, and I am pleased that the FDIC was consulted.  Next, taking advantage of the Commission’s experience with a few insolvent FCMs over the past decades, the proposal would provide increased deference to the trustee that a U.S. Bankruptcy Court appoints to oversee the proceedings of an insolvent commodity broker.  This increased deference is intended to expedite the transfer of customer funds.  In light of the Commission’s experience from the bankruptcy of MF Global in 2011, proposed amendments would treat letters of credit equivalently to other collateral posted by customers, so that the pro rata distribution of customer property in the event of a shortfall in the customer account would apply equally to all collateral.  The proposal also reflects experience from MF Global by dividing the delivery account into “physical delivery” and “cash delivery” account classes.  Property other than cash is generally easier to trace, so it should have the benefit of a separate account class.  Finally, the proposal’s revised treatment of the “delivery account,” applicable in the context of physically-settled futures and cleared swaps, would apply not only to tangible commodities, as is currently the case, but also to digital assets.  This amendment will provide important legal certainty to the growing exchange-traded market for cleared, physically-settled, digital asset derivatives.

I look forward to reviewing the comments to this proposal, not only from FCMs and DCOs, but also from their diverse customer base, including asset managers, the agricultural community, energy firms, and other derivatives end-users.

Statement of Commissioner Dawn D. Stump Regarding CFTC Open Meeting on April 14, 2020

Teamwork – An Essential Core Value

April 14, 2020

The Commodity Futures Trading Commission (“CFTC” or “Commission”) CFTC may have only recently established core values in an official manner, but they have long-existed within the agency.  Over the past month, the CFTC has done a remarkable job of demonstrating those core values of commitment, forward-thinking, teamwork, and clarity.

Today, I would like to focus my remarks on teamwork.  I have always considered teamwork to be integral to the CFTC’s success, and I often express my views internally on the need to preserve the unique benefits we have cultivated as a result of such engagement, both with the public and private sectors.  We not only coordinate within the CFTC, within the federal government, and within the international community of regulators, but also with the market infrastructure providers and participants who are on the front lines of supporting well-functioning markets.  The past several weeks demonstrate both how essential that teamwork is, and how well we have deployed it.  While the CFTC’s team mentality has been reinforced during recent events, it was built during far less stressful times.  Today, we are considering several matters years in the making, and only possible through the CFTC’s tradition of engagement with and respect for market participants and fellow regulators – within the United States and abroad.

Teamwork, the CFTC and External Market Experts - Updating the CFTC’s Bankruptcy Regime

We are considering the first comprehensive revision to the CFTC’s bankruptcy regime in 37 years.  As recent market events have demonstrated, futures commission merchants (“FCMs”) and derivatives clearing organizations (“DCOs”) are integral to well-functioning derivatives markets.  Throughout the recent market volatility to date, the market infrastructure that supports clearing has functioned as intended while facilitating massive amounts of risk transfer and extraordinary risk management efforts.  The revisions to our bankruptcy rules proposed today are the culmination of an extensive undertaking that has been in the works for years.  The timing of this proposal should in no way be considered an expression of doubt regarding the integrity, stability, or resiliency of FCMs or DCOs in today’s market environment.

I have long believed that one aspect that makes our industry and our agency unique is the level of engagement and spirit of cooperation between derivatives market participants and the CFTC.  This proposal is an exemplary product of that engagement and cooperation.  I thank Bob Wasserman, his team in the Division of Clearing and Risk, and the Part 190 Subcommittee of the Business Law Section of the American Bar Association for their expertise and insights, and for the countless hours they have dedicated to this endeavor.

This proposal is an example of the value in reviewing our regulations to make sure that they are still fit for purpose.  This proposal recognizes technological advancements over the past 37 years, incorporates lessons learned from FCM bankruptcies during that time, and recognizes the necessity of providing more clarity regarding how a DCO would be treated in bankruptcy.

I support the principles-based framework of the Commodity Exchange Act (“CEA”) and the CFTC’s regulations.  But there are some instances – like in a bankruptcy – where more prescription is warranted.  At the same time, each bankruptcy is unique, and some degree of flexibility is required.  I am interested to hear whether we have struck the proper balance of principles vs. prescription here – especially with respect to the new framework established were there to be a DCO bankruptcy.

I look forward to our continued engagement and cooperation on this topic as market participants review and comment upon our proposal.

Teamwork, the CFTC and Fellow Domestic Regulators - Revising CFTC Form CPO-PQR

The type of teamwork required to do our job takes on many different forms, none more critical than working across our own agency’s operational divisions and with other domestic regulatory partners to effectively achieve our distinct responsibilities.  To do so most efficiently, we must consider how various streams of information received here at the CFTC may be leveraged across our divisions.  At the same time, we must acknowledge that many market participants within our regulatory purview also operate in areas overseen by the Securities and Exchange Commission (“SEC”).  We need a clear delineation of requirements derived from our unique responsibilities.  For example, there has been some confusion surrounding the various reports, and their intended utility, that investment advisers supply to each regulator.  Today we are attempting to revert to our core functions.

While the subject of today’s proposal is CFTC Form CPO-PQR, I think it would be helpful to level set the conversation with a review of the different overlapping forms these investment advisors are required to file with various regulatory authorities.  I am hopeful this will demonstrate why a correction is warranted to best achieve the distinct missions of regulators who are tasked to work together, rather than apply duplicative requirements on competing forms.

First, I want to distinguish between Form PF and Form CPO-PQR.  To be clear, Form PF is a form filed with the SEC, not the CFTC.  The authority for Form PF is found in the Dodd-Frank Act, which provided that the SEC could require private funds to file reports to, among other things, assist the Financial Stability Oversight Council (“FSOC”) in assessing systemic risk.  Dodd-Frank also stipulated that the CFTC should join the SEC, in consultation with the FSOC, to promulgate the rules surrounding the content of these reports for dually-registered investment advisers.  I assume this was designed to ensure that the FSOC receives a comprehensive picture of any systemic risk that either agency feels could be presented by dually-registered investment advisers.  However, under the statute, the report is to be provided to the FSOC by the SEC, not the CFTC.  The CFTC does not require Form PF to be filed with us.  We are confident that should we require any such information to achieve our mission, we can easily obtain it from the SEC.

Commodity pool operators (“CPOs”) that file Form PF with the SEC also must file a Pool Quarterly Report (“Form CPO-PQR”) with the National Futures Association (“NFA”) for quarters ending March 31, June 30, and September 30, and with the CFTC for the quarter ending December 31.  This report increases the transparency of activities and investment trends of these CPO registrants within the markets we regulate.

Today, we are refining CFTC Form CPO-PQR to better distinguish its function from that of Form PF.  The new form proposed today significantly reduces complexity and refocuses the information requested on Form CPO-PQR to the CFTC’s specific regulatory tasks.  As a consequence, under the proposal, the CFTC would no longer accept a Form PF filing in lieu of the revised Form CPO-PQR because Form CPO-PQR would now be tailored to the CFTC’s regulatory needs.  All CPOs would be required to file the revised Form CPO-PQR quarterly, but would also be allowed to file NFA Form PQR in lieu of filing the CFTC’s revised Form CPO-PQR.  Since 2011, when the SEC and the CFTC adopted new rules for private fund advisers that are also registered with the CFTC as CPOs or commodity trading advisors (“CTAs”), we have further developed each agency’s data utility needs.  Today’s proposal reflects those lessons learned, and I am interested to receive feedback from the public on the streamlined approach presented therein.

I wish to take this opportunity to commend my colleague, Commissioner Quintenz, on his continued leadership in advancing our core value of teamwork with the SEC.  It is because we have such a relationship with the SEC that we are able to more effectively regulate through information sharing, such as with respect to the data collected on Form PF, without the inefficiency of redundant data collection by both agencies.

Teamwork, the CFTC and Global Regulatory Partners - International Regulatory Coordination and Respectful Deference

We are also considering today two matters that reflect the CFTC’s commitment to working with and deferring, where appropriate, to our fellow regulators in other jurisdictions.  As the current pandemic has demonstrated, our global derivatives markets face global risks, and we must continue to respect, nurture, and utilize our relationships with regulators in foreign jurisdictions.  For these reasons, I support the final rule excluding the European Stability Mechanism (“ESM”) from the definition of “financial end user,” such that uncleared swaps between a covered swap entity and the ESM are not subject to the CFTC’s margin rule.  This rule recognizes and respects that Europe has already determined to exempt the ESM under its own European Market Infrastructure Regulation’s margin rules for derivatives not cleared by a central counterparty.  I also support the proposal exempting from the clearing requirement certain central banks, sovereign entities, and international financial institutions.

Teamwork, the CFTC and Regulated Market Infrastructure Providers - Sharing Responsibility for Customer Financial Information Privacy

I support the amendment to Rule 160.30 that is before us today.  Rule 160.30 requires financial institutions subject to the Commission’s jurisdiction – including FCMs, swap dealers, CPOs, CTAs, introducing brokers, and retail foreign exchange dealers – to have policies and procedures that are reasonably designed to protect the security and confidentiality of customer records and information in their possession.

Just as we are strengthening the data privacy protections of Rule 160.30, the Data Protection Initiative that I announced last year reflects our commitment to robust data protection measures for sensitive data in our own systems.[1]  When it comes to data security, the Commission, like those we regulate, must have both a culture, and policies and procedures, that foster heightened vigilance against the ever-evolving threats that confront us all.[2]  Teamwork between the regulator and the regulated is not only a shared core value, but an essential defense when it comes to protecting data.

Conclusion

In concluding, I want to thank the several teams from the Division of Swap Dealer and Intermediary Oversight and the Division of Clearing and Risk that have carefully prepared the rulemaking documents presented today, patiently answered our questions, and tirelessly worked to accommodate our comments and input.

To reiterate, “teamwork” is not a catchy buzzword we occasionally weave into our speeches here at the CFTC.  We are proud of our long-established commitment to working with stakeholders to achieve effectively regulated markets.  Sometimes we play the position of head coach, sometimes co-captain, and sometimes referee, but in the end our markets and the public benefit from well-coordinated playbooks designed to achieve common goals.   Recent public health concerns and market volatility have tested our system and reminded us that everyone on the team has a critical role to play.
 

-CFTC-