Statement of Commissioner Rostin Behnam Regarding Tower Research Capital LLC

November 7, 2019

I respectfully concur as to the Commission’s determination today to accept an Offer of Settlement with Tower Research Capital LLC (“Tower”) and issue an order (the “Consent Order”) finding, among other things, that Tower engaged in a manipulative and deceptive spoofing scheme resulting in the largest civil resolution assessed by the Commission to date for such conduct. [1] I am supporting this determination because I believe the civil monetary penalty, restitution, and disgorgement in this matter are appropriately calibrated to the egregiousness of Tower’s actions.  

Additionally, and perhaps more relevant to the safety and transparency of CFTC markets, Tower’s actions demanded a firm and immediate response to send an unequivocal message to all market participants that any individual or organization who manipulates CFTC markets for personal gain will be held accountable to the fullest extent of the law.  I commend the Division of Enforcement for its timely and judicious work on this matter. I also would like to thank the Department of Justice for their assistance. 

However, I write to express my extreme reservations with the Commission’s decision to issue a Consent Order which includes advice that automatic disqualification under Rule 506(d)(1) of the Securities and Exchange Commission’s (“SEC”) regulations[2] should not arise as a consequence of the Consent Order.  Under these unique circumstances involving such significant violations of the Commodity Exchange Act’s anti-fraud and anti-manipulation provisions, I do not believe that the Commission should provide a waiver to automatic disqualification from relying on certain exemptions from registration for private offerings under Rule 506(d)(1).  Section 926 of the Dodd-Frank Act[3] clearly states that disqualification from Regulation D offerings should result where there is a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct -- like Tower’s actions here.  Section 926 further specifies which state and federal financial and/or banking regulators to which the disqualification provision applies. 

Despite Section 926 not expressly including the Commission, in its 2013 rulemaking, the SEC, after receiving public input, added the “…CFTC to the list of regulators whose regulatory bars and other final orders will trigger disqualification.”[4]  The SEC added that “…conduct that would typically give rise to CFTC sanctions is similar to the type of conduct that would result in disqualification if it were the subject of sanctions by another financial services industry regulator.”[5]

Rule 506(d)(2)(iii) of the SEC’s regulations expressly provides that disqualification “shall not apply” if the relevant regulator “advises in writing” that disqualification “should not arise as a consequence of such order.”  According to the preamble, this “allows the relevant authorities to determine the impact of their orders.”[6] 

Today, the CFTC chooses to provide this advice in writing.  However, given the gravity of Tower’s actions, which involved unprecedented levels of spoofing, I am not comfortable advising the SEC that the automatic disqualification should not apply.  In instances of this magnitude, where fraud and abuse harmed market integrity and market participants, the SEC should be the sole authority regarding whether or not a waiver should result.  In much the same way that the SEC’s rule allows relevant authorities to determine the impact of their orders, allowing the SEC to determine whether automatic disqualification should apply here would insure that the relevant authority determines the impact of Regulation D. 

I also note that, Rule 506(d)(2)(iii) of the SEC’s regulations does not require that the written advice be included in a final order of the Commission; it only requires that such advice be provided “before the relevant sale.”[7]  Accordingly, it is not clear to me that, at this point, the Regulation D issue is ripe, and therefore, it should not have been a matter for settlement negotiations at this time.

Finally, and as a general matter, regardless of how major the infraction, I am concerned that the SEC’s 2013 amendments to Rule 506(d)(1), which added the CFTC to the list of regulators whose “regulatory bars and other final orders will trigger disqualification”,[8] and corresponding waiver authority, has added an unintended layer of complexity to the Commission’s ability, under the Commodity Exchange Act, to efficiently and effectively execute its enforcement duties.  In short, the SEC is best suited to issue waivers to its market participants from its rule; not the Commission.  In this instance, where Tower has not previously been required to register with the CFTC or the SEC, there is ample time for the SEC to consider whether the CFTC’s action against Tower today should result in automatic disqualification. 

For these reasons, while I concur in the sanctions in today’s matter, I do not agree with the Commission’s issuance of a statement that automatic disqualification under Section 506(d)(1) should not arise as a consequence of the order. 

I look forward to working with my fellow Commissioners to find an approach to the issuance of advice under Rule 506(d)(1) going forward that allows our Division of Enforcement to focus on the robust enforcement of the Commodity Exchange Act, and also allows the SEC to determine whether automatic disqualification should occur under its rules. 

Statement of Commissioner Dan M. Berkovitz on the Commission’s Orders of Registration for the European Energy Exchange, Euronext Amsterdam, and Euronext Paris

November 5, 2019

I support the Commission’s Orders of Registration to permit the European Energy Exchange (“EEX”), Euronext Amsterdam N.V., and Euronext Paris SA to offer direct access to their members and market participants in the United States.[1]  Section 4(b) of the Commodity Exchange Act (“CEA”) and part 48 of the Commission’s regulations require a determination that the foreign board of trade (“FBOT”) and its clearing organization are subject to comparable and comprehensive regulation in their home jurisdictions.  FBOT registration is subject to conditions specified in the Commission’s rules, and to any additional terms and conditions set forth in the Order of Registration.[2]  Once registered, an FBOT can offer its products directly into the U.S. market without having to register as a designated contract market, and without having to clear through a registered derivatives clearing organization.  These valuable commercial benefits are a direct result of the Commission’s ability to rely on the comparable and comprehensive regulation of overseas exchanges and clearing organizations in their home countries.

The Orders of Registration for EEX, Euronext Amsterdam, and Euronext Paris include important references to international comity.  In each Order, the Commission reserves the right to “condition, modify, suspend, terminate, or otherwise restrict” the Order, based on “any material changes in the applicable regulatory regimes, including developments relating to international comity . . . .”[3]  As the Commission discussed during its recent consideration of a proposed rule to exclude the European Stability Mechanism from the definition of financial end user in the Commission’s margin regulations, comity is a two-way street.[4]  Reciprocal respect for the interests of other sovereigns is an important factor in establishing comity, and is a critical feature in ensuring harmonious regulation of entities operating across borders and jurisdictions.  I am pleased that the Commission has emphasized comity in today’s Orders, and I encourage it to continue conditioning future grants of regulatory benefits for foreign entities on reciprocal treatment for U.S. firms operating overseas.

The Commission’s regulatory regime recognizes the value of comity amongst regulators in the successful operation of modern, global derivatives markets.  In the case of FBOTs, the Commission acknowledges the importance of comity through a willingness to rely on comparable and comprehensive regulation of overseas exchanges and clearing organizations by foreign regulators.  A lack of reciprocity could call into question whether a foreign regulatory regime is in fact comparable to the Commission’s framework for markets and market participants in the United States.  All stakeholders should continue working to preserve comity and its role in advancing well-regulated derivatives markets throughout the world.

I thank my fellow Commissioners and staff of the Division of Market Oversight and the Office of General Counsel for their work on this matter.

Dissenting Statement by Commissioner Brian Quintenz before the Open Commission Meeting of November 5, 2019

FBOT Registration

November 5, 2019

Today, the Commission is considering whether to formally register as foreign boards of trade (FBOTs) three prominent European futures exchanges (Euronext Amsterdam, Euronext Paris, and European Energy Exchange) that have been permitted to directly access the U.S. market for many years under staff no-action relief.[1]  Both the Commission’s previous policy of granting no-action relief and current policy of registering foreign exchanges as FBOTs are premised on a policy of deference to foreign regulatory regimes.  The Commission assesses whether foreign exchanges are regulated comparably to how the CFTC supervises U.S. designated contract markets (DCMs), and, if so, permits the exchange to access U.S. markets without complying with the Commission’s DCM regulations or being subject to regularly scheduled CFTC examinations.[2]  This policy efficiently promotes cross-border markets and rationally focuses the Commission’s supervisory resources on U.S. exchanges.  While I do not disagree with the substance of granting these exchanges permanent status as registered FBOTs, I do disagree with the timing of today’s move by the Commission to finalize and formalize the status of these three European exchanges as registered FBOTs.

Last month, dissenting to the Commission’s proposed exclusion for the European Stability Mechanism (ESM) from the Commission’s margin requirements for uncleared swaps,[3] I reiterated 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).[4]  Specifically, the absence of the agreement’s re-affirmation directly implied the agreement’s abrogation by the European Market Infrastructure Regulation 2.2 (EMIR 2.2).[5]  While the possibility still exists for a successful outcome to EMIR 2.2 that fully respects the CFTC’s ultimate authority over U.S. CCPs, still no assurance has been given to remove that doubt. 

Today’s vote, however, is not on a proposal, but on multiple final formal registrations. While I believe the Chairman and all my fellow Commissioners are just as committed to a satisfactory resolution to this cross-border discussion with the E.U. as I am, I question whether we should act on this today and under what conditions the decision will be made to reconsider this status should this discussion not resolve productively.  

FBOT registration depends on the CFTC’s trust in our E.U. counterparts.  Such trust continues to be misplaced until the E.U. can provide assurance that the CFTC-EC CCP Agreement will be upheld. I therefore dissent from today’s action to register Euronext Amsterdam, Euronext Paris, and European Energy Exchange as FBOTs.  

Statement of Commissioner Dawn D. Stump Regarding Foreign Board of Trade Registration Applications of Euronext Amsterdam, Euronext Paris, and European Energy Exchange

November 5, 2019

I am pleased to support the Orders of Registration before us today that will allow three foreign boards of trade (“FBOTs”)[1] to permit identified members or other participants located in the United States (“U.S. Participants”) to enter trades directly into the FBOTs’ order entry and trade matching systems (a practice referred to as “direct access”).  Upon approval by the Commission, these three FBOTs would join 18 others that are currently registered under the CFTC’s FBOT registration rules.  I also am pleased to have this opportunity to discuss a successful, yet often overlooked, aspect of the CFTC’s regulatory program that reflects the principles that I believe should govern our approach – and that of our regulatory counterparts around the world – to the regulation of all market infrastructure providers. 

The CFTC’s historical, and current, approach to FBOTs seeking to provide direct access to U.S. Participants is based on: 1) deference to comprehensive, comparable regulation of other jurisdictions; and 2) where the CFTC must act to carry out its supervisory responsibilities under the Commodity Exchange Act (“CEA” or “Act”), such actions are principles-based and tailored to the CFTC’s mission to prevent disruptions to the integrity of the markets it regulates.[2]  Importantly, over the decades, we have not seen any significant market integrity episode involving FBOTs that might call into question this approach. 

Because the CFTC’s treatment of FBOTs often “flies under the radar,” a brief history is useful. 

Congressional Intent

We start, of course, with the dictates of our governing statute.  Section 4(a) of the CEA states Congress’ intent that a futures contract may be traded lawfully in the United States only if it is traded on or subject to the rules of a designated contract market (“DCM”) – but excludes from this designation requirement contracts made on or subject to the rules of an FBOT located outside the United States.[3]  CEA Section 4(b), in turn, authorizes the CFTC to adopt rules governing foreign futures and options contracts, but explicitly prohibits the CFTC from adopting rules that either:  1) require CFTC approval of any contract, rule, or action of any FBOT or clearinghouse for such FBOT; or 2) govern in any way any rule, contract term, or action of any FBOT or clearinghouse for such FBOT.[4] 

In short, the CFTC’s statutory mandate with respect to the operations of FBOTs has always been mindful of the need for international comity

Staff No-Action Process

Over time, though, innovations in technology and the electronic trading of derivatives often made it hard to tell when an FBOT listing contracts that were traded by U.S. persons really was “located outside the United States” and thus outside the scope of the CFTC’s authority over DCMs.  Beginning in the mid-1990s, FBOTs that had developed the capability to provide electronic direct access to U.S. Participants asked the CFTC to confirm that they could do so without having to submit to regulation as a DCM. 

Mindful of Congress’ mandate not to interfere in the operations of foreign trading platforms, the CFTC responded to these requests in a series of staff no-action letters.  Staff reviewed information and representations provided by the FBOT that related to, among other things, the rules and structure of the FBOT (with an emphasis on its financial integrity, market and trade practice surveillance and rule enforcement regime), various system integrity protections that govern the FBOT’s electronic trading system, the system’s related clearing and customer default protections, information concerning the regulatory structure to which the FBOT was subject, and the adequacy of information sharing with the CFTC by the FBOT and its regulator.[5]

In a Policy Statement issued in 2006 that endorsed the use of the staff no-action process for FBOTs that seek to provide U.S. Participants with direct access, the Commission noted that the no-action process was “based upon a review of, and ongoing reliance upon, the foreign market’s ‘home’ regulatory regime, and [was] designed to maintain regulatory protections while avoiding the imposition of duplicative regulation.”[6]  The CFTC’s Policy Statement further concluded that the standard conditions for granting no-action relief “have been reasonably and appropriately tailored to the factual circumstances raised by the applications for no-action relief.”[7]    

The CFTC’s Policy Statement

That 2006 Policy Statement was triggered, in part, when an FBOT that had received no-action relief notified the CFTC that it intended to list contracts whose settlement prices would be linked to contracts traded on DCMs regulated by the CFTC.  The Policy Statement observed that in a “global market environment” as had developed for derivatives trading, “conduct that takes place on markets located outside the United States may have an impact on U.S. futures and cash markets, as well as the members and users of those markets . . .”[8] 

Nevertheless, the CFTC did not react to these market developments abroad by moving to impose U.S. regulation on FBOTs.  It did not abandon its historically deferential approach regarding FBOTs, but rather took measures carefully calibrated to assure that developments in foreign jurisdictions did not adversely affect the CFTC’s ability to carry out its own regulatory responsibilities over DCMs. 

Specifically, the Policy Statement enhanced the CFTC’s no-action process by placing greater emphasis on information-sharing arrangements that would better enable the CFTC “to cooperate closely with foreign market authorities in order to ensure that the Commission can carry out its regulatory responsibilities.”[9]  The Policy Statement provided, among other things, that:  1) FBOTs and their regulators should have the power, authority, and willingness to share needed information with the CFTC; 2) FBOTs applying for no-action relief should sign relevant international Memoranda of Understanding; and 3) no-action relief should be conditioned on arrangements to obtain and share information required by the CFTC to carry out its domestic market surveillance responsibilities.[10] 

In early 2009, based on staff experience during the intervening period, the CFTC issued a Notice of additional conditions that would be imposed on no-action relief issued to FBOTs that list for trading by direct access from U.S. Participants any futures or option contract that is linked to a contract listed on a DCM.[11]  These conditions were targeted “to ensure that [FBOTs] apply to any linked contract comparable principles or requirements regarding the daily publication of trading information and the imposition of position limits or accountability levels for speculators as apply to the DCM . . . contract against which the linked contract settles.”[12]

The Dodd-Frank Act 

After the financial crisis, the Dodd-Frank Act (“Dodd-Frank”) amended Section 4(b) of the CEA to permit the CFTC to require FBOTs desiring to provide direct access to U.S. Participants to register with the agency.[13]  But Congress did not impose prescriptive requirements on FBOTs offering direct access, as Dodd-Frank largely left it to the CFTC to set out the details regarding FBOT registration. 

In doing so, however, Congress directed that the CFTC “shall consider whether any such [FBOT] is subject to comparable, comprehensive supervision and regulation by the appropriate governmental authorities in the [FBOT’s] home country.”[14]  I would note that it is no accident that this verbiage is similar to language included elsewhere in Dodd-Frank permitting the CFTC to exempt comparably and comprehensively regulated derivatives clearing organizations and swap execution facilities, further advancing the notion of international deference.

One area in which Dodd-Frank did impose specific requirements was with respect to linked contracts.  Dodd-Frank amended the CEA to prohibit an FBOT from providing U.S. Participants direct access with respect to a contract that settles against the price of a contract listed for trading on a DCM unless the CFTC determines that certain conditions are satisfied.[15]  The conditions set by Congress were drawn in part from those imposed in prior CFTC staff no-action letters, and are directly related to the integrity of the U.S. market that lists the contract to which the FBOT’s contract is linked and to the CFTC’s ability to oversee that market. 

Specifically, Congress required that if an FBOT wants to provide direct access for a linked contract, then the FBOT (or the foreign futures authority that regulates it) must have certain requirements that are comparable to those imposed on the DCM for the contract to which the FBOT’s contract is linked.  These include, for example, requirements relating to publication of daily trading information, position limits, large trader reporting, and providing information to the CFTC necessary to publish reports on aggregate trader positions.  The conditions also require the FBOT or its regulator to promptly notify the CFTC of certain changes relating to the linked contract in order to assure the CFTC’s ability to properly oversee the contract on the DCM to which the FBOT’s contract is linked.[16]

In short:  The hallmark of the FBOT registration provisions in Dodd-Frank is deference to foreign regulatory authorities that are providing comparable, comprehensive supervision and regulation of the FBOT.  And where the globalization of derivatives markets – in this case, the advent of linked contracts – compels the U.S. to impose conditions on an FBOT’s ability to provide direct access to U.S. Participants, those conditions are narrowly tailored to protect the integrity of the U.S. market to which the FBOT has linked its contract, and the CFTC’s ability to oversee that domestic market.[17]

The CFTC’s FBOT Registration Rules

This brings us to the CFTC’s FBOT registration rules, which we apply to the three registration applications before us today.  The rules do not stray terribly far from the agency’s historical no-action relief process.  Apart from new aspects such as including swaps[18] and addressing the linked contract provisions of Dodd-Frank, the rules continue to divide the registration requirements into the same categories that our staff evaluated in reviewing an FBOT’s request for no-action relief.[19] 

The CFTC made its intentions with respect to FBOT registration crystal clear in the preamble to the final rules.  These explicit statements of intent are worth quoting in full, as follows:

First, “when reviewing an application for FBOT registration, [the CFTC] will consider whether the FBOT and its clearing organization are subject to comprehensive supervision and regulation by the appropriate governmental authorities in their home country that is comparable to the comprehensive supervision and regulation to which DCMs and derivatives clearing organizations (DCO), respectively, are subject in the United States.”[20]  

Second, “[a]s in the case of the review performed under the no-action review process, the Commission’s determination of the comparability of the foreign regulatory regime to which the FBOT applying for registration is subject . . . will be a principles-based review . . . to determine if that regime supports and enforces regulatory objectives in the oversight of the FBOT and the clearing organization that are substantially equivalent to the regulatory objectives supported and enforced by the Commission in its oversight of DCMs and DCOs.”[21]

Third (in response to commenters’ concern about the CFTC adopting overly prescriptive registration rules for FBOTs), “the registration requirements . . . represent a principles-based approach to limited oversight and are not overly prescriptive.  FBOTs will be required to demonstrate . . . that they operate under supervision and regulation that is comparable to that provided by the Commission’s regulatory regime for DCMs, but will not be required to comply with the core principles applicable to DCMs under the CEA and the Commission’s regulations.”[22]

Finally, “[w]hile the regulations require the FBOT and its regulatory authority to provide critical information on an ongoing basis to the Commission, any on-going review of the FBOT and its clearing organization by the Commission will be limited to reviewing the required information and documentation that the FBOT must submit periodically to the CFTC and will not include direct surveillance of trading activity.”[23]

Here again, we see the CFTC’s dedication to:  1) deference to comparable, comprehensive regulation by our international regulatory colleagues; 2) a principles-based approach; and 3) requirements limited to those necessary to protect the integrity of U.S. markets and the CFTC’s ability to carry out its supervisory responsibilities with respect to those markets.[24]  Those defining characteristics of the CFTC’s approach to FBOTs under the registration rules are wholly consistent with the approach it has taken to FBOTs providing direct access to U.S. Participants throughout its history.

Conclusion

The deference that historically has characterized (and that continues to characterize) the CFTC’s approach to FBOTs providing direct access to U.S. Participants is a demonstration of international comity – an expression of mutual respect for the important interests of foreign sovereigns, and for our international regulatory colleagues overseeing well-regulated trading platforms and clearinghouses.  However, reciprocity also is an appropriate consideration in the exercise of international comity.[25]  As I previously have stated, I strongly prefer mutual recognition of comparable regulation to the application of retributive jurisdictional assertions, but will not rule out the latter should our own authority be disrespected.[26]  The Registration Orders that we are considering today expressly provide as much.

That said, it bears repeating that in Dodd-Frank, Congress authorized the CFTC to grant exemptions to other market infrastructure providers – specifically, clearing organizations and swap execution facilities – that are subject to comparable, comprehensive supervision and regulation abroad.[27]  It is my hope that as the CFTC, and our international regulatory colleagues, continue to implement the derivatives reforms to which the G-20 nations agreed at their Pittsburgh Summit in 2009, we apply the deferential, principles-based, and carefully calibrated approach that the CFTC historically has applied to FBOTs in the context of these other market infrastructure providers as well.[28]  This approach is sound, and it is time-tested.   

* * * * * * * *

I support the three FBOT Orders of Registration before us today.  I want to thank the staff of the Division of Market Oversight and the General Counsel’s Office for the time and effort they have put into them, and for addressing comments from my team. 

Statement of Chairman Heath P. Tarbert Before the November 5, 2019 Open Meeting

November 5, 2019

Thank you all for attending today’s open meeting of the U.S. Commodity Futures Trading Commission (CFTC).  We will begin by considering a proposed amendment to Commission regulation 160.30, which requires covered entities to adopt policies and procedures for administrative, technical, and physical safeguards to protect customer records and information.  This amendment will formalize the detailed requirements for those policies and procedures consistent with the Gramm-Leach Bliley Act.

The Commission will also consider three foreign board of trade applications submitted by the following European entities: (1) Euronext Amsterdam N.V. (“Euronext Amsterdam”); (2) Euronext Paris SA (“Euronext Paris”); and (3) the European Energy Exchange (“EEX”), (collectively, the “Applicants”).

Finally, I am proud to announce that today the Commission is celebrating the launch of its first-ever Veterans Affinity Group (“Veterans Group”), which will focus on the valuable role veterans play in fulfilling the CFTC’s mission.  It is an honor to welcome the Veterans Group with a public charter signing ceremony. 

Protection of Customer Records and Information

I support today’s proposed amendment to Commission regulation 160.30, which would establish specific requirements for policies and procedures protecting customer records and information.  Regulation 160.30 requires covered entities—including futures commission merchants, commodity trading advisors, commodity pool operators, introducing brokers, and swap dealers—to adopt policies and procedures to address administrative, technical, and physical safeguards for the protection of customer records and information. 

Today’s proposed amendment would require that these policies and procedures be reasonably designed to protect the security and confidentiality of customer records and information, address security hazards to that information, and guard against unauthorized use or access that can harm customers.  Formalizing these protections is important for those who entrust their sensitive information to CFTC-registered entities, as these customers must have comfort that measures are being taken to safeguard their data.  Requiring robust protections for customer information helps ensure that we are regulating our derivatives markets to promote the interests of all Americans.  Today’s proposed amendment advances that goal.

Foreign Board of Trade Registration Applications

My first strategic goal for the agency is to strengthen the resilience and integrity of our derivatives markets while fostering their vibrancy.  A core pillar of fulfilling this goal is to work with our international counterparts to reduce market fragmentation.  Accordingly, I support the applications of Euronext Amsterdam, Euronext Paris, and EEX to become registered foreign boards of trade pursuant to Section 4(b)(1) of the Commodity Exchange Act and Part 48 of the Commission’s regulations.  Achieving registration status will allow the Applicants to offer direct access to their electronic trading systems to members and other participants located in the United States, and to make eligible derivatives contracts available for trading by direct access from the United States. 

Part 48 establishes important requirements that foreign boards of trade must satisfy to become registered with the Commission.  In particular, Part 48 requires a determination that a foreign board of trade and its clearing organization are subject to comprehensive supervision and regulation by appropriate home country regulators that is comparable to the regulatory regime applicable to designated contract markets (DCMs) and derivatives clearing organizations (DCOs) under the Act and the Commission’s regulations. 

Regulatory comparability is determined by examining several requirements set out in Commission regulation 48.7.[1]  All three Applicants have worked diligently with our staff to demonstrate regulatory comparability, and all have credibly represented they have and enforce rules prohibiting fraud and abusive trading practices, and have implemented and enforce rules relating to market manipulation, price distortion, and other market disruptions, and that the derivative contracts they offer are not readily susceptible to manipulation.  All three Applicants are currently permitting direct access trading pursuant to existing staff no-action relief.

Euronext Amsterdam

Euronext Amsterdam, a public company organized under the laws of the Netherlands, operates a market licensed by the Dutch Ministry of Finance upon the recommendation of the Netherlands Authority for the Financial Markets (AFM), a signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (“IOSCO MMOU”).  Euronext Amsterdam is a wholly owned subsidiary of Euronext N.V., the holding company of the Euronext group, and is a “regulated market” for purposes of the European Community’s Investment Services Directive (the “European Directive”).  It is additionally subject to legislation adopted by the European Commission, the European Parliament, and the Council of the European Union. 

Euronext Amsterdam requires all members to meet specific fitness and financial soundness requirements.  It also employs a well-known trade matching system that complies with the IOSCO Principles for the Oversight of Screen-Based Trading Systems for Derivative Products (“IOSCO Principles”), and it clears trades through LCH, which is registered with the Commission as a DCO.

Pursuant to existing no-action relief, Euronext Amsterdam presently allows U.S. participants to trade certain of its listed futures and options contracts by direct access from the United States.[2]  Approving Euronext Amsterdam’s application for registration replaces and elevates to the Commission level this existing relief and allows direct access trading from the United States to continue without disruption.

Euronext Paris

Euronext Paris, also a wholly owned subsidiary of Euronext N.V., is a limited liability company organized under the laws of France.  It operates a market licensed by the French Minister of the Economy as a “regulated market” for purposes of the European Directive.  Euronext Paris is governed by France’s Monetary and Financial Code (COMOFI) and is supervised by the Autorité des Marchés Financiers (AMF) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR).  It is further subject to EC legislation as well as technical standards developed by the European Securities and Markets Authority (ESMA). 

Euronext Paris uses the same trade matching system as Euronext Amsterdam, Euronext’s Universal Trading Platform (UTP), which complies with the IOSCO principles.  Euronext Paris maintains appropriate tools to detect, investigate, and address regulatory violations, and it clears its trades through LCH.

Like Euronext Amsterdam, Euronext Paris is presently providing direct access trading pursuant to staff no-action relief that permits it to allow U.S. members and other participants to trade certain contracts from the United States.[3]  If its foreign board of trade registration application is approved, Euronext Paris will continue to be permitted to offer contracts for trading from the United States.[4]

EEX

EEX is based in Leipzig, Germany, and operates a regulated trading platform for a wide array of energy and agricultural contracts.  EEX is authorized to do business under the German Exchange Act and is subject to oversight by the Saxon State Ministry for Economic Affairs, Labour and Transport.  EEX clears through European Commodity Clearing AG (ECC), a licensed central counterparty (CCP) under the German Banking Act.  ECC observes the Principles for Financial Market Infrastructures (PFMI) adopted by the Technical Committee of IOSCO and the Committee on Payments and Market Infrastructures (CPMI).

EEX is subject to internal fitness and financial soundness requirements.  In addition, EEX’s automated trading system is provided through Eurex Deutschland’s trading platform, which incorporates the IOSCO Principles.  Like the other Applicants, EEX is providing for direct access trading for certain of its listed contracts pursuant to existing staff no-action relief.[5]

International Comity and Deference

I support issuing foreign board of trade registration orders for all three Applicants.  I believe doing so will promote vibrant derivatives markets and expand the liquidity available for trading and hedging.  The foreign board of trade regulatory regime hinges on deference to home regulators—in this case, the European Commission as well as member-state regulators. 

A sentiment that each Commissioner expressed during the last public meeting is that comity is a “two-way street.”  In recognition of the need for reciprocity, I believe approval of the applications is a sign of our good faith and continuing commitment to negotiate with the European Commission and ESMA about significant issues, particularly the implementation of the European Market Infrastructure Regulation (EMIR 2.2).

In supporting the issuance of registration orders, I note that language has been added to each order clarifying the CFTC’s ability to revoke foreign board of trade registration should we have concerns about material changes in the applicable regulatory regime, including developments relating to international comity.  It is my hope that such a revocation will never be necessary, as a relationship of comity between U.S. and EU home-jurisdiction regulators is essential to the smooth functioning of the transatlantic derivatives market, of which the registration of foreign boards of trade is an important component.

As my fellow Commissioners are aware, implementation of EMIR 2.2 could result in one or more U.S. CCPs being designated as systemically important to the EU financial system.  Such a designation could subject U.S. CCPs to direct supervision by ESMA, which risks market fragmentation and could inject systemic risk into the U.S. financial system.  This must be avoided, and the Commission will continue to review its engagement with EU entities as necessary. 

I continue to believe that no U.S. CCP poses a systemic risk to the EU financial system.  To the extent European authorities believe any U.S. CCP does in fact pose a systemic risk to the EU financial system, I would like to understand the reasons for this belief.  Such an understanding may allow the Commission to address the underlying causes of such concerns.  For example, if EU authorities believe the practice of posting European sovereign debt and Euro cash collateral to a U.S. CCP raises systemic risk concerns, the Commission could consider whether or not to allow such practices to continue. 

Signs of a lack of comity or deference may prompt additional reviews of exemptions and relief, similar to the Commission’s recent consideration of relief from the margin rule for uncleared swaps involving the European Stability Mechanism.  There is an opportunity to come to an agreement on the appropriate, deferential, and reciprocal means of supervisory cooperation that would allow each supervisor to monitor for any systemic risk that may be posed to the supervisor’s jurisdiction.

I hope that the recent positive signs from our European counterparts will continue, so that the Commission can maintain or provide further appropriate accommodations to European entities—mindful that cross-border trading, clearing, and intermediation all work to reduce fragmentation in our global derivatives markets.

The CFTC Veterans Affinity Group

Our veterans are an invaluable part of the fabric of our great nation.  Since the American Revolution, tens of millions of Americans have served our country in uniform.  As we approach Veterans Day, traditionally observed on November 11th, we are reminded that we are all forever indebted to them for their service and sacrifice.  Today, there are approximately 20 million veterans living in the United States.  We at the CFTC are proud to call more than 50 of them our colleagues.  They serve at every level of this organization, including on our executive leadership team.  I am honored to announce today that the CFTC will launch its first ever Veterans Affinity Group.

The primary purpose of the CFTC’s affinity groups is to assist the Commission in attracting, retaining, and promoting a diverse workforce of the best and brightest.  These groups are a valuable mechanism to build a culture committed to realizing our shared vision of being the global standard for sound derivatives regulation by offering employees leadership and professional development opportunities.[6]  Specifically, the Veterans Affinity Group will reinforce the agency’s core value of Teamwork[7] while highlighting the contributions veterans bring to our workforce.

The inception of the agency’s Veterans Affinity Group is a salute to all who have served.  I want to extend my deepest thanks and gratitude to my fellow Commissioners and their staffs, the Office of Minority and Women Inclusion, and the Office of the Executive Director for assisting me in turning this idea into reality.

Remarks by DSIO Director Joshua B. Sterling Before the Alternative Investment Management Association (AIMA)

October 30, 2019

Don’t Flip Your Wig: Contextualizing the Thematic Review Program for Registered Firms

Good morning.  I wish to thank AIMA for inviting me to participate in this important conversation, and for the hospitality extended by our hosts at Schulte Roth & Zabel today. 

For years, AIMA has successfully represented asset managers in their continued efforts to raise capital, invest client funds, and comply with different rule sets across the globe.  Since the asset management industry is ever more global each day, this mission is critical to the success of its members as they pursue value creation and value preservation for their own clients.

Chances are, your “alternative” investment firm trades derivatives subject to the CFTC’s jurisdiction.  And it’s even more likely – since you’re sitting here today – that your firm has registered with the CFTC as a commodity pool operator (CPO) and commodity trading advisor in order to take full advantage of the opportunities provided by trading in our strong and resilient derivatives markets.  In this vein, you may have heard that the Division of Swap Dealer and Intermediary Oversight (DSIO) will be undertaking on-site visits of select large CPOs and swap dealers, and that these visits will be thematic reviews as part of DSIO’s Examination Program.

We will spend some time today talking about these plans, and how they fit into broader efforts to recast DSIO’s world-class talent under our Five Building Blocks Program.[1]

Before I continue, please note that these remarks reflect solely my personal views and not necessarily those of the Commission or its staff.

Taking Action to Gather Facts, in Pursuit of Better Rules and Principles

Like many of you here, I am a child of the 1980s.  That was definitely a different world than the one in which we live today, no doubt rendered more fondly through the gauze of happy childhood memories.  There was so much to enjoy then – Transformers, Van Halen, E.T., and Cheers, to name a few.  And, my beloved Cleveland Browns even made it to three AFC title games.  On that last score alone, it seemed like anything was possible.

That decade also spawned one of my favorite quips about the role of government.  Perhaps you even know it – it’s the one about “the nine most terrifying words in the English language.”  As President Reagan then put it, those foreboding words were, “I’m from the government and I’m here to help.”[2] 

Always the steadfast advocate for smaller and more responsive government, the President was actually speaking of important practical steps that arguably departed from his philosophy – namely, measures to support America’s farmers in the face of adverse economic conditions.  So, while espousing a general skepticism of government intervention, President Reagan still saw the wisdom in targeted but powerful action to support a vital sector of the American economy.

His words resonate with me today, as I come before you to speak in more detail about my Division’s upcoming thematic reviews of CPOs and swap dealers.  To adapt old Dutch’s canny witticism to this purpose, I’m from the CFTC and I’m here to help. 

More to the point, my staffers are from the CFTC, too, and they will be visiting a handful of firms in order to learn more about a few key things.  Their work will be important to supporting the continued vibrancy, resiliency, and strength of our derivatives markets.  After all, your firms are vital to ensuring that our markets work for all participants.  So it’s just common sense for us to get our hands around a few key areas relevant to how your firms operate and interact with each other in our markets.  That’s particularly true now, as we start to think about how our CPO and swap dealer rule sets can be better suited to their purposes. 

It’s also an important thing to do, as we look to lessen our reliance on the no-action relief process:  If we are seeing fewer fact patterns coming in the door on an ad hoc basis, we’ll want to have a programmatic and transparent way of going to the market to gather the facts we need to run the Division’s programs and support the CFTC’s mission of promoting strong, resilient, and vibrant markets through sound regulation. 

Our Vision:  Improving Our Industry Sightlines, With a View Towards Principles-Based Regulation

For the first time in the CFTC’s nearly 45‑year history, we have a clear vision statement:  to be the global standard for sound derivatives regulation.  As the Chairman has indicated, to promote and achieve sound regulation, we need to use the right tools, at the right time, for the right reason.[3]

To understand when and how best to use those tools, we need to have a comprehensive understanding of the markets that we oversee, as well as the activity of our registrants in those markets.  Whenever we have the potential for blind spots in our oversight, there is a risk that we will fail to provide for sound regulation.

Here is the issue, simply stated:  DSIO has not itself conducted direct reviews of CPOs and swap dealers, yet we are the registrant oversight division of the federal regulator for the derivatives markets.  Through targeted thematic reviews, we hope to both mitigate the potential for blind spots in our oversight and enhance our engagement with registrants.  The reviews will support our efforts to take a principles-based approach to registrant oversight when possible. To articulate clear principles, after all, we first need to have a better handle on how CFTC rules affect our registrants.

Now, let’s dig in.

What Do We Want?  A Brief List

It’s been a few weeks since we announced the refashioning of our Examination Program to include thematic reviews of CPOs and swap dealers.[4]  That Program is part of our Five Building Blocks Program, which we are using to optimize the efforts of my Division’s world-class staff to advance the CFTC’s mission.  The Five Building Blocks have a simple purpose:  Working together, they will help the Division gather facts to inform better rules and guidance.

Since the time of our announcement, several questions have arisen about what we’re planning to do.  That’s fair enough.  Although we intend to be targeted in these reviews, it’s a big change in our overall posture.

So, let me provide some clarity about our plans.  I hope this exercise will help quell at least some of your concerns:

What is a thematic review?  It is simply a targeted look into specific areas of interest to my Division.   Each area of interest relates to potential rules and rule amendments that the Division is interested in evaluating.  Thematic reviews can be distinguished from other types of examinations in the following respects:

• First, they are targeted.  Our teams will focus on just a few issues that the Division may consider recommending to the Commission for potential action in the coming months.  They are not “all areas” reviews of firms, nor are they “event driven” sweeps at this point.
• Second, they are informational.  We are looking to gather information from individual firms, assess that information on an individual basis, and compare our assessments across firms to identify potential better ways of doing things.  While this process will involve assessing what we find, we will not be issuing deficiency letters.  We would expect to publish an examination manual that would give firms an understanding of our process before doing so.
• Third, they are educational. 
  • We intend to take what we’ve learned from our assessment and share our findings on potential areas of improvement in a general report of review.  That report will explain our scope, describe the general nature of the types of firms selected, and compare and contrast the different ways firms tackle the issues involved.  If we spot potential better ways of doing things, we’ll flag them for registrants.  In this way, the thematic reviews will have a leveraging effect.  That is, we will look at a few firms and use what we find to educate all firms. 
  • The “lessons learned” that we communicate will not be one size fits all.  We anticipate that any findings about good practices will be unlikely to fit every firm because firms have different businesses and structures.  Since the characteristics of the population we review probably won’t line up with the characteristics of every firm out there, firms will have flexibility to decide whether or how to implement our guidance as result.  To insist otherwise would not promote smart, effective, and practical regulation of our registrants.
• Finally, they are confidential, much like other types of reviews and examinations to which your firms have been subject.
   

Onto a few questions that we’ve heard through the grapevine:

Why are you conducting these reviews – what are your goals?  

• We have two principal goals for these reviews – to communicate better ways of doing things to the industry, and to gather information that can inform potential rule changes for CPOs and swap dealers.  We want our rules to be smart, effective, and practical, so gathering facts about how the rules work in the real world can only help us do a better job of achieving that goal.

What is the anticipated scope of these reviews, in terms of timing?  

• Our plan is to conduct each review within five business days onsite.  We expect to request some documents in advance, and to have some lead time to review those materials before we arrive.  We do not plan to have follow-up requests or follow-up visits as part of this process, as we expect good cooperation from the registrants involved.  Of course, if a particular firm does want to have further communications with us, we will be happy to continue the conversation.

How many firms will be selected? 

• We do not yet have precise figures, but you can expect that a limited number of CPOs and swap dealers will be reviewed.  We want to be smart about this initial phase of our reviews and focus our resources on doing the best possible job in a handful of cases, rather than spread our resources too wide.
• At the same time, we want to have a sample of CPOs and swap dealers sufficient to derive lessons learned that can provide a solid basis for communicating our views on market practices and for considering those practices as we evaluate potential future rule changes.

Is there any specific profile of firms you’ll be selecting? 

• We will attempt to select firms for the review process that are likely to have a significant impact on the derivatives markets.  Certainly, the size of the firm and the relative amount of its derivatives trading will be important considerations for us at this stage. 
• This approach makes intuitive sense to us, as we consider the fact that the CFTC is principally a market regulator.  We should consider the potential market impact of registrant-focused rules in assessing how firms operate and whether those rules should be revised in any way.

Will you be duplicating or replacing NFA examinations?  

• No.  The thematic reviews will have more focused and tailored scopes than the broader compliance examinations that NFA undertakes, which are important in their own right and vital to the successful oversight of all registrants.  The thematic reviews are looking at key issues across firms for the purpose of providing general guidance and informing potential future rulemakings.

Are you really just going out to look for matters to refer to the Division of Enforcement?

• No, we are not.  Nor will the Division of Enforcement participate in the review teams.  That said, DSIO communicates regularly with Enforcement, as do other policy-making Divisions, as part of the Commission’s ongoing work.
• In addition, under our Guidance Program, we are developing processes for registrant oversight that will enable us to retain the ability – within clearly established parameters – to determine that particular indications of non-compliance do not warrant referral to Enforcement based on the available facts and circumstances.  We expect to discuss those decisions with Enforcement periodically, so that we can confirm that our assessments are consistent with the separate roles of DSIO, as an overseer of registrants, and Enforcement, as the enforcer of the Commission’s requirements.
• Having said all this, my Division retains complete flexibility in setting course and changing tack as the circumstances of any specific review or multiple reviews dictate.

* * * * *

To sum up, our thematic reviews are intended to enhance our oversight abilities.  They will be targeted, educational, and informational, and our review process will respect your legitimate interests in confidentiality.  We will do what’s necessary to make sure that this initial wave of thematic reviews is successful and yields good outcomes, in terms of guidance to registrants and inputs for potential future rulemakings. 

Thank you for your time.  I really do hope this discussion sheds some light on our thinking and can help you begin to prepare for our upcoming thematic reviews.  My world-class staff and I look forward to working with you.

Thank you all again.

Remarks of CFTC Commissioner Brian D. Quintenz at 2019 ISDA Annual Japan Conference

“Significant’s Significance”

October 25, 2019

Thank you for that very kind welcome.  Before I begin, let me quickly say that the views contained in this speech are my own and do not represent the views of the Commodity Futures Trading Commission (Commission or CFTC).

Deference:  The Antidote to Market Fragmentation

Since the G-20 met in Pittsburgh over a decade ago, the world’s largest swap markets have made substantial progress toward implementing derivatives market reforms, including clearing, margin, capital, and trade reporting requirements.

However, jurisdictions implemented these reforms at different paces, and sometimes, in different ways.  Some of the implementation choices have created competitive disadvantages for one jurisdiction’s entities to participate in another jurisdiction’s markets.  This has led to a new challenge for regulators: regulatory-driven market fragmentation.  Liquidity pools have fractured in response to regulatory disputes over the extraterritorial application of jurisdictions’ rules, with counterparties from one jurisdiction unwilling to transact with counterparties from another jurisdiction if conflicting or overly punitive sets of regulations apply.  In order to avoid inconsistent, overlapping rules, counterparties – in particular derivatives end-users – are forced to restrict their activities by trading solely with domestic firms in their home markets.  Regionalized derivatives markets exacerbate liquidity risk, remove competitive pricing pressures, amplify volatility in times of market stress, and ultimately make the markets less efficient.

However, this concerning trend toward market fragmentation is not irreversible.  The key to fostering a global, vibrant swaps market lies in each jurisdiction’s recognition of, and deference to, the sovereignty of other jurisdictions, as well as other regulators’ supervisory interests in regulating their own local markets.  The good news is that the antidote to regulatory-driven fragmentation is within our reach, provided jurisdictions are collectively motivated to re-evaluate the extraterritorial application of their regulations.  This is one reason why I was so pleased that Japan chose to highlight and prioritize the harmful effects of market fragmentation across global financial markets during its G-20 presidency.[1]

Japanese leadership on this topic has encouraged international standard-setting bodies, like the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB), to examine the fragmentation of derivatives markets.[2]  Both reports suggest that deference between regulators is crucial to mitigating or avoiding the adverse effects of fragmentation.  I strongly agree.  We must acknowledge and embrace the comparable regulation present in other jurisdictions.  The full promise of the G-20 reforms cannot be realized by a single nation acting alone, but progress can be actively defeated if each jurisdiction expects all others to adopt the breadth, depth, and detail of their rulesets.

A New Approach

For our part, the CFTC has not always embodied a deference-based cross-border approach.  Now, some claim the Commission’s expansive extraterritorial posture was the result of historical context and jurisdictional rulemaking timing differences.  I disagree.  Personally, I saw a consistent theme overarching the CFTC’s cross-border policies from 2011 through 2016: never miss a chance to ignore the word “significant.”

When the CFTC first adopted many of its post-crisis swaps reform rules, including its cross-border guidance in 2013, the agency raced ahead of other G-20 nations, despite a clear directive from Congress in Dodd Frank to “consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation [of swaps]”.[3]  As of 2013, many jurisdictions had not yet enacted comparable regulatory frameworks, and some had enacted none.  Perhaps taking advantage of that unfinalized international regulatory landscape, the 2013 cross-border guidance and subsequent agency actions appeared grounded in a belief that almost every swap a U.S. person enters into, regardless of location or counterparty, should be subject to, and presumably protected by, CFTC regulation.

In my opinion, the foundational principle underlying any CFTC regulation of cross-border swaps activity, and the prism through which all extraterritorial reach by the CFTC must be viewed, is the statutory directive from Congress that the agency may only regulate those activities outside the United States that “have a direct and significant connection with activities in, or effect on commerce of, the United States.” [4]   Congress deliberately placed a clear and strong limitation on the CFTC’s extraterritorial reach, recognizing the need for international comity and deference in a global swaps market.

Pursuant to this statutory limitation, it is not sufficient for activities beyond the borders of the United States just to have a “direct” connection with activity in the United States or to have some effect on U.S. commerce.  Instead, in order to warrant the extraterritorial application of CFTC rules to other jursidictions’ markets, Congress requires the connection or effect to be both direct and significant. Both of these modifiers are consequential, though an examination of recent agency history may not lead one to think so.

Post-crisis CFTC actions, proposals, rules, guidance, or advisories placed almost their entire focus on seeking a “direct” connection between foreign activity and U.S. activity, with very little, or no, focus on weighing the “significance” of that activity or its potential effect on U.S. commerce as a whole.  How else to explain the 2013 staff advisory, which focused simply on whether a swap was “arranged, negotiated, or executed” in the U.S. (ANE transactions), or the 2016 cross-border proposed rule that based its expansive reach solely on the accounting practice of financial statement consolidation? [5]

With respect to the treatment of foreign consolidated subsidiaries (FCS), the 2016 proposal would have treated FCS with ultimate U.S. parents like U.S. persons and required them to include both their U.S.- and non-U.S. -facing swap dealing activity in their de minimis count.  This approach would have required these entities to include dealing activity occurring entirely outside the United States between two non-U.S. persons in their swap dealer registration calculation.  The 2016 proposal found that this non-U.S. activity had a “direct and significant” effect on the U.S. financial system - irrespective of the parent’s size, the entity’s size relative to the parent, or the risk of the entity’s activity - simply due to the consolidated financial reporting required by U.S. GAAP.[6]

I fundamentally disagree with the expansive interpretation of the Commodity Exchange Act (CEA) in the 2016 proposal, and I’m pretty sure it wasn’t what Congress intended when it inserted the word “significant.”  Although FCS activity, through accounting statements, may create a direct connection to the U.S. parent, I do not believe that consolidated financial reporting, by itself, automatically establishes that this connection is significant.

Before exerting its jurisdiction, I think the Commission should examine the following factors to determine if an FCS’ activities could pose a significant risk to the U.S: 1) the size of the U.S. parent entity itself (and therefore the parent’s significance to commerce in the United States), 2) the relative size of the FCS to that parent, 3) the scope of the subsidiary’s extraterritorial swaps activities, and 4) whether the FCS is already subject to consolidated supervision and regulation by another U.S. regulator, such as the Federal Reserve, or is located in a jurisdiction with comparable capital and margin requirements.  These domestic and foreign regulators have a strong supervisory interest in regulating the swap activity of these entities.  Deference to their purview is more than appropriate.

Secondly, and as previously mentioned, a 2013 staff advisory suggested that non-U.S. swap dealers must comply with certain transaction-level requirements, like clearing, margin, or trade reporting, with respect to ANE transactions.[7]  Subsequently, in response to great market uncertainty, staff issued a no-action letter relieving non-U.S. SDs from complying with certain transaction-level requirements for their ANE transactions.[8]

It is my view that CFTC transaction-level requirements should not attach to ANE transactions, which are, by definition, executed between two non-U.S. persons.  The swaps regime created by Dodd Frank is based on location of risk, not location of activity.  If the dealer or the counterparty to a swaps trade is U.S.-based, then the risk of that transaction resides in the U.S. and implicates U.S. rules.  However, the risk of ANE trades resides outside of the United States.  Therefore, those transactions are most appropriately managed by those foreign firms and their local supervisory authorities.

Applying discrete rules on a case-by-case basis using a vague construct that must be continuously interpreted is the definition of poor public policy.  If anything should apply to these transactions, it should apply to the U.S. personnel, such as business conduct standards, and not to the trades themselves.  Under no circumstances should such a diluted application of the word “significant” brought forward by the “ANE” standard warrant any additional U.S. regulatory consideration.

Conclusion

Market fragmentation poses serious risks to the liquidity and health of the derivatives markets.  The antidote is deference.  And one of the lynchpins to successful deference is appropriately scoping in, as well as out, the correct cross-border activities and entities.  Keeping in mind the paramount statutory limitation on the Commission’s extraterritorial reach, I am hopeful the Commission will codify a limited, but appropriate, regulatory framework for cross-border swap dealing.  Through deference and engagement, the Commission can work alongside our other like-minded international counterparts to ensure a well-regulated, liquid, global swaps market.