Joint Statement of Chairman Heath P. Tarbert and Commissioner Brian D. Quintenz in Support of Interagency Cooperation to Strengthen U.S. Financial Markets and Better Serve the Real Economy

September 16, 2019

We are pleased to support the interagency amendments to the Volcker Rule, which simplify the rule’s application; provide objective, clear standards for prohibited and permissible activities; and tailor the rule’s requirements to focus on entities with the most significant trading activity.  The revisions ensure that banking entities are able to serve their clients effectively and provide the traditional banking services that underpin our nation’s economic growth, without concern that such activity could implicate the Volcker Rule’s prohibitions.  The final rule highlights how cooperation among financial regulators can address the unintended consequences of prior regulations and ensure that capital formation and financial intermediation are not stifled by unnecessary regulatory complexity.

But more work remains to be done.  It is critical that regulators continue to evaluate the efficacy of post-crisis reforms to ensure that they work in concert to support the vitality, resiliency, and health of the real economy.  Just as the Commission worked productively and supportively with the banking regulators to adopt appropriate adjustments to the Volcker Rule, it is our hope and expectation that the banking regulators will continue to work with us to recalibrate certain capital requirements to ensure they are appropriate for derivatives transactions.

The banking regulators have recently proposed a rule to adopt the standardized approach for counterparty credit risk (SA-CCR) methodology for purposes of calculating risk-weighted assets under capital requirements.  The proposal also incorporates a modified version of SA-CCR into a firm’s supplementary leverage ratio (SLR) calculation.  As proposed, the implementation of SA-CCR could have a profoundly negative impact on the derivatives markets generally, and particularly on America’s energy producers and consumers—including farmers, ranchers, processors, manufacturers, retailers, and any business that relies on the transportation of physical goods.

With respect to the SLR calculation, our Commission has consistently advocated for adjustments that would allow clearing members to take into account segregated initial margin received from clients.[1]  Reworking the SLR formulation is critical to ensuring that firms are not disincentivized from offering clearing services to end users and other clients.  It is also critical to ensuring that central counterparties—some of which are systemically important—not be deterred from increasing margin requirements when appropriate for their continued safety and soundness.

Recognizing these concerns, the Basel Committee on Banking Supervision recently revised its recommended leverage ratio treatment for client cleared derivatives to include an offset for initial margin.  We urge the banking regulators to move swiftly to revise our domestic regulatory framework consistent with the international standards.  A margin offset would level the global playing field and, most importantly, avoid further clearing member consolidation and reduction of client clearing services in the United States.  An increased number of clearing members would benefit the U.S. derivatives markets by offering greater choice to customers.  Moreover, derivatives exposures would be allocated among a greater number of participants, which may reduce systemic risk within U.S. financial markets.

In its current form, the SA-CCR proposal arbitrarily treats all energy commodities the same, irrespective of their individual risk profiles.  As a result, the proposal is likely to increase transaction costs and diminish market liquidity in the commodity derivatives markets.  Although the Basel Committee did not provide transparency into its own decision-making process to assign supervisory factors to specific commodity asset classes, the Committee did distinguish between electricity and oil/gas commodities—assigning the latter a much lower supervisory factor compared to the charge for electricity contracts.  In contrast, the SA-CCR proposal adopts an inefficient approach that would uniformly apply electricity’s higher supervisory factor to the entire energy hedging set.

The end result would be nothing less than punitive treatment for oil and gas derivatives transactions.  Indeed, commenters have noted that a bank’s exposure calculations under SA-CCR with an end user counterparty could increase up to 460%.[2]  Increased exposure calculations due to this mispricing of risk will result in higher capital charges that will likely be passed on to end users in the form of higher transaction pricing.  This could burden everyday Americans with increased energy bills and higher prices for groceries and other consumer products.  To avoid that outcome, we believe the supervisory factors for all types of commodities should be revisited to ensure they are appropriately calibrated to the actual risks of the underlying commodity and the maturity of the derivatives contract.

Similarly, in order to ensure that end users’ exposures to bank counterparties are not over-inflated and that liquidity constraints do not preclude prudent risk management, we recommend that banking regulators consider recognizing relevant non-cash collateral arrangements under SA-CCR, when consistent with principles of safety and soundness.  Alternative collateral arrangements are frequently used by banks in commodity derivatives transactions with end users to create “right way” risk and can be effective means of managing the credit risk of certain derivatives transactions.  Allowing for the appropriate degree of recognition of these risk-reducing arrangements would increase the risk-sensitivity of SA-CCR and reduce the increased transaction costs likely to be borne by commercial end users.

As the final rule adopted by the Commission and our regulatory counterparts demonstrates, interagency cooperation over areas of joint jurisdiction can yield significant benefits and efficiencies for U.S. financial markets.  We hope to continue this coordinated approach to promote robust, competitive U.S. derivatives markets that support the growth and well-being of American businesses.  We believe the changes discussed above are necessary for ensuring that commercial firms are reliably able to access liquid, efficient derivatives markets to manage and hedge the risks of their core businesses.  We also believe these changes will yield benefits and efficiencies for the real economy.  They will help support our energy, industrial, and manufacturing sectors that are essential for the prosperity of American workers and families.

Statement of Commissioner Dan M. Berkovitz Regarding the Commission’s Final Rule on Position Limit Requirements for Security Futures Products

September 16, 2019

I support today’s final rule to amend the Commission’s position limit requirements for security futures products (“SFPs”).

The final rule updates SFP position limit requirements that the Commission originally adopted more than 18 years ago, and that have remained largely unchanged since then.  It helps align equity-based SFP position limits with the limits that national securities exchanges apply to equity options.  These measures, together with recent SFP margin proposals issued jointly with the SEC,[1] will help to level the regulatory playing field between SFPs and equity options.  It is important to ensure that regulatory differences do not disadvantage SFPs as a product class, while maintaining effective position limits to protect markets and market participants.

The Commodity Futures Modernization Act of 2000 (“CFMA”) permitted trading on SFPs, subject to certain conditions.[2]  The CFMA established similar regulatory standards for SFPs as for security options, including in the areas of coordinated surveillance across SFP, option, and security markets; coordinated trading pauses and halts; and margin levels.  The CFMA also amended both the Commodity Exchange Act and the Securities Exchange Act to require that trading in SFPs not be readily susceptible to manipulation, and that it not facilitate manipulation of an SFP’s underlying security.[3]  The final rule is consistent with the CFMA’s intent that SFPs and security options be subject comparable regulation, including in any position limits applicable to SFPs and equity options.[4]

In 2001, the Commission adopted spot month position limit requirements for equity-based SFPs that were broadly analogous to the equity option limits in place at the time.  Higher limits or position accountability were permitted based on the average daily trading volume and the number of shares outstanding of the security underlying an SFP.  Today’s final rule increases the default SFP position limits in line with current minimum position limits in equity options.

Position limits are important to fair, well-functioning markets.  The Commission has noted that national securities exchanges have raised position limits on equity options, with no apparent adverse impact.  The preamble to the final rule also reiterates boards of trades’ obligation under the Core Principles to adopt position limits or accountability to “reduce the threat of market manipulation or congestion.”[5]  These obligations would include establishing SFP position limits that are lower than the levels specified in this final rule if necessary and appropriate.

The final rule also amends the calculation method for equity-based SFP limits above the default level to incorporate a percentage of deliverable supply.  In this regard, the final rule more closely aligns the SFP limits with the Commission’s historical practice of considering deliverable supply in setting spot month limits for physical delivery contracts.  The final rule also allows for position accountability for SFPs based on the most liquid of underlying securities.

I commend Commission staff for their work on this final rule.

Statement of Commissioner Dan M. Berkovitz on Proposed Rule to Amend Rulemaking Procedures

September 16, 2019

I concur in issuing for public comment the proposed rulemaking to amend part 13 of the Commission’s regulations.  Part 13 established procedures for undertaking rulemakings by the Commission.  As noted in the release, the provisions of part 13 that would be eliminated overlap with the provisions of the Administrative Procedure Act (“APA”) that the Commission also follows in its rulemaking process.  Notably, the procedures for the public to petition the Commission currently in part 13 would remain.

This rulemaking provides us with an opportunity to request comment from the public on improving the Commission’s rulemaking process.  Section 2(a)(12) of the Commodity Exchange Act authorizes the Commission to promulgate regulations governing the Commission’s procedures.  I encourage the public to submit comments recommending procedures the Commission could adopt to enhance the transparency and effectiveness of our rulemaking process and the opportunities for the public to comment. 

I also strongly support adding a web page to the CFTC’s web site that explains in plain language the Commission’s rulemaking process and how stakeholders and the general public can play an important role through the statutorily mandated notice and comment process.  It is important for government to serve the people by being transparent about the procedures we use to make our rulemaking process transparent.

Dissenting Statement of Commissioner Dan M. Berkovitz on Volcker Rule Amendments – Final Rule

September 16, 2019

Congress adopted the statute commonly known as the “Volcker Rule” in the wake of the 2008 financial crisis to prevent banks that benefit from federal depository insurance or other government support from taking excessive risks that could lead to future taxpayer bailouts.  The Volcker Rule prohibits proprietary trading and the owning of hedge funds and private equity funds by banks and their subsidiaries (“banking entities”), with certain exceptions and exemptions.  In 2013 the Commission and other financial regulators adopted regulations to implement the Volcker Rule.  The final rule before the Commission today (“revised Volcker Rule”) substantially weakens these implementing regulations.

The revised Volcker Rule eliminates or reduces a variety of substantive standards in the current rule.  The revised Volcker Rule will render enforcement of the rule difficult if not impossible by leaving implementation of significant requirements to the discretion of the banking entities, creating presumptions of compliance that would be nearly impossible to overcome, and eliminating numerous reporting requirements.  The revised Volcker Rule also substantially reduces the bank trading activity covered by the rule.  Finally, the revised Volcker Rule includes a number of changes and additions not contemplated or adequately discussed in the notice of proposed rulemaking (NPRM) in violation of the Administrative Procedure Act (“APA”) requirements for public notice and comment for rulemakings.

For these reasons, I dissent.

Weak Regulation and Enforceability Concerns

Nearly every amending provision of the revised Volcker Rule adopts the weakened provisions from the NPRM, further weakens the proposed changes, or makes new changes that weaken or eliminate existing requirements and standards.  New presumptions of compliance favoring the banking entities, regulatory determinations left to the banking entities, and reductions in reporting requirements by the banking entities will make the revised Volcker Rule more difficult to enforce.  The cumulative effect of this myriad of changes is a set of regulations that is ineffective and unenforceable.  Although a single chip off a sculpture, by itself, may not create a noticeable blemish, widespread chiseling will disfigure the object.  Such is the result here.

The “trading account” definition and related regulatory exclusions in the 2013 rule determine which financial transactions are subject to the restrictions on proprietary trading.  Financial transactions of banking entities are subject to the Volcker regulations if they fall within certain “prongs” established in the trading account provision.  The revised Volcker Rule rejects the “accounting prong” proposed in the NPRM and effectively jettisons the existing “short-term intent prong” for most entities.[1] In addition, there are a number of newly created outright exclusions of whole types of transactions and broadening of existing exclusions under the revised Volcker Rule.

FDIC Commissioner Martin Gruenberg provided an analysis of how these changes will significantly reduce the banking activity subject to Volcker oversight.   “By excluding these financial instruments from the Volcker Rule, the final rule . . . opens up vast new opportunity –hundreds of billions of dollars of financial instruments – at both the bank and bank holding company level, for speculative proprietary trading funded by the public safety net.”[2]

The 2013 Volcker rules define the “trading desk” as the “smallest discrete unit of organization” that purchases and sells financial instruments.  The revised Volcker Rule removes the quoted text, and instead provides four broad criteria for designating a trading desk.  The rule then allows the banking entities to designate the trading desks for purposes of Volcker.

The new trading desk designation criteria appear to be broad enough that a “trading desk” could include whole business lines, divisions, or an entire swap dealer.  The opportunities for undertaking greater amounts of proprietary trading expand significantly when the limits (which are set by the banking entities themselves), the desk-specific positions being hedged, and reporting requirements are applied to much larger trading portfolios.  Because the revised Volcker Rule effectively presumes that these trading desk designations by the banking entities are valid, it will be more difficult for the applicable regulator to reign in proprietary trading undertaken by more expansively designated trading desks.

How much proprietary trading can occur under the market making exemption in the revised Volcker Rule will be determined by the risk limits set for each trading desk.  The risk limits are to be established at the discretion of each banking entity and, as noted above, the scope of a trading desk also will be determined by the banking entity within broad criteria.  “Reasonably expected near-term demand” (“RENTD”) of customers is included in the Volcker statute to establish the level of market making permissible.  While the RENTD concept is still in the revised Volcker Rule, a presumption has been added that the RENTD levels set by each banking entity are correct.

Because these determinations will be established by the banking entity and presumed to be compliant, it will be difficult for any regulator to challenge them or take any enforcement action – even if a banking entity experiences large losses from proprietary trading – so long as the trading is found to be within the set limits.

These concerns about enforcement and oversight are exacerbated by the reduced metrics and other reporting, documentation, and compliance requirements.  Numerous changes are made both as proposed and added on in this final rule.  To name a few, stressed value at risk, daily risk factor sensitivities, and risk limit breaches need not be reported.   In some cases, changes to reporting requirements make sense if experience shows a metric has little or no regulatory value.  But most of these changes in the revised Volcker Rule are purportedly justified because they reduce the burden on banking entities and the cumulative effect on the ability of a regulator to monitor for compliance and potential significant issues is not addressed.

Logical Outgrowth Concerns

The revised Volcker Rule includes a number of new rules and amendments that were not mentioned or adequately described in the NPRM.  The APA requires that a proposed rulemaking be published in the Federal Register and that interested persons be given an opportunity to comment.[3]  A “notice of proposed rulemaking must provide sufficient factual detail and rationale for the rule to permit interested parties to comment meaningfully.”[4]

In comparing the revised Volcker Rule to the NPRM, there are a number of changes that were either not addressed in the NPRM or at best are based on comments received in response to general questions.  For example, the NPRM included a proposal to replace the short-term intent prong with what is commonly referred to as the “accounting prong.”  In the revised Volcker Rule, the accounting prong was rejected, but the short-term interest prong also is eliminated for most banking entities.[5]  While replacing the short-term intent prong was discussed in the proposal, effectively eliminating the prong without a replacement was not proposed.  Similarly the option for certain banking entities to now elect to comply with the market risk capital rule prong rather than the short-term intent prong was not discussed as an alternative.  Nor was the replacement of the rebuttable presumption of proprietary trading for positions held shorter than 60 days with the opposite presumption that positions held longer than 60 days are not proprietary trading for purposes of the Volcker Rule.  Agencies cannot “pull a surprise switcheroo” in the rulemaking process.[6]

Furthermore, the NPRM appears to not even contemplate excluding government bond assets and liabilities, mortgage servicing rights hedges, or financial instruments that are not trading assets or trading liabilities from counting as proprietary trading.  Other changes, such as the elimination of incentive compensation limits, the matched derivatives transaction exclusion, and elimination of risk factor sensitivity metrics reporting appear to be based on general questions in the NPRM.  In each case, no draft rule text or adequate discussion of such amendments was provided that would allow the public to have anticipated those amendments.  Rather, many of these changes appear to be based on de novo comments made by banks or their trade organizations.  “[I]f the final rule ‘substantially departs from the terms or substance of the proposed rule,’ the notice is inadequate.”[7]

Conclusion

Self-regulation failed us in the early part of this century.  Dodd-Frank, including the Volcker Rule, has helped this country rebuild a strong and better managed financial sector.  To maintain a robust financial sector that benefits the American people, we must maintain strong standards and vigorous oversight.  Otherwise, it is only a matter of time before the memory of the huge losses and resulting pressures for a taxpayer bailout fades and excessive risk taking comes home to roost.  While the Dodd-Frank regulations may not be perfect and modest adjustments may be appropriate, the wholesale revision of regulations that greatly weaken the enforceability of those regulations such as we have before us today will, in the long run, weaken the financial sector and pose risks to the American public.

Statement of Commissioner Brian D. Quintenz in Support of Amendments to the Volcker Rule

September 16, 2019        

I support today’s targeted amendments to the Volcker Rule, which I believe will simplify firms’ compliance with the statutory ban on proprietary trading and improve the agencies’ supervision of banking entities.  Based upon the agencies’ implementation experience since 2013, it has become apparent that the rule as originally adopted has resulted in ambiguity over permissible activities, an overbroad application, and unnecessarily complex compliance processes.  The revised rule before us today tailors and simplifies the rule to enable banking entities to effectively provide traditional banking services to their clients in a manner that is consistent with the statute.

Adopting a risk-based approach, the revised rule tailors the scale of a banking entity’s compliance program to be commensurate with the firm’s size and level of trading activities.  Under the final rule, the most stringent compliance requirements apply to those entities with the most significant amount of trading activities, while banks with simpler business models and more limited trading operations would be subject to tiered compliance requirements tailored to the complexity and scope of their activities.  As a result, firms with little or no activity subject to the Volcker Rule’s prohibitions will face lower compliance costs and reduced regulatory burdens.  However, because activity implicated by the Volcker Rule is concentrated in a small number of banks, the agencies estimate that, even under this tiered approach, approximately 93% of the trading assets and liabilities in the U.S. banking system would continue to be held by firms subject to the strictest compliance standards.

The final rule also clarifies and simplifies the application of the short-term intent prong.  Under the 2013 rule, the purchase (or sale) of a financial instrument by a banking entity was presumed to be for the trading account if the banking entity held the financial instrument for fewer than sixty days (or substantially transferred the risk of the financial instrument within 60 days of purchase or sale).  In practice, firms have found it difficult to rebut the presumption, with the result that the short term intent prong has captured many activities that should not be included in the definition of proprietary trading.  The final rule addresses this issue by reversing the rebuttable presumption, providing that the purchase or sale of a financial instrument presumptively lacks short-term trading intent if the banking entity holds the financial instrument for 60 days or longer.  In addition, the final rule includes new or expanded exclusions from the definition of proprietary trading for liquidity management programs, certain customer-driven swaps, error trades, and certain traditional banking activities, such as the hedging of mortgage servicing rights.  These modifications clarify the scope of permissible activities and ensure that the application of the proprietary trading ban is not overbroad.

I believe today’s final rule serves as an example of effective cooperation among five regulators: the CFTC; the Securities and Exchange Commission; the Federal Reserve Board; the Office of the Comptroller of the Currency; and the Federal Deposit Insurance Corporation. The agencies have come together to address many of the unintended consequences of the prior rule, while continuing to comply with statutory requirements.  Finally, I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for their efforts on this matter.

Opening Statement of Commissioner Brian D. Quintenz before the Open Commission Meeting on September 16, 2019

Open Meeting on Final Rule on Position Limits and Position Accountability for Security Futures Products and Proposed Rule on Public Rulemaking Procedures (Part 13 Amendments)

September 16, 2019

Mr. Chairman, thank you for calling this meeting.  I am pleased to support today’s proposals, which are both examples of good government.

The Commission’s regulations establishing position limits and position accountability levels for security futures products (SFP) have not been substantively amended to account for market developments since they were first adopted in 2001.  While position limits on equity options have increased over time, the Commission’s SFP position limits have remained unchanged.  Today’s final rule increases the default maximum level of equity SFP position limits that exchanges may set and modifies the criteria exchanges apply when setting higher position limits to be based primarily on deliverable supply.  These long overdue updates to SFP position limits aim to provide regulatory comparability with equity options and minimize competitive disparity between the two markets.

I am also pleased to support the second rulemaking before us today.  The Commission is updating its rulebook to eliminate the unnecessary and defunct part 13 rulemaking procedures.  The Administrative Procedures Act (APA) governs the Commission’s rulemaking process, making it unnecessary and confusing to codify that process in a Commission regulation that is duplicative of the APA.

Concurring Statement of Commissioner Rostin Behnam Regarding the Proposed Rule on Public Rulemaking Procedures

September 16, 2019

I respectfully concur with the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) proposal to amend part 13 of the Commission’s Regulations (the “Proposal”).  The Proposal aims to succinctly and unambiguously confirm that the Commission’s rulemaking process is governed by the Administrative Procedure Act (“APA”).

As explained in the Proposal, the provisions of part 13 were originally adopted in 1976 as a replacement for the Rules of Practice of the CFTC’s predecessor agency, the Commodity Exchange Authority, which would remain in effect “unless and until” terminated, modified, or suspended by the CFTC.[1]  In condensing the APA framework into part 13, the CFTC perhaps went further than needed to both ensure the public’s awareness of the new agency’s purview and to provide it the clearest understanding of the means to initiate and participate in the rulemaking process.  However unnecessary it may seem at today’s point in the digital age, directly providing interested persons a truncated version of the applicable operating rules so that they may exercise their rights to participate in the rulemaking process and hold their regulators accountable was laudable.  Eager to effectuate its mandate and build its regulatory footprint, the Commission clearly understood the value in ensuring the barriers to participation were few.

I am pleased today that the Commission has chosen to publish the Proposal for public comment.  The removal of the part 13 regulations viewed as duplicative of the APA’s statutorily prescribed procedures for agency rulemakings and adjudications—which is almost part 13 in its entirety—could be accomplished without engaging the public in notice-and-comment on grounds that such regulations are strictly technical and administrative in nature.  However, the Commission has recognized the importance of ensuring that as we move forward in improving the efficacy of our regulations, they remain current and reflective of our statutory mandate, which includes adhering to process and providing transparency.  Whereas here we are preparing to remove the rules setting forth the Commission’s interpretation as to the application of the requirements of the APA with regard to information rulemaking[2]—with the intent to rely exclusively and unambiguously on the APA, it will be useful to hear from the public as to whether there remain matters of importance that ought to be considered before we move forward. 

This Proposal is consistent with the Department of Treasury’s October 2017 Report on Capital Markets in which it encouraged the CFTC to make full use of its ability to solicit public comment in order to better signal to the public what information may be relevant.[3]  To say that the various provisions of part 13 are unnecessary does not mean they are useless.  To the extent part 13 may in some instances accord more elaborate procedures than the APA sets as the minimum, I hope that the Commission is alerted thereto. 

While I have some concerns about the guidance and plainly written information to be lost upon the almost wholesale elimination of part 13, I am pleased that the Chairman and the Commission staff will be publishing a primer on the Commission’s rulemaking process to ensure that our governing procedures remain accessible to all interested persons.

Statement of Commissioner Dawn D. Stump for CFTC Open Meeting on September 16, 2019

Open Meeting on: 1) Final Rule on Position Limits and Position Accountability for Security Futures Products; and 2) Proposed Rule on Public Rulemaking Procedures (Part 13 Amendments)

September 16, 2019

Overview                                             

In my Opening Statement at my first Open Meeting last November, I noted the directive in the Leaders’ Statement from the 2009 G-20 Summit in Pittsburgh that member nations “assess regulatory implementation” of the new rules that would be adopted in response to the financial crisis of 2008.[1]  I believe that as a matter of sound regulation, we should undertake this same type of look-back for all our rules.  It is simply good government to re-visit our rules and assess whether certain rules need to be updated, evaluate whether rules are achieving their objectives, and identify rules that are falling short and should be withdrawn or improved.

I commend Chairman Tarbert for giving us the opportunity to do precisely that during the first Open Meeting of his Chairmanship with respect to the two rule sets before us today.

Position Limits and Position Accountability for Security Futures Products

With two decades having passed, it is hard to recall that one of the big issues of the day in the futures world around the turn of the century was removing the prohibition on single-stock futures and futures on narrow-based security indexes.  In the Commodity Futures Modernization Act of 2000 (“CFMA”), Congress repealed this prohibition and permitted these products (which it called “security futures products,” or “SFPs” for short) to be traded under a system of joint regulation by the CFTC and the Securities and Exchange Commission (“SEC”).[2]

In a journal article published shortly thereafter, William Brodsky, then-Chairman and CEO of the Chicago Board Options Exchange, borrowed from the Beatles to describe the journey that had culminated in the trading of SFPs as “the long and winding road.”  He cautioned, though, that with a system of dual regulation of SFPs, “the road will still meander onwards.”[3]

Unfortunately, the intervention of a global financial crisis and the ensuing decade of intense focus on swaps reforms delayed us in “taking stock” (apologies for the pun) of where we are on that road and whether a modest change in direction might be appropriate.  I am pleased that we are now doing so with respect to position limits and position accountability for SFPs.

As always, of course, we are bound by the dictates of our governing statutes.  In the CFMA, Congress intended that SFPs be regulated comparably to security options traded on national securities exchanges (“NSEs”).  The final rulemaking we are voting on today is true to that intent, as it will harmonize the default Exchange-set position limit level for equity SFPs to that for equity options traded on an NSE.

It also will, among other things, make our position limit rules for SFPs more consistent with our rules for other futures contracts, adjust the time during which position limits must be in effect, and enhance Exchange discretion in administering position limits for SFPs in certain respects.  We received no comments suggesting that these changes would adversely affect market integrity or an Exchange’s ability to prevent excess speculation, market manipulation or congestion.

It is my hope that these amended rules, together with final action on the joint proposal that we issued with the SEC over the summer on minimum customer margin requirements for SFPs,[4] will promote increased trading activity and improved liquidity in SFP markets.

Public Rulemaking Procedures (Part 13 Amendments)

When rules adopted in 1976 shortly after the birth of the agency have not been touched in the 43 years since then, it is time to take a look.  That is the case with our Part 13 rules governing the Commission’s rulemaking process.  Although the CFTC’s rulemakings are subject to the Administrative Procedure Act (“APA”),[5] the APA has changed over the years while our Part 13 rules have not.

Streamlining the Commission’s rulebook by withdrawing the Part 13 rules (other than the rule providing for petitions for rulemaking) would eliminate any confusion resulting from the existing disparities, while confirming that the CFTC adheres, and will continue to adhere, to APA requirements.  This rulemaking would not repeal or limit in any way the rights that the public has today in CFTC rulemakings under the APA.

* * * * * * * *

I am pleased to support both of the rulemakings 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 preparing them, and for answering questions and addressing comments from my team.

Dissenting Statement of Commissioner Rostin Behnam Regarding Amendments to the Volcker Rule

September 16, 2019

I respectfully dissent as to the Commission’s decision to approve revisions to the Volcker Rule.  In June 2018, when I voted against the proposed rule, I expressed that my biggest concern was that our action would encourage a return to the risky activities that led to the financial crisis, and perhaps further consolidate trading activity into a few institutions.[1]  My concern last June was that we were weakening the Volcker Rule around the edges, and I raised specific issues regarding unnecessary complexity, lack of clarity, and a flawed process that chilled dissent.  Unfortunately, today’s final rule does not do anything to assuage these concerns.  To make matters worse, while the proposal merely threatened to kill Volcker through a thousand little cuts, the final rule goes for the throat.  It significantly weakens the prohibition on proprietary trading by narrowing the scope of financial instruments subject to the Volcker Rule.   What remains is so watered down that it leaves one questioning whether it should be called the Volcker rule at all.  To that point, Paul Volcker himself recently sent a letter to the Chairman of the Federal Reserve criticizing the rule and stating that the rule “amplifies risk in the financial system, increases moral hazard and erodes protections against conflicts of interest that were so glaringly on display during the last crisis.”[2]

In my dissent last June, I pointed out that the proposal further complicated the Volcker rule while calling it simplification.  We do the same thing in the final rule.  Where once there was one set of rules for all banking entities, there will now be three categories of banking entities with different rules for each:  Banking entities with Significant trading assets and liabilities, banking entities with Limited trading assets and liabilities, banking entities in between with Moderate trading assets and liabilities.  While numerous commenters expressed concerns with this three-tiered compliance framework, we nonetheless are finalizing this needlessly complex system.  In addition, the majority today makes “targeted adjustments” that further complicate matters.  In some instances, these adjustments are at least requested by the commenters.  In others, they are invented seemingly out of whole cloth. 

The most troubling aspect of today’s rule, though, is something new.  The final rule includes changes to the definition of “trading account” that will significantly reduce the scope of financial instruments subject to the Volcker Rule’s prohibition on proprietary trading.  This change is described in the preamble to the final rule as avoiding having the trading account definition “inappropriately scope in” certain financial instruments, almost as if they were included in the proposal’s scope by mistake.  However, these financial instruments were within the scope of the 2013 rule, and they were within the scope of the proposal.  Removing them now limits the scope of the Volcker rule so significantly that it no longer will provide meaningful constraints on speculative proprietary trading by banks.  As such, I cannot vote for the rule.