Statement of CFTC Chairman J. Christopher Giancarlo on the Final Rule Regarding Financial Surveillance Examination Program Requirements for Self-Regulatory Organizations (1.52)

March 28, 2018

This Project KISS final rule regarding financial surveillance examination program requirements for self-regulatory organizations (SROs) will revise and appropriately limit the scope of a third-party expert’s evaluation of a SRO’s financial surveillance program, and extend the minimum timeframes from three to five years from when a SRO must engage a third-party expert to evaluate its FCM standards for consistency with certain auditing standards.  All of the comments received were in support of this proposal.  I also support it because it will reduce the burdens and costs for SRO examinations, without reducing their effectiveness.  It also more appropriately balances and recognizes the role and capabilities of the Commission’s oversight expertise.

Statement of Concurrence by CFTC Commissioner Rostin Behnam on Segregation of Assets Held as Collateral in Uncleared Swap Transactions; Amendments

March 28, 2019

I respectfully concur with the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) approval of amendments to subpart L of the Commission’s Regulations (“Segregation of Assets Held as Collateral in Uncleared Swap Transactions” consisting of Regulations 23.700 through 23.704), which implement Section 4s(l) of the Commodity Exchange Act (“CEA” or the “Act”).  The amendments to subpart L respond to ongoing concerns and confusion created by the finalization of the CFTC and Prudential Regulator Margin Rules and CFTC interpretive guidance.   I voted for the proposal of the subpart L amendments.  However, I expressed reservations about the Commission’s proposal to extend its prior interpretation of CEA section 4s(l) concerning the timing and frequency of required notifications of swap counterparties regarding their right to segregate initial margin for uncleared swaps.[1]  I continue to believe that the Commission’s rationale in support of interpreting CEA section 4s(l) to require a single, one-time notification to a counterparty of their right to require segregation of any initial margin may be based on an incomplete record; it is nevertheless based on the record before us.  The Commission sought comment from the public on the appropriateness of the proposed amendments and received just four comment letters.  However, none of the letters addressed whether and how requiring the notice to be provided annually has actually impacted or effected decision making by counterparties.

I am disappointed that the Commission is declining to specify what constitutes the beginning of the first swap transaction or to proscribe when trading may commence following the initial notification.[2]  In an effort to remain flexible, the Commission is creating uncertainty that may ultimately lead to additional rulemaking.  Where the record suggests that need for the current amendment to the notification requirement in CFTC regulation 23.701(a)(i) may be a consequence of a stakeholder-led compliance effort, I believe the Commission ought not to risk making the same mistake twice.

Statement of Chairman J. Christopher Giancarlo on the Final Rule Amending Regulations on Segregation of Assets Held as Collateral in Uncleared Swap Transactions (23.700-704)

March 28, 2019

This final rule is another Project KISS proposal simplifying and reducing burdens by revisiting our rules based on staff implementation experience and public comment.  Today’s amendments will remove overly burdensome and prescriptive conditions for providing notice to counterparties of their right to segregate initial margin for uncleared swaps and the commercial arrangement between the parties regarding the investment of segregated initial margin.

Staff experience shows that counterparties rarely elect to segregate initial margin, even though the option to do so was provided for in the Commodity Exchange Act and in the CFTC’s Regulations 23.700-704.  Enabling the election of segregation is a bipartisan goal, starting with a unanimous Commission rulemaking by a previous commission.  By reducing the burdens and prescriptiveness of these rules, and providing additional flexibility for the parties to engage in written segregation arrangements to fit their needs, as the final rule does here, more counterparties may opt to use this provision and avail themselves of any benefits of doing so.

Statement of Commissioner Dan M. Berkovitz on Less is More – Segregation of Assets Held as Collateral in Uncleared Swap Transactions; Amendments

March 28, 2019

The final rule amends CFTC regulations giving certain swap counterparties the right to require initial margin segregation.  I support the amendments.

In this instance, real world experience in implementing new regulations demonstrates that modifying certain of the regulatory requirements may help better achieve the intended customer protection goals.  An added benefit of fine-tuning the regulations is a reduction in costs for registrants without a reduction in customer protections.

CFTC regulations 23.701 through 704 (“Margin Segregation Rules”) set forth certain requirements concerning the right of counterparties of swap dealers to elect segregation of initial margin posted to secure uncleared swaps.  These regulations support an important safety measure for mostly non-financial swap counterparties by providing them the right to have collateral posted as initial margin for swaps to be held in segregated accounts at third-party custodians.  Segregation protects the counterparty by keeping the counterparty’s collateral, and the collateral posted by the swap dealer to cover obligations to the counterparty, separate from the swap dealer’s other assets and liabilities in the event of a bankruptcy.  The regulations currently in effect provide detailed requirements regarding the delivery of notices by swap dealers to their counterparties of the right to segregate as well as specific, limited investment choices for the collateral.

The Margin Segregation Rules were adopted in 2013.  Since that time, two things have happened to warrant changes to the regulations.  First, in 2016, the Commission adopted its uncleared swaps margin regulations.  The margin rules effectively superseded regulations 23.702 and 23.703 regarding investment of margin funds for a large majority of affected swap counterparties.  Second, as detailed in the final release, experience from implementing the Margin Segregation Rules demonstrated that certain aspects of these rules have provided little or no benefit.  Almost no counterparties are electing to segregate initial margin in the manner provided by the Margin Segregation Rules with fewer than five counterparties making the election at each of the swap dealers examined for this issue.  In addition, some of the specific requirements of the rule added unnecessary costs and the rule’s purpose could be achieved through more efficient means.

The amendments in the final rule will reduce the burdens of the rule’s notice requirements while assuring that each counterparty is properly notified of the important right to segregate initial margin at the most effective time in the swap documentation process.  The final rule also provides the parties with greater flexibility to negotiate mutually beneficial terms for the segregation arrangements based on the specific needs of the counterparties.  This flexibility may encourage more counterparties to elect segregation.  In addition, the final rule will increase regulatory efficiency by reducing unnecessary notices and procedural requirements that must be documented and examined by the National Futures Association in their oversight of swap dealers.

The reduced costs and greater flexibility that will result from the final rule should benefit both swap dealers and end users in uncleared swap transactions.  The comment letters that the Commission received on the notice of proposed rulemaking all provided reasoned support for the proposal.  I therefore support today’s final rule.

Statement of Commissioner Dan M. Berkovitz on Financial Surveillance Examination Program Requirements for Self-Regulatory Organizations

March 28, 2019

I support the targeted amendments to Commission Regulation 1.52 made in today’s final rules regarding third-party expert examinations of self-regulatory organization (“SRO”) financial surveillance programs.  The amendments adopted in these final rules are an outgrowth of the Commission’s experience with Regulation 1.52 since 2013, and they maintain the Commission’s strong commitment to customer protection while modifying certain requirements found to provide no incremental regulatory benefit.  The Commission’s customer protection rules are fundamental to safeguarding customer assets, promoting the safety and soundness of U.S. derivatives markets, and maintaining public confidence in our markets.  I strongly support these customer protection rules.

Regulation 1.52 is part of the Commission’s comprehensive framework for the protection of customers and customer funds.  The rules require that SROs, including contract markets and registered futures associations, monitor member FCMs’ compliance with financial and related reporting rules.[1]  In 2013, the Commission significantly enhanced its customer protection rules to provide customers with greater confidence that their funds are secure and that SROs have effective programs for the oversight of member FCMs.

The narrow amendments we are adopting address an SRO’s engagement of a third-party expert to evaluate its financial surveillance program.  With experience, the Commission has determined that third-party experts are appropriate to assess an SRO’s implementation of examination standards issued by the Public Company Accounting Oversight Board (“PCAOB”).  Commission staff is better positioned and has the expertise to evaluate an SRO’s oversight program as measured against the Commission’s rules.  Commission staff routinely conducts such evaluations and provides feedback to SROs.

The final rules also make additional amendments to Regulation 1.52 regarding, for example, the frequency with which SROs must engage a third-party expert.  Changes to relevant PCAOB standards are infrequent, and the final rules require an SRO to engage a third-party expert at least once every five years.  As a further safeguard, Commission staff retains the authority to direct an SRO to engage a third-party expert when relevant changes in PCAOB standards occur.

I thank the CFTC staff for their work on these final rules and for their responsiveness to questions and comments.

Keynote Address of Commissioner Dawn D. Stump at the Women’s Energy Network 2019 Biennial National Conference, Denver, Colorado

March 28, 2019

Is Perfection the Enemy of the Girl?

Thank you to Cimarex, Jenny Fordham, and the Women’s Energy Network for the opportunity to be here today.  Let me start with the standard disclaimer that the views I express today are my own and not those of the Commission I am honored to serve upon.

I am delighted to be a part of your conference, and I personally find inspiration in your theme of “Perseverance: Be Energized, Be Bold, Be You”.  As a demographic, women have reached a crossroads in our quest to contribute to the many professions we represent and perseverance is how we got here and how we will continue to expand our impact.

More and more women are claiming leadership roles – in the board room, in the C–suite, in Congress, and in other decision making bodies.  For me, getting a seat at the table is less about being a woman and more about knowing that the unique way in which I contribute – because I am a woman – is a value–add.  Let me explain:  Like most women, my approach is somewhat different from that of my male colleagues – all of whom I have a tremendous respect for – but   alternative ways of considering any challenge broaden the options for solving problems.  Women and men must embrace each other’s contribution for better results.  Why is it so important?  A few years ago, the McKinsey Global Institute produced a study indicating that a setting in which women participate in the economy identically to men would add up to $28 trillion, or 26 percent, to annual global GDP in 2025 compared with a status quo scenario.  S&P Global more recently conducted a data derived assessment of why gender diversity lends to profitability and economic growth.  Specific to the American workforce their data suggest that increasing both entry and retention of women, particularly to those professions traditionally filled by men, could present a growth opportunity for the world’s principal economy and the potential to add five to ten percent to nominal GDP within a few decades.  I encourage all of you to read their report.

So now that we have more research to validate why this is important, how do we as women stay energized, bold, and true to ourselves, as the theme for your conference suggests?  I would suggest that women will increasingly find seats at the table but in order to capture that productive, diverse viewpoint to the benefit of any organization, women must not only sit at the table but find their voices at the table.

Today, I would like to devote a bit of time to exploring the challenge women face in expressing our contribution.  I am converting the old adage, “perfect is the enemy of the good” into a question, is perfection the enemy of the girl?  Women often resist offering our opinion until we can perfect the message.  This requires research, contemplation, and delivery planning – all very good strengths that women can leverage, but I caution that if applied to every engagement they will render us less effective.  Men are usually far more confident in sharing their knowledge and when you are the only woman in the discussion the conversation may progress without you if you are paralyzed by the need to be an expert rather than a contributor.  Why does this dynamic exist?  I submit that some level of caution is inherent and some is developed.  I have a daughter and at a young age she displayed characteristics of caution that are simply not presented in my son’s personality.  That said I also believe an element of our quest for perfection is due to a fear of failure that develops from experience.  When women fail we immediately examine the question “what did I do wrong?”  Men however are much more likely to consider the problem as circumstantial and having little to do with them.  The correct assessment probably lies somewhere in the middle.

Drilling down on how women have developed this fear of perceived failure I would like to offer what I call the theory of misunderstanding.  It is fact that men and women approach problems and offer solutions in very different ways – a fact that is now being recognized as a benefit per the recent data I mentioned earlier.  However, this benefit cannot fully materialize so long as these differing approaches result in men and women talking past each other because over time, women, often the minority represented in the discussion, may find it easier to pull back from the conversation altogether rather than face a recurring lack of reception for their ideas.  This is not acceptable – we worked to get a seat at the table and now we all have to work hard to find our voice and make the contribution worthwhile.  Both men and women share the responsibility of recognizing each other’s meaningful contributions but to get there we need a more balanced representation in the conversation.  More women sharing seats at the same table will lend to reducing the communication barriers prevalent between men and a minority representation of women.

It is unacceptable for women to pull back for fear of failure but perhaps even worse is adaptation that causes us to lose the benefit of diverse viewpoints altogether.  Sometimes the perceived path for success suggests women need to simply adopt the methods long applied by successful men.  However, if the data is correct and diversity is the key to better economic performance, we are not doing our part if we simply succumb to advancing the already proven methods long employed by a less diverse set of decision makers.  This is the “be you” component of your theme and it can be easily lost. I personally can attest that throughout both my professional career and even my childhood I have exhibited a tendency to prove I can do things in the same manner as the boys or men.  I have countless examples I could share as I grew up very close to my large extended family of predominately male cousins where we all worked together in the agricultural business, since that time I have spent much of my career working in and around industries with far fewer women than men, and even in my current position where I am the lone female on the Commodity Futures Trading Commission.  I have often been tempted to adjust my own approach in order to more easily integrate in these environments, but to do so would completely miss the mark.

I grew up playing basketball and often the varsity girls’ basketball team would scrimmage the boys’ junior varsity team during practice.  I am somewhat competitive, and I very much wanted to beat the boys at their game.  Turns out they were physically bigger and stronger and after literally being slammed to the ground on a truly accidental foul, I realized we could only beat them at their game if we played to our strengths of strategy and collaboration – two areas I happen to believe women excel in no matter the forum – the basketball court or the board room.  The end result of this experience actually benefitted both the boys and the girls – we were more physically conditioned and they were more mentally prepared.  Don’t play the game the same way the boys do, make your unique impact and everyone will be better served.

So how do we overcome these tendencies of paralyzing perfectionism, withdrawal, and culturally prescribed adaptation such that we can truly deliver on our value add?  First – identify and distinguish your abilities; second – work smarter not harder; and third – claim credit.

Identifying general qualities that distinguish your approach from others does not mean bringing your famous chocolate chip cookies to every meeting or always agreeing to take the meeting notes because you happen to be an excellent writer.  What I am referring to here is entering every conversation armed with a self–knowledge of what you do best.  Is it strategy, teambuilding, marketing – where do you feel most confident?  You do not need to explain this to your male colleagues but simply knowing what you can best offer will allow you to more easily identify the opportunities for input without overthinking each and every engagement through the perfectionism lenses.

Work smarter, not harder – this one I learned the hard way.  There is simply no way around the fact that working parents, both men and women, have two full time jobs.  My second child was born during what was arguably the busiest time of my professional career – the financial crisis.  I am very fortunate that my spouse more than pulled his weight during this time but I also now know that my desire to prove myself capable of working long hours, nights and weekends was not always required but rather a bit habitual and rooted in a personal need to prove myself and ensure no display of weakness could ever be seen by others.  Retrospectively, this seems insane to me.  Certainly, you will be required to stay late and arrive early from time to time and I am not suggesting you reject this, but do not succumb to a culture of doing so for acceptance into an inefficient system that disregards the fact that women are typically quite good at multi–tasking.  Yes, you will still need to separate work and life much of the time – no texting at the family dinner table – but the notion that engaging in multiple life functions concurrently makes you less capable of performing at either task simply ignores one of our primary distinguishing qualities.  This not only applies to working moms, but any woman faced with competing personal and professional responsibilities – women are quite good at task management so long as we do not adapt to what we believe is expected rather than required to be effective.  Do not try to be an expert on every topic, do not feel compelled to contribute to every conversation simply for the sake of being heard unless you truly have something to say, hold efficient meetings, and if possible, politely excuse yourself from unproductive situations.  This requires saying “no” from time to time – another challenge for most women – but saying “no” to those things that are ineffective or simply not best suited to your skill set frees you to focus on the things you can truly influence.

So once we identify our distinguishing abilities and learn to work smarter, then comes the real challenge.  Claiming credit for our ideas and successes is well beyond our comfort zone.  Men are traditionally much better as this.  Marketing ourselves is often very awkward for women.  I offer no sophisticated solution for this one other than to say you must get out of your comfort zone.  Being able to perform is simply not enough.  Success requires ensuring that your performance is known – not necessarily celebrated, but known.  We as women tend to rely upon our network to advance our successes and commend our achievements because self–acknowledgement feels like bragging.  I am a huge advocate for a strong network but this cannot be the only means of recognition you employ.  Find a medium that makes you comfortable – pick up the phone and remind colleagues of your ideas, ask for a quarterly meeting with your boss to discuss achievements (this is not a goal–setting meeting), and employ social media but do not allow the number of “likes” or lack thereof to discourage you.  The exercise of claiming credit is simply uncomfortable but particularly unnatural to women.  This discomfort will likely not dissipate but we must constantly consider and remind ourselves of the threat that our ideas and contributions risk being lost if no one knows about them.

Bringing this back to the original need for more diverse leadership bodies – the fact that alternative ways of considering any challenge broaden the options for solving problems.  In my current capacity at the CFTC we have many issues to consider, and I am grateful that each of the five Commissioners offers a unique perspective which will ultimately improve our end results.  For example, we will soon consider a proposal to establish position limits in some of our commodity markets, including energy contracts – this has long perplexed the CFTC with several unsuccessful proposals over the years and a court challenge to a previously finalized rule.  We need each of the current Commissioners’ unique contribution to finally solve this challenge.  I do not expect that all of my male colleagues, as a demographic, will approach this challenge in the same way, nor will I.  It is the fact that each has a contribution to make that will ultimately yield the best results.

In closing, I simply want to say that all of the things I have suggested here today are difficult and my own personal application requires constant resetting.  The real solution requires both men and women to consider getting out of our norms.  As I have already mentioned, I have a daughter and I want the benefit of female contribution to be a given, not a statistic, by the time she enters the workforce, but I also have a son, who is here with me today because I want him to know that his ideas are not only worthwhile but probably made better by seeking a different perspective.  If no one around you challenges your ideas, you likely need to broaden your circle.  “Pressure Is a Privilege” – these words come from the title of a book written by Billie Jean King.  Embrace pressure but seek to avoid creating your own self–inflicted stresses.  The professional workplace is extremely competitive and being at the table and having the opportunity to do something special requires that we embrace the challenge in our own unique way.  Perfection may be the enemy of the girl, but we women have quite an arsenal at our disposal when it comes to combating that enemy.

Supporting Statement of Commissioner Brian D. Quintenz on the Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

March 27, 2019

I support the issuance of the Margin Comparability Determination for Australia (Determination).  As I have noted previously, in order to avoid market fragmentation and an unworkable, complex patchwork of cross-border regulations, the Commission must apply a holistic, outcomes-based approach to substituted compliance.  The Commission should assess comparability by determining if the totality of a legal regime’s regulations, guidance, and supervisory approach achieve comparable outcomes to the CFTC’s regime, instead of engaging in a rule-by-rule analysis for identical requirements.

I support today’s Determination which applies such a holistic approach and respects the sovereignty of another jurisdiction to implement important G-20 reforms, such as margin, as it deems appropriate.  Moreover, the Australian Prudential Regulation Authority (APRA) has already found CFTC margin regulations to be comparable to its own, so I am pleased that the determination adopted by the Commission today appropriately reciprocates that finding.

The outcomes-based approach of today’s Determination appropriately accounts for modest regulatory differences between the CFTC and Australian margin regimes.  For example, although CFTC rules require initial margin to be segregated at a third party custodian, the Australian framework allows initial margin to be segregated at a third party custodian or held in some other bankruptcy-remote manner, such as the use of a trust account.  The end result of both custodial arrangements is the same, however, because in the event of bankruptcy, the posting party’s assets are protected.  The Determination today recognizes that other regimes can achieve the same overarching policy goals as the CFTC’s regulations, although they do so by different means.

Like the recently amended Comparability Determination for Japan regarding margin for uncleared swaps, the Determination before us today also limits the flow of risk back to the United States.  This is because under the Commission’s Cross-Border Margin Rule, when a U.S. swap dealer enters into an uncleared swap with an Australian swap dealer or end-user, it is required to collect initial margin and variation margin must be exchanged.  In the case of uncleared swaps between affiliated U.S. and non-U.S. swap dealers, variation margin is always required.  In light of these safeguards, I do not believe that the Determination today will result in systemic risk being “backdoored” into the United States.

Since the Commission first began issuing comparability determinations in 2013, we have made substantial progress toward formalizing cooperative arrangements with our international counterparts through supervisory Memorandums of Understanding (“MOUs”).  MOUs facilitate information sharing and cooperation between regulators with a shared interest in supervising cross-border firms.  Importantly, we have an active MOU with APRA and I know we will continue to coordinate closely to ensure appropriate oversight over our respective regulated entities.[1]  Through deference and engagement, the Commission can work alongside other regulators to ensure a well-regulated, liquid, global swaps market.

Statement of Commissioner Dan M. Berkovitz on Comparability Determination for Australia:  Margin Requirements for Uncleared Swaps

March 27, 2019

I support today’s Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (“Australia Determination”).

The Commission’s regulations governing margin requirements for uncleared swaps (“CFTC Margin Rules”) help mitigate risks posed by uncleared swaps to swap dealers, major swap participants, and the overall U.S. financial system.[1]  In this regard, the CFTC Margin Rules—and other rules around the world requiring margin for uncleared swaps—are a fundamental component of the regulatory reforms adopted in the wake of the 2008 financial crisis.

In 2016, the CFTC adopted its cross-border margin rule to permit swap dealers and major swap participants located in non-U.S. jurisdictions to comply with the CFTC’s Margin Rules by meeting the similar rules of their home jurisdiction if the Commission has deemed those rules comparable.[2]  This framework for “substituted compliance” supports the global nature of the swaps market and conforms to the directive in the Dodd-Frank Act for the Commission to consult and coordinate with international regulators to establish consistent international standards for the regulation of swaps entities and activities.[3]  The substituted compliance framework helps reduce duplicative and overlapping regulatory requirements where effective comparable regulation exists, facilitates the ability of U.S. market participants to compete in foreign jurisdictions, and is consistent with the principle of international comity.

The CFTC’s cross-border margin rule establishes an outcomes-based approach that considers a number of factors and does not require strict conformity with the CFTC Margin Rules.  As I have said before, a comparability determination should not be based solely on the home country’s written laws and regulations, but also consider the country’s broader system of regulation, including oversight and enforcement.  In addition, the nature of the other country’s relevant markets may be taken into account.  Finally, in considering these issues, the Commission should keep in mind the principle of comity: the reciprocal recognition of the legislative, executive, and judicial acts of another jurisdiction.[4]

The Australia Determination finds the margin requirements for uncleared swaps under Australian laws, regulations, standards, and other materials comparable in outcome to the CFTC’s Margin Rules.  The CFTC staff engaged with staff of the Australian Prudential Regulation Authority (“APRA”), and evaluated prudential standards and other materials provided by APRA to develop an understanding of APRA’s regulatory objectives, the products and entities subject to margin requirements, the treatment of inter-affiliate swaps, and other aspects of APRA’s margin rules.  The in-depth analysis outlined in today’s Australia Determination reflects a holistic understanding by the Commission of APRA’s margin rules and its prudential oversight practices.  The analysis also observes that the CFTC Margin Rules and APRA’s margin requirements for uncleared swaps are not identical.  In a number of instances, APRA’s specific requirements are not as comprehensive as the CFTC’s Margin Rules.  However, the determination explains how mitigating factors—such as certain of APRA’s risk management requirements and differences in the size of the two countries’ swap markets and of the market participants in them—support a determination that the two systems of regulation have similar outcomes.

For example, unlike the CFTC Margin Rule, APRA only requires that variation margin be exchanged between counterparties whose average notional amount of uncleared swaps exceeds a certain threshold.  However, as noted in the determination, Australia’s non-centrally cleared swaps market is highly concentrated in large entities that exceed that threshold, and the large majority of transactions would therefore be subject to variation margin.  Furthermore, as noted in the determination, if an Australian entity that would otherwise be subject to the CFTC Margin Rules, but for substituted compliance, enters into swaps with any U.S. entity covered by the CFTC Margin Rules, then both entities are required to exchange margin under our rules.  This reduces the potential for risks from swap activities overseas finding their way to the United States.

As with other jurisdictions where the legal and regulatory structure does not mirror our own, and the substituted compliance determinations are based on the overall outcome of the regulatory system, subsequent monitoring may be appropriate to confirm that our initial understanding of the regulatory structure and the expected outcomes is accurate.  Accordingly, I encourage the CFTC staff to periodically assess the implementation of this determination to confirm our expectations are accurate.

I thank the CFTC staff for their thorough work on this determination and appreciate their responsiveness to our comments and suggestions.  I would also like to thank my fellow Commissioners for their collaboration in helping us reach this positive outcome.