I respectfully dissent from the proposed amendments to the Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors (Form PF).  The proposed joint amendments, an action of the CFTC as well as the SEC, seem to impose overly broad obligations that would be unnecessarily burdensome and would present potentially significant operational challenges and costs without a persuasive cost-benefit analysis under the Commodity Exchange Act (CEA).[1]  In a time of economic challenges, including rising inflation, we must be careful when considering proposals that could inhibit positive economic activity that supports American businesses and jobs.  I look forward to hearing from commenters as to the proposed amendments, including practical implementation issues and the relative costs and benefits of the proposal.

I am respectfully voting to dissent on the joint SEC/CFTC proposed rulemaking to amend Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds.  The class of registered investment advisers required to submit Form PF includes those that also are registered with the CFTC as commodity pool operators or commodity trading advisors. 

As I previously stated in my concurrence to the CFTC’s recent Request for Information on Climate-Related Financial Risk (“Climate RFI”),[1] I support efforts to engage market participants, industry, and the general public in our policy-making process.  And I agree that after a decade of experience with Form PF, it is appropriate to evaluate possible amendments.  If improvements can be made that would enable us to collect more efficiently data that we truly need to fulfill our responsibilities, while reducing unnecessary burdens on those required to supply that data, we should consider them.

However, I do not support this particular proposal.  Data and information that federal regulators request from market participants should be narrowly tailored to the purpose intended under our governing statutes, and unfortunately, that does not appear to be the overall approach in this proposal.  I am even more concerned that constructive input the agencies already have received over the years from market participants that actually complete Form PF receives little attention in the proposal.

I look forward to receiving the public’s comments, which I hope will inform the Commissions’ consideration of final amendments to Form PF that provide for the collection of necessary data as efficiently as possible.

As a U.S. financial markets regulator and a member of the Financial Stability Oversight Council (FSOC), the Commission has a critical responsibility to monitor, identify, and respond to systemic risks and emerging threats to U.S. financial stability.  I support the proposed amendments to Form PF because they will enhance one of the Commission’s tools to fulfill that critical responsibility and facilitate our regulatory oversight of private funds.[1]

One lesson from the financial crisis was the risk of contagion to U.S. financial markets from private-fund activities, strategies, and exposures, including those related to novel or complex derivatives.  This was evident with the failure of Bear Stearns’ structured credit funds in the lead-up to the financial crisis, and more recently, with the failure of Archegos Capital Management.  These examples, and others, highlight the necessity for U.S. financial regulators to have visibility into funds’ activities and exposures to fulfill their regulatory responsibilities and ultimately, to prevent or mitigate the buildup of systemic risk in the U.S. financial system.

This proposal marks important coordination with the Securities and Exchange Commission (SEC) to enhance joint reporting requirements and guard against hidden risks in the U.S. financial system.

The CFTC and SEC embark on this proposed rulemaking after nearly a decade of experience of private fund reporting.[2]   It is particularly appropriate to revisit our reporting framework given that, as U.S. financial markets have evolved over the past decade, the private fund space has grown and evolved in tandem.  This is why we seek public comment on new or revised areas of data—including those intended to provide further insight into complex structures, new types of instruments, identification data, redemption and withdrawal rights, ownership, and counterparty exposures, among other subjects.  It is also important that we collect information on fund exposure to digital assets in order to understand evolving market risk.

Our objective is to increase the usefulness of the data collected; to ensure that it is actually used as Congress intended to bring transparency to risk previously hidden.  I look forward to reviewing public comment on whether the proposal would meet our objective.

Thank you to Commission staff for working with my office to improve the proposal to facilitate effective oversight by the CFTC.  I commend staff from both agencies on this proposal, and on future information sharing, that will promote the financial stability of U.S. financial markets.

I support extending the no-action relief originally granted in 2017 in Commodity Futures Trading Commission (CFTC or Commission) Letter No. 17-37 (CFTC Letter 17-37)[1] and subsequently extended in 2019 in CFTC Letter No. 19-19 (CFTC Letter 19-19, and collectively with CFTC Letter 17-37, the CFTC Letters).[2]  The CFTC Letters provide market participants with relief from certain position aggregation requirements in Commission Regulation 150.4.[3]  I appreciate that extending that relief will provide certainty to impacted market participants for an additional three years.  However, the certainty that market participants seek, and that the Commission owes them, should be provided by the Commission fixing unworkable rules rather than using no-action relief to “kick the can down the road” for another three years. 

Just recently, I highlighted the need for the Commission to address unworkable regulations applicable to swap execution facilities instead of issuing registration orders containing a multitude of bespoke conditions and expecting registrants to rely on indefinite no-action relief.[4]  Here again, we have a regulation that just does not work.  And we have known this regulation does not work since early 2017.  But rather than focusing our efforts on prioritizing amending the regulation, we are yet again inappropriately using no-action relief as a band-aid. 

No action letters are useful tools, allowing the CFTC to remain flexible.  For example, staff no action relief was critical at the beginning of the COVID-19 pandemic, keeping our markets functioning during extended work-from-home periods.[5]  But when a regulation needs to be fixed, notice and comment rulemaking is the gold standard.  The notice and comment rulemaking process allows the CFTC to hear from stakeholders and consider regulatory solutions.  And the resulting regulations provide certainty, unlike no-action relief. 

I applaud the staff in the CFTC’s Division of Market Oversight for their coordination and cooperation with stakeholders and their attempts to facilitate compliance with CFTC regulations.  However, where compliance is impossible, it is the Commission’s responsibility to engage in notice and comment rulemaking, rather than perpetual no-action relief, to fix rules that do not work.  With a full slate of Commissioners, there is no reason or excuse to leave these regulations on the books and skirt our responsibility to act.

Washington, D.C. – Today, Commodity Futures Trading Commission Commissioner Kristin Johnson issued the following statement:

“I thank Chairwoman Stabenow, Ranking Member Boozman, and co-sponsors Senators Cory Booker and John Thune for their introduction of thoughtful legislation that aims to improve the oversight of digital asset markets, the Digital Commodities Consumer Protection Act of 2022.  In order for the industry to thrive and fulfill its promise, digital asset markets must integrate stronger investor protections and robust market integrity safeguards.  The CFTC, as part of the complement of federal and state regulators, has an important role to play in the oversight of these markets.  I look forward to working with Congress, my colleagues at the CFTC, and my fellow regulators to develop a regulatory infrastructure that achieves effective customer protections and market integrity safeguards.”

Washington, D.C. – Today, Commodity Futures Trading Commission Chairman Rostin Behnam issued the following statement on the introduction of digital commodity regulation legislation by Senators Stabenow and Boozman:

“As American investors continue to demonstrate growing interest in digital assets, there is a greater need to bring these markets within the regulatory fold.  We are at a critical inflection point where new legislative authority is needed to clarify ambiguities and provide a regulatory framework to the digital commodity market that protects customers, provides market integrity and certainty, and ensures financial stability.

“I commend Chairwoman Stabenow and Ranking Member Boozman for introducing bipartisan legislation that aims to accomplish these goals in a targeted manner.

“I look forward to working with the Congress as legislation continues to progress.”

I support the Commission’s issuance of the proposed capital comparability order for comment (Proposed Order).  I commend staff’s hard work on this matter and their meticulous review of the capital and financial reporting requirements in Japan, as well as their outstanding cooperation with the Financial Services Agency of Japan (JFSA).  I also appreciate the JFSA’s sustained and meaningful engagement of Commission staff during the entirety of the review process. 

The Commission’s capital and financial reporting requirements are critical to ensuring the safety and soundness of our regulated swap dealers.[1]  Ensuring necessary levels of capital, as well as accurate and timely reporting about financial conditions, helps to protect swap dealers and the broader financial markets ecosystem from shocks, thereby ensuring resiliency. 

Prior to the adoption of the CFTC’s final rules regarding swap dealer capital which published in the Federal Register on September 15, 2020,[2] with a compliance date of October 6, 2021,[3] the Commission had issued interpretive guidance allowing for substituted compliance determinations to be made with respect to other components of the Commission’s swap dealer requirements.  Under that guidance, the Commission has issued comparability determinations relating to market participants operating in several jurisdictions including the EU, Australia, Canada, Hong Kong, Switzerland, and, notably, Japan.[4]  The Proposed Order before the Commission is, however, the first capital comparability determination.

When the Commission initially issued interpretive guidance, many jurisdictions had not yet implemented swaps reforms addressing risk management failures that precipitated the 2008 financial crisis.  Today, many jurisdictions have made great strides to adopt effective regulatory regimes, mitigating the systemic risks that previously pervaded global markets.  The current procedure for regulatory capital and financial reporting requirements set forth in regulation 23.106 permits foreign nonbank swap dealers, a trade association on behalf of one or more foreign nonbank swap dealers, or a foreign regulatory authority with jurisdiction over a foreign nonbank swap dealer (as the JFSA has done) to file an application for substituted compliance.  The Proposed Order, if approved, will allow registered nonbank swap dealers organized and domiciled in Japan to satisfy certain capital and financial reporting requirements under the Commodity Exchange Act[5] by being subject to and complying with comparable capital and financial reporting requirements under Japanese laws and regulations.

I support acknowledging market participants’ compliance with the regulations of foreign jurisdictions when the requirements lead to an outcome that is comparable to the outcome of complying with the CFTC’s corresponding requirements. Substituted compliance must not, however, be confused with deference.  To the contrary, the swap dealers that qualify for substituted compliance under regulation 23.106 must be Commission registrants.  The Proposed Order, if approved, would continue to ensure that relevant Japan-based swap dealers are subject to the Commission’s examination and enforcement authority over the firms. 

Capital requirements play a critical role in fostering the safety and soundness of financial markets.  As indicated in the Commodity Exchange Act, capital requirements protect market participants against risks such as counterparty default.[6]  Robust capital requirements enable individual market participants to absorb losses, meet their obligations, and successfully navigate challenges that may threaten their integrity or trigger systemic risk concerns.  As a result, the Commission must be measured in applying its framework for capital comparability determinations.  I look forward to reviewing the public comments on this proposed determination.  

I support the Commission’s consideration of the proposed derivatives clearing organization (DCO) governance measures that establish structural and procedural mechanisms designed to improve efforts to identify and mitigate material risks, strengthen DCO resilience, and foster the integrity of our markets.

DCOs provide comprehensive settlement services and take on counterparty risk with the assistance of clearing members to facilitate centralized and over-the-counter trading.   DCOs also stand as final guarantors of performance in the event of a customer and clearing member default.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)[1] introduced groundbreaking reforms that directed the bulk of derivatives trading to DCOs, charging them with the great responsibility of maintaining the integrity of the derivatives markets through comprehensive and prudent risk mitigation practices.  These practices include securely handling participant funds and assets, developing and administering robust forward-looking margining frameworks for idiosyncratic markets, consistently setting appropriate margin levels for trader portfolios, and collecting risk-based guaranty fund contributions from clearing members.  DCO risk mitigation practices thereby can profoundly impact individual firms and, depending on the systemic importance of a specific DCO, the broader financial market.

The proposed rules include recommendations that the Commission received from the Central Counterparty (CCP) Risk and Governance (Subcommittee) of the Market Risk Advisory Committee (MRAC).[2]  I thank Chairman Behnam, who previously served as the sponsor of the MRAC and its subcommittees.  The Subcommittee’s Report is the product of effective collaboration among market participants with divergent views.  The Report reflects the leadership of Chairman Behnam and the Subcommittee Co-Chairs, Alicia Crighton and Lee Betsill, as well as the exceptional stewardship of Alicia Lewis, Special Counsel to the Chairman.  Today, I serve as the MRAC’s sponsor, and intend to continue the work of Chairman Behnam and further the goals outlined in the Committee’s Charter– “promoting the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation, as well as the monitoring and management of systemic risk.”[3]

The proposed rulemaking requires DCOs to standup risk management committees comprised of clearing members and their customers to leverage their risk management expertise and formalize the role of market participants in the DCO governance process pursuant to DCO Core Principles. The proposed rulemaking acknowledges that, at times, the perspectives of DCOs and their clearing members may not be aligned. As privately-owned businesses DCOs balance the interests of their owners and those of clearing members who have strong incentives to mitigate preventable default because DCO clearing members disproportionately bear default costs.  DCOs adopt diverse business organizational forms and may have existing board committees focused on risk management oversight, however, we anticipate that comments to the proposal will articulate the best approach for establishing a clear and uniform process for risk management committees to report concerns on all matters that could materially affect a DCO’s risk profile to the board of directors or appropriate decision-making authority and for ensuring that the decision-making authority effectively considers the reported concerns.

In 2010 and 2011, similar requirements were proposed but not adopted.[4]  DCO Core Principles O (Governance Fitness Standards), P (Conflicts of Interest), and Q (Composition of Governing Boards) collectively address governance requirements related to considering the views of owners and participants, adopting appropriate fitness standards for directors and others, minimizing and resolving conflicts of interest in decision-making, and including market participants on governing boards or committees. DCO Core Principle O expressly directs each DCO to establish governance arrangements that “permit the consideration of the view of owners and participants.”[5] Consequently, today’s proposal rekindles a critical, unresolved effort to reinforce DCO risk governance. 

While I am supportive of the proposal, I stand committed to carefully consider, based on the comments that we receive, the benefits, efficacy, limitations, and burdens of the proposed governance rules. There are certain aspects of the proposal where I particularly believe substantive comments from market participants will tremendously add value to the deliberative process. I am hopeful that the comments submitted in response to the proposal will support drafting final rules that make our markets stronger and safer through regulatory oversight.  I am sensitive to the need to consider how the proposed measures supplement existing risk management oversight and concerns about the need to ensure that the proposed rules effectively accomplish the articulated goals of making our markets safer and more resilient.

With the considerations noted above, I support issuing today’s proposal for comment.  The Dodd-Frank Act prominently entrusts DCOs with maintaining the integrity of the derivatives markets through risk mitigation practices that can profoundly impact individual firms and the broader financial market.  The Dodd-Frank Act amendments to the Commodity Exchange Act also expressly direct each DCO to establish governance arrangements that internalize the views of participants.  I look forward to receiving substantive commentary from all stakeholders to facilitate tailoring governance rules that further enhance a DCO’s ability to prudently manage risk.