Purpose Statement: Regulated Entities

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The Commission’s regulatory scope spans the full array of participants across the derivatives markets: contract markets and soon-to-be established swap execution facilities (SEFs) and swap data repositories; derivatives clearing organizations (DCOs); swap dealers, registered futures associations, and a host of intermediaries. The Dodd-Frank Act established a number of new market participants, the registration and regulation of which have been identified as priorities in the new Strategic Plan. Within this plan, the Commission set specific strategic goals to ensure market participant compliance with the core principles, timely identification of deficiencies and corrective measures, and enforcement actions to be taken where warranted.

Designated contract markets (DCMs) and SEFs provide transparent, liquid, and competitive marketplaces for trades occurring on regulated exchanges.  Historically, contract market futures and/or options contracts have been traded by both institutional and retail participants.  Beginning in the second half of FY 2012, the Commission will have established the regulatory framework for the execution of swaps by eligible contract participants on a new type of regulated trading platform, the swap execution facility.

The Commission anticipates a tripling in the number of exchanges and/or trading platforms under its purview between FY 2011 and 2013. In FY 2011, CFTC regulated 16 DCMs.  This number is anticipated to grow to 21 DCMs in FY 2013, as new entrants seek designation.  It is highly likely that some DCMs, which in the past only listed futures and options, will start listing swaps.  And, an additional 20 to 30 entities are likely to become SEFs, based on the number of exempt commercial markets, exempt boards of trades, interdealer brokers, information service providers and swap dealers that have formally or informally expressed an interest in registering.  See Appendix 5.

DCMs currently have to comply with certain core principles, including requirements to perform basic self-regulatory functions regarding their trading platforms.  Under the Dodd-Frank Act, these core principles have been expanded from 18 to 23.  SEFs will also have core principles and self-regulatory responsibilities.  A key objective of the Strategic Plan is ensuring that U.S. DCMs and SEFs have the systems, procedures and resources necessary for effective self-regulation and ongoing compliance with core principles.

Authority for the Commission to register foreign boards of trade (FBOTs) that wish to make their order entry and trade matching systems available from within the United States to their identified members and other participants (direct access) was provided by the Dodd –Frank Act.  The registration of such FBOTs will replace the practice of issuing direct access no-action relief letters.  The registration rule, expected to become effective in January, 2012, provides, among other things, the procedures for registration, including a limited application procedure for FBOTs currently operating under existing no-action relief.  It also identifies the requirements that the FBOT must meet before it can be registered and, once registered, the conditions that the FBOT must continue to satisfy in order to remain registered.  The Commission anticipates that 21 FBOTs will submit applications for registration in 2012.

Exempt boards of trade and exempt commercial markets are subject only to the CEA’s anti-fraud and anti-manipulation provisions. Both entities are prohibited from claiming that the facility is registered with, or recognized, designated, licensed, or approved by the Commission. In addition, if the entities perform a price discovery function, they must provide certain pricing information to the public. A total of 37 exempt commercial markets and 29 exempt boards of trade filed notices with the Commission in FY 2011.  In FY 2011, 21 exempt commercial markets and 21 exempt boards of trade were in business during the fiscal year.  The CFTC expects that a number of exempt commercial markets and exempt boards of trade will apply to be SEFs.

The category of swap data repository was created by the Dodd-Frank Act and the CFTC identified in its Strategic Plan that it must establish new regulations to register swap data repositories and ensure that swap data is collected, maintained and made available to the Commission and other regulators consistent with the new statutory and regulatory mandates which include requirements for real-time public reporting.  A swap data repository is a centralized recordkeeping facility for the collection and maintenance of information and records with respect to swaps transactions and positions.  The Dodd-Frank Act specifically requires that all cleared and uncleared swaps be reported to a swap data repository.  Swap data repositories will have, in turn, a set of registration, regulation, reporting and recordkeeping obligations that will require oversight by the CFTC.  These services in the non-security futures and options markets are performed by exchanges, other contract markets and DCOs.  As many swap transactions are anticipated to be conducted outside of exchanges and clearing organizations, swap data repositories will establish transparency at the transaction level by accepting and maintaining trade information, providing access to the data to the CFTC and other regulators.  The swaps data held at SDRs will be invaluable for many regulatory functions, such as evaluating systemic risk monitoring the swaps markets for manipulation, and publishing aggregate market information.  The Commission estimates that a total of five to eight data repositories will apply for registration.  In addition, the Commission anticipates that at least one SDR will be established and registered for each swap asset class.  This will preclude the need for any counter-party to report a swap transaction directly to the Commission and the need for the Commission to establish an SDR.

DCOs play an important role in mitigating risk in the markets that the CFTC regulates.  A DCO’s registration is predicated on its demonstration of compliance with the core principles contained in the CEA.  The CEA requires that any entity that seeks to provide clearing services with respect to futures contracts, options on futures contracts, or swaps must first obtain registration as a DCO. In addition, the Dodd-Frank Act expanded the scope of the CFTC’s regulatory mandate significantly with respect to the clearing of swaps and operation of DCOs.  This expansion includes:

• Mandating clearing for most swaps;
  
  
• Expanding the core principles with which a clearing organization must comply to gain and maintain its registration; and
  
  
• Establishing heightened risk management and prudential standards for systemically important DCOs.

The Commission’s Strategic Plan addresses its statutory responsibility to ensure the financial integrity of derivatives transactions and avoid systemic risk. Commission staff conduct daily risk surveillance across all markets regulated by the Commission by reviewing the risk profiles of DCOs, clearing firms and market participants with large positions. To discharge this responsibility, staff receives and reviews reports that detail positions in the regulated markets.  Staff calculates margin requirements, conducts stress tests, and compares potential losses to available resources such as futures commission merchant capital and the DCO guarantee fund.  Staff contacts DCOs, futures commission merchants, and large market participants regularly, on a proactive basis, to discuss risk posed by large positions and the measures in place to mitigate those risks. In addition, the Commission periodically reviews DCOs’ procedures for monitoring risks and protecting customer funds.

The Commission anticipates an estimated 18 DCOs will be registered by the beginning of FY 2013, up from 17 registered in FY 2011. Four to five of these may be located outside the United States, based upon current information.  The Commission estimates that no more than four of the 18 will be designated as systemically important by the Financial Stability Oversight Council.¹ Systemically-important DCOs will be subject to higher standards for financial resources, risk management, and other operational standards.

Futures market intermediaries are entities that act on behalf of another person in connection with the purchase or sale of any commodity for future delivery, security futures product, swap, or commodity option.  These intermediaries are generally required to register with the Commission² in order to ensure that futures industry professionals meet minimum standards of fitness and competency, and the Commission and members of the public have a means of addressing wrongful conduct by industry professionals. Intermediaries may also be, depending on the nature of their activities, subject to various financial, disclosure, reporting, and recordkeeping requirements.  Intermediaries include:

• Futures commission merchants, who solicit or accept orders from customers for the purchase or sale of any commodity for future delivery, a security futures product, a swap, or commodity options and, in or in connection with such solicitation or acceptance of orders, accept any money, securities, or property to margin, guarantee, or secure any trades or contracts that result or may result from the solicitation or acceptance of orders.
  
  
• Introducing brokers, who solicit or accept orders for the purchase or sale of any commodity for future delivery, a security futures product, a swap, or commodity options.  Introducing brokers are prohibited, however, from accepting any money, securities, or property from any customer to margin, guarantee, or secure any trades or contracts.
  
  
• Commodity pool operators (CPOs), who engage in the operation of commodity pools that are formed for the purpose of trading in any commodity for future delivery, security futures products, swap, or commodity options.   CPOs solicit or accept funds, securities, or property from participants who obtain an ownership interest in the commodity pool.
  
  
• Commodity trading advisors (CTAs), who (for compensation or profit) engage in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in, any futures or options contract traded on or subject to the rules of a contract market, or any commodity option; or as part of a regular business, issue or promulgate analyses or reports concerning any of the activities referred to above.

The Commission regulates approximately 65,000 intermediaries, including over 50,000 salespeople (see Appendix 5) and anticipates no material change in the number of historically regulated intermediaries between 2011 and 2013.

With the promulgation of final rules in October 2010, the Commission established a comprehensive regulatory regime for off-exchange foreign currency transactions involving retail participants.  This regime included a new class of registered entity, retail foreign exchange dealers (RFEDs).  An RFED is an individual or organization that acts, or offers to act, as a counterparty to an off-exchange foreign currency transaction with a person who is not an eligible contract participant and the transaction is either a futures contract, an option on a futures contract or an option contract (except options traded on a securities exchange); or offered or entered into, on a leveraged or margined basis, or financed by the offeror, counterparty or person acting in concert with the offeror or counterparty on a similar basis. At the end of FY 2011, fourteen such dealers are registered.

As part of comprehensive reform under the Dodd-Frank Act, swap dealers and major swap participants³must also register with the CFTC⁴.  These entities will be required to meet reporting requirements, minimum capital requirements, margin requirements, and business conduct standards.  There is significant uncertainty in the number of swap entities that will seek to register in FY 2012 and 2013. However, the Commission’s currently estimates that approximately 125 entities will register as swap dealers or major swap participants⁵.

Companies and individuals who handle customer funds, solicit or accept orders, or give trained advice on futures and options must apply for CFTC registration through a registered futures association under the CEA.  Currently, the National Futures Association is the only registered futures association with delegated oversight authority from the Commission.  In 1983, the Commission began a series of delegations to the National Futures Association regarding the registration of intermediaries. Over the course of the last 28 years, the Commission’s delegations have assigned nearly the entirety of registration and fitness examination activities for futures and options to the National Futures Association. The Commission retains an oversight role over the execution of these activities by the National Futures Association.

The National Futures Association’s financial surveillance and compliance oversight program entails examinations of commodity pool operators, commodity trading advisors and introducing brokers.  The National Futures Association also has been delegated or directed to perform other non-financial functions for the Commission that will be subject to ongoing Commission monitoring and assessment.  Non-financial functions performed by NFA include commodity pool operator/commodity trading advisor disclosure document reviews, registration processing, telemarketing reviews, and operating a dispute resolution program.

Likewise, under proposed Commission regulations, swap dealers and major swap participants will be required to register with the National Futures Association (as the only registered futures association) and be subject to National Futures Association’s oversight.  This oversight will involve National Futures Association staff conducting examinations to assess swap dealers’ and major swap participants’ compliance with the CEA, Commission regulations, and National Futures Association rules including compliance with certain financial requirements (e.g., capital, margin, segregation of counterparty funds, and financial reporting) and non-financial requirements (e.g., business conduct requirements).