I support the Final Rule on Swap Confirmation Requirements for Swap Execution Facilities (SEF Confirmation Final Rule) because it resolves the temporal impossibility of requiring SEF confirmations at the time of execution for block trades, which are in fact executed away from the SEF and then submitted to the SEF afterwards. I would like to thank Roger Smith, Nora Flood, and Vince McGonagle in the Division of Market Oversight for their work on the SEF Confirmation Final Rule.

Conflicting or impossible regulatory requirements can make compliance with our rules nonsensical.[1] That is clear from the years of CFTC staff no-action relief that led to the rule amendments codified today in the SEF Confirmation Final Rule.[2] I am pleased that the Commission has decided to fix an unworkable aspect of our existing rules, and encourage the Commission to continue to do so promptly when market participants identify these problems in the future. Continuous improvement of our regulatory frameworks, as appropriate, serves the public interest of well-functioning markets that are efficient and effective in providing risk management and price discovery. 

I am very pleased that the Commission voted to finalize necessary amendments to the Commission’s regulations addressing longstanding issues with the uncleared swap confirmation requirements under Rule 37.6(b).  During the initial implementation of part 37, SEFs informed the CFTC that the confirmation requirement for uncleared swaps was operationally and technologically difficult and impractical to implement.  In light of these challenges, the Division of Market Oversight provided targeted no-action positions for SEFs with respect to certain provisions of Commission regulations throughout the last decade.[1]

As there was no workable solution that could effectuate the original language of the relevant rule, the Commission has voted to amend Rule 37.6(b) to codify the longstanding staff no-action position.  The amendment enables SEFs to incorporate terms by reference in an uncleared swap confirmation without being required to obtain the underlying, previously negotiated agreements between the counterparties.  An amendment to Rule 23.501 will clarify the consistent treatment of trades executed away from a SEF or designated contract market (DCM) and permit confirmation of all terms of a swap transaction as soon as technologically practicable following execution, as opposed to requiring confirmation “at the same time as execution.”[2]

This final rule is an example of my continuing focus on providing market participants with clarity and certainty by, where possible, codifying existing staff no-action positions.

Workable rules are essential to maintain the confidence of the American public in the integrity of our derivatives markets.  So, when we become aware that our rules are not as workable as we thought, or impose substantial operational burdens with little corresponding regulatory benefit, we should address these shortcomings promptly.  Unfortunately, though, the Commission sometimes chooses to “kick the can down the road” by relying on staff no-action letters instead – often for many years – without tackling the root cause of the problem in the rule itself.

I have not been shy about expressing my feelings related to no-action letters during my tenure as a Commissioner.  Yes, there are appropriate reasons for staff to issue no-action letters, and I do see their utility in providing flexibility when needed.  However, I believe there has at times been an over-reliance on this practice at the agency, and we must move forward in a manner that respects the role of the Commissioners in agency policy-making.

My point is perfectly illustrated by Commission Rule 37.6(b) regarding confirmations for swaps executed on or pursuant to the rules of a swap execution facility (“SEF”).  The rule requires that a SEF provide each counterparty to a transaction with a written record of all the terms of the transaction.[1]  But things get complicated with respect to uncleared swaps, since the terms of such swaps also may include previously-negotiated agreements between the counterparties (such as an ISDA Master Agreement, and related Schedule and Credit Support Annex).

Accordingly, when the Commission adopted Rule 37.6(b) in 2013, it stated that a SEF’s written confirmation of an uncleared swap can incorporate the terms of such agreements by reference, but with a catch – namely, that such agreements must be submitted to the SEF prior to execution.[2]  This approach imposed on each SEF the virtually impossible (and, frankly, needless) task of building and maintaining a library of every previous bilateral agreement from counterparties to uncleared swap transactions on its platform.

Recognizing the enormous operational problems posed by the Commission’s approach to SEF swap confirmations for uncleared swaps, as well as the limited value of that approach, Commission staff issued four successive no-action letters beginning in 2014.[3]  Although it has taken a full decade, I am pleased that the Commission is finally adopting a permanent and practicable SEF confirmation solution. These rule amendments, among other things, will codify the existing staff no-action position that permits SEFs, in an uncleared swap confirmation, to incorporate by reference the terms of previously-negotiated counterparty agreements without obtaining the underlying agreements themselves.

I am pleased to support these rule amendments.  I thank Roger Smith and his colleagues in the Division of Market Oversight, as well as staff in the Office of General Counsel and the Chief Economist’s Office, for their work on this rulemaking.

But there remains more work to be done in this regard.  I will continue to push the agency to act through notice-and-comment rulemaking, rather than relying on perpetual staff no-action relief, with respect to other rules that are not workable for those who must comply with them – especially where, as here, their asserted benefits are largely illusory.

An essential component of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) is its framework for the regulation of swaps, including central clearing and trade execution requirements, registration and comprehensive regulation of swap dealers, and recordkeeping and reporting requirements.

I vote to approve today’s final rule on Swap Confirmation Requirements for Swap Execution Facilities (Final Rule), which facilitates predictability and consistency in swaps markets by codifying long-standing no-action relief into regulation, while maintaining a robust regulatory regime for swaps and swap execution facilities (SEFs).

The Dodd-Frank Act amended the Commodity Exchange Act (CEA) by adding Section 5h, which provides that a person may not operate “a facility for the trading or processing of swaps unless the facility is registered as a [SEF] or as a designated contract market.”[1] A SEF allows multiple participants to execute or trade swaps. As such, SEFs facilitate swap transactions in our markets by facilitating the execution of swaps between market participants. Additionally, SEFs play a critical role in price discovery and transparency and policing and reporting swap transactions in an effort to monitor systemic risk.

In 2013, the Commission adopted new rules and principles for SEFs. Under CFTC Regulation 37.6(b), a SEF must provide each counterparty to cleared and uncleared swaps with “a written record of all of the terms of the transaction which shall legally supersede any previous agreement and serve as a confirmation of the transaction.”[2] This confirmation is required to “take place at the same time as execution,” subject to certain exceptions related to bunched orders involving swaps.[3]

In the adopting release, the Commission noted that a SEF may comply with the swap confirmation requirement for uncleared swaps by incorporating terms set forth in master agreements previously negotiated by counterparties, if such agreements had been submitted to the SEF prior to execution and the counterparties ensure that nothing in the confirmation terms contradict the terms incorporated from the master agreement.[4] SEFs and market participants voiced concerns that it was operationally and technologically difficult and impracticable to obtain and store the underlying, bespoke, highly-negotiated swap agreements of SEF members for purposes of satisfying the swap confirmation requirement.

Pursuant to a no-action letter issued in March 2017, which was the last extension of a no-action letter originally issued in August 2014,[5] SEFs were permitted to incorporate by reference the terms of previously-negotiated agreements and were relieved of the obligation to: (1) obtain documents incorporated by reference in a swap confirmation and (2) report confirmation data contained in such agreements. SEFs were required to comply with certain additional conditions, including that their rulebooks require participants to provide copies of the underlying agreements to the SEF upon request.

On August 25, 2023, the Commission released a Notice of Proposed Rulemaking to codify this no-action relief (Proposed Rule) for uncleared swaps. The Commission did not incorporate the conditions in No-Action Letter 17-17 into new CFTC Regulation 37.6(b)(1). The Commission takes the view that, as noted below, the existing requirements for SEFs under the CEA, particularly Core Principle 5, and the Commission’s Part 37 regulations sufficiently account for and obviate the need for these conditions.[6]

As I noted at that time, the Commission “issued guidance and exemptive relief based on concerns that SEFs had been unable to develop a practicable and cost-effective method to request, accept, and maintain a library of the underlying previously negotiated freestanding agreements between counterparties.”[7]

The Final Rule approved today fully adopts the Proposed Rule. In addition to permitting SEFs to incorporate by reference terms of previously-negotiated agreements between counterparties, without having to obtain a copy of such agreements, the Final Rule will amend CFTC Regulation 37.6(b) to permit confirmation of all terms of a swap transaction to take place “as soon as technologically practicable” after the execution of the swap transaction. Additionally, the Final Rule amends CFTC Regulation 37.6(b) to make clear that the confirmation a SEF provides under CFTC Regulation 37.6(b) legally supersedes only conflicting terms in a previous agreement.

Importantly, as noted above, both SEFs and the Commission will retain the ability to obtain essential information, including copies of the underlying agreements for uncleared swaps. Under SEF Core Principle 5, a SEF must “[e]stablish and enforce rules that will allow the facility to obtain any necessary information to perform any of the functions described in section 5h of the [CEA].”[8] The SEF must also “[p]rovide [this] information to the Commission on request.”[9] A SEF must also have “the authority to examine books and records kept by [its] members and by persons under investigation.”[10] As the Final Rule notes, given these requirements, a SEF should have “the ability and authority to request copies of the underlying agreements that are incorporated by reference into a confirmation for an uncleared swap transaction and to provide such agreements to the Commission upon request.”[11]

I support this Final Rule, which provides a practical approach to implementing our regulatory requirements, while maintaining robust oversight of SEFs and our markets.

Thank you to the staff of the Division of Market Oversight and Roger Smith as well as the Office of the General Counsel, the Market Participants Division, and the Office of the Chief Economist, for their hard work on this Final Rule.

Good morning. I am very pleased to join everyone for this Agricultural Advisory Committee (AAC) meeting. I thank Chair Behnam and Swati Shah, Designated Federal Officer for the AAC, as well as Scott Herndon, President, Field to Market: The Alliance for Sustainable Agriculture, for their efforts to organize today’s meeting. I look forward to hearing and learning about liquidity, interest margin, access to credit through farm lending, interest rate risk, and land values in farming communities as well as options growth in the farming community.

Two of the issues that may impact small and medium-sized farming enterprises are part of today’s agenda. I am looking forward to hearing from Ty Kreitman of the Federal Reserve Bank of Kansas City, Joe Koenigsman of the FDIC, and Scott Donnelly of the Farm Credit Administration who will examine access to farm lending. I also look forward to hearing from Derek Samman of CME regarding options growth in agricultural markets.

Both topics seek to enable farmers and ranchers and other end users to have the resources that they need to manage and mitigate risks particularly during periods of sustained pricing volatility. These market challenges are sometimes exacerbated by frequent severe weather conditions and exogenous factors such as geopolitical events.

For example, in previous Ag Advisory Committee meetings and in my meetings with milling companies in Michigan and ranchers in Texas, we have discussed the challenges presented by too much or too little rain. Drought presents a global challenge for irrigation but also creates greater costs for logistical operations such as shipping and distribution. At an Ag Advisory Committee meeting last year, a representative from the Army Corps of Engineers described the impact of low water levels on the Mississippi River. Today, we are witnessing similar low water levels in the Panama Canal. Alongside these issues, markets have navigated the price volatility of energy inputs and grain outputs in connection with Russia’s invasion of Ukraine. Conflicts in the Middle East further reduce shipping lanes, and just a little over a week ago, a barge that lost power collided with the Francis Scott Key Bridge, creating additional pressures on shipping logistics.

As we explore the issues in the agenda today, I am thoughtful about solutions that may aid farmers and ranchers in increasing yields and thus profits with the same amount of inputs or achieve an equivalent yield with fewer inputs. One such example is precision agriculture, a transformative approach that integrates technology and data analytics to optimize farming practices and enhance agricultural productivity.[1] It represents a pivotal advancement in enhancing farming efficiency, sustainability, and resilience.[2] Precision agriculture uses a wide range of technologies, from remote sensing platforms to in-ground sensors, to gather data about soil conditions, weather patterns, crop health, and other relevant factors.[3]

Precision agriculture empowers farmers to make data-driven decisions that optimize resource allocation and enhance crop yields. Moreover, it may increase the efficiency of chemical and fertilizer use, helping farmers to avoid excess application and improve the environmental sustainability.[4]

Federal agencies have expressed support for precision agriculture’s adoption and development. In particular, the U.S. Department of Agriculture has provided financial assistance and loans and has established partnerships with the National Science Foundation to support such practices, including through the development of artificial intelligence research institutes.[5]

Amidst the backdrop of dynamic technological advancements, we must navigate these changes thoughtfully and proactively. While precision agriculture may provide substantial benefits, there are challenges related to the use of precision agriculture, such as high up-front acquisition costs, lack of uniform standards, and concerns regarding farm data sharing.[6]

I recently had the privilege of traveling to Zambia and South Africa, where I delivered keynote remarks at an event on emerging technologies hosted by the South African Reserve Bank. Zambia is currently facing a severe drought that has devastated the agricultural sector.[7]  This crisis poses a significant threat to national food security as well as water and energy supply.[8] Technological advances like precision agriculture may mitigate similar challenges in the future—but only if they are accessible and affordable.

As the proliferation of precision agriculture technologies generates vast amounts of agricultural data, it is also important to ensure that farmers maintain control over their data and to safeguard against unauthorized access to or misuse of data. Large agriculture machine companies aggregate significant quantities of data in order to improve the accuracy of predictions.[9] In the face of such advances, we cannot lose sight of concerns around data privacy—for example, concerns of farm owners that their data could be sold to competitors or commodity traders.[10] Data privacy is a critical issue that I have devoted significant attention to. As I have previously noted in discussing the Commission’s efforts to understand the uses of artificial intelligence, we must safeguard data privacy by ensuring that data “is stored securely and used only for its intended purpose.”[11]

As we explore the potential of precision agriculture to revolutionize farming practices, we must remain mindful of its broader implications for food security, environmental sustainability, and global economic development. I look forward to our discussions and the insights that will emerge as we delve into this critical topic at the intersection of agriculture and innovation.

Thank you.

Good morning.  Thank you, Chairman Behnam, for convening today’s Agriculture Advisory Committee (AAC) meeting and bringing this important discussion to the heartland.  I want to also recognize the committee’s Designated Federal Officer, Swati Shah, and all the staff who worked to make today’s meeting possible.  I know it’s no small task to organize a field event like this.  Thanks also to the Advisory Committee’s members for taking the time to share your expertise and help the CFTC better serve our stakeholders and commercial end users.  I grew up in the Central Valley of California, and my family owned orchards and I did 4-H.  These ag issues hit home.

There is no question that one of the most significant challenges facing American agriculture—as well as many other American industries—is the shifting geopolitical landscape and impacts to production and the entire value chain.  In fact, I have just returned from Asia where I was able to get on-the-ground perspectives about some of these challenges in my role sponsoring the CFTC’s Global Markets Advisory Committee.  As you know, I used to be a senior executive at a large global bank so I am very interested to hear more about agricultural lending and the growth of options in agricultural markets given price volatility in the commodities markets.  Regulations impact access to financial services, particularly for our smaller producers and growers, so it’s very important that we hear from you all.

These days, you’d be forgiven if you thought that the CFTC is primarily focused on crypto and speculators.  At least that’s what I see when reading through our news clips. But our roots are in helping ag producers access markets, discover prices, and mitigate risks.  And that continues to be at the core of our mission today. So, it’s great to be in Overland Park—in the heart of American agriculture—to examine the economic landscape for America’s growers and producers.

This region has a rich history in innovations to expand markets and hedge risk. Area merchants and producers established the Kansas City Board of Trade in 1856.  The first futures trades began here in 1876.  Today, the agriculture sector makes up roughly 13 percent of the state’s workforce, and contributes $81 billion to the Kansas economy, according to the Kansas Department of Agriculture.  Nationally, America’s food and agriculture sectors account for more than $9.6 trillion of our country’s economic activity—about 20 percent of our total economic output.  These sectors directly support nearly 24 million American jobs. And of course, the economic benefits of American agriculture reach far beyond any state’s borders.  American ag products feed and fuel the world.  A world without a steady, safe and abundant food supply is a world without peace.

It’s not just about food. At their heart, ag producers are dedicated stewards of our land and environment.  You continue to deploy innovative conservation practices and develop alternative cleaner-burning fuel in a manner that continues to reduce the sector’s environmental impact.  These pioneering solutions are also presenting new economic opportunities for the ag industry, including voluntary carbon markets, which we at the CFTC have been focused on recently.

So ag producers contribute positively to our kitchen, our economy, and our environment.  But a farmer or rancher’s success often depends on factors outside of their control.  Your bottom lines could be dramatically altered by a storm cloud building on the horizon or a geopolitical storm brewing on the other side of the world.  It’s imperative that we understand the economic factors impacting the ag sector and do all that we can to promote access, fairness and stability to the ag markets.  This includes promoting price discovery, detecting and deterring market manipulation, and establishing new tools to keep pace with ag innovation.

Thank you to Chairman Behnam and to the members for their service on this Committee.  I look forward to today’s discussions agricultural lending and the growth of options in agricultural markets.

Introduction

Good morning everyone, and thank you Commissioner Mersinger, Committee Secretary Lauren Fulks, Alternate Secretaries JonMarc Buffa and Lillian Cardona, and the members of EEMAC who are so gracious to be here today to build on the work from the EEMAC Meeting in February.

Future of Power Markets

The agenda today includes many critical topics, including the future of power markets and the path to attaining net zero carbon in the U.S.

Legislation implemented under the direction of President Biden, including the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA), has drastically improved the incentives to invest in energy markets. Under the IIJA, the federal government has awarded billions of dollars to promote grid reliability, resiliency, and energy efficiency.[1] As the Biden Administration has reported, in the year following the passage of the IRA, “[c]ompanies have announced more than $110 billion in new clean energy manufacturing investments, including more than $70 billion in the EV supply chain and more than $10 billion in solar manufacturing.”[2] Growing demand for electric vehicles, coupled with the growth of energy-intensive AI data centers, is leading to an increased need for electricity to power these new technologies. We must ensure that our infrastructure can grow along with new demand, while still allowing us to reach our sustainability goals, including net zero carbon emissions.

These developments also come as new environmental markets are forming, such as the market for carbon credits and their derivatives. Carbon credits are a novel way to incentivize parties to reduce their carbon emissions. Because the Commodity Exchange Act tasks the CFTC with enforcing against fraud and market manipulation, the CFTC must act to deter fraud and ensure market integrity. The Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee, which I sponsor, is tackling these issues.

Conclusion

Addressing climate-related market risk, and transitioning to carbon-neutral power sources, is going to take a whole-of-government, and whole-of-society approach, and I look forward to hearing today about how members of EEMAC can help advance this critical aim.

[2] The White House, FACT SHEET: One Year In, President Biden’s Inflation Reduction Act is Driving Historic Climate Action and Investing in America to Create Good Paying Jobs and Reduce Costs (Aug. 16, 2023), FACT SHEET: One Year In, President Biden’s Inflation Reduction Act is Driving Historic Climate Action and Investing in America to Create Good Paying Jobs and Reduce Costs | The White House.

Welcome to Kansas City, Missouri. First, I would like to thank our hosts at the University of Missouri-Kansas City. I am also glad that we could have this meeting in conjunction with AgCon, and I want to thank the Chairman for continuing the tradition of holding AgCon here in the Kansas City area. I am looking forward to the conference and I hope that you all can stay for it as well.

Sinclair Lewis, the first American novelist to win the Nobel Prize in Literature, observed that every state has its “historical treasures, small, precious, and mislaid.”[1] The same may be said about this city which boldly calls itself, “Paris on the Plains.” Here in Kansas City, Missouri, the life and art of Thomas Hart Benton is one of those mislaid treasures.

In 1934, Thomas Hart Benton became the first American painter to appear on the cover of Time Magazine as the leading proponent of a new style of painting called American Regionalism.[2] Today, you might not know who Benton was, but if you don’t, you surely know his regionalist colleague Grant Wood and Wood’s famous painting, American Gothic.[3]

In the 1930s, Grant Wood from Iowa, John Steuart Curry from Kansas, and Thomas Hart Benton from Missouri made up what was called the “American Regionalist Triumvirate.”[4] They all studied and lived for periods of time outside the Midwest, but as Wood said in defense of their travels, “I had to go to France to appreciate Iowa.”[5] They fought nationally and internationally for the idea that in an art world dominated by Paris and New York, there was a place for artists who lived, worked, and depicted American subjects like Wood’s pitchfork-holding Iowa farmer and his daughter.[6]

Among our financial regulatory peers, I like to think of the CFTC as taking a similar path. In an industry dominated by large cities and financial concerns, the CFTC was created to protect and give a voice to people who live in places like Iowa, Kansas, and Missouri (not to mention my home State of South Dakota) in major financial hubs and among global regulators.

Like the CFTC, Benton also straddled several different worlds. He was born in the small town of Neosho, Missouri, in 1889, but after his father was elected to Congress, he spent his early years moving back and forth between Missouri and Washington, DC, before being placed in a military academy in anticipation of a future career in politics.[7] After disappointing his family by becoming an artist instead of a politician, Benton studied in Chicago and Paris before achieving his long-desired success in New York.[8]

Then in 1935, he did something truly radical. He left New York for Missouri and returned home to teach at the Kansas City Art Institute where he remained until his death in 1975.[9]

Thomas Hart Benton’s art focused on the everyday people and moments in life across America, a focus we are striving to achieve through the work of this advisory committee as well.

One of our panels will examine the current state of the crude oil derivatives markets.

Painting in the 1920s and 30s, oil was a subject that fascinated Benton. In 1928, he traveled to Borger, Texas, to see the spectacle of a town and industry quickly cropping up around the discovery of crude oil.[10] From that trip came his painting, Boomtown, which in his memoir, An Artist in America, Benton described by saying: “Out on the open plain beyond the town a great thick column of black smoke rose as in a volcanic eruption from the earth to the middle of the sky.”[11]

Today we will also learn about the construction of our electric grid and the costs of large-scale electrification, which will further inform our work on derivatives markets for electric power.

Electric power was also a subject of interest for Benton. In his mural Instruments of Power, which is currently on display at the Metropolitan Museum of Art, he depicts everything from power plants and hydroelectric dams to high tension wires and gas turbines.[12]

Also, after EEMAC’s discussion of the proposed Basel III Endgame at our last meeting, a Committee member requested that we devote a panel to some different views on the implementation of Basel III. To that end, we have a panel that discusses the Endgame, but from a different perspective that is more supportive of the Federal Reserve’s current proposal. As I have said previously, we should not shy away from discussing difficult issues where viewpoints differ. We are all better informed when we understand and appreciate all sides of an issue.

Sadly, few painters have taken the time to depict the intricacies of bank capital standards, and even Thomas Hart Benton shied away from the subject. That said, when his father served in Congress, he was a populist in the tradition of William Jennings Bryan and an ardent opponent of large banks and industrialists, so he may have been sympathetic to our Endgame panelist’s point of view.[13]

In addition, we will receive further progress reports on our subcommittees from Professor Ian Lange, the Chair of EEMAC’s Role of Metals Markets in Transitional Energy Subcommittee and Professor Timothy Fitzgerald, the Chair of EEMAC’s Physical Energy Infrastructure Subcommittee.

Before we get started, I also want to recognize EEMAC’s own triumvirate of dedicated staff – Secretary Lauren Fulks and Assistant Secretaries, Lillian Cardona and JonMarc Buffa – as well as EEMAC Chair, Dena Wiggins and to recognize our newest Associate Member, Annette Hugh from S&P Global Commodity Insights.

Thank you to our members, associate members, and guests for attending today. I look forward to another informative meeting.

---

[1] Lewis, Sinclair. (1949). The God-Seeker. Random House.

[2] TIME Magazine. 24 Dec. 1934, https://content.time.com/time/covers/0,16641,19341.

[3] Wood, Grant. American Gothic 1930, Art Institute of Chicago, Chicago, Illinois.

[4] Watson, Keri. “Cultivating Citizens: The Regionalist Work of Art in the New Deal Era.” Panorama, Journal of the Association of Historians of American Art. Fall 2019.

[5] Semuels, Alana. “At home in a piece of history.” Los Angeles Times, April 30, 2012.

[6] Letter from Wood, Grant to Sudduth, Nellie. March 21, 1941.

[7] Wolff, Justin. (2012). Thomas Hart Benton: A Life. Farrar, Straus and Giroux.

[8] Id.

[9] Id.

[10] Benton, Thomas Hart. Boomtown, 1928. Memorial Art Gallery, Rochester, NY.

[11] Benton, Thomas Hart. (1951). An Artist in America. University of Kansas City Press.

[12] Benton, Thomas Hart. Instruments of Power, 1931. Metropolitan Museum of Art, New York, NY.

[13] Wolff, Justin. (2012). Thomas Hart Benton: A Life. Farrar, Straus and Giroux.

Introduction

Good morning, I am honored to welcome you to the first Market Risk Advisory Committee (MRAC) meeting of 2024. At this meeting, the MRAC will introduce formal recommendations, reports, and presentations with insightful guidance to improve the integrity and stability of our markets. These include an unprecedented analysis of the state of intermediated clearing markets and the significant reduction in the number of FCMs providing trade execution services over two decades. The Market Structure Subcommittee will also examine the U.S. Treasury cash-futures basis trade and risk management implications. The Future of Finance Subcommittee’s AI and Risk Management workstream will share it’s working plan, outlining initial observations and potential suggestions for navigating the complex landscape of AI integration in financial markets.

Today, we continue the long tradition of this Committee’s engagement with the Commission, its valuable insight into the concerns that shape the stability and integrity of global derivatives markets, and its collaboration toward developing ways that the industry and the Commission can prepare for and mitigate the most critical risks facing our markets today. The work of this Committee influences industry standards and best practices and provides thought leadership on many of the most important issues that will impact citizens and businesses in every corner of the world by shaping the direction of the development of markets.

CCP Risk and Governance

The Central Counterparty Risk and Governance Subcommittee, co-chaired by Alessandro Cocco, Vice President in the Financial Markets Group at the Federal Reserve Bank of Chicago, on detail as Senior Policy Advisor at the Department of Treasury and Alicia Crighton, Chair of the Futures Industry Association Board of Directors will share a presentation, a report, and recommendations on behalf of the Recovery & Resolution workstream. The recommendations reflect the collective work of the Subcommittee, whose members include diverse stakeholders, including representatives from derivatives clearing organizations (“DCOs”), clearing members, end-users, public interest advocates and academics.

As the report notes:

CCPs are fundamental market structures in derivatives markets and gained further prominence following the post-2008 financial crisis reforms. The G20 nations committed to have all standardized OTC derivatives, where appropriate, cleared through CCPs by 2012.[1] In 2010, the Dodd-Frank Act reformed the legislative framework for U.S. CCPs.[2] Title VII of the Dodd-Frank Act sets core principles for DCOs.[3] Lawmakers addressed CCP resilience by requiring CCPs to have adequate financial, operational, and managerial resources to discharge their responsibilities and to have in place appropriate risk management tools and procedures. The Dodd-Frank Act also created a novel type of regulated entity, a systemically important DCO. Title VIII of the Dodd-Frank Act, in fact, gave the Financial Stability Oversight Council (“FSOC”) the authority to designate as systemically important those clearing entities (e.g., DCOs) that “are or are likely to become, systemically important”.[4] Systemically important DCOs (“SIDCOs”) are subject to enhanced prudential and risk management standards and procedures.[5] In addition, Title VIII introduced an enhanced supervisory regime for SIDCOs that imposed on the CFTC the obligation to conduct annual examinations of these firms.[6]

In addition to the domestic reforms adopted under the Dodd-Frank Act, since 2010, international standard-setting bodies have been very active in adopting principles, guidance, and standards to support and inform national policymakers in the regulation of CCPs. The Committee on Payments and Market Infrastructures (“CPMI”), the Committee on Payment and Settlement Systems (“CPSS”) and the International Organization of Securities Commissions (“IOSCO”) (together, “CPMI-IOSCO” and “CPSS-IOSCO”, respectively), and the Financial Stability Board (the “FSB”) have published extensive reports on CCP resilience, recovery, and resolution. In 2012, CPSS-IOSCO published the Principles for Financial Market Infrastructures (“PFMI”),[7] a set of 24 principles that should apply to financial market infrastructures, including CCPs, with the ultimate goal of enhancing their safety and efficiency.

Many of the PFMIs address the resilience of CCPs and their capacity to manage financial risk. The PFMI approach to CCP resilience builds on four aspects, developed in an ad hoc additional guidance report:[8] (1) governance arrangements of CCPs;[9] (2) comprehensive risk management frameworks;[10] (3) financial resources allocated to loss absorption;[11] and (4) stress testing for both credit and liquidity exposures.[12] CPMI-IOSCO acknowledges that it is vital for CCPs to have sufficient resilience to withstand clearing member failures and other stress events—and this is even more critical in the current market landscape, characterized by the mandatory central clearing of certain standardized OTC derivatives. To complement the resilience guidelines, CPMI-IOSCO also published a report on the recovery of CCPs.[13] The recommendations on recovery focus on CCPs’ adoption of transparent and effective recovery plans, where the interests of all affected stakeholders are considered, and that contain different recovery tools appropriate to meet different recovery objectives.

At the international level, the FSB has been quite active as well. In 2017, the FSB published guidelines for CCP resolution and resolution planning.[14] In March 2022, in the aftermath of the Covid-19 pandemic, the FSB, together with the CPMI and IOSCO, commenced new work to assess CCP financial resources in the context of recovery and resolution.[15] The FSB acknowledged the increased systemic importance of CCPs in markets that embraced central clearing and evaluated the operation of recovery mechanisms. However, the FSB concluded by admitting the necessity of additional input from stakeholders on the sufficiency of the existing toolkit for CCP resolution, in particular on non-default loss scenarios. The FSB further noted the need for potential alternative financial resources and tools for CCP resolution, along with an analysis of the costs and benefits (including effectiveness and impact on incentives) of such alternatives. In September 2023, the FSB launched a public consultation on financial resources and tools for CCPs.[16] The consultation, that ended in November 2023, proposed a regulatory toolbox approach as a global standard for CCPs resolution. “In this approach, home resolution authorities for systemically important CCPs should have access to a set of resolution-specific resources and tools to meet the objectives for financial resources to support resolution, in addition to the use of recovery[17]

The FSB is working on finalizing its report, taking into account comments received during the consultation period. As discussed above, since 2008, domestic lawmakers and international standard-setting bodies have established regulations and standards that have substantially enhanced the resilience of CCPs. Such resilience has been demonstrated by the successful performance of CCPs during extreme stress events, including a historic global pandemic. Attention has more recently turned toward CCP recovery and wind-down as international standard standard-setting bodies issue various forms of guidance.

Since 2013, SIDCOs and Subpart C DCOs have been subject to the requirement to develop and submit recovery and resolution plans. In July 2016, the staff of the CFTC’s Division of Clearing and Risk (“DCR”) issued an advisory letter (“guidance”) regarding the content of a SIDCO’s and Subpart C DCO’s recovery and orderly wind-down plans. In response to CFTC regulations and such guidance, SIDCOs and Subpart C DCOs spent considerable time, in collaboration with DCR, analyzing scenarios that could prevent a DCO from being able to meet its obligations and to provide its critical operations and services; developing and implementing recovery tools, wind-down scenarios and options; analyzing interconnections and interdependencies; evaluating agreements to be maintained during recovery and wind-down; reviewing financial resources, governance arrangements, and notification policies; establishing a framework for regular policy updates; and conducting testing. This analysis resulted in significant revisions to DCO policies and practices to address recovery and wind-down.

SIDCOs and Subpart C DCOs have spent considerable time responding to guidance and have taken material steps to reduce systemic risk within the financial system. The Commission is now proposing to codify some of that guidance in the proposed rule. The Commission believes that most, if not all, of the proposals are already incorporated into the plans submitted by SIDCOs and Subpart C DCOs. But the proposed requirements will be new for other DCOs. Informal guidance and rules do not have the same weight, as guidance is non-binding, nor is guidance subject to public consultation. Moreover, the rule applies to all DCOs whereas the guidance applies to SIDCOs and Subpart C DCOs.

Pursuant to Title VII and VIII of the Dodd-Frank Act, and taking into account the international standards set by CPMI-IOSCO and the FSB, the CFTC adopted a proposed rule for DCOs recovery and orderly wind-down plans. The CFTC is “proposing, among other things: (1) for SIDCOs and Subpart C DCOs, that they should incorporate certain subjects and analyses in their viable plans for recovery and orderly wind-down; and (2) for all other DCOs, that they should maintain viable plans for orderly wind-down that incorporate substantially similar subjects and analyses as the proposed requirements for SIDCOs and Subpart C DCOs.”[18]

The report includes a number of important recommendations, which, if adopted by MRAC, can be used by the Commission to inform the development of the final rule on DCO resilience, recovery, and orderly wind-down. The recommendations include:

First, implementation of supervisory stress tests:

• Commission staff should adopt and implement supervisory stress testing of credit and liquidity risks for all DCOs.
• Commission staff should adopt and implement operational and other non-default risk stress testing, leveraging industry exercises covering these risks, where appropriate.
• Commission staff should include reverse stress tests in their supervisory stress tests.
• The results of the supervisory stress tests should be made available to the public, in a level of detail determined to be appropriate by Commission staff, within a reasonable time after the stress tests have been concluded.
• Subcommittee members representing end users, FCMs and academia believe these stress test should be required to take place at least annually. Subcommittee members representing DCOs do not believe that the frequency of reverse stress tests should be annual but rather that the frequency of reverse stress tests should be determined by Commission staff.

Second, regarding recovery scenarios and analysis:

• In the final rule, the text of CFTC Regulation 39.39(c)(2) should be amended to require that DCOs conduct scenario analysis that includes extreme but plausible scenarios that could trigger recovery or wind down.
• The final rule should require that SIDCOs include in their plans an assessment of (1) the financial resources and tools available in the event of recovery and wind-down, and (2) how they would address the scenarios identified that could trigger recovery and wind-down.

Third, regarding non-default losses:

• The Commission should retain the proposal to require a DCO that is neither a SIDCO nor a Subpart C DCO to maintain and submit to the Commission viable plans for orderly wind-down necessitated by default losses as well as NDLs.
• The Commission should retain the proposed definition of NDL as applied to all DCOs.

Fourth, regarding the provision of data for resolution planning:

• Subcommittee members believe that the Commission and FDIC should develop an inter-agency task force to discuss the sharing of information for resolution planning purposes. However, Subcommittee members representing DCOs believe that coordination already occurs between the FDIC and CFTC with respect to SIDCOs, that an interagency task force is not necessary, and that coordination can and will continue to occur through existing channels.

And, finally, regarding challenges to porting of customer positions and collateral during resolution:

• The Commission should develop an inter-agency task force, which should include the National Futures Association (NFA) to discuss and address impediments to the porting of customer position and collateral in the context of a DCO resolution and clearing member default.

Throughout the years, I have maintained an unwavering commitment to researching and proposing regulatory solutions for AI in financial markets, driven by a steadfast dedication to ensure integrity and stability in this rapidly evolving landscape. Five years ago, I began to convene and participate in convenings of AI developers, adopters, academics, government and industry researchers, regulators, and public interest organizations.

In 2020, a co-author and I received invitations to publish two books, one of which examines the ethical implications of AI across diverse sectors of our society. In two recent speeches, a speech last month before the New York Bar Association and a speech at Japanese Fintech Week in Tokyo, Japan, I have advocated for the CFTC to begin to identify best practices for integrating AI in our markets. Last week while in South Africa, I offered remarks at the South African Reserve Bank’s Fintech Summit about the regulation of novel financial products as well as the rapid development and deployment of generative AI and its impact on financial markets.

While the use of AI in financial markets may hold the potential for substantial benefits, such use may also introduce unprecedented risks concerning market integrity, customer protection, governance, data privacy, bias, and cyber threats.[19] The derivatives market provides many potential applications for AI. Accordingly, given the Commission’s mandate to promote responsible innovation while safeguarding market integrity, effective risk management is essential to address these concerns.

In January of this year, the Commission issued a request for comment (RFC) to “to assess the benefits associated with the use of AI in CFTC-regulated markets, to inform staff’s supervisory oversight and to evaluate the need for any future guidance and rulemakings.”[20] The RFC solicits responses to 20 questions that cover a wide range of topics, including the definition of AI, general and specific use-cases, market manipulation, and consumer protection.

Three weeks ago, the Future of Finance Subcommittee held a public meeting on March 15, 2024, which focused on the use of artificial intelligence (“AI”) in CFTC-regulated markets. This meeting supports work initiated at the MRAC meetings over nearly two years. The MRAC meetings have long served as an effective venue for exchanging diverse viewpoints on critical issues facing futures and derivatives markets. Dating back to the first MRAC meeting of 2022, the panel recognized the transformative innovation in the market of digital assets, where broad collaboration and information sharing were deemed to be essential for financial institutions to mitigate significant risks associated with digital assets.[21]

In 2017, the Financial Stability Board (FSB) issued a report on market developments related to AI and the financial stability implications. The Financial Stability Oversight Council (FSOC) and the Financial Industry Regulatory Authority (FINRA) have published recommendations that offer guidelines for governing AI. More recently, the International Organization of Securities Commissions issued a report following a consultation on the use of AI by market intermediaries. These efforts include a number of common threads, suggesting that, while many questions remain, there are important areas of consensus regarding the right approach to AI in financial markets. A few of these commonalities include:

• A focus on the governance of AI models. FSOC “recommends monitoring the rapid developments in AI, including generative AI, to ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system while facilitating efficiency and innovation.”[22] Similarly, IOSCO has recommended that“[r]egulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and [machine learning]. This includes a documented internal governance framework, with clear lines of accountability.”[23]
  
  CFTC regulations, for example, introduce important governance obligations for registered market participants. Designated Clearing Organizations must establish a Risk Management Committee “comprised of clearing members and customers of clearing members on matters that could materially affect the risk profile of the DCO” and Risk Management Working Groups composed of market participants.[24] Enhanced risk management oversight and governance best practices will play an important role in managing the development and implementation of AI.
• Promoting the explainability of AI models. Many AI models are “black-box” models, meaning that it may be difficult, and in some cases impossible, to explain their decision-making processes. Accordingly, FSOC, IOSCO, the FSB, and FINRA have all emphasized the importance of addressing the explainability challenge.[25] As FINRA put it, [i]ncorporating explainability as a key consideration in the model risk management process for AI-based applications.”[26]
• The need for data controls. Data quality, security and privacy are central concerns for regulators as market participants adopt AI models. FSOC recent report notes, “data controls like data quality, suitability, security, privacy, and timeliness are vital to sound AI use.”[27] Similarly, FINRA calls for “data governance efforts” including: “data review for potential bias,” “data source verification,” “data integration,” “data security,” and “data quality benchmarks and metrics.”[28]
• Implementing measures to address bias. In 2019, I testified before Congress and voiced my concerns that AI models trained on incomplete or inaccurate data may engender biased results. Consistent with these concerns voiced by civil rights advocates, the White House AI Bill of Rights emphasizes the need to ensure fairness and guard against bias. In its report, FSOC notes that “specific requirements to prevent discrimination or bias that apply to tools, models, or processes used in consumer compliance also apply to AI. This is an important consideration because without proper design, testing, and controls, AI can lead to disparate outcomes, which may cause direct consumer harm and/or raise consumer compliance risks.”[29]
• Testing and monitoring output. Protecting against bias, promoting explainability, and implementing governance strategies are only possible where models are properly tested and monitored. FSOC, IOSCO, the FSB, and FINRA have each emphasized the importance of testing. FSOC notes the responsibility of financial institutions to “monitor the quality and applicability of AI’s output” the ability of regulators to “help to ensure that they do so.”[30] Similarly, the FSB recognizes the importance of “[a]ssessing AI and machine learning applications for risks, including adherence to any relevant protocols regarding data privacy, conduct risks, and cybersecurity.”[31] Existing approaches to issues like cybersecurity offer some guidance.

Last year, in a statement regarding a proposed cyber resilience rulemaking, I noted the importance of comprehensive regulation in this area, including regulations that capture mission-critical third-party service providers.[32] Model testing and oversight, which concerns cybersecurity, and much more, must similarly be comprehensive in the parties and the issues that it captures.

I have advocated interventions for the Commission to foster responsible use of AI in financial markets. First, I have encouraged greater visibility and transparency regarding our registrants’ use of AI by expanding our annual systems examination questionnaire to incorporate questions that directly inquire about the adoption of AI and related risks. Additionally, I have proposed for the development of a principles-based framework. In consultation with members of this working group of the Market Risk Advisory Committee, I look forward to exploring a principles-based regulatory framework that underscores intelligibility, risk management, compliance, oversight, market responsibility, notice, and explainability.

Further, I have advocated for the Commission to consider introducing heightened penalties for those who intentionally use AI technologies to engage in fraud, market manipulation, or the evasion of our regulations. Finally, the Commission should lead in creating an inter-agency task force focused on information sharing and composed of market and prudential regulators including the CFTC, SEC, Federal Reserve System, OCC, CFPB, FDIC, FHFA, and NCUA. The task force would support the AI Safety Institute in developing guidelines, tools, benchmarks, and best practices for the use and regulation of AI in the financial services industry. It may also provide recommendations to the AI Safety Institute as well as evaluate proposals coming out of the Institute.

In consultation with members of this Subcommittee, I look forward to exploring the ways in which the Commission can ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system while facilitating efficiency and innovation.

Building on our productive dialogue over the last year and a half, we will hear from Gary Kalbaugh, deputy general counsel and director at ING Financial Holdings Corp., who will outline for us the ambitious workplan that the Subcommittee has adopted for its AI workstream.

This workplan will guide the Subcommittee’s development of recommendations for this Committee on the use of AI in CFTC-regulated markets.

The Subcommittee endorses FSOC’s recommendation to monitor the “rapid developments in AI, including generative AI, to ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system while facilitating efficiency and innovation.”[33]

Based on its review of the statements and materials presented at its inaugural meeting, the Subcommittee has developed a work plan. This is an initial plan only: the Subcommittee intends to further review, research and develop the plan for future presentation to the full committee and, as appropriate, the Commission:

1. Conducting a Survey on the Use of AI in CFTC-regulated Markets. The Subcommittee believes that it may be useful for the Commission to conduct a survey[34] of CFTC registrants’ use of AI in CFTC-regulated markets. The survey could be designed to inform the Subcommittee, the full committee, as well as the Commission and its staff on how different types of AI are being used, how its risk are being mitigated, and by which CFTC registered market participants.
   
   The Subcommittee would further consider the design of the survey, including: (1) whether such a survey should be incorporated into Commission and divisional staff examinations and other oversight and monitoring tools and mechanisms;[35] and (2) whether the survey would be mandatory for CFTC registered market participants. The Subcommittee will provide a recommendation on this matter and present it to the full Committee for potential presentation to the Commission.
    
2. Recommendations on New Guidance, Advisories or Rulemaking. The Subcommittee may advance a recommendation that the staff should consider new guidance, advisories or formal rulemaking, based on how CFTC market participants are using AI to conduct regulated activities and any gaps identified in existing regulations and guidance. Areas of focus may include, without limitation:
   1. Framing the Risk of AI Models. Whether CFTC registrants should be required to disclose or explain[36] key attributes and risks of those models, including those created by third parties.[37] This may include enhanced requirements for registrants that are using AI for critical requirements such as compliance, client-facing business activities, or market regulation functions.
   2. Robust Monitoring and Testing of AI Models. Whether CFTC market participants should adhere to additional requirements regarding testing and monitoring of AI models as used in CFTC-regulated activities.[38] Potential areas of testing and monitoring may include cybersecurity, data controls, bias, privacy, and output consistency.
   3. Oversight and of AI Models. Whether additional guidance is appropriate to clarify oversight and governance expectations for AI models used in CFTC-regulated activities. Such arrangements that the subcommittee may consider include a comprehensive governance framework and designated personnel focused on AI oversight, including senior management with functional understandings of AI to permit adequate supervision.[39] The subcommittee will consider the degree to which a materiality standard is appropriate, as well as concentration[40] and other risks.

With sincerest gratitude, I would like to acknowledge the hard work put in by the Subcommittee members to advance this workplan and special thanks to Gary for presenting it here today.

Market Structure

Next, we will hear presentations from members of the Market Structure Subcommittee, co-chaired by Ann Battle, Senior Counsel, Market Transitions & Head of Benchmark Reform at ISDA, and Biswarup Chatterjee, Managing Director and Head of Innovation for the Global Markets Division at Citigroup. The FCM Capacity Workstream will present a cover letter attaching a data analysis examining current state of the market for futures commission merchants (FCMs). FCMs serve as critical intermediaries in cleared markets. The workstream created and analyzed a database of publicly available financial information for FCMs, and noted industry consolidation and an increased concentration in the market for FCM services.

Treasury workstream

The Treasury Reform workstream will provide a presentation on U.S. treasury cash-futures basis trades and risk management considerations. This presentation will be delivered by Nathaniel Wuerffel, Head of Market Structure, at Bank of New York Mellon. This presentation underscores issues raised during the December 11, 2023 MRAC meeting when the Subcommittee provided a general overview of the state of the U.S. treasury markets, including the role of the basis trade in U.S. treasury markets, risk-management practices that are intended to limit leverage, oversight and transparency, and regulatory changes impacting these markets. Today’s presentation explores the mechanics of these trades, the benefits and risks, and potential ways to manage risks associated with these trades.

PTRR and Block Trade

We will also hear brief updates from two other workstreams of the Market Structure Subcommittee. The post-trade risk reduction workstream will provide an update on its work and plans to further develop proposed recommendations in order ensure that any recommended changes preserve the systemic risk and financial market stability goals of Title VII. The block trade workstream will provide a brief update in light of industry-wide efforts to conduct a centralize data analysis to inform block trade policy.

Climate-Related Market Risk

In December of last year, the CFTC issued Proposed Guidance Regarding the Listing of Voluntary Carbon Credit Derivatives Contracts and issued a request for comment from the public on the proposed guidance. As I said at the time that it was difficult to overstate the importance of the guidance, and trumpeted how “[o]nce again, the CFTC is demonstrating leadership in the novel carbon credit markets.”[41] I remain excited about how the guidance might evolve going forward, particularly in light of the extensive public engagement that the Commission received in response.

As I also said at the time of the Guidance, however, “I find the Proposed Guidance to be necessary, but insufficient,”[42] and that I hoped that it would be the beginning of robust consideration of how the CFTC might be able to use its authority to foster and improve the market going forward. The Climate-Related Market Risk Subcommittee convened a roundtable on March 15, 2024 and expert speakers offered guidance on their understanding of the foundational issues challenging the market for carbon credits.

The roundtable focused on three main topics related to the carbon credit markets: (1) market integrity, disclosure, transparency and enforcement, (2) market design and intermediation, and (3) product design and reliability.

Regarding market integrity, Holly Pearen of the Environmental Defense Fund, who we will be hearing from again today, warned the Subcommittee that poorer quality voluntary carbon credits are overwhelmingly bought and sold in over-the-counter and less transparent carbon credit transactions. Panelists also argued that the CFTC should ensure that crediting programs properly implement social safeguards so that credits created with co-benefits for local communities do in fact go to the intended communities.

The second panel of the roundtable focused on how market design and intermediation can make carbon credit markets stronger. Panelists from diverse viewpoints as exchanges and a dairy industry association were consistent that robust and liquid markets for carbon credits and their derivative products promote greater integrity of the underlying credits through the market’s reflection of the quality of the credits in their price. The third panel focused on the design of the products themselves, including a discussion of the legal nature of carbon credits, and the importance of integrity standards that focus on results and use data to analyze the quality of the voluntary carbon credits.

Across the board, the roundtable participants were enthusiastic for the CFTC to create more robust standards. If carbon credits are going to be a force for good in the monumental task to limit anthropogenic atmospheric carbon, a firmer hand from regulators and standard-setting bodies will be critical.

Today we will hear from three different speakers regarding voluntary carbon markets. The first will be the unique perspective of Dale Lewis, joining us from Zambia, who is the CEO of Community Markets for Conservation, or COMACO. Mr. Lewis and his company do the on-the-ground work in Zambia of building the various carbon-limiting projects that are the source of voluntary carbon credits currently being traded. We will also hear from two people who spoke at the March 15 roundtable as well: Holly Pearen from the Environmental Defense Fund, and Jessica Garcia from Americans for Financial Reform Education Fund. Both Ms. Pearen and Ms. Garcia will be sharing their thoughts on the critical issues facing the voluntary carbon markets today, and discuss what they think the subcommittee should be studying going forward.

Conclusion

Today’s meeting is an opportunity to roll up our sleeves and begin to chart a course for the development and completion of the important work that the MRAC Subcommittees have and will explore this year. I am hopeful for an open and meaningful discussion among MRAC members regarding the critical issues facing our markets.

Allow me to thank our MRAC Chair and Chair of the FIA Board, Alicia Crighton; MRAC Designated Federal Officer (DFO) Tamika Bent; and MRAC Alternate DFO Peter Janowski. I also thank each of the ADFOs who support MRAC—Rebecca Lewis Tierney and Julia Welch.

I also want to thank the CFTC logistics and administrative staff and contractors who ensured that our physical conference room and our virtual conference room were ready to go for our members and our invited speakers, including Altonio Downing, Monae Mills, Andy Brighton, Keane McBride, Venise Raphael-Constant, Margie Yates, Jean Cespedes, Pete Santos, and Ty Poole.

Thank you so much for joining us today. I look forward to a robust and informative discussion.

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[1] Group of 20 (G20), Leader’s Statement, The Pittsburgh Summit (Sep. 24-25, 2009), https://www.oecd.org/g20/summits/pittsburgh/G20-Pittsburgh-Leaders-Declaration.pdf.

[2] See Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in scattered sections of 7, 12, and 15 U.S.C.).

[3] See Dodd-Frank Act § 725(c); 7 U.S.C. 7a-1(c)(2).

[4] See Dodd-Frank Act § 804; 12 U.S.C. 5463.

[5] See Dodd-Frank Act § 805; 12 U.S.C. 5464.

[6] See Dodd-Frank Act § 807; 12 U.S.C. 5466.

[7] Comm. on Payment and Settlement Sys. (CPSS)—Int’l Org. of Sec. Comms. (IOSCO), Principles for Financial Market Infrastructures (April 16, 2012), https://www.bis.org/cpmi/publ/d101.htm; see also Committee on Payments and Market Infrastructures (CPMI)-IOSCO, Resilience and Recovery of Central Counterparties (CCPs): Further Guidance on the PFMI—Consultative Report(August 2016), https://www.bis.org/cpmi/publ/d149.htm; CPMI-IOSCO, Implementation monitoring of PFMI: Level 3 assessment—Report on the Financial Risk Management and Recovery Practices of 10 Derivatives CCPs (August 2016), https://www.bis.org/cpmi/publ/d148.htm.

[8] CPMI-IOSCO, Resilience of Central Counterparties (CCPs): Further Guidance on the PFMI—Final Report(July 2017), https://www.bis.org/cpmi/publ/d163.htm.

[9] Id. (specifically Principle 2).

[10] Id. (specifically Principle 3, 4, 7, 13, 14, 17).

[11] Id. (specifically Principles 5, 6).

[12] Id. (specifically

[13] CPMI-IOSCO, Recovery of financial market infrastructures (October 2014, revised July 2017) https://www.bis.org/cpmi/publ/d162.htm.

[14] Financial Stability Board (FSB), Guidance on Central Counterparty Resolution and Resolution Planning (July 2017) https://www.fsb.org/2017/07/guidance-on-central-counterparty-resolution-and-resolution-planning-2/.

[15] FSB, Central Counterparty Financial Resources for Recovery and Resolution (March 10, 2022) https://www.fsb.org/2022/03/central-counterparty-financial-resources-for-recovery-and-resolution/.

[16] FSB, Financial Resources and Tools for Central Counterparty Resolution: Consultation report (September 2023) https://www.fsb.org/2023/09/financial-resources-and-tools-for-central-cou.nterparty-resolution-consultation-report/.

[17] Id. at iii.

[18] 88 Fed. Reg. 48968 at 48969.

[19] CFTC, Request for Comment on the Use of Artificial Intelligence in CFTC-Regulated Markets (Jan. 25, 2024), CFTC Staff Releases Request for Comment on the Use of Artificial Intelligence in CFTC-Regulated Markets | CFTC.

[20] Id.

[21] Kristin N. Johnson, Commissioner, CFTC, Opening Statement Before the Market Risk Advisory Committee Meeting (Sept. 28, 2022), Opening Statement of Commissioner Kristin N. Johnson Before the Market Risk Advisory Committee Meeting | CFTC

[22] Financial Stability Oversight Council (FSOC), 2023 Annual Report at 93, (Dec. 14, 2023), https://home.treasury.gov/system/files/261/FSOC2023AnnualReport.pdf.

[23] IOSCO, The use of artificial intelligence and machine learning by market intermediaries and asset managers at 17 (Sept. 2021), FR06/2021 The use of artificial intelligence and machine learning by market intermediaries and asset managers (iosco.org).

[24] 88 Fed. Reg. 44675.

[25] FSOC, 2023 Annual Report supra note 22, at 92.

[26] Financial Industry Regulatory Authority (FINRA), Report on Artificial Intelligence (AI) in the Securities Industry (June 2020), https://www.finra.org/sites/default/files/2020-06/ai-report-061020.pdf.

[27] FSOC, 2023 Annual Report, supra note 22, at 92.

[28] FINRA, Report on Artificial Intelligence (AI) in the Securities Industry, supra note 26.

[29] FSOC, 2023 Annual Report, supra note 22, at 92.

[30] Id.

[31] FSB, Artificial intelligence and machine learning in financial services: Market developments and financial stability implications at 34 (Nov. 1, 2017), https://www.fsb.org/wp-content/uploads/P011117.pdf.

[32] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding the CFTC’s Notice of Proposed Rulemaking on Operational Resilience Program for FCMs, SDs, and MSPs (Dec. 18, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement121823.

[33] Financial Stability Oversight Council, Annual Report 2023 at 93, available at ‌https://home.treasury.gov/‌system/files‌/261‌/‌FSOC2023AnnualReport.pdf.

[34] Committee will discuss related issues, including whether the survey will be mandatory.

[35] At the meeting, a spokesperson from the Futures Industry Association noted that its members use AI for: (1) Trading strategies; (2) Hedging/risk mitigation; and (3) Compliance tools.

[36] This could be at the time of integration or adoption of an AI model or significant amendment to one.

[37] For more on explainability, see FINRA, Artificial Intelligence (AI) in the Securities Industry (June 2020), available at https://www.finra.org/rules-guidance/key-topics/fintech/report/‌artificial-intelligence-in-the-securities-industry‌/‌key‌-challenges, suggesting that parties consider: “Incorporating explainability as a key consideration in the model risk management process for AI-based applications.” See also, Financial Stability Oversight Council, Annual Report 2023 at 92, available at https://home.treasury.gov/system/files/261/FSOC2023AnnualReport.pdf.

[38] For example, AI technologies with automated elements may require “compliance by design, i.e., technology with built in features that prevent ex ante compliance violations. For the similar “transparency by design” and “AML by design” concepts from which this is partially derived, see Sandy Pentland, Robert Mahari, and Tobin South, Transparency by Design for Large Language Models, Network Law Review (May 25, 2023), available at https://www.networklawreview.org/computational-three/, and Robert Z. Mahari, Thomas Hardjono, and Alex Pentland, AML by Design: Designing a Central Bank Digital Currency to Stifle Money Laundering, MIT Science Policy Review 57 (Aug. 29, 2022), available at https://sciencepolicyreview.org/2022/07/mitspr-191618003020/.

[39] For example, IOSCO has recommended that “[r]egulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and [machine learning]. This includes a documented internal governance framework, with clear lines of accountability.” Board of the International Organization of Securities Commissions, The Use of Artificial Intelligence and Machine Learning by Market Intermediaries and Asset Managers (Sept. 2021), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD684.pdf.

[40] “Concentration” here is broad and could be, among others, concentration among vendors or concentrations due to model availability, hardware or software limitations, or intellectual property rights.

[41] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding Commission Guidance Regarding Listing of Voluntary Carbon Credit Derivative Contracts (Dec. 4, 2023), Statement of Commissioner Kristin Johnson: Commission Guidance Regarding Listing of Voluntary Carbon Credit Derivative Contracts | CFTC.

[42] Id.

Commodity Futures Trading Commission (CFTC) Commissioner Caroline D. Pham today released the following statement regarding the CFTC’s complaint filed March 26, 2024 in the U.S. District Court for the Southern District of New York:

“The CFTC has filed another aggressive enforcement action exercising our authority to pursue alleged unregistered crypto asset derivatives trading platforms and other violations of law. I commend the Division of Enforcement’s vigilance in protecting our markets. However, I note that the complaint appears to assert that fund shares held by investors—namely, securities—can themselves constitute leveraged trading pursuant to section 2(c)(2)(D) of the Commodity Exchange Act. This interpretation fails to distinguish between an investment in a fund, which would typically be a security under the jurisdiction of the SEC, and the trading activities of a fund, alleged here to be under the CFTC’s jurisdiction. The CFTC’s approach may infringe upon the SEC’s authority and undermine decades of robust investor protection laws by conflating a financial instrument with a financial activity, disrupting the foundations of securities markets. Owning shares is not the same thing as trading derivatives.”