FIA has filed a comment letter responding to the US Commodity Futures Trading Commission’s notice of proposed rulemaking on conflicts and affiliations. FIA has long highlighted the need for clear rules to address potential and perceived conflicts of interest in vertically integrated derivatives markets.
FIA’s letter broadly supports the CFTC’s objective in the proposed rule of addressing conflicts associated with affiliations between exchanges, clearinghouses, intermediaries and other market participants. The letter notes that effective safeguards are critical to maintaining confidence in the integrity and impartiality of the derivatives markets’ self-regulatory framework. FIA supports most of the proposed rule provisions and offers recommendations to strengthen the final rules.
FIA’s principal recommendation is that the CFTC designate the National Futures Association (NFA) – as a not-for-profit registered futures association – to serve as the sole designated self-regulatory organization (DSRO) for all futures commission merchants, with all DSRO examinations of FCMs transitioning to the NFA.
“Only by having a neutral self-regulatory entity serve as DSRO for all FCMs will the Commission fully address potential conflicts and perceived conflicts in the DSRO examination process,” wrote FIA’s Chief Legal Officer and General Counsel, Allison Lurton.
“Everyone in the derivatives ecosystem benefits from robust and fair exams, not least FCMs whose assets are at risk in the event of a fellow clearing member default. We respectfully submit that there will not be complete trust and confidence in the process where a for-profit, commercial entity has authority to conduct the exams, especially where it has an affiliate FCM.”
In addition to dispelling conflicts concerns, FIA’s letter notes that mandating NFA as the DSRO will have practical benefits over a model where FCMs can choose between examining bodies, including ensuring consistency in examinations, DSRO resource adequacy, and fair and transparent allocation of DSRO-related costs.
FIA’s FCM members believe that having the NFA serve as a single neutral DSRO would also enhance the role of the Joint Audit Committee (JAC) as a coordinating body for FCM oversight. The JAC would continue to function as a forum through which member exchanges and NFA can develop, communicate and update examination priorities and standards for the protection of FCMs, market participants and regulators, including exchanges and clearinghouses in their capacity as self-regulatory organizations for their respective markets.
A mandatory transition of DSRO responsibilities to NFA would simply ensure that the entity performing the FCM examinations lacks commercial conflicts, as even mere suspicion of partiality may undermine confidence in the integrity of the self-regulatory process.
“We respectfully submit that the only solution that preserves systemic safety, protects proprietary competitor data and eliminates the risk of commercially driven responsive action is to adopt a uniform mandate designating the NFA as the DSRO for all FCMs,” wrote Lurton.
FIA’s letter recommends that the CFTC adopt several other important enhancements to address conflicts that may arise in connection with SRO oversight, financial surveillance and risk management in vertically integrated market structures.
