At first post-COVID gathering, CFTC advances CCP governance proposal

Agency also requests comment on submission by JFSA related to swap dealers

27 July 2022


The US Commodity Futures Trading Commission (CFTC) voted 5-0 to advance a proposed rule related to governance requirements for derivatives clearing organizations (DCOs) during an open meeting on July 27. The proposed rule also requests comment on additional areas related to governance requirements for DCOs, for the Commission’s consideration in potential use in future rulemaking.

Separately, the CFTC voted 4-0, with Commissioner Caroline Pham concurring, to advance a Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination submitted by the Financial Services Agency of Japan (JFSA).

Opening statements

Chairman Rostin Behnam noted the event was the Commission's first open meeting held in-person since the onset of the COVID-19 pandemic, and the first open meeting since 2020 with the CFTC at full strength. Behnam said his intention is to “make today the first of many productive and insightful open meetings as our new Commission thoughtfully supports the growth, transparency, and vibrancy of the US derivatives markets.”

Commissioner Kristin Johnson stated the values she hopes to emphasize as a commissioner are first, customer protection, and second, maintaining the integrity of financial markets. She noted that clearing mandates have contributed to the development of fair and orderly markets but noteworthy concerns persist. While central counterparties (CCPs) play a critical role as central risk managers, the clearing mandates increased the dependence on CCPs, concentrating risks.

Commissioner Christy Goldsmith Romero said she believes regulators should identify the public interest that is served in the actions that they take. Goldsmith Romero said the proposals serve the broader public interest of promoting financial stability and reducing systemic risk.

Commissioner Summer Mersinger provided brief remarks noting that the items being considered reflect some of the greatest attributes of the CFTC.

Commissioner Caroline Pham noted that with the implementation of Dodd-Frank reforms, the CFTC has had some challenges with getting the rules right, and have used various tools to provide flexibility, when necessary. Pham raised concerns that there are nine no-action relief letters that expire in the next year and encouraged the Commission to “provide regulatory certainty, well in advance of the expiration” of these letters. Pham also discussed the importance of international regulatory harmonization, particularly related to the implementation of the oversight regime for swap dealers and expressed support for considering the proposal to enhance clearinghouse risk governance.

Proposed rule on governance requirements for Derivatives Clearing Organizations

The proposed rule advanced by the CFTC is based on consensus recommendations contained in the February 2021 report issued by the Central Counterparty (CCP) Risk and Governance Subcommittee of Market Risk Advisory Committee (MRAC).

First, the proposal requires a DCO to establish one or more Risk Management Committees (RMCs) and require its board to consult with and consider and respond to input from its RMCs on matters that affect the risk profile of the DCO.

Second, the proposal requires each DCO to establish one or more market participant risk advisory working groups in order to seek risk-based input from a broad array of market participants on matters that could materially affect the risk profile of the DCO.

Clark Hutchison, Director of the Division of Clearing and Risk (DCR), noted that while the proposed rule relates to areas in which MRAC CCP Risk and Governance Subcommittee generally agreed, there are other governance topics discussed in the report where subcommittee members did not reach clear agreement. The proposed rule requests comment on several topics for the Commission’s consideration in potential use in future rulemakings, including DCO consultation of market participants prior to commission of rule change submissions, made pursuant to Part 40, and of rules and policies regarding ability of RMC members to share certain types of DCO information with others who work at their firms, in order to obtain additional expert opinion that may assist DCO risk management.

Chairman Behnam said the proposed rule increases transparency and accountability, “taking a data-driven approach to support possible enhancements in the Agency’s oversight of DCOs” while “ensuring coordination and consistency with domestic and international partners.” Behnam noted that the CFTC won’t stop where the MRAC subcommittee found consensus in their February 2021 report, and invites further debate on other important issues.

Commissioner Johnson raised questions about risk management oversight in situations when new market participants might not be engaged in use of intermediates and, perhaps, and might have their risk management fully controlled by algorithms. Hutchison said he these are interesting questions and acknowledged they don’t have the answers at this point.

Notice of proposed order and request for comment on an application for a capital comparability determination submitted by the Financial Services Agency of Japan

“The preliminary Capital Comparability Determination is the first such order proposed by the Commission since adopting its regulatory substituted compliance framework for non-U.S. domiciled nonbank swap dealers (SDs) in July 2020” according to Chairman Behnam. “The Commission is proposing this order in response to an application submitted by the Financial Services Agency of Japan (JFSA), which has direct supervisory authority over the three Japanese nonbank SDs that are provisionally-registered with the Commission.”

The CFTC is inviting public comment – open for 60 days - on its analysis and proposed comparability determination order, including its proposed conditions, as well as on the JFSA Application and relevant Japanese laws.

If the Commission determines to issue a favorable comparability determination, an eligible Japanese nonbank SD would be required to file a notice of its intent to comply with FSA’s capital adequacy and financial reporting rules in lieu of the Commission’s requirements.

Statements and additional documents


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