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Commodity Futures Trading Commission Open Meeting

Commodity Futures Trading Commission

Open Meeting

Wednesday, December 18, 2019

Key Topics & Takeaways

  • Cross-Border: In a 3-2 vote, the Commission approved a proposal that addresses the cross-border application of the registration thresholds and certain requirements applicable to swap dealers and major swap participants, and establishes a formal process for requesting comparability determinations for such requirements
  • Post-Trade Name Give-Up: The Commission unanimously approved a proposal to amend Part 37 of the CFTC’s regulations to prohibit “post-trade name give-up” practices for swaps that are anonymously executed on a Swap Execution Facility (SEF) and are intended to be cleared.

Opening Statements & Introduction

Chairman Heath P. Tarbert

After providing a brief overview of the agenda items, Tarbert noted that they will be withdrawing the proposal regarding a request for comment on designated foreign sovereign debt as collateral and acceptable currencies for collateral and settlement. He noted that the Commission will continue to engage in construction dialogue with the European Commission and the European Securities and Markets Authority (ESMA) on this issue.

Staff Presentation: Proposed Rule – Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants

Staff:

  • Josh Sterling, Director, Division of Swap Dealer and Intermediary Oversight (DSIO)
  • Frank Fisanich, DSIO
  • Lauren Bennett, DSIO
  • Owen Kopon, DSIO
  • Rajal Patel, DSIO
  • Jacob Chachkin, DSIO

Sterling began by noting that in drafting this proposed rule, staff focused on crafting a clear, smart and effective approach that is based on the Commodity Futures Trading Commission’s (CFTC or Commission) 2013 swaps cross border guidance. He continued that this proposed rule is faithful to the requirements of section 2(i) of the Commodity Exchange Act (CEA). He said that in the 10 years since the United States was the first to act on swaps reform under the 2009 G20 commitments, foreign jurisdictions around the world have put into place their own swaps regimes, joining the Commission’s efforts to oversee a global and cross-border swaps market. Sterling stated that this measure rejects the application of the proposed rule to transactions that are arranged, negotiated, and executed (ANE) outside of the United States. He concluded that staff intends for this proposal and the subsequent final rule to be complete, meaning that they do not expect the Commission will need to issue any further no-action letters or relief.

Patel outlined the defined terms under the proposed rule. First, the definition of a U.S. person would be consistent with the definition adopted by the Securities and Exchange Commission (SEC) in their regulations regarding cross-border securities-based swap activities as well as the definition in the Commission’s cross-border margin rule. He noted that certain financial institutions would not be included in the definition of U.S. person and that staff believes that any person designated as a U.S. person under the proposed rule would also be designated as such under the cross-border margin rule, but in order to provide certainty for market participants, the proposed rule permits time limited reliance on the definition of U.S. person obtained for the cross-border margin rules. Patel then defined ‘guarantee’ as an arrangement where one party to a swap has rights to recourse against a guarantor. Further, a non-U.S. person may be considered a guaranteed entity with respect to certain swaps with certain counterparties but not others.

Kopon then turned to the concept of a significant risk subsidiary (SRS) which would be introduced by the proposed rule in order to determine what entities are required to comply with the swap requirements. He continued that an entity would be an SRS if 1.) it is a subsidiary of a large parent entity with more than $50 billion in consolidated assets and 2.) satisfies a three-part test of whether the entity is given a threshold for one of the revenue, equity capital, or total assets significance tests. He noted that the proposed rule would also exclude two categories of entities that are already subject to significant regulatory oversight from the definition of an SRS. The first would be those entities that are already subject to consolidated supervision and prudential regulation and the second are entities subject to capital standards and oversight by home regulators that is consistent with Basel III as well as subject to the Commission’s margin determination.

Patel stated that the proposed rule also defines ‘branch’, ‘swap conducted through a foreign branch’, ‘U.S. branch’, ‘swap conducted through a U.S. branch’, ‘foreign based swap’ and ‘foreign counterparty’ in order to determine if swaps need to be counted for registration purposes and to determine the available exceptions and compliance for Group A, B, and C. He continued that SRSs and guaranteed entities will need to count all their deemed swaps towards their de minimis threshold.

Chachkin summarized the classification of Group A, B, and C requirements and exceptions available for certain foreign based swaps. Group A requirements include the presence of chief compliance officers, risk management, record keeping, and anti-trust consideration requirements. He noted that these are most effective when applied across the whole enterprise. He continued that Group B includes a trading swap requirement, portfolio reconciliation and compression, trade confirmation, and a daily trading record-keeping requirement. Chachkin stated that these Group B requirements relate to risk mitigation as well as good record keeping practices and that the guidance in the Group B requirements can be practically applied on a bifurcated basis to foreign party relationships. He then turned to the Group C requirements stating that they are designed to enhance counterparty protections by establishing robust requirements regarding conduct with counterparties. He said that Group C requirements have a more attenuated length and that they are distinguishable from the systemic and market-oriented requirements outlined in Groups A and B. He stated that the proposed rule proposes exemptions that are largely consistent with the current guidance. Chachkin concluded that for those that avail themselves of these exceptions, they 1.) remain subject to the CEA and Commission regulations not covered by the exceptions; and 2.) address any risk in accordance with the risk management programs under Commission regulation or comparable foreign regulations.

Bennett noted that the proposed rule outlines an approach for substituted compliance for the Group A and B requirements that builds on the Commission’s cross-border framework. She continued that the proposal would permit a non-U.S. swap dealer to avail itself of substituted compliance if the swap dealer is subject to comparable regulation in their home jurisdiction. Bennett stated that the proposal also allows a U.S. swap dealer transaction through a foreign branch to avail itself of substituted compliance for swaps of foreign counterparties because the proposal will establish a process pursuant to which the Commission conducts determinations. She stated that the proposal outlines procedures for initiated comparability determinations, including a provision to allow the Commission to undertake a comparability determination on its own initiation. Further, the proposal also lists the information that outside applicants would be required to provide in a request for comparability. She concluded that the proposal also outlined the proposed standard of review as to how the commission would determine whether a foreign jurisdiction’s regulatory standards are comparable to the Group A and B requirements.

Question & Answer

In his dissent, Berkovitz voiced his concern with this proposed rule, specifically stating that he is against overly deferring to the prudential regulators given the role and expertise of the Commission. He continued that he is very much concerned with the narrowing of the definition of ‘guarantee’ and that he believes that this proposal contrasts with the Congressional mandate outlined in Title 7 of Dodd-Frank regarding relationship and activity-based tests. Patel responded that the definition of ‘guarantee’ in the proposal presents a more workable framework that is consistent with the margin rules while at the same time not undermining the protection of U.S. persons and the financial system.

Stump voiced her support for the proposal as it moves the process along of getting to an actual rule that is enforceable as opposed to the current guidance that is not.

In his dissent, Behnam voiced his support for changing the comment period to 90 days as opposed to 60, due to the significance of this proposal. He echoed the points of Berkovitz regarding over-deference to the prudential regulators, the definition of ‘guarantee’, and Congressional intent, specifically stating that this proposal limits the Commission to a risk-based approach which would conflict with Congressional intent and potentially expose the U.S. to systemic risk, before noting his concern that going to a final rule will restrict the Commission’s flexibility in responding to evolving market participants. He continued that guidance allows the Commission to be nimbler when it comes to the highly complicated and technical nature of the cross-border ruleset. He concluded by outlining that he is encouraged by the balanced nature of the requests for comment and called upon commenters to indicate whether they believe it is appropriate and prudent for the Commission to proceed with a rulemaking at this time, or whether the preference is to adhere to the current guidance, or some hybrid of the two.

Quintenz voiced his support for the proposal.

Tarbert outlined his support for the proposal stressing his desire to move away from guidance and the need for rule-based finality. He outlined three guiding principles for regulating foreign activities, 1.) protecting and advancing the national interest of the United States; 2.) acting to advance a framework that applies CFTC regulations outside the United States only when it addresses one or more important risks to our country; and 3.) pursuing SEC harmonization where appropriate. He concluded that this proposal represents a sensible and principles approach to addressing when foreign transactions should fall within the CFTC’s swaps registration and related requirements.

Final Vote: Proposed Rule – Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants

The proposed rule was approved in a 3-2 vote, with Behnam and Berkovitz opposing.

Staff Presentation: Proposed Rule – Prohibition on Post-Trade Name Give-Up on Swap Execution Facilities

  • Alexandros Stamoulis, Division of Market Oversight
  • Vincent McGonagle, CFTC

Stamoulis outlined the proposed rule which would amend Part 37 of the Commission’s regulations to prohibit “post-trade name give-up: practices for swaps that are anonymously executed on a Swap Execution Facility (SEF) and intended to be cleared. Stamoulis continued that “post-trade name give- up” would still be permitted for uncleared swaps as well as for swaps that are not executed anonymously and intended to be cleared. He noted that the motivation for this proposal is a result of market participants expressing the view that “post-trade name give-up” acts as a deterrent and limits broad participation on SEFs. He noted that while swap data repositories are already prohibited from disclosing counterparty names, extending this prohibition to SEFs would advance privacy protections. Stamoulis concluded that this proposal will promote fair competition among market participants and impartial access to a SEF’s trading platform in addition to increasing liquidity.

Question & Answer

Tarbert, Behnam, and Berkovitz issued a joint statement of support for the proposal. Tarbert specifically noted that this proposal will further promote fair competition among market participants and that he looks forward to reviewing comments dealing with issues pertaining to impartial access and liquidity on SEFs.

Quintenz stated that while he supports this proposal, he maintains concerns about the government banning an established trading practice that has supported liquidity in the dealer-to-dealer swaps market. He continued that the Commission should fully understand how banning post-trade name give-up could impact dealers’ ability to hedge efficiently as well as how this change could implicate fundamental market dynamics. He concluded that he will be paying special attention to comments regarding the impact of this proposal on different trading platforms, specifically referencing SEFs that are predominantly dealer-to-client platforms versus inter-dealer SEFs.

Stump voiced support for this proposal but called upon the Office of the Chief Economist to produce a publicly available study that aggregates and anonymizes the activity taking place across the entire SEF market structure to better inform market participants on what incentivizes the trading of swaps on SEFs.

Final Vote: Proposed Rule – Prohibition on Post-Trade Name Give-Up on Swap Execution Facilities

The proposed rule was approved unanimously.

Staff Presentation: Final Rule – Amendments to Derivatives Clearing Organization General Provisions and Core Principles 

  • Clark Hutchison, Division of Clearing and Risk (DCR)
  • Eileen Donovan, DCR
  • Parisa Abadi, DCR

Abadi stated that this rulemaking will require derivatives clearing organizations (DCOs) to establish an enterprise risk management program as well as identify an enterprise risk officer who will formally manage the DCOs risk management practices. Further, this rulemaking will better align the Commission’s regulations with international standards in terms of requiring the DCOs to calculate their largest financial exposure. She continued that this rule would require DCOs to include clearing members and allow their participation in default management plans as well as issue immediate public notice of default. Abadi stated that while timing of the notice will be left to the DCOs, staff encourages that it be given as quickly as possible. She concluded by noting that staff is not recommending certain changes at this time, such as requiring DCOs to establish a default committee in the event of a default of complex position, as they would like to give market participants more time to consider such changes.

Question & Answer

Berkovitz, Stump, Quintenz, Behnam and Tarbert all voiced support for the proposal. Tarbert noted specifically that this final rule represents the codification of best practices and procedures adopted by CCPs in accordance with the Commission’s core principles. He reiterated that in promulgating this rule, the Commission is both strengthening the regulation of CCPs while increasing transparency for all market participants.

Final Vote: Final Rule – Amendments to Derivatives Clearing Organization General Provisions and Core principles

The final rule was approved unanimously.

For more information on this event, please click here.

For an archive of past SIFMA hearing coverage, please click here.