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Commodity Futures Trading Commission Open Meeting

Commodity Futures Trading Commission

Open Meeting

Thursday, September 17th, 2020

Opening Statements

Chairman Heath P. Tarbert

Tarbert offered brief opening remarks and outlined his support for all measures under consideration, specifically noting the timeliness of this Commission action.

Staff Presentations

Final Rule: Amendments to Real-Time Public Reporting Requirements (Part 43)
Final Rule: Amendments to Swap Data Recordkeeping and Reporting Requirements (Part 45)
Final Rule: Amendments to the CFTC’s Regulations Relating to Certain Swap Data Repository and Data Reporting Requirements (43, 45, and 49 Verification)

  • Dorothy DeWitt, Division of Market Oversight (DMO)
  • Meghan Tente, DMO
  • Benjamin DeMaria, DMO
  • Richard Mo, DMO
  • Kristin Liegel, DMO
  • Kate Mitchel, Office of Data and Technology
  • Nancy Doyle, Office of International Affairs
  • Eliezer Mishory, DMO
  • Thomas Guerin, DMO
  • Matthew Jones, DMO

Final Rule: Amendments to Real-Time Public Reporting Requirements (Part 43)

Staff explained that this final rule revises the Commission’s regulations for real-time public reporting and dissemination requirements for swap data repositories (SDRs), derivatives clearing organizations (DCOs), swap execution facilities (SEFs), designated contract markets (DCMs), swaps dealers (SDs), major swap participants (MSPs), and swap counterparties that are neither SDs nor MSPs. Staff emphasized that this final rule will help ensure that the Commission’s swap data reporting systems are effective, efficient, and resilient. Staff noted that the measure also revises the “block trade” definition, the block swap categories, block thresholds as well as the cap size. .

Final Rule: Amendments to Swap Data Recordkeeping and Reporting Requirements (Part 45)
Mo covered the discussion around UTIs and LEIs in Part 45. He stated that this rule represents a step in the adoption of international data standards. He summarized that the Commission used to require USI, which resulted in firms creating proprietary standards, but now the Commission will have UTI, which will develop a uniform global standard to identify each swap. Mo continued that comments received on the proposal were largely in support of the adoption of UTI. The rule provides instructions on how to create UTI and details who is responsible for creating a UTI. While the 18-month compliance date aligns with those of other jurisdictions, the Commission will still be among the first to adopt UTI. The UTI enhances the ability to identify swap participants, while the LEI enhances the ability to identify counterparties. He said the Commission reinforces the commitment to LEI by requiring entities of most systemic impact to annually renew their LEIs yearly.

The Part 45 rule streamlines areas related reporting, such as giving swaps counterparties more time to report data, to t+1 or t+2, requiring only one swap report rather than two, no longer requiring end user counterparties to give quarterly swap valuation data to SDR, and excluding DCOs from requirements to report collateral and margin to SDRs, as the Commission already receives this data through other regulations.

Final Rule: Amendments to the CFTC’s Regulations Relating to Certain Swap Data Repository and Data Reporting Requirements (43, 45, and 49 Verification)

Staff explained that the CEA created swap data repositories to receive data and disseminate data to the public. The goal of the rule under consideration is to create effective swap data confirmation, update and clarify requirements related to data correction, and improve SDR operational and governance requirements.

Staff continued that the updated verification requirement requires reporting counterparties to check the swap data for open swaps and is intended to improve swap data quality by enabling the discovery of errors in previously reported or erroneously reported swap data. The new rule will prevent required data fields from being recorded as blank or in the wrong formatting. Verification can also look back to identify errors in data reported before the new verification rules were in place, leading to more errors being discovered and discovered earlier than under the previous rules. Staff explained how the requirements finalized differ in ways from the May 2019 proposal. In the May 2019 proposal, SDRs were required to make available to each reporting counterparties open swap reports on a regular basis, which was weekly for swap participants and DCO counter parties and monthly for all other counterparties. The proposal also required those counterparties to respond to the SDR for verification of accuracy within a specific timeframe. Based on suggestions from commenters, staff said the final rule does not require SDRs to create regular open swaps reports or require the counterparties to respond to the open swap reports. The rule requires SDRs to provide a mechanism to allow reporting counterparties to access and review their open swap data on a regular basis, which is monthly for SD, MSP, and DCO reporting counterparties and quarterly for other reporting counterparties.

The requirements also include a verification and error correction log. This new rule is less prescriptive and burdensome for SDRs while at the same time increasing compliance due to increased accountability.

Updated error correction requirements are broader than just errors discovered during verification. The proposed rule originally added a backstop, which limited the time to correct and discover errors to three business days and if the market participants were not able to meet that deadline, they would have to inform DMO of the scope of the error, along with an immediate remediation plan. The final rule provides a longer seven business day backstop, and if necessary, requires a market participant to inform DMO within 12 hours of realizing they would not be not able to meet the error correction deadline. The rule also only requires a remediation plan, if one is available. Another change is a limit on the timeframe for error corrections. The rule requires the correction of all swaps, even dead swaps, but also limits error correction for each swap to the applicable recordkeeping requirements of that swap. A specific definition of the word “error” is also included in the final rule. An error includes any present but incorrect data, any data that is missing, and any data not updated properly, including the failure to properly terminate a swap.

DMO staff explained the final rule contains amendments to SDR, operational, and governance provisions of Part 49. The final rule removes the requirement that SDRs file form SDR each year, while also codifying the requirements for SDRs to send open swaps reports to the Commission, thus adding standardization to the reports.

Question & Answer

Chairman Tarbert asked staff to provide context on how the lack of standardization currently challenges effectiveness of real time reporting for swaps. Staff noted there has been widespread confusion on how to apply to rules within firm’s compliance departments and even to end users, as they don’t know how to fill out fields, or they fill them out wrong, so the trade looks unusable and people ignore them. Staff noted the Commission needs to always have an idea of the quality of swap data available to them. The rule creates an incentive to report data correctly in first place or as soon as possible so they don’t have to notify the CFTC and create remediation plan. Situations longer than a week depend on how much data is wrong or what is causing the problem, likely a more significant issue. Lastly the Chairman asked staff to explain the policy rational for changes from the original rule proposal. Staff explained the new rule strikes the appropriate balance between ensuring the accuracy of the data while maximizing the efficiency of process, creating a less burdensome and more efficient structure.

Commissioner Quintenz stated that adopting these rules makes the Commission more consistent with SEC rules on security based SDRs and eases compliance burden costs. He noted these rules provide the Commission with homogenous data across jurisdictions. He expressed his support for the adoption of CDE fields and asked if DMO has a timeline for when additional work on physical commodities and equity swaps asset classes will begin and if additional amendments will be needed in the future. DMO staff noted they do not have a timeline but will continue to work with international counterparts and will likely need to release amendments to update these asset classes in the future. Quintenz closed by asking DMO how many collateral margin reporting fields are currently required by ESMA. Staff noted that of the 15 CFTC data elements, 9 are currently required by ESMA and 11 are required in CDE international guidance and are proposed by ESMA in their consultation, which isn’t yet final. The Commissioner also released a statement on Part 45.

Commissioner Behnam asked how staff got to the data standard for reporting swaps to SDRs. Staff noted they are following the international data standards already mandated by ESMA which use one transmission protocol to provide consistency of data and better data quality while reducing the burden and cost. Behnam asked staff to explain proprietary data fields. DMO staff answered that they are trying to avoid SDRs creating their own data fields, therefore, the rule allows them to have some proprietary data fields in narrow scope for internal processing purposes only.

Commissioner Stump stated that she is pleased that the rule will provide improvements in the quality of data being reporting to CFTC and the public. She asked staff to walk through a scenario of the back and forth between SDR and those reporting to evaluate the completeness of what is being reported. Staff responded they that don’t want data that isn’t going to be useful for the Commission or the public. Validation requirements are intended to ensure all data looks like it should i.e. would not be able to put in numbers when the allowable value is letters. Stump asked staff to speak about the role of the counterparty. Staff noted the SDR will create and provide the mechanism for the reporting CCPs to use in order to look at data in their system, at least as often as they have to do verification.

Commissioner Stump highlighted the importance of substituted compliance as 56 percent of CFTC swap dealers are not US persons and asked staff to discuss the analysis of granting substituted compliance for other reporting regimes. Staff noted the cross-border guidance for substituted compliance is extensive and includes reciprocal access to data and an MOU to be in place. Staff said they are focused on these rules as a first step before they can turn to granting substituted compliance.

Commissioner Berkovitz asked staff to discuss the comments received on Part 43. Staff responded they received 18 comments, 15 of which opposed the 48 delay at any level. The 67 percent threshold was not included in the NPRM, as it is included in the statue. Berkovitz highlighted multiple times that commenters were not able to comment on the 67 percent threshold for block trades. Staff noted it is a balance between value and accuracy of trade information and speed, both of which impact transparency in some way. Staff stated an excessively low threshold would have been exacerbated by the delay. Staff highlighted the fact that the old rule applied the threshold to the entire market, while the new rule tries to tailor the threshold to high volume parts of the market, removing products trading infrequently with low liquidity, as the methodology would not have been robust for them.

Berkovitz asked how the right level threshold is determined and the factors that go into that determination. Staff noted they have access to data beyond what market participants see. They also analyzed the comments received and academic literature. Berkovitz asked if the division worked with the Office of the Chief Economist. Staff noted the Chief Economist reviewed the liquidity profiles and recommended that the 67 percent threshold is appropriate. Berkovitz highlighted comments in the SIFMA/ISDA comment letter raising concerns about high block level of 67 percent, stating they believe this will put SEFs at a competitive disadvantage, resulting in the transition of this business outside of the US. Staff stated that this is speculative and unlikely to occur, but that they can monitor trading in markets for any such trading migration. Berkovitz ended questioning by stating that it is important to make a statement that this is not what the Commission intends to happen and that the Commission will be watching and take appropriate action if this does start to occur.

Quintenz noted that commenters only had the option to comment on the 48-hour delay or the status quo. He noted it is a hard balance between increased block thresholds and increased reporting time and stated it is important for the Commission to think on what it will do if and when it sees negative consequences from this action. He asked if DMO expects to review the new data to ensure the new figures are appropriate. DMO staff explained they chose an extended compliance date of 30 months to allow them to review block thresholds and application to the data and implement changes, rather than doing everything at once. The Commissioner agreed this analysis will be very important for the Commission to do, as the 67 percent threshold was decided before the SEF regimes were adopted, therefore the Commission does not know if 67 percent is the appropriate threshold. Commissioner Quintenz then read his statement on Part 43.

Behnam noted this is a very difficult and challenging issue, to balance moving markets towards transparency and move in measured way to follow statutory requirements, while not undermining the market. Staff stated that they considered the interplay between the current threshold and the proposal to extend delay to hours, continuing that an extended time delay and lower threshold would have exacerbated the problem. They noted it was easier to be confident that this is an appropriate balance at 67 percent, based on the current delay of 15 minutes. Behnam noted the Commission needs to be sure they are not putting anyone at competitive disadvantage and needs to work with foreign colleagues to ensure a level playing field and that the US markets remain the most robust, healthy, and transparent in the world.

Commissioner Stump stated that the 67 percent threshold was mandated before swap data was received and before SEF trading was mandated. She noted the percent calculations were not exactly scientific. She highlighted that commenters did not have the chance to comment on the finalized time delay of 15 minutes in combination with the proposed block threshold, as the threshold was not included in the rule proposal. She mentioned that staff spoke of possibly updating the threshold after receiving data. Staff agreed that they chose a longer compliance period, 30 months, to allow them to review data and better balance what the Commission should be doing now and in the future.

Commissioner Berkovitz noted the Commission chose block trade percentages without any data at the time. He asked staff to confirm their comments in the preamble, that they did not just accept the 67 percent, but that they analyzed the data the Commission has received since 2013, and that this is why numerous adjustments have been made to the categories. Staff considered re-doing the entire 2013 rule, but rather they decided stick with the approach and look forward on how to improve and better calibrate the analysis. Berkovitz agreed that it is time to look at the data available and address this issue, noting this process is meant to use the best available to data to get the best available real time reporting and land on the best available block size. He noted the compliance period is within his term of office and he will continue to work on this and make decisions based on the best available data. He stated the Commission is interested in vibrant and strong markets for the American people and has done a good job of getting this balance right and will continue to improve with better data.

Final Vote

Part 43: The Commission approved the amendment order in a unanimous 5-0 vote.

Part 45: The Commission approved the amendment order in a unanimous 5-0 vote.

Part 49: The Commission approved the amendment order in a unanimous 5-0 vote.

Final Rule: Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations

  • Clark Hutchison, Division of Clearing and Risk (DCR)
  • Eileen A. Donovan, DCR
  • Tad Polley, DCR

Staff explained that this final rule allows non-US DCOs that clear swaps for US persons to meet the CFTC’s core principles by complying with its home country rules, as long as that non-US DCO does not pose substantial risk to the US financial system.

Staff noted that five of the 15 DCOS registered are organized outside of US and are subject to both the Commission’s and their home country regulator’s rules. This final rule seeks to allow greater deference to foreign jurisdictions, to reduce overlapping supervision and regulatory inefficiencies while retaining oversight of DCOs with heightened supervisory interest, due to the extent of their US clearing activity.

To assist in the determination of heighted supervisory interest, the Commission has established a substantial risk test. Under this test, substituted compliance is not available to a non-US DCO that satisfies both prongs of the test. Prong 1: 20 percent or more of the required IM of US clearing members for swaps across all registered and exempt DCOs. Prong 2: 20 percent or more of the required IM requirement for swaps of the DCO is attributable to US clearing members. The definition provides the Commission can exercise discretion if the DCO satisfies the test in certain close cases.

Under the final rule non-US clearing organizations will be eligible for registration if:

  1. The Commission determines that the DCOs compliance with home country regulations satisfies the DCO core principles;
  2. The DCO is in good regulatory standing with the home country, as recognized in writing by home country regulator; and
  3. A MOU between the Commission and the DCO’s home country regulator exists.

As this allows a DCO to clear swaps through registered FCMs, it will be required to fully comply with the Commission’s customer protection requirements and swap data reporting requirements, and certain ongoing and event specific reporting requirements.

Staff highlighted two changes contained in the final rule:

  1. Concern was raised over the Commission exercising discretion over the substantial risk determination as a whole, based on only 1 of 2 prongs of the substantial risk test (being close to 20 percent threshold). The final rule clarifies that the Commission will only exercise discretion towards any individual prong that’s close to a threshold.
  2. Change the term alternative compliance to the more accurate term – compliance with core principles through compliance with home country regime.

Question & Answer

Chairman Tarbert released a statement and asked if a DCO based outside of U.S. who wants to be a full-service clearing organization, with US members and customers, has to register with the CFTC and comply with the CFTC’s core principles. Staff confirmed this is correct. The Chairman noted the CFTC has many detailed rules, and a foreign DCO may also have detailed rules it has to comply with in the home country jurisdiction. He asked if a non-US DCO that poses a non-substantial risk, in a location with regulation that satisfies CFTC core principles, would be allowed to use home country regulations. Staff agreed they can use home country rules, but noted there are still some CFTC rules they would be subject to.

Quintenz stated this rule appropriately recognizes risk to the US through the substantial risk test and that it is good policy to harmonize rules or show deference to the expertise of foreign regulators to manage the entities in their jurisdiction with appropriate communication. He asked staff to estimate how many DCOs abroad are eligible to elect substituted compliance. Staff noted they are not sure exactly but they expect one DCO to elect and noted there are two others who are eligible, but they do not know if they will seek substituted compliance. Quintenz noted that it may be small number, but it will likely represent a significant amount of activity to be brought into this regime, represent significant importance with relations abroad, and have a significant positive impact on the division’s workload.

Behnam asked staff to share the relevance of the 20 percent threshold and other factors that come together to make a decision. Staff acknowledged there shouldn’t be a hard line where 20.1 has a different result than 19.9 and that’s when other factors that can come into play. The Commissioner asked staff to share thoughts on if the test is drawing a hard or flexible line and when to stop considering other factors. Staff noted it will be somewhat of a sliding scale. The further away from the 20th percentile will need more in additional factors to make the decision. Staff outlined their desire for the test to be done predictably and easily, while allowing for other factors.

Behnam questioned how the definition of US clearing member differs from the US person definition in the cross-border rule. Staff stated US clearing member definition is broader in that it will automatically apply to the parent, as the risk can flow to the parent. asked what the process is when a home country regulator makes changes overseas that would affect the understanding of the comparability arrangement. Staff noted the reporting requirement within 3951 requires a DCO to notify the CFTC of changes done to their home country regime.

Stump applauded the progress made by this final rule, but stated the work is not done. She noted she is hopeful the CFTC will soon turn to substituted compliance for reporting rules, which is relevant to this rule as well., and finalizing this rule does not eliminate registration with the CFTC. She said she is hopeful the Commission will finalize the July 2019 rule that allows US customers to use a foreign intermediary, but not an FCM to access a foreign CCP, that is exempt from registration with the CFTC.

Berkovitz issued a statement and also asked staff to clarify why a non-US DCO would still have to comply with CFTC and US regulations concerning customer protection. Staff stated non-US DCOs gave feedback that they wanted to be able to offer US customers clearing through FCMs and wanted to be the equal with US based DCOs in offering the same level of protection. Berkovitz noted this is something the market and customers want. Berkovitz asked staff to compare foreign and US bankruptcy experiences. Staff noted any time an FCM goes into bankruptcy it is bad, but it is fair to say customers with US bankruptcy protections fared well and were given funds fairly quickly compared to cases proceeding in foreign intermediaries.

Final Vote

The Commission approved the amendment order in a unanimous 5-0 vote

Supplemental Notice of Proposed Rulemaking: Part 190 Bankruptcy Regulations

  • Robert B. Wasserman, Division of Clearing and Risk

Wasserman explained that sub-part C of Part 190 regulations proposed would establish a bespoke bankruptcy approach to a DCO. Part of 19014 was a proposal to provide a brief opportunity for paths other than liquidation – transfer of clearing operations to another DCO – to avoid DCO’s bankruptcy filing having an irrevocable consequence on the termination clearing, and in cases of a SIDCO (systemically important DCO) would likely be disruptive of markets and potentially the U.S. financial market system. A number of commenters raised concerns with the approach, saying that if effective it would interfere with a DCO’s close out netting bank capital requirements of the prudential regulators.

The supplemental proposal includes a different means of fostering the Title 2 resolution of a SIDCO, for a brief period after a bankruptcy filing. Failure of either of the 2 SIDCOs would likely threaten the stability of the U.S. financial system. The process for placing a financial company into title 2 resolution “key turning” is intricate, including a detailed written recommendation of each of the prudential regulators. By contrast, a voluntary petition in bankruptcy immediately constitutes order for relief. The SIDCO could file for bankruptcy before the key turning process could place the SIDCO into Title 2 resolution.

The supplemental proposal would stay the termination of SIDCO contracts for a brief time in order to not undermine the QMNA status of DCO rules. The 48-hour stay period in current prudential regulator rules does not currently apply to SIDCO or any CCP in bankruptcy, but it appears this is something the regulators are comfortable with and thus the supplemental period would allow for a 48-hour stay for SIDCOs.

Unlike the original proposal, there will be no collection of VM during the stay period. The termination of contracts would be stayed for the stay period. The supplemental proposal only applies to SIDCOs and not other DCOs. In order to avoid QMNA status, no stay provision will be available unless and until each of the 3 Prudential Regulators take action. It is the common goal to amend Part 190 in one rule making.

Implementation of a stay provision would only become effective after each prudential regulator takes action. In order to make it effective the Commission would issue an order confirming that each prudential regulator action is sufficient to make such a stay provision consistent with QMNA status.

Question & Answer

Chairman Tarbert stated this is a way to make the best of a bad situation and give a brief time for the key turning process to finish. Wasserman agreed that the biggest concern is under QMNA. He continued that some DCOs say in their close out netting provisions that termination would not happen for some days after a bankruptcy. The Chairman noted all choices in such a situation are bad ones and this is meant to address how to minimize the harm. The Chairman highlighted the importance of finalizing rule 190, as it will be the first update to the bankruptcy code in 37 years.

Quintenz asked if it is still possible to review the supplemental comments and meet the Commission’s target of finalizing the rule by the end of year. Staff stated they believe they can finalize the rule on time, noting this is a narrow issue and staff is already working on comments received on the rest of Part 190. Quintenz stated that given the challenges around this issue, it is important to put this forward so comments can be officially received and reviewed.

Stump thanked the commenters who pointed out the original proposal might undermine QMNA status of DCO rulebooks. She agreed it is imperative regulations work with regulation from each of the prudential regulators. Stump thanked staff for providing a new process for the public to comment on, especially regarding implications on imposing a mandatory stay.

Berkovitz stated he was glad the issue has been identified and that the Commission is seeking public comment on the resolution of the issue. Staff noted this will have a 30-day comment period after publication in the Federal Register, but that the proposal will be available online after the meeting. The Commissioner noted that 30 days is a short comment period and urged commenters to submit comments quickly.

Final Vote

The Commission approved the measure in a unanimous 5-0 vote.

For more information on this hearing, please click here.

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