June 30, 2023

Submitted electronically via CFTC Comments Portal

Mr. Christopher Kirkpatrick
Secretary
U.S. Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581

Re: Derivatives Clearing Organization Risk Management Regulations to Account for the Treatment of Separate Accounts by Futures Commission Merchants (RIN 3038–AF21)

Dear Mr. Kirkpatrick:

The Asset Management Group of the Securities Industry and Financial Markets Association1 (“SIFMA AMG”) appreciates the opportunity to provide comments to the Commodity Futures Trading Commission (the “CFTC” or “Commission”) on the proposed amendments to its derivatives clearing organization (“DCO”) risk management regulations to permit futures commission merchants (“FCMs”) that are clearing members to treat the separate accounts of a single customer as accounts of separate entities for purposes of certain Commission regulations.2

SIFMA AMG appreciates the Commission’s recognition of the importance to memorialize the limited no-action relief granted in CFTC Staff Letter 19-173 into regulation. SIFMA AMG supports efforts to provide regulatory certainty on this important issue. As the Commission considers amendments to regulation, however, our members have concerns about the prescriptive nature and potential negative unintended consequences of some of the requirements in the Proposal.

Overview

First, SIFMA AMG notes that the Proposal, which would amend DCO regulations, sets forth a proposed timeframe for FCM margin calls and is not directly an issue for DCOs. To the extent that residual interest covers the issues the Proposal intends to address, this issue is more so between FCMs and their customers or asset managers and their respective reasons for missing margin deadlines. Accordingly, SIFMA AMG urges the Commission to reconsider this Proposal as relevant to Part 1 of the Commission’s rules (related to FCMs) rather than applying the regulatory compliance obligations on DCOs.

Second, SIFMA AMG believes that the Proposal would be difficult to implement in practice and does not reflect the longstanding (and largely successful) practices in place in the futures market today. This is particularly evident in the approach set forth for margin calls and transfer timelines, as well as the impractical treatment of global holidays. These prescriptive requirements ignore the realities of market participants’ global operations and credit risk management capabilities.

Specifically, SIFMA AMG is concerned by footnote 63 of the Proposal, which posits that a “grace period” would violate the Commission’s regulation.4 This ignores longstanding contractual relationships in derivatives markets and would lead to a counterproductive and disproportionate amount of time, energy, resources, and effort being focused on arbitrary margin call timelines.

The Proposal, if adopted, would have a broad impact across market participants, including increased operational complexity and compliance obligations around the world that would lead to higher costs for FCM customers, such as pensions and retirement plans. FCM risk management practices for separately managed accounts and curing margin deficits have not risked the stability of DCOs, nor led to an FCM default. There have not been any market events that would suggest these prescriptive rules are necessary or even beneficial. Accordingly, we believe that the Commission can accomplish its regulatory objectives without imposing bright-line rules for DCOs and FCMs with respect to margin across accounts and risk management.

As we wrote to Commission staff in 2019, “treating [separately margined] accounts as separate legal entities should not expose an FCM to any greater regulatory or financial risk. To the contrary, an FCM’s internal controls and procedures, . . . should assure that the FCM is not undertaking any additional risk as to the separate account.”5 The same premise holds true today.

For the reasons discussed below, we believe the Proposal would overcomplicate FCMs’ risk management across markets, countries and accounts.

Executive Summary

I. Withdraw this Proposal and Repropose FCM-Specific Regulations in Part 1 of the CFTC’s Rules. Commission regulations governing an FCM’s treatment of its customer having separate accounts are better promulgated in Part 1, which addresses intermediaries, than in Part 39, which addresses DCOs.

II. Redefine “Ordinary Course of Business” to Exclude Defined Events. SIFMA AMG encourages the Commission to better define “ordinary course of business” and consider developing an approach that presumes operation in the “ordinary course of business,” with clearly delineated events (such as default or bankruptcy) to be the limited instances that would not be considered “ordinary course of business.”

III. Eliminate Prescriptive Timing Requirement for Margin Calls. The prescriptiveness of the Proposal does not reflect an adequate appreciation of the differences in operational workflows and risk management processes in place across the market and how they may differ depending on the markets, products, clients, custodians, and fund structures involved.

IV. Preserve the Flexibility of a Limited Discretionary Grace Period. The grace period is not inconsistent with ensuring the timely correction of shortfalls or timely identification of a customer’s inability to meet a margin.

V. Do Not Limit Compliance Carve-outs to “Unusual Administrative Errors or Operational Constraints.” This type of regulation will be challenging to implement and difficult to administer and is inconsistent with the Commission’s longstanding principles-based approach to regulation.

VI. Abandon Effort to Regulate Approach for Addressing Operational Complexities. To be effective, Commission rules should focus on behaviors that evidence an intent to evade or game the system, rather than calendar-driven technical deficits that can be resolved in the ordinary course of business through prudent risk management, as they have been handled for years.

VII. Codify Staff Letter 20-28’s Interpretation of CFTC Rule 1.56. That letter makes clear that “no specific or express language” must be contained in customer agreements to meet Rule 1.56.

1 SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.

2 Derivatives Clearing Organization Risk Management Regulations To Account for the Treatment of Separate Accounts by Futures Commission Merchants, 88 Fed. Reg. 22934 (Apr. 14, 2023) (the “Proposal”); available at https://www.govinfo.gov/content/pkg/FR-2023-04-14/pdf/2023-06248.pdf.

3 CFTC Staff Letter No. 19-17, Advisory and Time-Limited No-Action Relief with Respect to the Treatment of Separate Accounts by Futures Commission Merchants; available at https://www.cftc.gov/csl/19-17/download.

4 Proposal at 22941.

5 SIFMA AMG Letter Requesting Interpretation of CFTC Rules 1.56(b) and 39.13(g)(8)(iii) (June 2, 2019); available at https://www.sifma.org/wp-content/uploads/2021/01/Request-for-Interpretation-Rule-1.56b-and-Rule-39.131.pdf.