CFTC Open Meeting
Commodity Futures Trading Commission
Open Meeting
Thursday, May 28, 2020
Opening Statements
Chairman Heath P. Tarbert
In his opening statement, Tarbert summarized the meeting agenda before highlighting the Commission’s various actions taken to help address the impact of COVID-19 on the derivatives markets. He stated that the Commission continues to monitor and prioritize agricultural and energy markets as these markets faced significant volatility as a result of the pandemic. Tarbert emphasized the ongoing coordination with both the Department of Agriculture and Department of Energy with a particular focus on livestock and crude markets respectively. He highlighted the Commission’s effort in issuing targeted, temporary and timely relief to market participants as well as the ongoing efforts of the respective CFTC advisory committees. He concluded that while there is still more work to be done in terms of responding to the COVID-19 pandemic, the Commission will continue to move forward on its broader mandate to promote the integrity, resiliency, and vibrancy of the U.S. derivatives markets.
Staff Presentations
Proposed Rule: Amendment Regulation 3.10(c)(3) – Providing an Exemption from Registration for Foreign Persons Acting as Commodity Pool Operators on Behalf of Offshore Commodity Pools
- Joshua B. Sterling, Director, Division of Swap Dealer and Intermediary Oversight (DSIO)
- Amanda Olear, Deputy Director, DSIO
- Frank Fisanich, Chief Counsel & Deputy Director, DSIO
Olear summarized the proposed rule stating that it would amend the conditions under which a foreign commodity pool operator (CPO), in connection with commodity interest transactions on behalf of persons located outside the United States, would qualify for an exemption from CPO registration and regulation with respect to that offshore pool. She continued that this measure would also add a safe harbor as new regulation 3.10(c)(3)(iv) for non-U.S. CPOs that have taken what the Commission preliminarily believes are reasonable steps designed to ensure that participation unites in the operated offshore pool are not being offered or sold to persons located in the United States. Specifically, these amendments would allow a non-U.S. CPO to claim an exemption from registration for its qualifying offshore commodity pools, without being required to register as a CPO with respect to the operation of other commodity pools. She concluded that this is a timely change given the increasingly global nature of commodity markets and this measure will provide regulatory flexibility without compromising protection of pool participants.
Fisanich stated that commission staff is also recommending a 60-day reopening of the comment period related to the notice of proposed rulemaking originally issued by the Commission in 2016 that would codify two DSIO no-action letters (15-37 & 16-08) and amend the conditions under which persons located outside the United Sates acting in the capacity of a futures commission merchant (FCM), an introducing broker (IB), commodity trading advisor (CTA), or commodity pool operator (CPO) in connection with commodity interest transactions solely on behalf of persons located outside the U.S., or on behalf of certain international financial institutions, would quality for an exemption from registration with the Commission.
Q&A
Chairman Heath P. Tarbert
In his statement of support, Tarbert first stated that as the Commission is considering a proposed rule that is very similar, he felt that the reopening of the comment period of the latter measure was timely. He then emphasized that the CFTC is a taxpayer-funded agency and as such, the Commission should always concern itself with furthering the interest of U.S. citizens and also revisiting regulations where there does not appear to be clear connection with said interest. He continued that the CFTC’s regime for regulating foreign CPOs is to protect U.S. investors who put their money in commodity investment funds run from outside the U.S. but stated that there is no statutory mandate for the CFTC to regulate funds never offered or sold to U.S. investors. As such, in elaborating on his support for the proposed measure, Tarbert stated that it would provide much-needed regulatory flexibility for non-U.S. CPOs operating offshore commodity pools without compromising the CFTC’s mission to protect U.S. investors. He concluded with a statement of support for the affiliate investment exemption which would permit certain U.S. control affiliates of a non-U.S. CPO to contribute capital to that CPO’s offshore pools as part of the initial capitalization without rendering the non-U.S. CPO ineligible for the exemption under regulation 3.10, stating that there is no reason to deploy the resources of the CFTC to protect U.S. parents of foreign CPOs who are far better positioned that the Commission to safeguard their own interests.
Commissioner Brian D. Quintenz
Quintenz stated that he is fully supportive of this proposed rulemaking as it sensibly marks the boundaries of the Commission’s reach into foreign derivatives trading activities while at the same time ensuring continued protection of U.S. market participants. He concluded that this rulemaking makes the Commission’s regulations more efficient and that he is looking forward to reviewing industry comments on this front.
Commissioner Rostin Behnam
In outlining his support for the proposed, Behnam noted his belief that it will reduce regulatory protections without sacrificing critical regulatory safeguards. He stated that this measure is just one example of the Commission’s ongoing efforts to hone its regulatory footprint by consistently recalibrating policy and rulemakings to the present needs of the market participants, consumers, and the national public interest.
Behnam also asked a variety of questions regarding the safe harbor outlined in the notice of proposed rulemaking as well as the specific issues raised regarding seed money. In response, DSIO staff responded that they anticipate that the offerings of those availing themselves of this safe harbor would be pursuant to SEC’s Regulation S and emphasized the ongoing coordination with the SEC to ensure that Regulation S is layered on top of the proposed rule. Regarding seed money, DSIO staff stated that the proposed rule aligns with the limitations outlined under the Volcker Rule and that this measure is not intended to supersede any time limits imposed by other regulations.
Commissioner Dawn D. Stump
In elaborating on her support for the proposed rulemaking, Stump stated that this proposal reflects the benefits of both acting to codify staff relief where appropriate and periodically re-visiting Commission rulemaking as well as the importance of continuing the Commission’s tradition of deference to international counterparts where their regulatory interest is paramount. In response to a question from Stump, Commission staff summarized Advisory 18-96, which provided relief from certain regulatory requirements for registered CPOs with respect to their offshore commodity pools, and stated that CPOs will no longer have to rely solely on 18-96 as a result of this notice of proposed rulemaking. Stump concluded that this proposal is an example of promoting effective regulation via coordination with international counterparts via deference.
Commissioner Dan M. Berkovitz
Berkovitz spoke in support of the proposed rule stating that the Commission should focus its limited resources on commodity pools in which U.S. persons participate, rather than commodity pools located outside the U.S. in which only non-U.S. persons participate. He then noted his concern with the provision in the proposal that would enable controlling affiliates (U.S. entities with U.S. investors that provide capital to non-U.S. pools) to rely on the proposal could also be used by CPOs who take funds directly from U.S. persons to evade CPO registration and regulatory requirements, resulting in an “end-run” around important safeguards. Berkovitz emphasized that he is also looking for industry comment on the definition of “U.S. Person” in this proposed rulemaking as to whether it is appropriate.
Final Vote:
The proposed rule was approved unanimously.
Interim Final Rule: Amending Regulation 23.161 – Extending the Compliance Schedule for Initial Margin Requirements for Uncleared Swaps in Response to the COVID-19 Pandemic
- Joshua B. Sterling, Director, Division of Swap Dealer and Intermediary Oversight (DSIO)
- Carmen Moncada-Terry, Special Counsel, DSIO
- Warren Gorlick, Associate Director, DSIO
Moncada-Terry summarized the interim final rule that would defer the phase 5 compliance date of September 1, 2020 to September 1, 2021, thereby aligning it with the recent initial margin compliance schedule extension issued by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO). She stated that this compliance deadline extension would allow phase 5 firms to continue their critical business continuity efforts without diverting necessary resources to compliance efforts. She concluded that the Commission also intends to submit a notice of proposed rulemaking in the near future to extend the phase 6 compliance date.
Q&A
Chairman Heath P. Tarbert
In his statement of support, Tarbert emphasized that this interim final rule is appropriate from both a substance and a process perspective due to the extraordinary burdens being levied upon phase 5 entities, firms that would otherwise become subject to initial margin requirements in just three months, as a result of COVID-19 pandemic. He noted that this relief serves to further bring the Commission in line with BCBS and IOSCO. Tarbert concluded that while this relief is being issued as an interim final rule, the Commission still has time to address the need for a phase 6 extension and will therefore pursue such an extension via the traditional notice-and-comment rulemaking process as soon as possible.
Commissioner Brian D. Quintenz
Quintenz spoke in favor of the interim final rule and outlined his support for a one-year deferral on the phase 6 compliance date. He then encouraged the Commission to reflect on how the uncleared margin regime can be improved to address certain compliance challenges exposed in earlier states, specifically praising the recommendations of the Global Markets Advisory Committee’s (GMAC) Subcommittee on Margin Requirements for Non-Cleared Swaps.
Commissioner Rostin Behnam
Behnam outlined his support for the measure stating that he believes that the COVID-19 pandemic has severely and adversely impacted preparations for the exchange of regulatory initial margin. He continued that such a disruption will make compliance with the September 1, 2020 deadline untenable if doing so diverts already strained resources from critical business continuity functions. Behnam did note his concern regarding the possibility that postponement of compliance deadlines may increase counterparty credit risk. He concluded by emphasizing that he is very committed to move forward and complete phase 5 and 6 in a sensible fashion.
Commissioner Dawn D. Stump
Stump spoke in support of the interim final rule and stated that she looks forward to soon considering a proposal to extend the phase 6 compliance date as well. She concluded by echoing the comments of Commissioner Quintenz and calling on the Commission to consider addressing a number of recommendations included in the report recently prepared by the GMAC’s Subcommittee on Margin Requirements for Non-Cleared Swaps.
Commissioner Dan M. Berkovitz
Berkovitz concurred with the timely issuance of this interim final rule and agreed with Chairman Tarbert that any phase 6 extension should be pursued via the traditional notice-and-comment rulemaking process. He also took this opportunity to reinforce that while the COVID-19 pandemic has disrupted markets and the operations of market participants, these same market participants have demonstrated incredible strength, consistency and ingenuity in continuing normal business operations in the face of this pandemic while the markets continue to function as they should.
Final Vote:
The interim final rule was approved unanimously.
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