April 1, 2024
Submitted via CFTC Comments Portal
Christopher Kirkpatrick
Secretary of the Commission
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W., Washington, D.C. 20581
Re: Operational Resilience Framework for Futures Commission Merchants, Swap Dealers and Major Swap Participants
Dear Mr. Kirkpatrick,
The Securities Industry and Financial Markets Association (“SIFMA”)1 and the Institute of International Bankers (the “IIB”)2 (together, “the Associations”)3 appreciate the opportunity to comment on the Commodity Futures Trading Commission’s (“CFTC”or the “Commission”) rule proposal for requirements for an Operational Resilience Framework (“ORF”) for Futures Commission Merchants (“FCMs”), Swap Dealers (“SDs”), and Major Swap Participants (“MSPs”) (the “Proposal”).4
The Associations commend the Commission’s objective to introduce principles-based requirements that are robust, yet reasonably designed to identify, monitor, manage and assess risks relating to information and technology security, third-party relationships, and emergencies or other significant disruptions to normal business operations. The Associations agree with the Commission that any such requirements should be “sufficiently nimble to meet the challenges of the ever-evolving technological threat landscape and fit the unique business and risk profile of each covered entity.”5Furthermore, the Associations welcome that, in general, the Proposal aligns with many existing practices that SDs have already successfully adopted to improve operational resilience and comply with current regulatory requirements that apply to the SD entities or the wider group structures within which they operate.6
While supportive of the approach, the Associations believe that parts of the Proposal undermine the Commission’s stated objective of creating a principles-based rule on operational resilience, guided by proportionality and adopting a risk-based approach. Instead, because of a combination of the broad definitions7 and certain prescriptive elements, the Proposal has the effect of creating a framework that diverts risk management resources and attention from areas that present bona fide risk to the covered entity. The current approach would also trigger significant workstreams for even relatively minor disruptions, which could materially detract from the efforts of SDs, FCMs, and MSPs to effectively manage significant operational challenges. Moreover, as the Commission recognizes, there are many regulators in the U.S. and internationally that are focusing on operational resilience. This expanded regulatory focus on operational resilience compounds the issues with the Proposal’s broad-based definitions and prescriptive requirements given the risk of regulatory overlap and inconsistency. Thus, as these regulatory developments take shape, the need for harmonization and a principles-based approach increases so as to keep the target on standards and industry practices steady.
If the Commission is seeking to protect the industry from incidents that recently affected financial institutions, we recommend revisions that would help achieve that end. As much as possible, we have tailored our recommendations to reflect areas where the Proposal adds value to the operational resilience landscape as well as to identify areas that are duplicative of or inconsistent with other regulatory regimes and international
standard setting bodies.
Unless the issues we discuss below are addressed, however, certain elements of the Proposal could ultimately inhibit an SD’s ability to operate an effective, risk-based operational resilience program. In addition, such provisions could inundate the Commission with information that does not add value and could diminish the Commission’s effective oversight of the ORF. The Associations believe the challenges the Proposal presents can be remedied and respectfully offer the following recommendations.
1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (“GFMA”). For more information, visit http://www.sifma.org.
2 The IIB represents the U.S. operations of internationally headquartered financial institutions from more than thirty-five countries around the world. The membership consists principally of international banks that operate branches, agencies, bank subsidiaries, and broker-dealer subsidiaries in the United States. The IIB works to ensure a level playing field for these institutions, which are an important source of credit for U.S. borrowers and comprise the majority of U.S. primary dealers. These institutions enhance the depth and liquidity of U.S. financial markets and contribute greatly to the U.S. economy through direct employment of U.S. citizens, as well as through other operating and capital expenditures.
3 This letter focuses on the Proposal as it applies to swap dealers and, as such, primarily uses the term “SDs” rather than “covered entities” and references the proposed 17 CFR § 23.603.
4 Operational Resilience Framework for Futures Commission Merchants, Swap Dealers, and Major Swap Participants, 89 Fed. Reg. 4706 (Jan. 24, 2024) [hereinafter Proposing Release].
6 For example, performing risk assessments, creating incident response and business continuity plans, and establishing robust third-party risk management policies are standard practices for SDs. Moreover, these areas of focus are familiar to SDs through other regulatory regimes such as NFA Interpretive Notice 9070 and NFA Compliance Rules 2-9, 2-36 and 2-49. See National Futures Association, Interpretive Notice to NFA Compliance Rules 2-9, 2-36 and 2-49, available at https://www.nfa.futures.org/rulebooksql/rules.aspx?RuleID=9070&Section=9.
7 The Associations agree with Commissioner Caroline Pham’s statement that “it is very important for the Commission to be precise in the words that [it] use[s] for defined terms.” CFTC, Statement of Commissioner Caroline D. Pham on Operational Resilience Proposal for Swap Dealers and Futures Commission Merchants (Dec. 18, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement121823b [hereinafter Commissioner Pham’s Statement]. To that end, the Associations provide suggested definitions to certain defined terms in Appendix 1.