2022-16683
[Federal Register Volume 87, Number 154 (Thursday, August 11, 2022)]
[Proposed Rules]
[Pages 49559-49568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-16683]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 39
RIN 3038-AF15
Governance Requirements for Derivatives Clearing Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission)
is proposing amendments to require derivatives clearing organizations
(DCOs) to establish and consult with one or more risk management
committees (RMCs) comprised of clearing members and customers of
clearing members on matters that could materially affect the risk
profile of the DCO. In addition, the Commission proposes establishing
minimum requirements for RMC composition and rotation, and requiring
DCOs to establish and enforce fitness standards for RMC members. The
Commission also proposes requiring DCOs to maintain written policies
and procedures governing the RMC consultation process and the role of
RMC members. Finally, the Commission is proposing to require DCOs to
establish one or more market participant risk advisory working groups
(RWGs) that must convene at least quarterly, and adopt written policies
and procedures related to the formation and role of the RWG.
DATES: Comments must be received by October 11, 2022.
ADDRESSES: You may submit comments, identified by ``Governance
Requirements for Derivatives Clearing Organizations'' and RIN number
3038-AF15, by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (FOIA), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
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\1\ 17 CFR 145.9. Commission regulations referred to in this
release are found at 17 CFR chapter I (2020), and are accessible on
the Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected]; Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581; Theodore Z. Polley III, Associate
Director, (312) 596-0551, [email protected]; or Joe Opron, Special
Counsel, (312) 596-0653, [email protected]; Division of Clearing and
Risk, Commodity Futures Trading Commission, 77 West Jackson Boulevard,
Suite 800, Chicago, Illinois 60604.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Proposed Amendments to Sec. 39.24(b)
III. Proposed Amendments to Sec. 39.24(c)
IV. Request for Comments
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
The Market Risk Advisory Committee (MRAC) is a discretionary
advisory committee established by the authority of the Commission in
accordance with the Federal Advisory Committee Act, as amended.\2\ The
MRAC advises the Commission on matters related to evolving market
structures and movement of risk across clearinghouses, exchanges,
intermediaries, market makers and end-users.\3\ MRAC subcommittees are
organized by topic to produce reports and recommendations to the full
MRAC that, if approved, are submitted to the Commission for its
consideration.
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\2\ 5 U.S.C. App. 2.
\3\ See Market Risk Advisory Committee, available at https://www.cftc.gov/About/AdvisoryCommittees/MRAC.
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On February 23, 2021, the MRAC approved a report from its Central
Counterparty (CCP) Risk and Governance Subcommittee (Subcommittee) that
provided several recommendations on DCO risk governance.\4\ For each
topic considered in the report, the (1) DCOs and (2) clearing members
and end-users (CM/EU) represented on the Subcommittee each provided
separate recommendations, and in some instances proposed rule text. On
some topics, the two groups reached a general agreement on how DCO
governance might be improved, but there were also areas of
disagreement.
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\4\ MRAC CCP Risk and Governance Subcommittee, Recommendations
on CCP Governance and Summary of Subcommittee Constituent
Perspectives, available at https://www.cftc.gov/media/6201/MRAC_CCPRGS_RCCOG022321/download (Feb. 23, 2021).
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The Commission is proposing several amendments to Sec. 39.24 that
are consistent with the Subcommittee's recommendations to enhance the
Commission's DCO governance standards. First, the Commission proposes
to require each DCO to establish and consult with one or more RMCs
comprised of clearing members
[[Page 49560]]
and customers of clearing members prior to making decisions that could
materially affect the risk profile of the DCO, and proposes
requirements related to the composition and activities of RMCs. Second,
the Commission proposes to require each DCO to establish one or more
RWGs in order to seek risk-based input (as opposed to commercially-
driven input) from a broader array of market participants. The
Commission also requests comment below on several other topics
discussed in the Subcommittee report on which the DCO and CM/EU members
of the Subcommittee did not reach clear agreement.
II. Proposed Amendments to Sec. 39.24(b)
Section 5b(c)(2) of the Commodity Exchange Act (CEA) sets forth
core principles with which a DCO must comply in order to be registered
and to maintain registration as a DCO (DCO Core Principles),\5\ and
part 39 of the Commission's regulations implement the DCO Core
Principles. DCO Core Principle O requires a DCO to establish governance
arrangements that are transparent, fulfill public interest
requirements, and permit the consideration of the views of owners and
participants.\6\ Paragraphs (a) and (b) of Sec. 39.24 implement this
aspect of Core Principle O by providing minimum requirements regarding
the substance and form of a DCO's governance arrangements. The
Commission proposes to enhance these requirements by requiring a DCO
to: (1) establish and consult with one or more RMCs on matters that
could materially affect the risk profile of the DCO; (2) appoint
clearing members and customers of clearing members to the RMC; (3)
rotate RMC membership on a regular basis; (4) establish one or more
RWGs; and (5) establish written policies and procedures regarding the
RMC consultation process and the formation and role of each RWG.
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\5\ 7 U.S.C. 7a-1.
\6\ See 7 U.S.C. 7a-1(c)(2)(O)(i).
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A. Establishment and Consultation of RMC--Sec. 39.24(b)(11)
Commission regulations require a DCO to consider the views of
clearing members and customers of clearing members as part of the DCO's
governance process. Most notably, Sec. 39.24(a)(1)(iv) requires a DCO
to have governance arrangements that support the relevant public
interest considerations of clearing members, customers of clearing
members, and other relevant stakeholders. Regulation 39.24(a)(2)
requires a DCO's board of directors to make certain that the DCO's
design, rules, overall strategy, and major decisions appropriately
reflect the legitimate interests of clearing members, customers of
clearing members, and other relevant stakeholders.
While not required by Commission regulations, many DCOs have
addressed the above requirements by establishing advisory RMCs
comprised of clearing members that provide expert opinion on key risk
management issues.\7\ Codifying this best practice furthers the purpose
of Core Principle O by providing a consistent, formalized process
across all DCOs to solicit, consider, and address input from clearing
members and end-users before making decisions that could materially
affect the risk profile of the DCO. Moreover, while serving on an RMC,
clearing members and end-users would be able to use their risk
management expertise to promote the safety and efficiency of the DCO
and foster the stability of the broader financial markets. Finally,
codifying a market participant consultation requirement formally
enhances the role of market participants in the DCO risk governance
process across DCOs.
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\7\ See, e.g., Chicago Mercantile Exchange, Inc., Clearing House
Risk Committee Charter, accessed on February 3, 2022, available at
http://investor.cmegroup.com/static-files/7445789a-8aaa-46ec-8539-069e8cbf0fab; ICE Clear Credit Regulation and Governance, Fact
Sheet, accessed February 3, 2022, available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf.
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Therefore, the Commission is proposing new Sec. 39.24(b)(11),
which would require a DCO to maintain governance arrangements that
establish one or more RMCs,\8\ and require a DCO's board of directors
to consult with, and consider and respond to input from, its RMC(s) on
all matters that could materially affect the risk profile of the
DCO.\9\ While the Commission is not proposing to prescribe exactly how
a board of directors should respond to RMC input, the board of
directors must respond to the substance of the input it receives rather
than merely acknowledging that the input was received. Proposed Sec.
39.24(b)(11) would identify a non-exhaustive list of matters that could
materially affect the risk profile of the DCO, including any material
change to the DCO's margin model, default procedures, participation
requirements, and risk monitoring practices, as well as the clearing of
new products.
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\8\ The Commission notes that some DCOs maintain separate RMCs
for each product type that they clear. For example, Chicago
Mercantile Exchange, Inc.'s (CME) Clearing House Risk Committee
oversees primarily futures and options products, and its Interest
Rate Swaps Risk Committee oversees interest rate swaps products. See
CME, Governance, accessed on February 3, 2022, available at https://www.cmegroup.com/education/articles-and-reports/governance.html.
\9\ RMCs are mentioned in existing Commission regulations (see,
e.g., Sec. 39.24((b)(7)) given that many DCOs already use them, but
current regulations do not explicitly require a DCO to establish an
RMC or prescribe the nature of its role.
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Clearing members have a significant interest in the clearing of new
products, especially at DCOs with mutualized default funds. The fact
that new products typically have low open interest upon launch does not
prevent them from potentially materially affecting the risk profile of
the DCO. When determining whether a new product could materially affect
its risk profile, a DCO should consider the product's potential impact
as the product matures, and not only at the onset of trading, when
risks may be less pronounced.
The Commission requests comment on whether a DCO's proposal to
clear a new product should be categorically treated as a matter that
could materially affect the DCO's risk profile for purposes of the
proposed RMC consultation requirement given the heightened potential
for novel and complex risks associated with clearing new products. If
so, should the Commission define what constitutes a new product for
this purpose, and how should it do so? For example, should the
Commission define new products to include those that have margining,
liquidity, default management, pricing, or other risk characteristics
that differ from those currently cleared by the DCO? In the
alternative, should the Commission require DCOs to adopt policies
defining what constitutes a new product?
Finally, for the avoidance of doubt, the Commission notes that
while it believes that codifying an RMC consultation requirement will
significantly enhance overall DCO risk management, a DCO's board of
directors has the ultimate responsibility to make major decisions with
respect to the DCO.\10\
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\10\ See 17 CFR 39.24(a)(2) through (3).
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B. Policies and Procedures Governing RMC Consultation--Sec.
39.24(b)(11)(i)
The Commission is proposing new Sec. 39.24(b)(11)(i), which would
require a DCO to maintain written policies and procedures to make
certain that the RMC consultation process is described in detail, and
includes requirements for the DCO to document the board's consideration
of and response to RMC input. The Commission believes that explicitly
requiring DCOs to develop and maintain policies and procedures
[[Page 49561]]
governing DCO consultation with its RMC(s), and to document the
activities of its RMC(s), will promote transparency, accountability,
and predictability, and facilitate effective oversight by the
Commission in this area. The Commission requests comment on whether
DCOs should be required to create and maintain minutes or other
documentation of RMC meetings.
C. Representation of Clearing Members and Customers on RMC--Sec.
39.24(b)(11)(ii)
As discussed above, Core Principle O and Sec. 39.24 require DCOs
to consider the views and legitimate interests of clearing members and
customers of clearing members in their decision-making process. This
principle is rooted in the need to ensure that these parties have an
opportunity to express their concerns, and in recognition of the stake
that clearing members and their customers have in the financial
integrity of the DCO, as well as the fact that DCOs benefit from their
unique perspective and expertise on risk management issues.
Accordingly, the Commission is proposing new Sec. 39.24(b)(11)(ii),
which would require a DCO to maintain policies to make certain that an
RMC includes representatives from clearing members and customers of
clearing members.
With respect to RMC composition, the Commission proposes to adopt
the Subcommittee's recommendation that an RMC include
``representatives'' from both clearing members and customers of
clearing members. The Commission believes that requiring more than one
clearing member and more than one customer of a clearing member ensures
a minimum level of market participant participation on RMCs while
providing DCOs with appropriate flexibility to account for differences
among DCOs in terms of size, business models, resources, and governance
structure. However, the Commission requests comment on whether it
should adopt additional specific composition requirements, and if so,
what those requirements should be.
D. Rotation of RMC Membership--Sec. 39.24(b)(11)(iii)
The Commission believes that requiring DCOs to regularly rotate
their RMC membership will promote the ability of clearing members and
customers of clearing members from a broad array of market segments to
provide their expertise, and will ensure that the RMC provides the DCO
with fresh perspectives on risk management matters. Accordingly, the
Commission is proposing new Sec. 39.24(b)(11)(iii), which would
require a DCO to maintain policies to make certain that membership of
an RMC is rotated on a regular basis. The Commission requests comment
on whether it should set a minimum frequency for RMC membership
rotation, what are the advantages and disadvantages of doing so, and,
if it does, what that frequency should be.
E. Establishment of RWG To Obtain Input--Sec. 39.24(b)(12)
As noted above, the Commission's proposal to require a DCO to
establish and consult with an RMC that includes clearing member and
customer representatives who are rotated on a regular basis would
further implement the Core Principle O requirement that a DCO establish
governance arrangements that permit the consideration of the views of
owners and participants. However, the Commission recognizes that
practical considerations, most notably the size of a typical RMC and
the significant time commitment that an RMC would require of its
members, will limit the number of representatives that can serve on a
DCO's RMC at any given time. Many DCOs have dozens of clearing members,
each of which can have a large number of customers. Moreover, as
proposed, an RMC's duties would involve formal consultation with a
DCO's board of directors on all matters that could materially affect
the risk profile of the DCO. Thus, RMC membership may constitute a
significant time commitment. As an advisory working group, an RWG would
require a smaller time commitment from its participants. Therefore, in
order to further expand and diversify the information available to a
DCO while making material risk decisions, and to expand opportunities
for those with a stake in DCO risk management to provide input, the
Commission is proposing new Sec. 39.24(b)(12) to require a DCO to
establish one or more RWGs, and to maintain policies and procedures
regarding the formation and role of each RWG. Having an RWG would allow
a DCO to seek risk-based input (as opposed to commercially-driven
input) from a broader array of market participants, such that a diverse
cross-section of the DCO's clearing members and customers of its
clearing members are represented, regarding all matters that could
materially affect the risk profile of the DCO. Requiring policies and
procedures regarding the role of each RWG will promote transparency,
accountability, and predictability and facilitate effective oversight
by the Commission. Finally, the Commission proposes to require each RWG
to convene at least quarterly, with the goal of ensuring that each RWG
is able to discuss and provide input on material risk matters in a
timely manner.
The Commission requests comment on whether the proposed requirement
that each RWG convene quarterly is the appropriate frequency. The
Commission also requests comment on whether it should require DCOs to
document the proceedings of RWG meetings, considering both the
transparency and accountability benefits of such a requirement and the
potential impact of a documentation requirement on free and open
dialogue.
III. Proposed Amendments to Sec. 39.24(c)
A. Fitness Standards for RMC Members--Sec. 39.24(c)(1)
Regulation 39.24(c) implements subsection (ii) of DCO Core
Principle O, which requires a DCO to establish and enforce appropriate
fitness standards for directors, members of any disciplinary committee,
members of the DCO, any other individual or entity with direct access
to the settlement or clearing activities of the DCO, and any other
party affiliated with any of the foregoing individuals or entities.\11\
If a DCO is required to establish and consult with its RMC on all
matters that could materially affect the risk profile of the DCO as
proposed, the Commission believes a DCO also would need to consider the
fitness of individual members for RMC participation, recognizing that
fitness standards may vary across DCOs. Therefore, the Commission
proposes to amend Sec. 39.24(c) by adding new paragraph (c)(1)(iv)
(and renumbering current paragraphs (c)(1)(iv) and (v) accordingly) to
require a DCO to establish and enforce appropriate fitness standards
for its RMC members.
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\11\ See 7 U.S.C. 7a-1(c)(2)(O).
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B. Role of RMC Members as Independent Experts--Sec. 39.24(c)(3)
As discussed above, the Commission's proposal to require a DCO's
board of directors to consult with its RMC(s), comprised of clearing
member and customer representatives, is intended to benefit the DCO
risk management process by engaging a broad array of backgrounds and
expertise. The Commission believes that in order to ensure that RMC
members feel empowered to provide objective input during this process,
they must be able to serve as independent experts, neither beholden to
their employers' particular interests nor acting as fiduciaries of the
[[Page 49562]]
DCO. Therefore, the Commission is proposing new Sec. 39.24(c)(3) to
require a DCO to maintain policies designed to enable its RMC members
to provide independent, expert opinions in the form of risk-based input
on all matters presented to the RMC for consideration, and perform
their duties in a manner that supports the safety and efficiency of the
DCO and the stability of the broader financial system. The Commission
requests comment on whether requiring RMC members to act as independent
experts, neither beholden to their employers' commercial interests nor
acting as fiduciaries of the DCO raises any potential legal issues for
those members. Specifically, as a matter of corporate law, would RMC
members be forced to contend with competing duties or obligations to
the DCO and their employer, including any duties or obligations that
would foreclose RMC participation? If so, how may the goal of receiving
independent, expert opinions be achieved? Should DCOs be required to
have policies specific to RMC members for managing conflicts of
interest?
IV. Request for Comment
The Commission generally requests comment on all aspects of the
proposed rules. Additionally, the Commission requests comments on the
following specific items, which the Commission might address in a
future rulemaking:
A. Market Participant Consultation Prior to a Rule Change
Commission regulations require a DCO to include in its rule
submissions under Sec. Sec. 40.5, 40.6, and 40.10 a brief explanation
of any substantive opposing views expressed to the DCO by governing
board or committee members, members of the DCO, or market participants
that were not incorporated into the rule, or a statement that no such
opposing views were expressed.\12\
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\12\ 17 CFR 40.5(a)(7)(iv); 40.6(a)(7)(iv); 40.10(a)(1)
(including by reference the requirements of 17 CFR 40.6(a)(7)).
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The proposed amendments to Sec. 39.24 would require a DCO's board
of directors to consult with its RMC, which must contain
representatives from clearing members and customers of clearing
members, on all matters that could materially affect the risk profile
of the DCO, including matters that would be captured in DCO rule
submissions. In addition, a DCO would be required to establish one or
more RWGs as a forum to seek risk-based input from a broad array of
market participants, such that a diverse cross-section of the DCO's
clearing members and customers of clearing members are represented,
regarding all matters that could materially affect the risk profile of
the DCO.
The Commission requests comment on whether it should also require a
DCO to consult with a broad spectrum of market participants prior to
submitting any rule change pursuant to Sec. Sec. 40.5, 40.6, or 40.10.
If so, what constitutes a sufficiently broad spectrum of market
participants, and how should the DCO engage that group? Should a DCO be
required to consult only on those rule changes that could materially
affect the DCO's risk profile?
In accomplishing effective consultation, is there value to
requiring a DCO to respond to market participant feedback?
Specifically, where specific risk-based feedback from market
participants has not been incorporated in the DCO's decision, should
the DCO be required to respond to market participants informing them of
the decision and outlining the rationale behind their action? How could
such a requirement be tailored to avoid forcing a DCO to respond to
excessively detailed or irrelevant comments?
As noted above, Commission regulations currently require a DCO to
provide to the Commission a ``brief explanation of any substantive
opposing views.'' Should the Commission further clarify the meaning of
``substantive'' in the context of this requirement? Should a DCO be
required to provide the Commission with a report of all opposing views
expressed to the DCO? Rather than expecting the DCO to accurately
describe opposing views, should the Commission only require a DCO to
pass on to the Commission any opposing views expressed to the DCO in
writing? Should a DCO be required in its submission to the Commission
to respond to opposing views expressed to the DCO? Finally, should the
Commission consider additional rules to address a DCO's failure to
comply with the full submission requirements of part 40, such as the
imposition of an automatic stay?
B. RMC Member Information Sharing With Firm To Obtain Expert Opinions
The Commission believes that the proposed RMC requirements will
greatly improve the level of market participant input during the DCO
risk governance process for those DCOs that do not currently have an
RMC. However, the Commission recognizes that an RMC member's employer
may have subject matter experts other than the RMC member who could
provide additional expertise that could improve the RMC's ability to
make informed recommendations to the DCO. The information provided to a
DCO's RMC is often confidential, however, and the value of the enhanced
input must be weighed against the increased risk of disclosure in
allowing confidential information to be shared outside of the RMC.
Moreover, different types of information may require different levels
of confidentiality. For example, information concerning prospective
changes to aspects of the DCO's risk management framework may have a
different level of confidentiality than information concerning an
action against a member due to financial responsibility concerns.
The Commission requests comment on whether DCOs should be required
to maintain policies and procedures designed to enable an RMC member to
share certain types of information it learns in its capacity as an RMC
member with fellow employees in order to obtain additional expert
opinion. If so, what types of information should be eligible to be
shared? What measures should be taken to ensure that confidential
information is appropriately protected?
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\13\ The
amendments proposed by the Commission will affect only DCOs. The
Commission has previously established certain definitions of ``small
entities'' to be used by the Commission in evaluating the impact of its
regulations on small entities in accordance with the RFA.\14\ The
Commission has previously determined that DCOs are not small entities
for the purpose of the RFA.\15\ Accordingly, the Chairman, on behalf of
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the
proposed regulations will not have a significant economic impact on a
substantial number of small entities.
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\13\ 5 U.S.C. 601 et seq.
\14\ 47 FR 18618 (Apr. 30, 1982).
\15\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \16\ provides that Federal
agencies, including the Commission, may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid
[[Page 49563]]
control number from the Office of Management and Budget (OMB). This
proposed rulemaking contains reporting and recordkeeping requirements
that are collections of information within the meaning of the PRA. This
section addresses the impact that the proposal will have on existing
information collection requirements associated with part 39 of the
Commission's regulations.
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\16\ 44 U.S.C. 3501 et seq.
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The Commission is proposing to add new Sec. 39.24(b)(11) to
require a DCO to establish one or more RMC(s) and require its board of
directors to consult with the relevant RMC on all matters that could
materially affect the DCO's risk profile. The Commission also is
proposing to add new Sec. 39.24(b)(11)(i), which would require a DCO
to maintain policies to ensure that the RMC consultation process is
described in detail, including the documentation and consideration of
input; new Sec. 39.24(b)(11)(ii), which would require a DCO to
maintain policies to ensure each RMC includes representatives from
clearing members and customers of clearing members; new Sec.
39.24(b)(11)(iii) to require a DCO to maintain policies that make
certain membership of each RMC is rotated on a regular basis; new Sec.
39.24(b)(12) to require a DCO to establish one or more RWG(s) and to
maintain policies and procedures regarding the formation and role of
each RWG; and new Sec. 39.24(c)(1)(iv), which would require a DCO to
establish fitness standards for RMC members. Finally, the Commission is
proposing new Sec. 39.24(c)(3), which would require a DCO to maintain
policies enabling its RMC members to provide independent, expert
opinions in the form of risk-based input to the RMC, and to perform
their duties in a manner that supports the DCO's safety and efficiency
and the stability of the broader financial system.
The proposed regulations require a DCO to develop governance
arrangements for its RMC(s) and RWG(s), to the extent it does not
already have governance arrangements meeting the requirements. Existing
regulations require a DCO to disclose new governance arrangements to
the extent permitted under applicable statutory and regulatory
requirements on confidentiality to the Commission, other relevant
authorities, clearing members and their customers, owners of the DCO,
and the public.\17\ Because this disclosure requirement stems from
existing regulations, it is already included in the reporting burden
estimate for Sec. 39.24 and currently covered by the collection of
information titled ``Requirements for Derivatives Clearing
Organizations, OMB control number 3038-0076.'' The proposed regulations
will not impose a new reporting burden and will not increase the
reporting burden estimate.
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\17\ See 17 CFR 39.24(b)(2).
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Request for Comment
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. The Commission will consider public
comments on this proposed collection of information in:
(1) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(2) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(3) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(4) Minimizing the burden of the proposed information collection
requirements on registered entities, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
The Commission specifically invites public comment on the accuracy
of its estimates that the proposed regulations will not impose a new
reporting burden and will not increase the reporting burden estimate.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC
20581, (202) 418-5160 or from https://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that all comments can be summarized and addressed in the final
rulemaking, and please refer to the ADDRESSES section of this proposed
rule for instructions on submitting comments to the Commission. OMB is
required to make a decision concerning the proposed information
collection requirements between 30 and 60 days after publication of
this proposed rule in the Federal Register. Therefore, a comment to OMB
is best assured of receiving full consideration if OMB receives it
within 30 calendar days of publication of this proposed rule. Nothing
in the foregoing affects the deadline enumerated above for public
comment to the Commission on the proposed rule.
C. Cost-Benefit Considerations
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\18\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five specific considerations identified in Section 15(a) of the CEA
(collectively referred to herein as Section 15(a) factors) addressed
below.
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\18\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Commission recognizes that the proposed amendments may impose
costs. The Commission has endeavored to assess the expected costs and
benefits of the proposed amendments in quantitative terms, including
PRA-related costs, where possible. In situations where the Commission
is unable to quantify the costs and benefits, the Commission identifies
and considers the costs and benefits of the applicable proposed
amendments in qualitative terms. The lack of data and information to
estimate those costs is attributable in part to the nature of the
proposed amendments. Additionally, any initial and recurring compliance
costs for any particular DCO will depend on the size, existing
infrastructure, practices, and cost structure of the DCO.
The Commission generally requests comment on all aspects of its
cost-benefit considerations, including the identification and
assessment of any costs and benefits not discussed herein; data and any
other information to assist or otherwise inform the Commission's
ability to quantify or qualitatively describe the costs and benefits of
the proposed amendments; and substantiating data, statistics, and any
other information to support positions posited by commenters with
respect to the Commission's discussion. The Commission welcomes comment
on such costs, particularly from existing DCOs that can provide
quantitative cost
[[Page 49564]]
data based on their respective experiences. Commenters may also suggest
other alternatives to the proposed approach.
2. Baseline
The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking are: (1) the DCO Core Principles
set forth in Section 5b(c)(2) of the CEA; and (2) Sec. 39.24.
Specifically, DCO Core Principle O requires a DCO to establish
governance arrangements that are transparent, to fulfill public
interest requirements and to permit the consideration of the views of
owners and participants, and Sec. 39.24 implements DCO Core Principle
O. Of the fifteen DCOs currently registered with the Commission, twelve
already have some form of an RMC, which may have been intended, in
part, to fulfill the DCO's compliance obligations under DCO Core
Principle O and Sec. 39.24. Of the fifteen DCOs currently registered
with the Commission, six already have some form of an RWG, which may
have been intended, in part, to fulfill the DCO's compliance
obligations under DCO Core Principle O and Sec. 39.24.
3. Proposed Amendments to Sec. 39.24
a. Summary of Proposed Amendments
The Commission is proposing regulations that require each DCO to
establish an RMC and require each DCO's board of directors to consult
with, and consider and respond to input from, the RMC on all matters
that could materially affect the DCO's risk profile. The Commission
also proposes to require DCOs to: establish fitness standards for RMC
members; maintain policies to ensure each RMC includes representatives
from clearing members and customers of clearing members; maintain
policies that require rotation of the membership of each RMC on a
regular basis, and maintain written policies and procedures regarding
the RMC consultation process. The Commission also proposes to require
each DCO to maintain policies enabling RMC members to provide
independent, expert opinions in the form of risk-based input to the
RMC, and to perform their duties in a manner that supports the DCO's
safety and efficiency and the stability of the broader financial
system. Finally, the Commission proposes to require each DCO to
establish one or more RWGs as a forum to seek risk-based input from a
broad array of market participants, such that a diverse cross-section
of the DCO's clearing members and customers of clearing members are
represented, regarding all matters that could materially affect the
risk profile of the DCO. RWGs would be required to convene at least
quarterly. In addition, each DCO would be required to adopt written
policies and procedures related to the formation and role of the RWG.
b. Benefits
The proposed additions to Sec. 39.24 would promote more efficient,
effective, and reliable DCO risk management, benefitting DCOs, clearing
members, market participants, and the financial system more broadly.
RMCs would provide a formal mechanism for DCOs to receive valuable
expert input from market participants on critical issues including the
DCO's margin model, default procedures, participation requirements, and
risk monitoring practices, as well as the clearing of new products that
could materially impact the DCO's risk profile. Moreover, codifying the
requirement that a DCO's board of directors consult with, and consider
and respond to input from, market participants on an RMC will formalize
a widely-used method for engaging market participants in the risk
governance process. This would allow DCOs to more effectively consider
and address risks impacting DCO stability, market participant
stability, and market resilience.
To the extent that some DCOs already have RMCs that are compliant
or partially compliant with the proposed rules, the benefits of the
proposed regulations are currently being realized to some degree.
The proposed regulations would help RMCs to be well positioned to
provide effective risk management opinions to the DCO's board of
directors by requiring DCOs to establish RMC membership fitness
standards. These standards would help to ensure that individual RMC
members are well qualified to perform the RMCs' duties. Ensuring that
RMCs include representatives from clearing members and customers of
clearing members would give DCOs the benefit of these stakeholders'
perspectives on risk management issues, and gives market participants
the benefit of a forum for conveying their input on risk management
issues. Rotating the membership of the RMCs on a regular basis would
promote a diversity of perspectives. In addition, requiring DCOs to
implement policies enabling RMC members to provide independent, expert
opinions in the form of risk-based input, and to perform their duties
in a manner that supports the DCO's safety and efficiency, would help
ensure that RMC members feel empowered to provide objective input
during this process by serving as independent experts that are neither
beholden to their employers' commercial interests nor acting as
fiduciaries of the DCO. These requirements for RMCs and their members
collectively increase the likelihood of effective DCO risk management.
Finally, requiring DCOs to develop and maintain policies and procedures
governing DCO board of directors consultation with its RMC(s), and to
document the activities of its RMC(s), will promote transparency,
accountability, and predictability, and facilitate effective oversight
by the Commission in this area.
Similarly, the requirement that each DCO establish one or more RWGs
will further increase the likelihood of effective DCO risk management
by providing each DCO with an expanded pool of clearing member and
customer of clearing member representatives to consult when considering
matters that could materially affect the risk profile of the DCO.
Requiring DCOs to maintain written policies and procedures related to
the formation and role of each risk advisory working group will promote
transparency, accountability, and predictability and facilitate
effective oversight by the Commission in this area.
As discussed above, the Commission requests comments on the
potential benefits of the proposed changes to Sec. 39.24, including
benefits that would be realized by DCOs, other market participants
(including clearing members and their customers), or the financial
system more broadly.
c. Costs
To the extent that some DCOs do not already have RMCs or would need
to adjust the policies and procedures of their existing RMCs to comply
with the proposed rules, the proposed regulations would impose some
costs on DCOs. Costs could arise from additional hours a DCO's
employees might need to spend analyzing the compliance of the DCO's
rules and procedures with these requirements, designing and drafting
new or amended rules and procedures when necessary, and implementing
these new or amended rules and procedures. Specifically, DCOs would
need to draft governance arrangements providing for RMCs and RWGs with
the membership requirements and policies stated in the proposed
amendments to Sec. 39.24 if compliant arrangements are not already in
place.
Drafting new governance arrangements would cost DCOs administrative
time. The amount of time required for each DCO to initially implement
the proposed requirement
[[Page 49565]]
would vary based on a number of factors, including whether the DCO
already has policies complying with the proposed regulations and the
amount of time needed for each DCO to design and draft new or amended
policies where necessary. As noted above, twelve of the fifteen DCOs
currently registered with the Commission already have RMCs in place in
some form, which may lower the cost of implementing the proposed
regulations. Further, the DCOs' policies implementing the proposed
regulations would likely not change significantly from year to year, so
after the initial creation of the policies, the time required to create
rules and procedures would be minimal.
Ongoing implementation of the proposed regulations would also
impose costs. Establishing and operating an RMC would cost a DCO time
to identify potential RMC members that meet the fitness standards when
the RMC is initially formed, as well as each time the RMC membership is
rotated. Operation of the RMC would require a DCO to provide
information to the RMC as needed for its consideration, and time for
the DCO's board to consult with the RMC and consider and respond to its
input. An RMC's operation would also require time from its members to
consider relevant information regarding the DCO's risk practices, and
to form and deliver its views. These costs would, however, be dispersed
among different participants over time due to the proposed requirement
that DCOs rotate their RMC members regularly.
As discussed above, the Commission requests comments on the
potential costs of the proposed amendments to Sec. 39.24, including
any costs that would be imposed on DCOs, other market participants, or
the financial system more broadly. In particular, for those DCOs that
already have RMCs and RWGs in place, the Commission requests comment on
the extent to which the proposed regulations would require changes to
the DCO's existing policies and procedures regarding its RMC(s) and
RWG(s).
d. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits of the proposed amendments to Sec. 39.24 in
light of the following five broad areas of market and public concern
identified in Section 15(a) of the CEA: (1) protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission believes that the proposed amendments
would have a beneficial effect on sound risk management practices and
on the protection of market participants and the public.
(1) Protection of market participants and the public: The proposed
regulations also would protect market participants and the public by
improving DCOs' identification and handling of risk, reducing the
likelihood that market participants and the public face unexpected
costs resulting from deficient DCO risk management. The proposed
amendments to Sec. 39.24 also give market participants a voice in DCO
risk management matters through their participation in RMCs and RWGs,
increasing the likelihood that risks to market participants are
adequately considered and minimized.
(2) Efficiency, competitiveness, and financial integrity of futures
markets: The improvements to DCO risk management practices that the
proposed regulations are designed to encourage also would benefit the
financial integrity of futures and cleared swap markets. The Commission
has not identified any other effect of the proposed rules on
efficiency, competitiveness, and financial integrity.
(3) Price discovery: The Commission has not identified any effect
of the proposed regulations on price discovery.
(4) Sound risk management practices: The proposed regulations are
designed to support sound risk management practices at DCOs by
providing a forum for independent, expert risk-based input to a DCO's
board of directors from clearing members and customers of clearing
members. Proposed requirements regarding RMC composition, fitness
standards for RMC members, and RMC membership rotation all support
RMCs' purpose of promoting sound risk management practices. In
addition, the proposed requirement that a DCO establish one or more
RWGs is designed to further expand and diversify the information
available to a DCO while making material risk decisions, and to expand
opportunities for those with a stake in DCO risk management to provide
input, which further promotes sound risk management.
(5) Other public interest considerations: The Commission has not
identified any effect of the proposed regulations on other public
interest considerations.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\19\
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\19\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is the promotion of competition. The Commission
requests comment on whether the proposed amendments implicate any other
specific public interest to be protected by the antitrust laws. The
Commission has considered the proposed rulemaking to determine whether
it is anticompetitive and has identified no anticompetitive effects.
The Commission requests comment on whether the proposed rulemaking is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that the
proposed rule amendments are not anticompetitive and have no
anticompetitive effects, the Commission has not identified any less
anticompetitive means of achieving the purposes of the CEA. The
Commission requests comment on whether there are less anticompetitive
means of achieving the relevant purposes of the CEA that would
otherwise be served by adopting the proposed rule amendments.
List of Subjects in 17 CFR Part 39
Governance requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 39 as follows:
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
1. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464;
15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July
21, 2010, 124 Stat. 1749.
0
2. Amend Sec. 39.24 as follows:
0
a. Revise paragraphs (b)(9) and (b)(10)(iii);
0
b. Add paragraphs (b)(11) and (12);
0
c. Redesignate paragraphs (c)(1)(iv) and (v) as paragraphs (c)(1)(v)
and (vi) and add new paragraph (c)(1)(iv); and
0
d. Add paragraph (c)(3).
The revisions and additions read as follows:
Sec. 39.24 Governance.
* * * * *
(b) * * *
[[Page 49566]]
(9) Assign responsibility and accountability for risk decisions,
including in crises and emergencies;
(10) * * *
(iii) Recovery and wind-down plans required by Sec. 39.39, as
applicable;
(11) Establish one or more risk management committees and require
the board of directors to consult with, and consider and respond to
input from, the risk management committee(s) on all matters that could
materially affect the risk profile of the derivatives clearing
organization, including any material change to the derivatives clearing
organization's margin model, default procedures, participation
requirements, and risk monitoring practices, as well as the clearing of
new products. A derivatives clearing organization shall maintain
written policies and procedures to make certain that:
(i) The risk management committee consultation process is described
in detail, and includes requirements for the derivatives clearing
organization to document the board's consideration of and response to
risk management committee input;
(ii) A risk management committee includes representatives from
clearing members and customers of clearing members; and
(iii) Membership of a risk management committee is rotated on a
regular basis; and
(12) Establish one or more market participant risk advisory working
groups as a forum to seek risk-based input from a broad array of market
participants, such that a diverse cross-section of the derivatives
clearing organization's clearing members and customers of clearing
members are represented, regarding all matters that could materially
affect the risk profile of the derivatives clearing organization. A
derivatives clearing organization shall maintain written policies and
procedures related to the formation and role of each risk advisory
working group. Each market participant risk advisory working group
shall convene at least quarterly.
(c) * * *
(1) * * *
(iv) Members of risk management committee(s);
* * * * *
(3) A derivatives clearing organization shall maintain policies
designed to enable members of risk management committee(s) to provide
independent, expert opinions in the form of risk-based input on all
matters presented to the risk management committee for consideration,
and perform their duties in a manner that supports the safety and
efficiency of the derivatives clearing organization and the stability
of the broader financial system.
Issued in Washington, DC, on July 29, 2022, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Governance Requirements for Derivatives Clearing
Organizations--Commission Voting Summary, Chairman's Statement, and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson,
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Support of Chairman Rostin Behnam
The last several years have tested the resilience of the
derivatives markets and post-financial crisis reforms more generally
in ways that few risk scenarios could have contemplated. Despite a
resoundingly strong response to the numerous market shocks, the
global regulatory community, in concert with market participants,
has appropriately debated the need for additional tools, resources,
and rules to manage these and future risks. As farmers, ranchers,
corporates, pension funds, insurers, and other market participants
continue to turn to the derivatives markets for risk management and
price discovery, it is critical that derivatives clearing
organizations (DCOs) clearing these products sufficiently calibrate
their risk management tools and frameworks to meet the most extreme,
but plausible, tail events.
DCOs with governance structures that embrace the diverse risk-
based views of clearing members and their clearing members'
customers will be better situated to refine their risk management
frameworks to withstand extreme but plausible market conditions
while promoting financial stability. With an ever-evolving risk
landscape, including new clearing structures, new product
innovation, and the emerging risk of climate change to name just a
few, it is critical that DCOs' governance arrangements and fitness
standards evolve.
That is why I support today's proposal to amend the governance
requirements for DCOs in CFTC Regulation 39.24 to enhance the role
of clearing members and customers of clearing members in the risk
governance process for DCOs. A DCO's robust risk management
framework is particularly critical because of the systemic nature of
clearinghouses and the integral role that DCOs have in promoting
financial stability.
Today's DCO governance proposal is a direct outgrowth of the
work of the Central Counterparty (CCP) Risk and Governance
Subcommittee (Subcommittee) of the Commission's Market Risk Advisory
Committee (``MRAC''),\1\ of which I was the immediate past Sponsor.
The Subcommittee's February 2021 report to the MRAC provided several
recommendations for improving DCO governance standards that the
Commission is proposing today to amend CFTC Regulation 39.24.
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\1\ The MRAC is a discretionary advisory committee established
by the authority of the Commission in accordance with the Federal
Advisory Committee Act. 5 U.S.C. App. 2. The MRAC advises the
Commission on matters related to evolving market structures and
movement of risk across clearinghouses, exchanges, intermediaries,
market makers, and end-users. See Market Risk Advisory Committee,
available at https://www.cftc.gov/About/AdvisoryCommittees/MRAC.
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First, the Commission proposes to require each DCO to establish
one or more risk management committees (RMCs) to consult wit
clearing members and clearing member customers prior to making any
decisions that could materially affect the risk profile of the DCO.
Under the proposal, the DCO would need to consult with the RMC for
material changes to a DCO's margin model, default procedures,
participation requirements, risk monitoring practices, and clearing
of new products. The proposal would further require a DCO to have
written policies and procedures related to the RMC's consultation
process, composition, and rotation of the membership on a regular
basis. As proposed, a DCO would be required to establish and enforce
appropriate fitness standards for RMC members. The Commission also
proposes that a DCO maintain policies that are designed to enable
RMC members to provide independent, expert opinions in the form of
risk-based input on all matters presented to the RMC for its
consideration.
Second, the Commission proposes to require each DCO to establish
one or more risk advisory working groups (RWGs) as a forum to seek
risk-based input (as opposed to commercially-driven input) from a
broader array of market participants on matters that could
materially affect the DCO's risk profile. The Commission proposes to
require a DCO to maintain written policies and procedures related to
the formation and role of each RWG, which would be required to
convene at least quarterly.
Finally, the Commission is also requesting comment on the
consultation process to add or amend a DCO rule, disclosure of
opposing views in a rule submission, and whether DCOs should be
required to maintain policies and procedures designed to enable an
RMC member to share certain types of information in order to obtain
additional expert opinions.
Today's proposal is an extremely positive and critical step
towards further enhancing the effectiveness of the CFTC's governance
standards. Strengthening the clearing ecosystem and developing a DCO
governance policy has been a priority since I joined the Commission
in 2017. As Chairman, this critical market infrastructure will
remain a focus, and I look forward to taking a data-driven approach
to support any possible enhancements to the agency's oversight of
DCOs, ensuring coordination and consistency with our domestic and
international partners as we collectively pursue our shared goals of
market resiliency and financial stability.
[[Page 49567]]
Today is a big step, and the Commission will continue to monitor the
clearing ecosystem and engage market participants on DCO risk and
governance issues in the future.
I wish to again thank the hardworking staff in the Division of
Clearing and Risk for all of their efforts towards bringing us here
today.
Appendix 3--Statement of Support of Commissioner Kristin N. Johnson
I support the Commission's consideration of the proposed
derivatives clearing organization (DCO) governance measures that
establish structural and procedural mechanisms designed to improve
efforts to identify and mitigate material risks, strengthen DCO
resilience, and foster the integrity of our markets.
DCOs provide comprehensive settlement services and take on
counterparty risk with the assistance of clearing members to
facilitate centralized and over-the-counter trading. DCOs also stand
as final guarantors of performance in the event of a customer and
clearing member default. The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) \1\ introduced
groundbreaking reforms that directed the bulk of derivatives trading
to DCOs, charging them with the great responsibility of maintaining
the integrity of the derivatives markets through comprehensive and
prudent risk mitigation practices. These practices include securely
handling participant funds and assets, developing and administering
robust forward-looking margining frameworks for idiosyncratic
markets, consistently setting appropriate margin levels for trader
portfolios, and collecting risk-based guaranty fund contributions
from clearing members. DCO risk mitigation practices thereby can
profoundly impact individual firms and, depending on the systemic
importance of a specific DCO, the broader financial market.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, tit. VII (July 21, 2010) (codified in relevant
part at 7 U.S.C. 7a-1).
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The proposed rules include recommendations that the Commission
received from the Central Counterparty (CCP) Risk and Governance
(Subcommittee) of the Market Risk Advisory Committee (MRAC).\2\ I
thank Chairman Behnam, who previously served as the sponsor of the
MRAC and its subcommittees. The Subcommittee's Report is the product
of effective collaboration among market participants with divergent
views. The Report reflects the leadership of Chairman Behnam and the
Subcommittee Co-Chairs, Alicia Crighton and Lee Betsill, as well as
the exceptional stewardship of Alicia Lewis, Special Counsel to the
Chairman. Today, I serve as the MRAC's sponsor, and intend to
continue the work of Chairman Behnam and further the goals outlined
in the Committee's Charter--``promoting the integrity, resilience,
and vibrancy of the U.S. derivatives markets through sound
regulation, as well as the monitoring and management of systemic
risk.'' \3\
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\2\ See Report of the Central Counterparty (CCP) Risk and
Governance Subcommittee, Market Risk Advisory Committee of the U.S.
Commodity Futures Trading Commission (Feb. 23, 2021) (the
``Report'').
\3\ MRAC Charter available at https://www.cftc.gov/About/AdvisoryCommittees/MRAC.
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The proposed rulemaking requires DCOs to standup risk management
committees comprised of clearing members and their customers to
leverage their risk management expertise and formalize the role of
market participants in the DCO governance process pursuant to DCO
Core Principles. The proposed rulemaking acknowledges that, at
times, the perspectives of DCOs and their clearing members may not
be aligned. As privately-owned businesses DCOs balance the interests
of their owners and those of clearing members who have strong
incentives to mitigate preventable default because DCO clearing
members disproportionately bear default costs. DCOs adopt diverse
business organizational forms and may have existing board committees
focused on risk management oversight, however, we anticipate that
comments to the proposal will articulate the best approach for
establishing a clear and uniform process for risk management
committees to report concerns on all matters that could materially
affect a DCO's risk profile to the board of directors or appropriate
decision-making authority and for ensuring that the decision-making
authority effectively considers the reported concerns.
In 2010 and 2011, similar requirements were proposed but not
adopted.\4\ DCO Core Principles O (Governance Fitness Standards), P
(Conflicts of Interest), and Q (Composition of Governing Boards)
collectively address governance requirements related to considering
the views of owners and participants, adopting appropriate fitness
standards for directors and others, minimizing and resolving
conflicts of interest in decision-making, and including market
participants on governing boards or committees. DCO Core Principle O
expressly directs each DCO to establish governance arrangements that
``permit the consideration of the view of owners and participants.''
\5\ Consequently, today's proposal rekindles a critical, unresolved
effort to reinforce DCO risk governance.
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\4\ See Requirements for Derivatives Clearing Organizations,
Designated Contract Markets, and Swap Execution Facilities Regarding
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18,
2010); Governance Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities, Additional Requirements Regarding the Mitigation of
Conflicts of Interest, 76 FR 722 (Jan. 6, 2011).
\5\ 7 U.S.C. 7a-1(c)(2)(O).
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While I am supportive of the proposal, I stand committed to
carefully consider, based on the comments that we receive, the
benefits, efficacy, limitations, and burdens of the proposed
governance rules. There are certain aspects of the proposal where I
particularly believe substantive comments from market participants
will tremendously add value to the deliberative process. I am
hopeful that the comments submitted in response to the proposal will
support drafting final rules that make our markets stronger and
safer through regulatory oversight. I am sensitive to the need to
consider how the proposed measures supplement existing risk
management oversight and concerns about the need to ensure that the
proposed rules effectively accomplish the articulated goals of
making our markets safer and more resilient.
With the considerations noted above, I support issuing today's
proposal for comment. The Dodd-Frank Act prominently entrusts DCOs
with maintaining the integrity of the derivatives markets through
risk mitigation practices that can profoundly impact individual
firms and the broader financial market. The Dodd-Frank Act
amendments to the Commodity Exchange Act also expressly direct each
DCO to establish governance arrangements that internalize the views
of participants. I look forward to receiving substantive commentary
from all stakeholders to facilitate tailoring governance rules that
further enhance a DCO's ability to prudently manage risk.
Appendix 4--Statement of Support of Commissioner Christy Goldsmith
Romero
I support the Commission's efforts to strengthen the resilience
of clearing houses to future risk, including through this proposed
rule. Since the 2008 financial crisis, I have spent my entire career
in [Federal] public service helping our nation recover, and build a
stronger, safer, more resilient, financial system. I have seen how
clearing houses play an important public interest role--one of
critical market infrastructure that fosters financial stability,
trust and confidence in U.S. markets. The Financial Stability
Oversight Council (``FSOC'') has recognized this public interest
role, designating several clearing houses as systemically important
Financial Market Utilities. FSOC's designation highlights the
important role that the Commission plays in the oversight of
clearing houses.
Thank you to the staff for taking this oversight role seriously.
Thank you for working closely with me and my office on changes to
improve the proposal in ways that will facilitate effective
oversight by the Commission and promote greater accountability,
transparency, and predictability.
Clearing houses serve as a cornerstone to mitigating risk in
U.S. markets. The 2008 financial crisis revealed that over-the-
counter trades left market participants vulnerable to the weaknesses
of their counterparties, and left regulators in the dark about
hidden risk. In contrast, clearing houses--who put themselves in the
center of counterparties--take on counterparty risk and bring
transparency to the markets and regulators.
One important post-crisis reform was to increase central
clearing of trades in U.S. markets, putting clearing houses in even
more of a public interest role. However, this has resulted in a
concentration of more risk in clearing houses. FSOC found that the
failure or disruption of systemically important clearing houses
``could create or increase the risk of significant liquidity or
credit problems spreading among financial
[[Page 49568]]
institutions or markets and thereby threaten the stability of the
U.S. financial system.'' \1\
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\1\ See https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations.
FSOC designates clearing houses who serve as central counterparties
responsible for clearing a large majority of trades as systemically
important Financial Market Utilities.
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The systemic nature of several clearing houses registered with
the Commission further underscores the need for vigilant oversight
by the Commission.\2\ Under the Commission's oversight, clearing
houses have shown resilience in navigating an ever-growing list of
recent market stress events. They have helped U.S. markets maintain
financial stability during the global pandemic, supply chain issues,
and geopolitical events.
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\2\ The Commodity Exchange Act established several core
principles for Derivatives Clearing Houses, including a requirement
that the clearing houses establish governance arrangements that are
transparent to fulfill public interest requirements and to permit
the consideration of the views of owners and participants. 7 U.S.C.
7a-1(c)(2)(O). To further implement these core principles, the
Commission adopted several rules including a rule that clearing
houses maintain clear, documented governance arrangements.
Commission regulation 39.24(b).
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However, uncertainty surrounding these events has driven home
the need for the Commission to enhance its rules so that clearing
houses strengthen their resilience to future risk. The public
interest role of clearing houses is best served when the clearing
houses work with their clearing members who have much at stake as
they shoulder the burden of losses and defaults. Clearing houses,
members, and end users should work collaboratively to decide how to
increase the resilience of their respective clearing house, and how
to best navigate risk during times of market stress. Simply put,
there is strength in numbers and diversity of perspective.
We have seen how clearing houses have benefitted from risk
management committees and other working groups that reflect a broad
coalition of stakeholders. Their voices should be heard in a
meaningful way.\3\ Today, the Commission proposes formalizing
requirements for these committees.\4\ We propose a requirement for
the consideration of input from members of risk committees on
matters that could strengthen or weaken the resilience of the
clearing organization to future risk. The proposed rule seeks to
balance the calls of those on the committees for increased
transparency, predictability, and a voice in risk management, with
the clearing houses' calls for flexibility and consideration of
their own internal opinions on risk. Commenters will tell us whether
we have gotten this balance right in a way that will strengthen the
resilience of clearing houses to future risk while keeping it agile
to respond to sudden market events.
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\3\ The Commission previously stated that clearing organization
governance rules, ``improve DCO risk management practices by
promoting transparency of governance arrangements and making sure
that the interests of a DCO's clearing members and, where relevant,
their customers are taken into account.'' Derivatives Clearing
Organization General Provisions and Core Principles, 85 FR 4800,
4848 (Jan. 27. 2020).
\4\ Proposals include broad and diverse participation, fitness,
the importance of independent, expert opinions, and a performance of
committee duties focused on the safety of the clearing organization
and the stability of the financial system.
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Additionally, we endeavor to formalize governance rules that
promote accountability of clearing houses, and facilitate oversight
by the CFTC. Both accountability and oversight are served in the
proposal through written policies and procedures, and documentation
that stakeholder voices have been solicited and heard. The proposal
is not prescriptive about the content of the policies and
procedures. A requirement for written policies and procedures,
accompanied by documentation of the consideration of input, will
benefit the full range of clearing houses, from systemically
significant clearing houses to new or future clearing houses,
including in the digital asset space, who may not have a history of
risk management committees.
It is my hope that over time, a requirement for policies and
procedures will serve as a launch pad for best practices to emerge.
I look forward to public comment on additional opportunities for how
the Commission can effectively advance best practices, including the
question of whether the Commission should require the publication of
the policies and procedures, and whether the Commission should be
prescriptive of the content. I also look forward to comments on
whether meetings of risk advisory working groups should be
documented to ensure that those members' voices are adequately heard
in a meaningful way.
Today's proposal serves as an important first step to promote
accountability, transparency, predictability, and effective
oversight for the governance of clearing houses. We also invite
comment on certain future rulemaking for best practices. I look
forward to future consideration of additional opportunities for the
Commission to promote transparency, accountability, predictability,
and effective oversight.\5\
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\5\ While there may be a diversity of views on these additional
opportunities, I hope that diversity will help, rather than deter,
this independent Commission to develop strong and long-lasting rules
to strengthen the resilience of clearing houses to future risk.
[FR Doc. 2022-16683 Filed 8-10-22; 8:45 am]
BILLING CODE 6351-01-P