Introduction

Good morning.  Today, the Commission will consider four matters – one final rule, two notices of proposed rulemaking, and one proposed order and request for comment – as we continue to work through the aggressive agenda I laid out in early February.[1]

By August, my hope is that the Commission will consider another nine or so additional matters including rule and other proposals addressing enhanced customer protections, promoting efficiency and innovation in the SEF (swap execution facility) and ETF spaces and regarding swap trading documentation, codifying certain no-action positions relating to swap dealer external business conduct standards; and cleaning up some matters regarding rule and product filing requirements.

We will also consider the finalization of last year’s proposal to amend certain reporting and information regulations applicable to derivatives clearing organizations (DCOs).[2]  If finalized, these amendments would, among other things, update information requirements associated with commingling customer funds and positions in futures and swaps in the same account.

Before we hit the end of the fiscal year in September, the Commission will consider at least another half-dozen proposals and host events aimed at further engaging stakeholders and the general public on issues facing every sector of our jurisdictional markets and beyond.  I anticipate that we will reach some conclusions on comparability determinations for swap dealers, and continue to contemplate global strategies for crypto, carbon, and continuity of market operations.

While I will share additional remarks on each in greater detail following the staff presentations, before we get too deep in the weeds, I want to take a moment to hone in on the significance of what we are seeking to accomplish today.

A Source of Strength: Clearing

Half of today’s agenda is dedicated to Derivatives Clearing Organizations (DCOs).  As a fundamental pillar of global financial reform efforts and our most universally effective tool in the box, central clearing reduces risks, fosters resiliency, and builds continuity and confidence in financial markets.  The global implementation of the central clearing mandate has produced a significant demand for clearing services and a substantial increase in overall clearing volumes in the swaps market.  However, clearing is not without risk.  Policymakers, both bank and market regulators, must take the necessary steps to ensure that clearinghouses are not simply commercially viable, but can continue to operate and provide critical services as expected, even in times of extreme market stress.

Governance

The Commission will first consider a final rule on Governance Requirements for DCOs.  As I highlighted in remarks earlier this year, “[t]his particular rulemaking has a long history, and its timing could not be more crucial.”[3]  Throughout my CFTC tenure, clearinghouse or central counterparty (CCP) governance has remained a topic of increasing emphasis among domestic and international regulators.  In the decade that followed the initial rule proposal addressing DCO governance,[4] clearing members continually expressed concerns that their interests may not be adequately represented, considering that clearing members, through mutualized default funds, are the bearers of a majority of a CCP’s tail risk.

Under my sponsorship, the CFTC’s Market Risk Advisory Committee (MRAC) formed a Central Counterparty Risk and Governance Subcommittee to bring DCOs, clearing members, and customers together to make recommendations to the full MRAC and ultimately, the Commission, as to how they, the stakeholders, believed DCO governance could be improved.[5]  That Subcommittee understood the assignment.  I hope that the completion of this rulemaking serves as a model of how the Commission and the public (through advisory committees and other means) can work together towards effective and attainable solutions.

I fully support the final rule which facilitates further cooperation and collaboration through risk management committees including representation from clearing members and customers and through risk advisory working groups, which will give all clearing members and customers—not just those on the risk management committee—an opportunity to have their voices heard on risk management issues which impact them, not just the DCO.  While there may be more to come in this area, today’s final DCO Governance rule promotes the safety and soundness of our DCOs and the financial system at large.  I hope that this final rule encourages the industry and other stakeholders to continue to work on those issues where, so far, they have not reached consensus.  That said, transparent and honest communication is a cornerstone to the success of any system.  I am hopeful that this governance rule will establish a new, enhanced level of communication among participants in the clearing ecosystem that will serve to bridge differences in multiple areas of disagreement, ultimately strengthening our financial markets, which I know is a shared interest.

Recovery, Wind-Down & Resolution

Our second matter on the agenda involves a proposed rule to amend the requirements related to recovery and orderly wind-down and resolution planning for DCOs that have been designated as systemically important (SIDCOs) as well as other DCOs that elect to comply with DCO core principles by satisfying the higher standards for SIDCOs—referred to as “Subpart C DCOs.”  At a high level, the Commission will consider codifying and expanding existing staff guidance,[6] as well as propose to specify the types of information that a SIDCO or Subpart C DCO may be required to provide to the Commission to share with the FDIC for resolution planning.  Building on the themes of risk management, resilience and contingency planning, this proposal aims to build consistency, awareness, and preparedness across SIDCOs and Subpart C DCOs by providing greater predictability should an unlikely event occur that prevents a DCO from being able to meet its obligations, provide critical services to its members, or if a DCO ultimately needs to wind-down operations in an orderly manner.  That is why I fully support the proposal.

Today’s proposal would set forth in Commission regulation an expectation that SIDCOs and Subpart C DCOs, as financial market infrastructures, have comprehensive and effective recovery plans and orderly wind-down plans.  These plans would analyze the services that clearing members and others rely upon the DCOs to provide, as well as the necessary services that others provide to the DCOs.  DCOs would also be required to consider, as part of their planning process, a thorough set of scenarios that might potentially create losses that challenge their ability to provide their critical operations and services.  Some scenarios that we specify may not be applicable to every DCO, and the proposal notes scenarios are to be considered to the extent they are possible in light of the DCO’s structure and activities.  However, the proposal, reiterating existing guidance, cautions DCOs considering whether a scenario is possible to avoid confusing “low risk” with “zero risk.”  There is a difference. A low risk scenario, which is remotely possible, must be addressed by the plans whereas a scenario that is not possible would not. It is critical that scenario analyses and, in turn, the preparation of recovery and orderly wind-down plans occur during business-as-usual operations, and not during times of stress, in order to ensure thorough preparation and planning.

I have remarked before, among the many lessons learned from the 2008 financial crisis, the interconnectedness of our global financial system is one of, if not the single, most important.  All risk analyses must include a holistic examination of the systemic relationships throughout all of our financial markets.  The proposal would require a SIDCO and Subpart C DCO to identify its financial and operational interconnections and interdependencies, plans for resilient staffing arrangements, governance structure, and any contracts or agreements subject to alteration in the event of orderly wind-down.  The proposal also requires each SIDCO and Subpart C DCO to assess the full range of options for recovery and orderly wind-down, to test the plans, and to notify clearing members when recovery or wind-down is initiated.

In light of recent market events, the proposal before us today would require all DCOs, not just SIDCOs and Subpart C DCOs, to submit viable plans for orderly wind-down.  The wind-down plan requirements for non-SIDCOs that are not Subpart C DCOs are similar in that the plan must identify scenarios, triggers, and available tools.

Finally, the proposal expands on existing regulation requiring SIDCOs and Subpart C DCOs to have procedures in place for providing the Commission with information needed for resolution planning.  In the spirit of regulatory transparency, this proposal identifies categories of information that a SIDCO or Subpart C DCO would be required to provide to the Commission for such planning.

I look forward to the public’s submission of comments and feedback on this proposed rulemaking.

Every Day Useful Information: Large Traders

Moving to one of our more historically significant areas, the Commission will consider a proposed rule to modernize and create a path for efficient future modernization of large trader data reporting under Part 17 of the Commission’s regulations.  The proposal also seeks to align Part 17 data and reporting with the reporting structure in Parts 16, 20, 39, 43, and 45.

Part 17 governs large trader reporting for futures and options, and requires certain registrants to report daily position information for the largest futures and options traders.  The Commission uses the large trader reports for surveillance (detection and prevention of price manipulation) and enforcement of speculative limits.  These reports also provide the basis for the Commission’s weekly Commitments of Traders (“COT”) report, which is used by a wide range of commercial and speculative traders, and was itself recently modernized to include an updated interface that simplifies the downloading of COT data and an Application Program Interface (API), which enables an easier automated download process.[7]

Large trader data and the COT report alike are tools of the trade, and ensuring that they are usable internally and externally promotes transparency and efficiency as we carry out our regulatory and enforcement functions.  Submission standards and data fields for the report (Regulation 17.00(g)) were promulgated in 1986 and last updated in 1997, and have become outdated and difficult for staff to use.  The proposal seeks to modernize the format standards and data fields by: removing the 80-character format and delegating authority to the Director of the Division of Data (DOD) to designate a modern data submission standard; replacing the data fields enumerated in the regulation with a new Appendix C specifying data elements to be reported; and delegating to the DOD Director the authority to specify the form, manner, coding structure, and electronic data transmission procedures for reporting.

If approved for publication in the Federal Register today, the Part 17 proposal will be accompanied by the contemporaneous publication of a proposed Part 17 Guidebook on the Commission’s website.  The proposed Guidebook designates a modern FIXML submission standard for submitting reports required under regulation 17.00(a).  The proposal includes a general description of the Guidebook and requests comments from the public.

At their core, rules like this support foundational compliance and unequivocally support our efforts in ensuring that end-users and individual and institutional investors alike can measure and understand risks.  Further, this rule will allow a better understanding that those trading in our markets are being monitored, and their impacts and influence within such markets, constantly measured and evaluated.

Proposed Order and Request for Comment on EU Non-Bank Swap Dealer Capital Comparability Determination

Finally, the Commission will consider a proposed order and request for comment on an application for a capital comparability determination on behalf of four nonbank[8] swap dealers that are domiciled in France or Germany (the “Proposed Order”).  All four of these EU nonbank SDs are subject to the EU capital and financial reporting rules as implemented by the national laws of France or Germany.  Today’s preliminary capital comparability determination for these EU nonbank SDs is the third proposed order and request for comment[9] to come before the Commission since it adopted its substituted compliance framework for non-U.S. domiciled nonbank swap dealers in July 2020.[10]

Subject to certain conditions, I support the Proposed Order and request for comment on its preliminary determination that the EU nonbank SDs, which are subject to, and comply with, capital and financial reporting requirements in their respective member states, and are comparable to certain capital and financial reporting requirements under the Commodity Exchange Act and the Commission’s regulations.

Closing

Today’s agenda will take us one step further in incorporating current and forward-looking risk assessment and management into our ruleset and responsibility and resilience into our regulated entities.  As always, my approach has been thoughtful and surgical, and has benefitted from the relationships we have inside and outside of the Commission.  I look forward to the continued collaboration and comments from all stakeholders.

Most importantly, I want to thank the staff who worked on today’s final rule and proposals.  From the Division of Clearing and Risk, I would like to acknowledge and thank Clark Hutchison, Eileen Donovan, Tad Polley, Joe Opron, Megan Wallace, Bob Wasserman, and Eric Shmelzer.  For their work on the Part 17 proposal, I would like to acknowledge and thank Vince McGonagle, Owen Kopon and Paul Chaffin from the Division of Market Oversight, Tom Guerin and James Fay from the Division of Data, and Daniel Prager from the Office of the Chief Economist. And from the Market Participants Division, I would like to acknowledge and thank Amanda Olear, Tom Smith, Rafael Martinez, Liliya Bozhanova, Joo Hong, and Justin McPhee.  I’d also like to thank the Office of the General Counsel.

Finally, I would like to thank my dedicated staff, David Gillers, Laura Gardy, John Dunfee, Abigail Knauff, Alicia Lewis, Jason Somensatto, and David Felsenthal who keep the agenda moving in a positive direction.

Farewell to Joseph Borg, Director of the Alabama Securities Commission

Early last month, Joseph Borg, Director of the Alabama Securities Commission, retired after close to 30 years of service to the State of Alabama.  Mr. Borg also served three terms as President of the National Association of State Securities Administrators.  Joe’s tenure in Alabama and service to NASSA in multiple roles exemplify the best of public service.  Joe has been a longtime partner to the CFTC, helping spearhead many enforcement actions that protect investors across our country.  As I often say, our state regulators serve a critical role in protecting the public interest and financial markets.  State regulators, in the most literal sense, are the boots on the ground across our great country.  And Joe was one of the great leaders to help all regulators, at the local, state, and federal level, protect investors.  Joe will be missed, but we wish Joe and his family a well-deserved – earned – retirement.