Introduction

Good morning.  Today, the Commission will consider four matters – one final rule and three notices of proposed rulemaking.  To the tremendous credit of our staff and the Commission, we are on course to timely complete an agenda I laid out in February[1] which seeks to continue a longer trajectory of refining policy and regulation to alleviate unnecessary burdens and uncertainty while promoting competition and innovation in the U.S. and abroad.  By staying on course, we will ultimately achieve our most important goal:  protecting customers and ensuring safe, transparent, and resilient derivatives markets.

I am incredibly proud of the work being performed by my colleagues at the CFTC.  We are all locating tremendous strength amid the exhaustion of keeping up with the breakneck pace of market developments and shifting policy—all of which move in concert with natural and geopolitical events around the globe.  Increasing demands for regulatory action are often coupled with some level of angst or opposition.  But, regardless of its source, under my leadership, resistance and hesitation will be met by the Commission with intentionality and fairness.

Always in pursuit of progress, we are seeking to balance multiple objectives within our ruleset.  Practical, consistent, operationally reasonable and feasible, harmonized across borders, and responsive to real-world challenges, today’s final rule and proposals each seek to address needs articulated by stakeholders—including those sitting at this dais—pragmatically and in partnership.  Each has benefitted to some extent from the thoughtful dialogues and reports generated by the Commission’s advisory committees.[2]

We have a collective interest in enhancing competition and liquidity and facilitating price discovery while creating greater resilience and a more transparent derivatives market environment.  And we all benefit when compliance is prioritized over individual opportunity.  I believe that starts with each stakeholder’s recognition and appreciation for their role and relative impact in our markets and the larger financial system.

I believe that today’s final rule and proposals reflect and acknowledge the breadth of institutional and individual market participants affected and seek to solidify responsibilities and secure accountability.  By ensuring the Commission receives and can retrieve the information it needs from the entities that own, assimilate, and shepherd it throughout the lifecycle of the transactions, entities, and relationships that are subject to the Commodity Exchange Act, today’s agenda proposes and provides the right kinds of solutions.

I will share some additional remarks on each component of the agenda following the staff presentations.  However, before we do, I would like to provide a brief overview.

Today’s Agenda

Reporting and Information Requirements for Derivatives Clearing Organizations

The Commission will first consider the final rule addressing reporting and information requirements for derivatives clearing organizations (DCOs).  As with the proposal, the final rule provides greater transparency, clarity, and certainty to our DCOs and market participants.  It also streamlines how the Commission receives information necessary to carry out its supervisory role.  By periodically updating our regulations, the agency can incorporate our experiences with the industry and market participants directly into our ruleset.  We can also use these opportunities to respond to emerging technologies, issues, and risks with responsive and targeted regulation.  This both creates efficiencies and a level playing field, and provides a forum to address ongoing compliance concerns on each of our respective sides through open dialogue.

I fully support the final rule.  Ensuring our regulations are operating as intended is paramount.  DCOs play a critical role in U.S. derivatives markets.  Any lapse in their duties or even the perception that compliance is nothing more than window dressing puts our markets and the larger financial system at risk, especially when it comes to entities that have been designated as systemically important by the Financial Stability Oversight Council known as “SIDCOs.”

The majority of the proposed Part 39 amendments--with the exception of those addressing system safeguards--will be considered today.  Several amendments, if adopted in the final rule, codify existing staff letters and Commission practices and interpretations with the goal of ensuring that DCOs understand their reporting obligations and the Commission receives the information it needs to perform its supervisory responsibilities in the most effective and least burdensome manner.  For example, if approved, an amendment to Rule 39.19 will codify an existing staff letter[3] providing for no-action relief by removing the requirement that a DCO report daily variation margin and cash flows by individual customer account.  The final rule will also codify existing reporting fields for the daily reporting requirements in new appendix C to Part 39.  Additional amendments will update information requirements associated with commingling customer funds and positions in futures and swaps in the same account.

Acknowledging that different risk profiles require more tailored consideration, if approved, the final rule will adopt specific obligations for fully collateralized positions which specify that certain requirements for risk management, daily reporting, and website publication do not apply to DCOs that clear fully collateralized positions.

To ensure that the Commission maintains unfettered access to data, if approved, an amendment to Part 140 of the Commission rules will delegate to the Director of the Division of Clearing and Risk (DCR) existing authority to require a DCO to provide to the Commission the information specified in Rule 39.19 and any other information that the Commission determines to be necessary to conduct oversight of the DCO, and to specify the format and manner in which the information required must be submitted to the Commission.

Given that what we do as regulators is as important as what we do not do, based on the concerns raised regarding the system safeguards proposals, the Commission will not be voting today to adopt any of the proposed amendments.  This determination does not alter the current landscape or diminish Commission concerns regarding cyber resilience.  However, significant and important concerns and meaningful alternatives raised by commenters require additional consideration and analysis.  The Commission will continue to consider how best to address the issues targeted in the proposed rule while incorporating additional information gained through this rulemaking process and additional examination.

Provisions Common to Registered Entities

The Commission will next consider a proposed rule to amend Part 40 of the Commission regulations.  Part 40 sets forth provisions common to registered entities, including designated contract markets (DCMs), DCOs, swap execution facilities (SEFs), and swap data repositories (SDRs), and establishes requirements and procedures for submitting rules and products, listing products for trading, and accepting products for clearing.  Part 40 has not been amended comprehensively since 2011; the proposal would amend part 40 based on the Commission’s experience applying the Part 40 regulations since 2011, and is intended to clarify and enhance the utility of Part 40.  I support this proposed rule.

At a high level, the proposed amendments would: (1) simplify the determination of whether a registered entity is deemed dormant; (2) edit language to reflect the development and use of the Commission’s online portal for filing of rule and product submissions; (3) reorganize and enhance the utility of rules regarding rule submissions and delegations of authority; and (4) provide meaningful guidance to SIDCOs regarding filing instructions for rules that could materially affect the nature or level of risks presented by the SIDCO.

Swap Confirmation Requirements for Swap Execution Facilities

Next, we will vote to propose amendments to Parts 23 and 37 of the Commission regulations to address longstanding issues with the uncleared swap confirmation requirements under Rule 37.6(b).  During the initial implementation of Part 37, SEFs informed the CFTC that the confirmation requirement for uncleared swaps was operationally and technologically difficult and impractical to implement.  The Division of Market Oversight (DMO) investigated and acknowledged these challenges and provided targeted no-action positions for SEFs with respect to certain provisions of Commission regulations throughout the last decade.[4]  I support this proposal which represents sound judgment and clear consideration of the issues.

As there remains no workable solution that could effectuate the original language of the relevant rule, and the currently applicable staff letter has no explicitly set expiration date, the Commission is proposing to amend Rule 37.6(b) to codify the staff no-action position.  The proposed amendment would enable SEFs to incorporate terms by reference in an uncleared swap confirmation without being required to obtain the underlying, previously negotiated agreements between the counterparties.  A proposed clarification and conforming amendment to Rule 23.501 will clarify the consistent treatment of trades executed away from a SEF or DCM and permit confirmation of all terms of a swap transaction as soon as technologically practicable following execution, as opposed to requiring confirmation “at the same time as execution.”[5]  The simplicity of these latter proposed amendments should not overshadow their practical impact.

Seeded Funds and Money Market Funds

Lastly, the Commission will consider an eligible seeded funds proposal and a money market funds proposal within a notice of proposed rulemaking on margin requirements for uncleared swaps for swap dealers (SDs) and major swap participants (MSPs) for which there is no prudential regulator.  The proposal would amend the CFTC’s margin rule for SDs and MSPs, as promulgated in 2016, to incorporate two recommendations in the 2020 report to the CFTC’s Global Markets Advisory Committee (GMAC) by the Subcommittee on Margin Requirements for Non-Cleared Swaps (the “GMAC Subcommittee Report”).[6]

The seeded funds proposal would revise the definition of “margin affiliate” in Commission Rule 23.151 to provide that certain investment funds that receive all of their start-up capital, or a portion thereof, from a sponsor entity would be deemed not to have any margin affiliates for the purposes of calculating certain thresholds that trigger the requirement to exchange initial margin for uncleared swaps.  This proposed amendment would effectively relieve SDs and MSPs from the requirement to post and collect initial margin with a limited number of eligible seeded funds for their uncleared swaps for a period of three years from the date on which the eligible seeded fund’s asset manager first begins making investments on behalf of the fund.  While today’s proposal builds upon the GMAC subcommittee’s 2020 recommendation, the proposal today also sets forth eight carefully calibrated conditions to ensure that only the investment funds that were intended to be targeted by the GMAC’s recommendations are eligible to qualify for the seeded funds exception.

I support today’s seeded funds proposal as it is consistent with the CFTC’s Margin Rule risk-based approach of imposing margin requirements that are commensurate with the risk of uncleared swaps entered into by SDs and MSPs; is appropriately calibrated to acknowledge the operational challenges for start-up funds; and supports international harmonization as the approach is consistent with the BCBS-IOSCO Framework.

The money market funds proposal would eliminate a current provision that disqualifies certain securities issued by certain money market funds (MMFs) from being used as eligible initial margin collateral.  This would expand the scope of assets that qualify as eligible collateral.  I support today’s MMF proposal as it would remove a restriction that has unintentionally and severely restricted the use of securities of MMF and similar assets that transfer their assets through repurchase and similar arrangements.  According to the GMAC Subcommittee Report, the impact of the restriction was that only securities of four U.S. MMFs would meet the requirements to be used as eligible collateral.[7]

Lastly, the proposal would also add a footnote that was inadvertently omitted for the haircut schedule in Regulation 23.156(a)(3)(i)(B), when the Commission originally promulgated the margin rule in 2016.  With all the proposals, I look forward to receiving public comments.

Closing

Today’s agenda demonstrates the breadth of issues and the regulatory and compliance considerations that Commission registrants navigate daily.  The matters are before us because we have a shared interest with the industry, market participants, and the American public, and we all benefit from our shared experiences over time.

In closing, 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 Eileen Donovan, Parisa Nouri, August Imholtz, Gavin Young, Tad Polley, and Elizabeth Arumilli for their work on the final rule addressing DCO information and reporting requirements.  For their work on the proposed rule addressing provisions common to registered entities, I would like to acknowledge and thank Rachel Kaplan Reicher, Steve Benton, and Nancy Markowitz from the Division of Market Oversight, and Eileen Chotiner from the Division of Clearing and Risk.  For their work on the swap confirmation proposal, I would like acknowledge and thank Roger Smith from the Division of Market Oversight and Stephen Kane and Madison Lau from the Office of the Chief Economist.  And, from the Market Participants Division, for their work on the seeded funds proposal, I would like to acknowledge and thank Amanda Olear, Tom Smith, Warren Gorlick, Liliya Bozhanova, and Rafael Martinez.

I would also like to thank everyone in the Office of the General Counsel, the Office of the Chief Economist, the Office of the Secretariat, and in operations and logistics for ensuring that we stay on course and can welcome the public into our building and join us virtually.  And finally, I would like to thank my dedicated staff: David Gillers, John Dunfee, Abigail Knauff, Alicia Lewis, Laura Gardy, and David Felsenthal.