I support the Commodity Futures Trading Commission’s (CFTC) issuance of the Notice of Proposed Amendments to Reporting and Information Requirements for Derivatives Clearing Organizations (Notice).  Across the diverse commodity and derivatives markets subject to CFTC oversight and in nascent markets where the CFTC’s visibility and enforcement authority may be limited, recent events demonstrate the need to adopt, implement, enforce, and continuously refine CFTC rules and regulations to foster fair, orderly, and transparent markets, to ensure effective protection of customer assets and to preserve market integrity.  These efforts are critical to fulfilling our mandate.

The proposed amendments advance greater transparency, facilitate better supervision, and ensure that rules are fit for purpose.  I thank the staff of the Division of Clearing and Risk (Division) for efforts taken to update derivatives clearing organization (DCO) information and reporting requirements.

Even as we prepare to enhance information and reporting requirements, we cannot rest on our laurels.  As noted, recent events underscore the significant value of these requirements imposed on DCOs.  We must thoroughly interrogate attempts by actors seeking to enter our markets under the guise of complying with our regulations only to reveal intentions to engage in various forms of regulatory arbitrage or worse, defrauding customers and destabilizing our markets.

Refining Risk Management Information and Reporting Requirements

Adopted in the wake of the global financial crisis that began in 2007, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), implemented reforms to mitigate systemic financial risk and promote financial stability and transparency.[1]  The market structure, governance, and oversight reforms introduced by the Dodd-Frank Act support centralized clearing of bilateral over the counter swaps transactions in an effort to “foster greater efficiencies” across derivatives markets.[2]  Building on existing regulatory principles previously implemented under the Commodity Exchange Act, the Dodd-Frank Act significantly strengthened the CFTC’s authority to adopt, implement, and enforce regulations governing DCOs.

Payment, clearing, and settlement systems serve a central role in financial market infrastructure.  DCOs clear and settle trillions of dollars in transactions each year in global financial markets. Each DCO interposes itself into each contract presented for clearing and settlement, meaning that the DCO serves as the economic counterparty to each party in a transaction for each contract that it clears and settles.  This novation mutualizes risk, enables greater visibility into the risk exposure of market participants and DCOs, introduces uniform contractual obligations, and establishes standards for initial and variation margin.

The Commission, clearing members, and clearing service providers engage in a regulatory dialogue to ensure DCOs and clearing members maintain minimum liquidity reserves, introduce critical system safeguards including cyber-risk management measures, and implement governance measures that mitigate conflicts of interest, among other concerns.  In the years following passage of the Dodd-Frank Act the CFTC issued a number of rules to implement core regulatory principles, including rules relating to treatment of funds (Core Principle F), system safeguards (Core Principle I), reporting (Core Principle J), and the public availability of information (Core Principle L).[3]

In January 2020, the Commission amended many of the provisions in part 39 in order to enhance certain risk management and reporting obligations, clarify the meaning of certain provisions, and streamline registration and reporting.[4]  The proposed rulemaking updates these rules to reflect developments in risk management and in the Commission’s understanding of what information is most helpful in carrying out its oversight mission.

I commend staff for beginning to review current regulations and their interplay with potential disintermediated clearing and settlement frameworks.  While this proposal is a laudable first step, there is much more work to be accomplished.

Reflecting on the risk management oversight role and purpose of DCOs, it is critical that we correctly calibrate information and reporting requirements.  This responsibility is heightened in the context of our consideration of proposals that allow DCOs to offer direct clearing to retail customers.  Direct clearing models may remove intermediaries who are subject to capital, risk management, and recovery and resilience requirements. Expansion of clearing to new asset classes, such as digital assets, also raises potential new stresses on traditional and alternative clearing models. It is important that the Commission properly tailor information and reporting in a manner that will enhance CFTC market surveillance, supervision and oversight.  For a few issues raised in the Notice, the Commission may benefit from forward-looking comments that consider alterative market structures.

Segregation of Customer Funds Information and Reporting Requirements

Commission regulation 39.15 implements DCO Core Principle F and requires DCOs to establish standards and procedures for protecting and ensuring the safety of clearing member and customer funds.  Core Principle F, as amended by the Dodd-Frank Act, requires a DCO to establish standards and procedures that are designed to protect and to ensure the safety of funds and assets held in custody, to hold such funds and assets in a way designed to minimize risk, and to limit investment of such funds and assets to instruments with minimal credit, market, and liquidity risks.[5]

Segregation and safekeeping of clearing member and customer funds and assets is critical to ensuring that a DCO in fact serves the risk mitigating function for which it is intended; if these funds and assets are not optimally protected it can compromise the stability of the DCO and result in substantial losses to clearing members and ultimately customers, with accompanying destabilization of the markets.  The proposed amendments to Regulation 39.15 aim to better tailor the information that DCOs distribute to the CFTC in response to requests for combining swaps and futures positions and the assets that support their trading in a single account.  I support these proposed amendments because they are carefully designed to facilitate activity that will improve DCO risk management practices.[6]

Liquidity Reserves Reporting and Information Requirements

Most timely in light of recent events, the Notice proposes a package of liquidity-related transparency amendments revising the rules implementing Core Principle J.[7]  Prudent risk management, and particularly the management of liquidity needs, is critical to DCO resilience.  Macroeconomic conditions today are marked by persistent inflation and periods of sustained volatility.  Prevailing market conditions are characterized by extreme volatility and positively correlated assets that amplify the risk of contagion, creating a perfect storm for unanticipated liquidity demands.  Collectively, the proposed transparency amendments, which trigger reporting of changes to credit and liquidity facilities, and the financial health of the entities that offer them, should significantly improve the Commission’s risk surveillance of DCOs and clearing members. I fully support these transparency provisions.  They add value to the core principles we uphold—the protection of customers and the integrity of the financial markets that we regulate.

Cyber-Risk and Systems Safeguard Reporting and Information Requirements

The proposed rulemaking also amends the regulations implementing Core Principle I to increase the reporting of DCO automated system impairments, including impairments concerning third-party provided services.[8]  We live in a digital age that is dependent on technology and the systems and software that comprise it.  The Notice proposes amendments to regulation 39.18(g)(1) to require that a DCO promptly notify the Division of any hardware or software malfunction or operator error that impairs, or creates a significant likelihood of impairment of, automated system operation, reliability, security, or capacity.  The Notice also proposes to adopt new regulation 39.18(g)(2) that requires a DCO to promptly notify the Division of any security incident or threat that compromises or could compromise the confidentiality, availability, or integrity of an automated system or any information, services, or data relied upon by them in discharging their responsibilities.  This information is essential to the Commission’s ability to monitor registrants for operational safety and soundness and to consider the implications of events that threaten the integrity of systemically important DCOs (SIDCOs).

While I appreciate that new reporting obligations will require adjustments, these important reforms represent a refined, more carefully tailored reporting regime that seeks to achieve the goals outlined in the Dodd-Frank Act.  I, therefore, support the Commission’s issuance of the Notice of Proposed Rulemaking on DCO Reporting Requirements.  I also very much welcome stakeholder comments as to whether the proposed amendments are sufficient to accomplish the stated purpose, or whether additional information would further assist the CFTC in carrying out its mission.