The Fall 2022 regulatory agenda (the Agenda) of the Commodity Futures Trading Commission (CFTC or Commission) was recently published as part of the government-wide Unified Agenda of Federal Regulatory and Deregulatory Actions (Unified Agenda).[1]  These semiannual submissions set out the CFTC’s Agenda of rulemaking matters that it expects to propose or finalize over the next year.

I do not object to the rulemaking matters that are listed in the CFTC’s Agenda.  However, I am deeply troubled by the Agenda’s:

• Withdrawal of two important rule proposals based on recommendations from a CFTC Global Markets Advisory Committee (GMAC)  report prepared by its Subcommittee on Margin Requirements for Non-Cleared Swaps (GMAC Report);[2] and
• Omission of proposals to amend several rules that our experience has demonstrated are unworkable, ambiguous, and/or inefficient, and which have therefore been the subject of never-ending staff no-action relief or other workarounds because the Commission has failed to address these issues by rulemaking. 

Tailoring the Uncleared Margin Rules to the Challenges Faced by Financial End-Users

The comprehensive GMAC Report made several recommendations to the Commission to tailor the CFTC’s uncleared margin rules to account for the very real practical and operational challenges arising when they are applied to financial end-users that have only recently come into scope of those rules (such as pension plans, endowments, insurance providers, and mortgage service providers).  The Commission promptly—and unanimously—implemented four of the GMAC Report’s recommendations.[3]

The Commission then included a proposed rulemaking to implement two more of these recommendations in its regulatory agenda that was published last Spring.  This rulemaking would have proposed:

• Revising the definition of a margin affiliate to prevent triggering the requirement to exchange initial margin with certain eligible seeded investment funds for a limited, three-year period; and
• Eliminating a provision disqualifying securities in certain money market funds from being used as eligible initial margin collateral.[4]

But abruptly, and without offering any explanation, the Commission has now withdrawn this proposed rulemaking from the Agenda[5]—notwithstanding that agency staff has already devoted significant time and resources to developing it.

The reason this is important is that our uncleared margin rules, like the Framework of the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions (BCBS/IOSCO) on which they are based,[6] were designed to ensure the exchange of margin between the largest, most systemic and interconnected financial institutions for their uncleared swap transactions with one another.  These transactions became subject to the margin rules several years ago.

Thoughtful consideration is now necessary as to whether the margin rules should appropriately be tailored to account for the unique, practical challenges posed by the exchange of margin when one of the counterparties is a financial end-user instead.

The proposals in question would harmonize our margin requirements with the way these issues are handled by our international colleagues in other major market jurisdictions, which would enhance compliance and coordinated regulatory oversight.  In the Dodd-Frank Act, Congress specifically directed the Commission, “[i]n order to promote effective and consistent global regulation of swaps,” to “consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation . . . of swaps [and] swap entities . . .”[7] 

Congress thus recognized that because modern swap markets are not bound by jurisdictional borders, they cannot function absent consistent international standards.  Fragmented regulation can hinder compliance with margin requirements, encourage regulatory arbitrage, and undermine the resilience of global derivatives markets.  Harmonization, on the other hand, fosters both improved compliance and effectively regulated markets—which must always be our goals.

To be clear, these recommendations from the GMAC Report would not “roll back” the Commission’s uncleared margin requirements that apply to the largest financial institutions for their swap transactions with one another.  Rather, they reflect thoughtful proposals to refine our rules to align them with those of the international regulatory community, and to take into account specific circumstances in which our rules impose substantial operational challenges when applied to other market participants that have recently come within the scope of their mandates.

Of course, the members of the Commission ultimately will determine whether to adopt these recommendations.  But to refuse, with no explanation, to even put them out as proposals for public comment:

• Wastes taxpayer dollars because CFTC staff has already devoted significant resources to preparing a draft notice of proposed rulemaking regarding these two recommendations;
• Ignores the value added to the CFTC’s policymaking by our Advisory Committees, the very purpose of which is for market participants and other interested parties, as they did here, to come together and provide us with their perspectives and potential solutions to practical problems;
• Disregards the extraordinarily hard work (at the start of the pandemic, no less) of GMAC members, and especially members of its Margin Subcommittee, to provide us with a high-quality report on complex margin issues and to reach consensus on these recommendations; and
• Runs directly counter to the Commission’s stated Core Value of transparency to market participants about our rules and processes.[8]

“Kicking the Can Down the Road” Rather than Working on Rulemaking Solutions

During my nine-month tenure as a Commissioner at the CFTC, I have publicly commented on multiple instances in which the Commission and our staff have had to twist ourselves into knots dealing with the fallout of the Commission’s failure to address unworkable, ambiguous, or inefficient rules.[9]

One of the clearest examples of an unworkable rule is Rule 37.6(b)—because the Commission conceded as much over four years ago.  Rule 37.6(b) requires that a swap execution facility (SEF) provide each counterparty with a confirmation of the transaction.[10]  When it adopted this rule, the Commission explained that, for uncleared swaps, SEFs could satisfy the written confirmation requirement by incorporating by reference terms in agreements previously negotiated by the counterparties, provided that such agreements were submitted to the SEF ahead of execution.[11]

Subsequently, however, the Commission recognized that the proviso that a SEF must obtain such documentation from the parties to an uncleared swap ahead of execution simply was not workable.  It stated that the proviso—

has created impractical burdens for SEFs.  Based upon feedback from SEFs, the Commission understands that SEFs have encountered many issues in trying to . . . collect and maintain bilateral transaction agreements from many individual counterparties.  SEFs have stated that they are unable to develop a cost-effective method to request, accept, and maintain a library of every previous agreement between counterparties.  SEFs have also noted that the potential number of previous agreements is considerable, given that SEF counterparties enter into agreements with many other parties and have multiple agreements for different asset classes.[12]

Despite the Commission’s awareness of this defect, it has not amended Rule 37.6(b) to fix the problem.  This has forced our staff to issue four no-action letters providing relief from this SEF confirmation requirement, the last of which was issued in 2017.[13]  Further, when the Commission has granted SEF registrations,[14] it has had to include in its registration orders an extended discussion about the single issue of swap confirmations in order to ensure a level playing field by requiring new SEFs to comply with the same conditions that currently-registered SEFs must comply with in order to rely on the staff no-action relief.[15]

Other recent instances of continuing reliance on successive no-action letters abound, due to years of Commission inaction in the exercise of its rulemaking responsibilities.  For example:  1) seven no-action letters over eight years with respect to the execution of package transactions where at least one individual swap component is subject to the trade execution requirement, and all other components are futures contracts; and 2) five no-action letters over six years regarding certain swap reporting obligations.[16] 

To be sure, staff no-action letters are useful tools in appropriate circumstances, allowing the CFTC to remain flexible.  But when one of our rules needs to be fixed because it is unworkable, ambiguous, or inefficient, corrective action by notice-and-comment rulemaking is the gold standard because it allows the Commission to hear from stakeholders and develop regulatory solutions that provide certainty. 

Excessive reliance on staff no-action relief also undermines the Commission’s ability to achieve its mission.  First, it diverts resources (both staff and funding) away from core agency responsibilities and into the processing of multiple requests for no-action relief simply to maintain the status quo.  Second, no-action relief, by definition, is relief from enforcement.  It is an acknowledgement that unworkable or unclear rules can neither be complied with by market participants, nor justly enforced by the Commission.  Only by adopting realistic rules that clearly define our expectations can we then hold those who violate those rules accountable.

Thus, it is disappointing that the CFTC’s Agenda does not include notice-and-comment rulemakings to craft long-term solutions to the known problems identified above.  The omission of these issues from the Agenda indicates that, far from making the fixing of these rules a top priority, the Commission’s failure to act on them will continue for the foreseeable future.

Solving these important issues is our job; failing to address them is a dereliction of our duty.  The inaction reflected in the Agenda is unfair to market participants – and it also undermines the integrity of the Commission’s regulatory framework.  We can and should do better.

Conclusion

Public policy is shaped not just by what an agency does, but also by what it does not do.  I urge the Commission to exercise the leadership that is expected of us by proposing:  1) the margin rule amendments regarding seeded investment funds and money market funds recommended in the GMAC Report; and 2) rule amendments to fix unworkable, ambiguous, and inefficient rules that interfere with the effective regulation of the U.S. derivatives markets.