Good morning, and thank you to everyone who is joining today’s Open Meeting here at the Commodity Futures Trading Commission (CFTC) conference room and those joining us remotely.  Open public meetings are critical to the notice and comment rulemaking process, and the more members of the public we can reach, the better the process.  Transparency in the regulatory process is a Core Value at the CFTC,[1] and is foundational to good governance.

It has been almost seven months since we have held a public meeting at the CFTC, and I think you will see this reflected in the ambitious agenda before us today.  The matters before us are the result of months, if not years, of focus and hard work from CFTC staff.  In some instances, they are also the result of decades of experience and commitment to the regulatory work of the agency.  We are incredibly fortunate to have this level of expertise and dedication from our agency staff.

In addition to recognizing the incredible efforts from our staff in bringing forward today’s ambitious agenda, I also want to recognize the leadership of Chairman Behnam in steering these efforts toward consideration today.  I think everyone on this dais will agree that the Chairman has the difficult job of navigating this particular ship through largely unchartered waters, and often in extreme weather conditions.

Today’s agenda covers a lot of ground, with a number of items taking the first steps toward reaching important outcomes.  Indeed, the proposed European Union (EU) Nonbank Swap Dealer Capital Comparability Determination is an example of an important step in implementing the decision the Commission made years ago to recognize comparable regulatory frameworks related to capital requirements for non-bank swap dealers in foreign jurisdictions.  The proposed EU Nonbank Swap Dealer Capital Comparability Determination is critical to ensuring the global swap markets we regulate do not become fragmented due to regulatory overlap.

The Governance Requirements for Derivatives Clearing Organizations final rule before us today is an example of how regulators should interact with industry and other stakeholders to address concerns through sound regulation.  These rules have their origins in a report from the CFTC’s Market Risk Advisory Committee subcommittee under Chairman Behnam’s sponsorship.  This report was the result of collaboration, and a lot of compromise, by those in the industry, and I believe the resulting rules will offer additional risk protections to our clearinghouses here in the United States. 

The Amendments to Part 17 Large Trader Reporting Requirements Proposed Rule before us today will help the agency better utilize large trader data reporting.  This proposal will remove references to outdated computer codes and will streamline the process—improving the data reporting experience for those providing data to the agency, and allowing the agency to better manage the incoming data.  These data streams are critical to the agency’s popular Commitments of Traders weekly report, which has been a labor and time-intensive task for our staff for far longer than should have been the case given the many technological improvements since that report was first published in 1986.  I do hope that we receive robust and useful comments from those in the industry so we can ensure that any final rule is narrowly tailored to prevent over-collection of data by this agency.

While I am pleased to see the ambitious agenda before us, that does not mean that I support everything on today’s list.  The Derivatives Clearing Organizations Recovery and Orderly Wind-Down Plans proposal before us today is a classic example of “government knows best” and the antithesis of the CFTC’s regulatory foundation based on core principles versus iterative, bespoke, prescriptive rules.  I understand the desire to address clearinghouse recovery and wind-down planning, and normally I would applaud efforts to move from what is now staff advice to regulatory text.  However, here we have a staff advisory that I believe went too far, and a proposed rule that goes even further.  Unfortunately, I cannot support this proposal in its current form.

But I do not want my criticism of this proposal to detract in any way from my high opinion and even higher regard for the staff in the Division of Clearing and Risk who were responsible for drafting this proposal.  I may not be able to support the policy before us today, but I will always be a cheerleader for this team.

Statement of Commissioner Summer K. Mersinger Regarding Governance Requirements for Derivatives Clearing Organizations

When the Commission voted last summer, at my first Open Meeting as a Commissioner, to propose regulations regarding governance requirements for derivatives clearing organizations (DCOs), I commented that one of the special characteristics of the CFTC is the level of engagement and expertise of its advisory committees, through which market participants and other interested parties come together to provide us with their perspectives and potential solutions to practical problems.[2]  I am pleased that we are today considering a final rule that leverages recommendations contained in a report from the Market Risk Advisory Committee’s (MRAC) Central Counterparty Risk and Governance Subcommittee (Subcommittee), which was adopted by the MRAC in February 2021.[3]  That report recommended that CFTC regulations be amended to require DCOs to establish risk management committees (RMCs) and risk advisory working groups (RWGs).

The Core Principles in the Commodity Exchange Act (CEA) provide that a DCO must have governance arrangements that are transparent in order both to fulfill public interest requirements and to permit the consideration of the views of owners and participants.[4]  CFTC regulations implementing this Core Principle set forth more detailed requirements regarding the form and substance of a DCO’s governance arrangements.[5]  Today, we are voting to enhance these regulations by requiring a DCO to establish one or more RMCs and one or more RWGs.

After benefitting from the hard work of the Subcommittee, the Commission benefitted tremendously from the thoughtful comment letters we received in response to last summer’s proposal.  Today’s final rule contains several important changes and clarifications to the proposal, resulting in an improved work product that establishes specific thresholds and requirements, where appropriate, but also recognizes—consistent with the CEA’s principles-based regulatory framework—that each DCO is unique and that flexibility is necessary.

I again thank the members of the Subcommittee and the members of the MRAC for their work on these issues.  Thank you to all of the commenters for their thoughtful engagement on the proposal.  And, most especially, thank you to the staff of the Division and Clearing and Risk for their hard work on this rule, including their responsiveness to commenters and CFTC Commissioners alike.

Dissenting Statement of Commissioner Summer K. Mersinger Regarding Proposed Rule Amendments Addressing Derivatives Clearing Organizations’ Recovery and Orderly Wind-Down Plans and Resolution Planning

I cannot support the proposed amendments to Part 39 of the Commodity Futures Trading Commission’s[6] regulations before us today.  The proposed amendments would: (1) make substantial changes to the current recovery and orderly wind-down plan regulations applicable to systemically important derivatives clearing organizations (SIDCOs) and Subpart C derivatives clearing organizations (Subpart C DCOs)[7]; (2) require for the first time that all other CFTC-registered derivatives clearing organizations (DCOs) have orderly wind-down plans; (3) revise the CFTC’s bankruptcy regulations that the CFTC just recently amended to now require a bankruptcy trustee to act in accordance with a DCO’s recovery and orderly wind-down plans; and (4) require SIDCOs and Subpart C DCOs to provide copious amounts of information to the Federal Deposit Insurance Corporation (FDIC) through the CFTC for the purpose of planning the potential resolution of the entity (the Proposal).

To be clear, in considering the Proposal, the Commission is not debating whether SIDCOs and Subpart C DCOs should be required to engage in thoughtful planning for recovery and orderly wind-down.  That has already been decided.[8]  They are required to do so.[9]  In fact, they have been required to do so since December 2013.[10]

Instead, through a set of prescriptive requirements, the Proposal takes a “government knows best” approach to recovery and orderly wind-down plans and the events that might trigger them.  Furthermore, the Proposal’s obligation to have an orderly wind-down plan, and many of the Commission’s prescriptive directives attendant thereto, would extend to all DCOs, not just the SIDCOs and Subpart C DCOs that tend to be the largest and most complex derivatives clearinghouses.

Ignoring the Work of SIDCOs and Subpart C DCOs Over the Past Decade

Over the past decade, SIDCOs and Subpart C DCOs have spent considerable time and resources developing viable plans for recovery and orderly wind-down.  Adoption of those plans was not a one-time event, and those plans have not been allowed to grow stale.  Indeed, current CFTC regulations require SIDCOs and Subpart C DCOs to maintain those plans.[11] 

In accordance with Commission regulations, SIDCOs and Subpart C DCOs have been revising and updating those plans and taking steps to develop their strategies and tools, including adopting changes to their rulebooks that explicitly set forth tools they would use and when they would use them.  Furthermore, the CFTC has engaged with SIDCOs and Subpart C DCOs on the contents of those plans and associated rules, including through approving rule changes and conducting examinations. 

The Proposal would make significant changes to the CFTC’s current regulations addressing recovery and orderly wind-down plans.  With respect to SIDCOs and Subpart C DCOs, I do not believe that the benefits of the rule changes in this Proposal outweigh the costs of implementing them.  Worse, I believe that the Proposal’s prescriptive requirements would undermine the ability of SIDCOs and Subpart C DCOs to manage risks during business as usual and appropriately plan for recovery and orderly wind-down.

The Proposal is Too Prescriptive

I am further concerned that the Proposal would require every DCO to consider as a potential trigger for recovery or orderly wind-down, as applicable,[12] a scenario that some DCOs might be able to manage during business as usual—a much preferred outcome in my opinion.  This is not just a difference of semantics.  The distinction between whether a DCO can manage a specific factual circumstance during business as usual or whether that fact pattern would trigger recovery or orderly wind-down has significant financial and governance implications.

In fact, if the CFTC requires a DCO to have tools and resources in its recovery plan to address a scenario that the DCO has determined it can manage during business as usual, then those resources and tools are required to be set aside for recovery and, by definition, are not available to manage the situation during business as usual.  Not only is that inefficient and counterproductive, it undermines the focus on the DCO’s risk management during business as usual.  It is the DCO, not the Commission, that is in the best position to determine what risks it can manage during business as usual, and what risks would trigger use of its recovery plan and/or orderly wind-down plan, and to allocate its resources accordingly.

Furthermore, the Proposal would require recovery and orderly wind-down plans to consider a potentially limitless set of scenarios.  The Proposal states, “The [DCO’s] recovery plan scenarios should also address the default risks and non-default risks to which the [DCO] is exposed.”  While the preamble spends a significant amount of time pontificating on a variety of risk-inducing scenarios, the Proposal does not define the terms “default risks” or “non-default risks” that are used in the rule text, and the requirement contains no limiting language.  Without clear definitions or limitations, this phrase requires a DCO to consider every risk to which it might possibly be exposed in its recovery and orderly wind-down plans.

The Proposal goes on to require each SIDCO and Subpart C DCO to “identify scenarios that may prevent it from meeting its obligations or providing its critical services as a going concern”[13] (emphasis added) in its recovery and orderly wind-down plans.  I am concerned that this extremely low threshold could capture anything—and everything.

As if considering the aforementioned “risks” and “scenarios” were not enough, the Proposal requires a SIDCO’s or Subpart C DCO’s recovery plan to “establish the criteria that may trigger implementation or consideration of implementation of that plan,” and its orderly wind-down plan to “establish the criteria that may trigger consideration of implementation of that plan.”  I am not sure there is a clear distinction between “risks,” “scenarios,” and “triggers” in the Proposal.   

A Faulty Premise and Unnecessary Requirements for All DCOs

Based on the Proposal’s definition of “orderly wind-down,”[14] one purpose of having an orderly wind-down plan is to effect the permanent cessation of one or more of a DCO’s critical operations or services in a manner that would not increase the risk of significant liquidity, credit, or operational problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.  We already have such a process—the bankruptcy of a DCO pursuant to chapter 7 of the U.S. Bankruptcy Code and Part 190 of the Commission’s regulations.

Indeed, the Commission engaged in an extensive effort just a few years ago to update Part 190 of the Commission’s regulations so that they specifically address the bankruptcy of a DCO.[15]  By imposing on every DCO costly and burdensome requirements designed to prevent the DCO from ever going through the bankruptcy process, or to control that process by attempting to tell a bankruptcy trustee that it must follow the DCO’s orderly wind-down plan, the Proposal assumes that bankruptcy proceedings are so fraught with the peril of disorder that any DCO going through bankruptcy pursuant to chapter 7 of the U.S. Bankruptcy Code and Part 190 of the Commission’s regulations would threaten the stability of the U.S. financial system.

I question the fundamental premise of the Proposal that every DCO offers one or more services that is so critical that the sale, transfer, or permanent cessation of that service would threaten the stability of the U.S. financial system, thereby justifying the requirement that every DCO develop an orderly wind-down plan to avoid that.  The preamble of the Proposal acknowledges that “the failure of [a DCO that is neither a SIDCO nor a Subpart C DCO] is much less likely to have ‘serious adverse effects on financial stability in the United States,’” and states that, as a result of that conclusion, “the Commission is not proposing to require these DCOs to maintain recovery plans.”  And yet, the Proposal would require those DCOs to expend significant time and resources to maintain and submit to the Commission a plan to “effect the permanent cessation, sale, or transfer, of one or more of its critical operations or services, in a manner that would not increase the risk of significant liquidity, credit, or operational problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.”

Just as I do not believe that it is necessary for every DCO to have an orderly wind-down plan, I certainly do not see the purpose of a DCO applicant submitting an orderly wind-down plan to the CFTC as part of its application for registration as a DCO.  Not only does a DCO applicant lack a magic ball to foresee its future level of success, the applicant might not even be approved by the Commission.  We are asking applicants to plan for going-out-of-business before they even have permission to go into business.

Unbridled Access to Information

I also am very concerned by the unbridled scope of information the Commission could demand from SIDCOs and Subpart C DCOs under the Proposal with the goal of the Commission providing said information to the FDIC for purposes of resolution planning.  As the primary regulator of SIDCOs and Subpart C DCOs, the CFTC can already request and receive information necessary to appropriately oversee these entities.[16]   Additionally, pursuant to CFTC Regulation 39.39(c)(2), each SIDCO and Subpart C DCO already must have “procedures for providing the Commission and the [FDIC] with information needed for purposes of resolution planning.”[17]

The Proposal would specify six types of information that each SIDCO and Subpart C DCO would be required to provide upon request.  It then includes an all-encompassing catch-all category of “any other information deemed appropriate to plan for resolution under Title II of the Dodd-Frank Act.”  I do not support giving a government regulator, let alone two federal regulators, unlimited access to information, especially when that information is being collected for the purpose of providing it to a federal regulator that is not the entity’s primary regulator.  I am unmoved, and certainly not comforted, by the assertion that someone (though it is unclear who) must “deem the information appropriate” before it is requested by the CFTC or shared with the FDIC.

What’s more, in light of today’s cybersecurity risks, government agencies must take care in determining what information they collect and store.  We must only collect information we need to do our job as regulators, not information we may want at some point for some event that may or may not materialize.

Conclusion

I have great respect for the Commission’s long history of implementing principles-based regulation and allowing our regulated entities the flexibility to build the appropriate policies and procedures—best suited for their unique business—to satisfy those principles.  Unfortunately, this Proposal supplants prescriptions for principles and regulatory constraints for flexibility.

Statement by Commissioner Summer K. Mersinger Regarding Amendments to Part 17 Large Trader Reporting Requirements Proposed Rule

I believe that it is incumbent upon the CFTC, like any regulatory agency, to continually review its rule set to evaluate whether rules are achieving their objectives, or can be improved based on experience over time, or need to be updated because they have simply failed to keep up with the times.  It is that last category that applies to the large trader position reporting rules for futures and options in Part 17 of the CFTC’s regulations.

The large trader reporting rules are critical for the CFTC’s market surveillance program, and also for enabling the CFTC to generate its Commitments of Traders Report, which is heavily relied upon by members of the public.  And yet, astonishingly, the rule that sets forth the submission standard and data fields to be used in large trader reports has been in place since 1986, and has remained largely unchanged during the past two decades.

Any rule that outdated is a prime candidate for us to review.  But this is particularly true of reporting rules, where the technology available to market participants to report required information to the CFTC has grown by leaps and bounds.

It is time for the CFTC to—

• Modernize its large trader position reporting rules;
• Enhance their flexibility so that they can accommodate future innovations in the marketplace and advancements in technology, rather than being static and stuck in time; and
• Align them with the agency’s other reporting rules.

The proposal before us today would do just that, and I am pleased to support issuing it for public comment.  But I do want to acknowledge that, as part of this update, we are proposing to require the reporting of certain additional data elements that are not currently required to be reported under the rules as they exist today.

As with any reporting rule, the question we should be asking is not what data we might like to have, but what data we need to do our job as regulators.  This is always a vital concern, but even more so in this day and age given the prevalence of cybersecurity concerns.  Now more than ever, we must consider the necessity for collecting the data we are receiving and storing, especially in light of the burden being imposed on those who must provide it.

I therefore appreciate the staff accommodating my request to include questions specifically asking for comment on the necessity of the new data elements we are proposing to require, and the cost and burden of reporting those data elements.  And I also want to thank the staff more generally for the hard work, commitment, and expertise that they have brought to this important rulemaking.

Statement of Commissioner Summer K. Mersinger Regarding a Proposed Comparability Determination Applicable to Certain Nonbank Swap Dealers Subject to Capital and Financial Reporting Requirements of the European Union

I am pleased that today we are considering, for the third time in the past year, a proposed order and request for comment on an application for a swap dealer capital and financial reporting comparability determination.  Having previously considered the laws applicable to CFTC-registered nonbank swap dealers in Japan and Mexico, we are now considering the laws and regulations of the European Union that are applicable to CFTC-registered nonbank swap dealers organized and domiciled in the French Republic and Federal Republic of Germany.

I will reiterate today what I said when we considered each of the prior proposed orders and requests for comment:  Our markets are global, and international coordination and mutual recognition of comprehensive, comparable home-country regulation are essential.  When the G-20 leaders met in Pittsburgh in 2009 in response to the financial crisis, they recognized the global nature of the derivatives markets and explicitly committed to taking action to raise standards together so that national authorities would implement global standards consistently in a way that would ensure a level playing field and avoid fragmentation of markets, protectionism, and regulatory arbitrage.[18]  The U.S. Congress memorialized these commitments throughout the Dodd-Frank Act,[19] and the CFTC has implemented a regulatory framework that respects these commitments.

In accordance with CFTC regulations, the Institute of International Bankers, International Swaps and Derivatives Association, and Securities Industry and Financial Markets Association have submitted an application requesting that the CFTC determine that the capital and financial reporting laws and regulations of the European Union applicable to CFTC-registered nonbank swap dealers organized and domiciled in the French Republic and Federal Republic of Germany are comparable to the corresponding CFTC regulations.

The proposed order we are considering today reflects countless hours of work by staff in our Market Participants Division (MPD).  Thank you to the MPD staff for their time and attention to this complex and labor-intensive analysis.  I appreciate all that you have done and continue to do on this and other swap dealer capital and financial reporting comparability determinations.

[1] CFTC Core Value, Clarity, available at https://www.cftc.gov/About/AboutTheCommission.

[2] Statement of Commissioner Summer K. Mersinger Regarding CFTC Open Meeting on July 27, 2022, available here (July 27, 2022).

[3] MRAC CCP Risk and Governance Subcommittee, Recommendations on CCP Governance and Summary of Subcommittee Constituent Perspectives, available here (Feb. 23, 2021).

[4] CEA Section 5b(c)(2)(O)(i), 7 U.S.C. § 7a-1(c)(2)(O)(i).

[5] See CFTC Rule 39.24, 17 C.F.R. § 39.24.

[6] This statement uses the terms CFTC or Commission to refer to the Commodity Futures Trading Commission.

[7] As used herein, the term Subpart C DCO refers to a derivatives clearing organization that elects to be subject to the provisions in Subpart C of Part 39 of the Commission’s regulations.

[8] See Derivatives Clearing Organizations and International Standards, 78 Fed. Reg. 72476 (Dec. 2, 2013).

[9] CFTC Rule 39.39(b), 17 C.F.R. § 39.39(b) (“Each [SIDCO] and [Subpart C DCO] shall maintain viable plans for: (1) recovery or orderly wind-down, necessitated by uncovered credit losses or liquidity shortfalls; and, separately, (2) recovery or orderly wind-down necessitated by general business risk, operational risk, or any other risk that threatens the [DCO’s] viability as a going concern.”).

[10] See 78 Fed. Reg. at 72476 (stating “the rule is effective December 31, 2013”).  However, the Commission may, upon request, grant a SIDCO or a Subpart C DCO up to one year to comply with any provision of CFTC regulations 39.39 or 39.35.  See CFTC Rule 39.39(f), 17 C.F.R. § 39.39(f).

[11] CFTC Rule 39.39(b), 17 C.F.R. § 39.39(b).

[12] The Proposal would require all DCOs to have orderly wind-down plans, and only SIDCOs and Subpart C DCOs to have recovery plans.

[13] The Proposal uses the term “critical services” with respect to recovery scenarios and the term “critical operations and services” with respect to orderly wind-down scenarios.

[14] The Proposal defines “orderly wind-down” as “the actions of a derivatives clearing organization to effect the permanent cessation, sale, or transfer, of one or more of its critical operations or services, in a manner that would not increase the risk of significant liquidity, credit, or operational problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.”

[15] See Part 190 Bankruptcy Regulations, 86 Fed. Reg. 19324, 19325 (Apr. 13, 2021) (stating that one of the “major themes in the revisions to part 190” is that “[t]he Commission is promulgating a new subpart C to part 190, governing the bankruptcy of a clearing organization.  In doing so, the Commission is establishing ex ante the approach to be taken in addressing such a bankruptcy, in order to foster prompt action in the event such a bankruptcy occurs, and in order to establish a more clear counterfactual (i.e., ‘what would creditors receive in a liquidation in bankruptcy?’) in the event of a resolution of a clearing organization pursuant to Title II of Dodd-Frank.”) (footnote omitted).

[16] The preamble to the Proposal notes that “Under Core Principle J, the Commission may request any information from a DCO that the Commission determines to be necessary to conduct oversight of the DCO” and concedes that its aim is to obtain and provide to the FDIC “certain information for resolution planning that goes beyond the information usually obtained during business as usual under the Core Principles and associated Part 39 regulations.”

[17] CFTC Rule 39.39(c)(2), 17 C.F.R. § 39.39(c)(2)

[18] See Leaders’ Statement from the 2009 G-20 Summit in Pittsburgh, Pa. at 7 (Sept. 24-25, 2009) (“We are committed to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage”), available here.

[19] Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203, 124 Stat. 1376 (2010).