It is hard to describe how humbling it is to sit on the dais at the Commodity Futures Trading Commission (CFTC or Commission) today among this distinguished group and where many extraordinary individuals have sat before us.  When I first walked into this room three years ago and witnessed the collegial debate and deliberation that occurred on this dais during Open Meetings, I honestly did not imagine that one day my name would be on this placard and I would occupy this seat.  But we do not always know the destination when we first step onto a new path.  There are four wonderful individuals seated up here with me whom I have had the good fortune to get to know along this path, as well as the dedicated CFTC staff, including the teams we will hear from today.

The items we are considering today reflect some of the greatest attributes of the CFTC: the diligent work of our staff, the willingness of our market participants to share their expertise and provide recommendations, and the CFTC’s coordination with – and respect for – our regulatory counterparts in other jurisdictions.

Governance Requirements for Derivatives Clearing Organizations

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.  I have witnessed this through my prior role as the Designated Federal Officer of the Agricultural Advisory Committee, my support of former Commissioner Stump’s sponsorship of the Global Markets Advisory Committee, and the numerous advisory committee meetings that I have attended over the past few years.

Today’s proposed derivatives clearing organization (DCO) governance regulations were born out of 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.[1]  I thank the members of the Subcommittee for the thorough and extensive work they did in preparing that report and the recommendations contained therein, and I thank the members of the MRAC for their consideration of that report.  Additionally, I want to offer sincere thanks to the Chairman for his leadership as the sponsor of the MRAC.  The accomplishments stemming from the diligence and cooperation of the members of the MRAC under Chairman Behnam’s sponsorship are numerous and serve as an example to new commissioners, including myself, of how to effectively engage with a CFTC advisory committee to the betterment of our rulemaking agenda.  I am certain the MRAC is in good hands with Commissioner Johnson as its new sponsor.

The proposed rules we are considering today reflect areas of general agreement among the Subcommittee members and build upon their report’s specific recommendations regarding the establishment of 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.[2]  CFTC regulations implementing this Core Principle set forth more detailed requirements regarding the form and substance of a DCO’s governance arrangements.[3]

The proposed rules we are considering today would enhance these regulations by requiring a DCO to establish one or more RMCs and one or more RWGs.  The rules would require a DCO to maintain written policies and procedures regarding the establishment of RMCs, the RMC consultation process, and the formation and role of each RWG, but would afford the DCO flexibility on the specific contents of those policies and procedures.

There are currently fifteen DCOs registered with the Commission.  Of those, twelve already have some form of an RMC, and six already have some form of an RWG.  Codifying these best practices implements the statutory Core Principle that DCOs have governance arrangements that are transparent and permit the consideration of the views of owners and participants.  I look forward to receiving comments on our proposed rule text as well as the many questions we are asking throughout the proposal. 

These proposed rules are an important first step in what I hope is further discussion and rulemaking around the best practices when it comes to DCO governance.  Good governance benefits DCOs, market participants, and markets.

Thank you to the members of the Subcommittee and the members of the MRAC for their work on these issues, and, most especially, thank you to the staff of the Division of Clearing and Risk for their work on this proposal and their consideration of questions and comments from me and my Office.

Another Advisory Committee Report: Margin Requirements for Non-Cleared Swaps

But before leaving the topic of advisory committees, I would note that in May 2020, the CFTC’s Global Markets Advisory Committee (GMAC)[4] adopted a comprehensive report prepared by its Subcommittee on Margin Requirements for Non-Cleared Swaps (GMAC Report).[5]  The GMAC Report included recommendations to tailor the Commission’s uncleared margin rules for swap dealers to account for the very real practical and operational challenges arising when they are applied to the different set of financial end-users (such as pension plans, endowments, insurance providers, and mortgage service providers) that are now coming into scope of the margin rules.

The Commission promptly – and unanimously – adopted four of the GMAC Report’s recommendations.[6]  And, most recently, the Commission included two more of these proposals in its “Agency Rule List” that it published this Spring.[7]

GMAC members worked extraordinarily hard to reach consensus on these recommendations, and I would like to have seen these two proposed rulemakings on today’s agenda.

Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination from the Financial Services Agency of Japan

Now, returning to that agenda:  Another special characteristic of the regulatory regime at the CFTC is our demonstrated ability to work collaboratively with foreign regulators.  Our markets are global, and international coordination and deference to 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.[8]  The U.S. Congress memorialized these commitments throughout the Dodd-Frank Act,[9] and the CFTC has implemented a regulatory framework that respects these commitments.

In accordance with CFTC regulations, the Financial Services Agency of Japan (JFSA) submitted an application requesting that the Commission determine that Japan’s capital adequacy and financial reporting requirements, and related financial recordkeeping and reporting requirements for non-U.S. nonbank swap dealers, 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), as well as a real commitment and engagement by our regulatory counterparts in Japan.  For that, I offer a sincere thank you to our staff and the JFSA.

The Commission’s approach for conducting this comparability determination is a principles-based, holistic approach that focuses on whether Japan’s regime achieves comparable outcomes to the corresponding CFTC requirements.  This has been no small undertaking, and this effort has literally taken years to get to this stage.  This is just the first of several capital comparability determinations the Commission has been asked to consider, so the work here is just getting started.  I appreciate the MPD staff’s diligence and continued efforts on these complex and labor-intensive analyses.

Concluding Thoughts

Again, I want to thank the staff from MPD and the Division of Clearing and Risk for their hard work on the proposals before us today.  I also want to say thank you to staff in our Legal Division, including the Secretariat’s Office, and the Chief Economist’s Office for the work they do in order for the Commission to consider matters at an Open Meeting.

I would be remiss if I did not also mention our technology and logistics teams for their part in preparing for and executing today’s meeting.  We often forget just how critical they are to the success of the Commission’s Open Meetings, as well as to our ability to do our everyday jobs.  Thank you for all of your efforts and hard work which allows this agency to function, not only during Open Meetings, but every single day.