I am voting to publish the Notice of Proposed Rulemaking on Requirements for Designated Contract Markets (DCMs) and Swap Execution Facilities (SEFs) Regarding Governance and the Mitigation of Conflicts of Interest Impacting Market Regulation Functions (DCM and SEF Conflicts of Interest Proposal or NPRM) because the public must have an opportunity to weigh in on these important issues that raise serious concerns. I would like to thank Lillian Cardona, Jennifer Tveiten-Rifman, Marilee Dahlman, Swati Shah, and Rachel Berdansky in the Division of Market Oversight for their time and efforts, and I take this opportunity to recognize the importance of their rule enforcement reviews program for DCMs and SEFs. I appreciate the staff working with me to make revisions to address my concerns. Unfortunately, while the NPRM has been improved, it is far from perfect.

Overall, I believe the public comment process is a critical component of good government. That is why, although I have serious concerns about the DCM and SEF Conflicts of Interest Proposal, I am voting to publish it for transparency and public engagement on this flawed rulemaking.

The CFTC cannot haphazardly codify guidance as rules. That goes against the very essence of the statutory framework to regulate derivatives markets under the Commodity Exchange Act (CEA). Here, public input will serve as a valuable tool in refining the NPRM by providing insights that may not have been considered in changing the CFTC’s longstanding principles-based approach to oversight of self-regulatory organizations (SROs) such as DCMs and SEFs, who establish their own rule books and bring enforcement actions against market participants for violations.[1] In 2012, when the CFTC first adopted its DCM rules and decided to leave certain areas as guidance on acceptable best practices, the CFTC thoroughly examined each regulation and explained where guidance was more appropriate than a rule in recognition of the need to maintain flexibility for DCMs to establish rules that are appropriate for their products, markets, and participants, including associated risks.[2] I have serious concerns with the CFTC proceeding down a path to finalizing a rule that is overly prescriptive and unsupported by data or other evidence.

Specific Areas for Public Comment

Separately, I am highlighting two additional issues for commenters:

Material non-public information

The Commission is refusing to fix the references to “material non-public information” in Parts 37 and 38. Even though the NPRM cites Regulation 1.59(d) and its use of “material, non-public information,” and that the intent is to copy the requirements in Regulation 1.59(d) to Parts 37 and 38 purely for housekeeping purposes, the Commission is potentially creating a loophole by making a small but very substantive change in using “material non-public information” in Parts 37 and 38. The former—with a comma—broadly captures information that is material and non-public. The latter—with no comma—is an incorrect usage of a well-established term of art under securities laws that is too narrow to address the potential conflicts in derivatives markets, creates unnecessary confusion for market participants, and undermines robust compliance programs by introducing uncertainty.[3] “Consistency” is a goal repeated throughout the NPRM, and I do not understand why we are refusing to resolve the inconsistency here.

The Commission must protect all confidential information—not just material information—in order to effectively mitigate, prevent, or avoid conflicts of interest. In some circumstances, there must be a complete information barrier or segregation of activities between business units or personnel to protect sensitive and confidential information about customer trades or positions in order to prevent potential market manipulation or other abusive trading practices. The Commission’s misguided approach is not enough to protect our markets from misconduct.[4]

Revocation of registration

I am deeply concerned about proposed Regulations 37.5(c)(6) and 38.5(c)(6).[5] This is the first time that the CFTC has decided to promulgate a rule to revoke the registration of a registered entity since section 5e of the Commodity Exchange Act was enacted in 1998, with insufficient explanation to demonstrate a reasonable basis and reasoned decision-making as required by the Administrative Procedure Act,[6] and insufficient procedural safeguards to ensure due process for DCMs and SEFs. The government must ensure due process under the Constitution, including judicial review, before taking away the rights of the public in what may well be a death knell for trading venues. Anything less is an abuse of power.[7]

Further, the rules are clearly overbroad because the CFTC could revoke registration due to changes “in the ownership or corporate or organizational structure” of a DCM or SEF (emphasis added). This could include simple changes in headcount and other staffing reorganizations, making it all too easy for the CFTC to manufacture a reason to revoke registration. I sincerely hope that this is not the Commission’s intent. What is even more puzzling is that the CFTC is choosing to propose structural changes as cause to revoke registration, but not grave misconduct such as fraud, abuse, or manipulation. This is nonsensical. I urge commenters to pay close attention to the full import of the revocation of registration proposed rules.

I look forward to reviewing the comments on the DCM and SEF Conflicts of Interest Proposal.

[1] See Statement of Commissioner Caroline D. Pham Regarding Request for Comment on the Impact of Affiliations Between Certain CFTC-Regulated Entities (June 28, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement062823; Statement of Commissioner Caroline D. Pham on Effective Self-Regulation and Notice of Proposed Rulemaking to Amend Part 40 Regulations (July 26, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement072623b.

[2] See Core Principles and Other Requirements for Designated Contract Markets, 77 FR 36612, 36614 (June 19, 2012), https://www.federalregister.gov/documents/2012/06/19/2012-12746/core-principles-and-other-requirements-for-designated-contract-markets (explaining the process as “In determining whether to codify a compliance practice in the form of a rule or guidance/acceptable practice, the Commission was guided by whether the practice consisted of a commonly-accepted industry practice. Where there is a standard industry practice that the Commission has determined to be an acceptable compliance practice, the Commission believes that the promulgation of clear-cut regulations will provide greater legal certainty and transparency to DCMs in determining their compliance obligations, and to market participants in determining their obligations as DCM members, and will facilitate the enforcement of such provisions. Several of the rules adopted in this notice of final rulemaking largely codify practices that are commonly accepted in the industry and are currently being undertaken by most, if not all, DCMs.”).

[3] See Dissenting Statement of Commissioner Caroline D. Pham on Misappropriation Theory in Derivatives Markets (Sept. 27, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement092723.

[4] Id.

[5] The language is the same for both SEFs and DCMs, so for brevity I will only include it for SEFs here: Reg. 37.5(c)(6) A change in the ownership or corporate or organizational structure of a SEF that results in the failure of the SEF to comply with any provision of the CEA, or any regulation or order of the Commission thereunder— (i) shall be cause for the suspension of the registration of the SEF or the revocation of registration as a SEF, in accordance with the procedures provided in sections 5e and 6(b) of the CEA, including notice and a hearing on the record; or (ii) may be cause for the Commission to make and enter an order directing that the SEF cease and desist from such violation, in accordance with the procedures provided in sections 6b and 6(b) of the CEA, including notice and a hearing on the record.

[6] The only justification provided is “[i]t is imperative that SEFs and DCMs, regardless of ownership or control changes, continue to comply with the CEA and all Commission regulations to promote market integrity and protect market participants.”

[7] See Statement of Commissioner Caroline D. Pham on Effective Self-Regulation and Notice of Proposed Rulemaking to Amend Part 40 Regulations (July 26, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement072623b.