Today, the Commodity Futures Trading Commission (CFTC or Commission) and the Office of Financial Research (OFR) entered into a Memorandum of Understanding (MOU) that establishes the framework under which the CFTC will share the information and data reported on Form CPO-PQR with OFR. OFR was established in 2010 to support the Financial Stability Oversight Council (FSOC) in its statutory mission to identify and respond to risks to the financial stability of the United States.[1] As part of that mission, FSOC is authorized to collect information from other FSOC members[2] and “provide direction to, and request data and analyses from, the [OFR], to support the work of the [FSOC].”[3] In turn, OFR is authorized by statute to collect data on behalf of FSOC and share that data with FSOC and its member agencies.[4]  As a part of fulfilling its mission, OFR has requested the information on the Form CPO-PQR to be used in connection with its support of FSOC. The MOU is designed to facilitate that information sharing. 

Prudential banking regulators, such as the Federal Reserve, the OCC, and the FDIC, perform incredibly important roles by overseeing the largest, systemically important, depository financial institutions. The CFTC, on the other hand, is primarily a markets regulator – while our agency does have primary oversight over two systemically important derivatives clearing organizations, our regulatory purview is over the derivatives markets as a whole. There are important distinctions between a prudential regulatory framework and a market regulator’s oversight regime – prudential regulation is primarily focused on the safety and soundness of individual institutions whereas market regulation is primarily focused on ensuring the integrity of transactions in a specific marketplace, thereby ensuring the integrity of the market as a whole. 

Of course, some overlap between the two exists. It is therefore important for both the U.S. prudential regulators and the primary financial market regulators to share data amongst themselves, and with OFR, to monitor for systemic risk. However, Form CPO-PQR requires 1,200 registered commodity pool operators (CPOs) to report highly confidential, proprietary information regarding an individual fund’s trading positions. As a market regulator, the CFTC needs detailed information about the trading activities and trends in the derivatives markets. While this information is crucial to understanding the functioning and evolution of the derivatives markets, much, if not all, of this specific trading and position information is not necessary, or even useful, for systemic risk monitoring purposes. Further, I remain highly skeptical, if not outright opposed, to the idea that funds and investment firms can pose systemic risk to the financial system that is not adequately addressed by the current banking, derivatives, and investment adviser regulatory frameworks.

Therefore, to fulfill its mission to FSOC, I have strong doubts OFR needs Form CPO-PQR information at all, and certainly not on a firm-by-firm basis, to have a view into, or develop analyses on, systemic risk. If OFR believes specific firms, based on their size or interconnectedness, may raise systemic risk concerns beyond what is addressed through current regulatory tools, then I think it should justify its request for specific information about those firms in a written request to the Commission.

Given these concerns, I hope the Commission considers the form and manner in which this information is shared pursuant to the MOU. I believe that the provision of CPO-PQR data to OFR on an aggregated basis would satisfy their need for data to assist in monitoring financial stability concerns in our markets. Indeed, nothing in the MOU precludes the Commission from providing this information in aggregated form.  Providing aggregated data would also provide funds more comfort from a cybersecurity and data security perspective that the universe of people who have access to their individual firm’s data remains limited to a small set of CFTC employees directly charged with their oversight. 

Finally, I also want to emphasize that the information requested on Form CPO-PQR is justified solely because it informs the Commission’s oversight and regulation of CPOs.  Regardless of OFR’s interest in any particular data currently requested on the form, if the Commission determines in the future that it does not require the information to effectively oversee CPOs, the form should be revised to eliminate the question. Said differently, and as the discussion during the adoption of the Final Rule to revise Form CPO PQR made clear, OFR’s use of the revised CPO PQR data is not a sufficient “use case” from the Commission’s perspective to prevent the form from being further revised or questions further streamlined.[5] 

Financial research across sectors and markets can lead to more informed policy decisions, identify potential threats to financial stability, and build confidence in American financial markets by increasing transparency and public understanding.  However, the findings of any academic study are only as good as the data and methodology underlying it; the data must be free from selection bias, analytical methods must be robust and transparent, and the conclusions must be driven by data, rather than by a pre-determined or politically desired policy outcome.

I hope the information OFR receives pursuant to this MOU will assist its development of focused research that leads to data-driven policy decisions. I hope this sensitive information is always used responsibly to facilitate productive, informative analysis and research as provided for in the MOU, which limits OFR’s use of this sensitive information, requiring that it use the information “solely in connection with OFR’s statutory responsibility, mission, purpose, function, and activity under the Dodd-Frank Act.” I also hope the relationship between OFR and the Commission continues to be as collaborative and constructive as it has been under Chairman Heath P. Tarbert’s and OFR Director Dino Falaschetti’s leadership.

However, I must respectfully dissent from today’s MOU, because I believe more should have been done to ensure any data shared under this agreement has a well-justified connection to systemic risk or financial stability and will always be provided in an aggregated format, both of which would ensure the data will only be used constructively in the future to advance data-driven and well-substantiated policy discussions among regulators.