The CFTC is proposing to change a post-Dodd Frank Act reform to issue a rule that permits CFTC-registered foreign boards of trade to have direct access to U.S. customers through introducing brokers.[1] The Dodd-Frank Act defines direct access to mean an explicit grant of authority by a foreign board of trade to identified members or other participants located in the United States to enter trades directly into the trade matching engine of the foreign board of trade. As described in the open Commission meeting on the final rule, “By adopting uniform application procedures and registration requirements and conditions, the process by which foreign boards of trade are permitted to provide direct access to their trading systems will become more standardized, more transparent to both registration applicants and the general public, and will promote fair and consistent treatment of all applicants.”[2]

The Commission in 2011 limited direct access to certain intermediaries that did not include IBs, explaining,

Part 48 identifies the types of entities to which a registered FBOT could grant direct access. That would include identified members and other participants that trade for their proprietary accounts, FCMs that can submit orders on behalf of U.S. customers, and CPOs or CTAs or entities exempt from such registration that submit orders on behalf of U.S. pools or for accounts of U.S. customers for which they have discretionary authority. Again, this list of eligible participants is consistent with the participants under the existing no-action relief.><[3]

FBOT’s have operated under this rule ever since. For the first time, this proposal would change that rule and expand direct access to an additional 937 intermediaries who are registered introducing brokers. It is not addressed in the rule or preamble why this rule change is necessary. I am aware of an early 2020 request from one of the 24 registered foreign boards of trade for no-action relief related to direct access for IBs. The CFTC did not act on that request over the last four years. I am not aware that the request has been made by any other FBOT.  The CFTC is going farther than what was requested by one FBOT, and is instead changing the rule for all foreign boards of trade.

As regulators, we have an important responsibility to make an independent assessment of what is needed to carry out the CFTC’s mission to promote market resilience, integrity, and vibrancy through sound regulation. If the Commission is going to engage in rulemaking to change post-Dodd Frank Act reforms, it is important that the CFTC analyze the current market need for the change, and the consequences of changing the rule, including any potential increase in benefits as well as risks (and conditions necessary to manage those risks).

It can be difficult to make decisions on proposed rules based on a general statement that the Commission is proposing the rule “based on the Commission’s experience engaging with registered FBOTs and applying part 48 over the ensuing years.” I would have liked to have seen a discussion of that experience, the current state of the market, and the need for expanded access for more than one FBOT. FBOTs are all over the world, reflecting unique nations, continents, markets, and issues. I look forward to public comment on whether there are important differences in FBOTs that should be reflected in any potential final rule. I appreciate a November 2023 letter by the Futures Industry Association, which explains:

With IBs currently not allowed FBOT direct access under 48.4(b), U.S. participants are left without this access route after EU-based IBs close, usually around 1 p.m. Eastern time. Updating the rules to expand direct access to U.S.-registered IBs would allow U.S. market participants continued access to the relevant foreign markets after the closure of those broker firms in Europe that provide access earlier in the day. This is especially important for U.S. participants’ ability to conduct their risk management during periods of high market volatility, such as those experienced with the collapse of Silicon Valley Bank and Russian invasion of Ukraine.

Given the public interests behind the 2011 rule of standardization, transparency, and a need for fair and consistent treatment, as well as FIA’s description of a current risk management need, I am willing to support releasing the proposed rule to gain public comment. However, I caution not to read into this supportive vote that I will vote in favor of any future action on this or other rulemaking or action without sufficient independent CFTC analysis to accompany an industry request.

Finally, given the Commission’s mission to promote market integrity, I question the proposed allowance of a guarantee by an entity exempt from FCM registration under Regulation 30.10 that is not required to follow the anti-money laundering and other requirements of the Bank Secrecy Act, rather than limit the guarantee to registered FCMs. While an entity exempt from FCM registration under Regulation 30.10 may be subject to another country’s anti-money laundering regime, the CFTC does not have the same level of insight or enforceability with that entity as with a registered FCM that is subject to the BSA.

As the former head of a federal law enforcement office (the Special Inspector General for the Troubled Asset Relief Program), I have significant experience in using Currency Transaction Reports and Suspicious Activity Reports required by the BSA to investigate and prosecute money laundering, organized crime, drug trafficking and other criminal enterprises. I have experienced the benefit of financial institutions serving as a first line of defense given their BSA requirements.

The Commission’s mission includes requiring safeguards to combat money laundering, illicit finance, and terrorist financing that can threaten national security and financial stability, and undermine confidence in the U.S. financial system. Illicit finance threats, vulnerabilities, and risks facing the United States continue to grow.[4]  The Bank Secrecy Act plays a critical role in addressing these threats

I appreciate the staff for their work on this proposed rule change and look forward to public comment.