I support the Commission’s efforts to strengthen the resilience of clearing houses to future risk, including through this proposed rule.  Since the 2008 financial crisis, I have spent my entire career in federal public service helping our nation recover and build a stronger, safer, more resilient financial system.  I have seen how clearing houses play an important public interest role – one of critical market infrastructure that fosters financial stability, trust, and confidence in U.S. markets.  The Financial Stability Oversight Council (“FSOC”) has recognized this public interest role, designating several clearing houses as systemically important Financial Market Utilities.  FSOC’s designation highlights the important role that the Commission plays in the oversight of clearing houses. 

Thank you to the staff for taking this oversight role seriously.  Thank you for working closely with me and my office on changes to improve the proposal in ways that will facilitate effective oversight by the Commission and promote greater accountability, transparency, and predictability.

Clearing houses serve as a cornerstone to mitigating risk in U.S. markets.  The 2008 financial crisis revealed that over-the-counter trades left market participants vulnerable to the weaknesses of their counterparties, and left regulators in the dark about hidden risk.  In contrast, clearing houses – who put themselves in the center of markets as counterparties – take on counterparty risk and bring transparency to the markets and regulators. 

One important post-crisis reform was to increase central clearing of trades in U.S. markets, putting clearinghouses in even more of a public interest role.  However, this has resulted in a concentration of more risk in clearinghouses.

FSOC found that the failure or disruption of systemically important clearinghouses “could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.”[1]

The systemic nature of several clearing houses registered with the Commission further underscores the need for vigilant oversight.[2]  Under the Commission’s oversight, clearing houses have shown resilience in navigating an ever-growing list of recent market stress events.  They have helped U.S. markets maintain financial stability during the global pandemic, supply chain issues, and geopolitical events. 

However, uncertainty surrounding these events has driven home the need for the Commission to enhance its rules so that clearing houses strengthen their resilience to future risk.  The public interest role of clearing houses is best served when the clearing houses work with their clearing members who have much at stake as they shoulder the burden of losses and defaults.  Clearing houses, members, and end users should work collaboratively to decide how to increase the resilience of their respective clearing houses, and how to best navigate risk during times of market stress.  Simply put, there is strength in numbers and diversity of perspective. 

We have seen how clearing houses have benefitted from risk management committees and other working groups that reflect a broad coalition of stakeholders.  The voices of these stakeholders should be heard in a meaningful way.[3]  Today, the Commission proposes formalizing requirements for these committees.[4]  We propose a requirement for the consideration of input from members of risk committees on matters that could strengthen or weaken the resilience of the clearing organization to future risk.  The proposed rule seeks to balance the calls of those on the committees for increased transparency, predictability, and a voice in risk management, with the clearinghouses’ calls for flexibility and consideration of their own internal opinions on risk.  Commenters will tell us whether we have gotten this balance right in a way that will strengthen the resilience of clearing houses to future risk while keeping it agile to respond to sudden market events.

Additionally, we endeavor to formalize governance rules that promote accountability of clearing houses and facilitate oversight by the CFTC.  Both accountability and oversight are served in the proposal through written policies and procedures, and documentation that stakeholder voices have been solicited and heard.  The proposal is not prescriptive about the content of the policies and procedures.  A requirement for written policies and procedures, accompanied by documentation of the consideration of input, will benefit the full range of clearing houses, from systemically significant clearing houses to new or future clearing houses, including in the digital asset space, who may not have a history of risk management committees. 

It is my hope that over time, a requirement for policies and procedures will serve as a launch pad for best practices to emerge.  I look forward to public comment on additional opportunities for how the Commission can effectively advance best practices, including the question of whether the Commission should require the publication of the policies and procedures, and whether the Commission should be prescriptive of the content.  I also look forward to comments on whether meetings of risk advisory working groups should be documented to ensure that those members’ voices are adequately heard in a meaningful way.

Today’s proposal serves as an important first step to promote accountability, transparency, predictability, and effective oversight for the governance of clearing houses.  We also invite comment on future rulemaking for best practices.  I look forward to future consideration of additional opportunities for the Commission to promote transparency, accountability, predictability, and effective oversight.[5]

[1]  See U.S. Department of the Treasury, Policy Issues: Designations (last accessed July 26, 2022), available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations.  FSOC designates clearing houses who serve as central counterparties responsible for clearing a large majority of trades as systemically important Financial Market Utilities.

[2]  The Commodity Exchange Act established several core principles for Derivatives Clearing Houses, including a requirement that the clearing houses establish governance arrangements that are transparent to fulfill public interest requirements and to permit the consideration of the views of owners and participants.  7 U.S.C. §7a-1(c)(2)(O).  To further implement these core principles, the Commission adopted several rules, including a rule that clearing houses maintain clear, documented governance arrangements.  Commission regulation 39.24(b).

[3]  The Commission previously stated that clearing organization governance rules, “improve DCO risk management practices by promoting transparency of governance arrangements and making sure that the interests of a DCO’s clearing members and, where relevant, their customers are taken into account.”  Derivatives Clearing Organization General Provisions and Core Principles, 85 Fed. Reg. 4800, 4848 (Jan. 27, 2020).

[4]   Proposals include broad and diverse participation, fitness, the importance of independent, expert opinions, and a performance of committee duties focused on the safety of the clearing organization and the stability of the financial system.

[5]  While there may be a diversity of views on these additional opportunities, I hope that diversity will help, rather than deter, this independent Commission to develop strong and long-lasting rules to strengthen the resilience of clearing houses to future risk.