Statement of Commissioner Dawn D. Stump Regarding Foreign Board of Trade Registration Applications of Euronext Amsterdam, Euronext Paris, and European Energy Exchange

November 5, 2019

I am pleased to support the Orders of Registration before us today that will allow three foreign boards of trade (“FBOTs”)[1] to permit identified members or other participants located in the United States (“U.S. Participants”) to enter trades directly into the FBOTs’ order entry and trade matching systems (a practice referred to as “direct access”).  Upon approval by the Commission, these three FBOTs would join 18 others that are currently registered under the CFTC’s FBOT registration rules.  I also am pleased to have this opportunity to discuss a successful, yet often overlooked, aspect of the CFTC’s regulatory program that reflects the principles that I believe should govern our approach – and that of our regulatory counterparts around the world – to the regulation of all market infrastructure providers. 

The CFTC’s historical, and current, approach to FBOTs seeking to provide direct access to U.S. Participants is based on: 1) deference to comprehensive, comparable regulation of other jurisdictions; and 2) where the CFTC must act to carry out its supervisory responsibilities under the Commodity Exchange Act (“CEA” or “Act”), such actions are principles-based and tailored to the CFTC’s mission to prevent disruptions to the integrity of the markets it regulates.[2]  Importantly, over the decades, we have not seen any significant market integrity episode involving FBOTs that might call into question this approach. 

Because the CFTC’s treatment of FBOTs often “flies under the radar,” a brief history is useful. 

Congressional Intent

We start, of course, with the dictates of our governing statute.  Section 4(a) of the CEA states Congress’ intent that a futures contract may be traded lawfully in the United States only if it is traded on or subject to the rules of a designated contract market (“DCM”) – but excludes from this designation requirement contracts made on or subject to the rules of an FBOT located outside the United States.[3]  CEA Section 4(b), in turn, authorizes the CFTC to adopt rules governing foreign futures and options contracts, but explicitly prohibits the CFTC from adopting rules that either:  1) require CFTC approval of any contract, rule, or action of any FBOT or clearinghouse for such FBOT; or 2) govern in any way any rule, contract term, or action of any FBOT or clearinghouse for such FBOT.[4] 

In short, the CFTC’s statutory mandate with respect to the operations of FBOTs has always been mindful of the need for international comity

Staff No-Action Process

Over time, though, innovations in technology and the electronic trading of derivatives often made it hard to tell when an FBOT listing contracts that were traded by U.S. persons really was “located outside the United States” and thus outside the scope of the CFTC’s authority over DCMs.  Beginning in the mid-1990s, FBOTs that had developed the capability to provide electronic direct access to U.S. Participants asked the CFTC to confirm that they could do so without having to submit to regulation as a DCM. 

Mindful of Congress’ mandate not to interfere in the operations of foreign trading platforms, the CFTC responded to these requests in a series of staff no-action letters.  Staff reviewed information and representations provided by the FBOT that related to, among other things, the rules and structure of the FBOT (with an emphasis on its financial integrity, market and trade practice surveillance and rule enforcement regime), various system integrity protections that govern the FBOT’s electronic trading system, the system’s related clearing and customer default protections, information concerning the regulatory structure to which the FBOT was subject, and the adequacy of information sharing with the CFTC by the FBOT and its regulator.[5]

In a Policy Statement issued in 2006 that endorsed the use of the staff no-action process for FBOTs that seek to provide U.S. Participants with direct access, the Commission noted that the no-action process was “based upon a review of, and ongoing reliance upon, the foreign market’s ‘home’ regulatory regime, and [was] designed to maintain regulatory protections while avoiding the imposition of duplicative regulation.”[6]  The CFTC’s Policy Statement further concluded that the standard conditions for granting no-action relief “have been reasonably and appropriately tailored to the factual circumstances raised by the applications for no-action relief.”[7]    

The CFTC’s Policy Statement

That 2006 Policy Statement was triggered, in part, when an FBOT that had received no-action relief notified the CFTC that it intended to list contracts whose settlement prices would be linked to contracts traded on DCMs regulated by the CFTC.  The Policy Statement observed that in a “global market environment” as had developed for derivatives trading, “conduct that takes place on markets located outside the United States may have an impact on U.S. futures and cash markets, as well as the members and users of those markets . . .”[8] 

Nevertheless, the CFTC did not react to these market developments abroad by moving to impose U.S. regulation on FBOTs.  It did not abandon its historically deferential approach regarding FBOTs, but rather took measures carefully calibrated to assure that developments in foreign jurisdictions did not adversely affect the CFTC’s ability to carry out its own regulatory responsibilities over DCMs. 

Specifically, the Policy Statement enhanced the CFTC’s no-action process by placing greater emphasis on information-sharing arrangements that would better enable the CFTC “to cooperate closely with foreign market authorities in order to ensure that the Commission can carry out its regulatory responsibilities.”[9]  The Policy Statement provided, among other things, that:  1) FBOTs and their regulators should have the power, authority, and willingness to share needed information with the CFTC; 2) FBOTs applying for no-action relief should sign relevant international Memoranda of Understanding; and 3) no-action relief should be conditioned on arrangements to obtain and share information required by the CFTC to carry out its domestic market surveillance responsibilities.[10] 

In early 2009, based on staff experience during the intervening period, the CFTC issued a Notice of additional conditions that would be imposed on no-action relief issued to FBOTs that list for trading by direct access from U.S. Participants any futures or option contract that is linked to a contract listed on a DCM.[11]  These conditions were targeted “to ensure that [FBOTs] apply to any linked contract comparable principles or requirements regarding the daily publication of trading information and the imposition of position limits or accountability levels for speculators as apply to the DCM . . . contract against which the linked contract settles.”[12]

The Dodd-Frank Act 

After the financial crisis, the Dodd-Frank Act (“Dodd-Frank”) amended Section 4(b) of the CEA to permit the CFTC to require FBOTs desiring to provide direct access to U.S. Participants to register with the agency.[13]  But Congress did not impose prescriptive requirements on FBOTs offering direct access, as Dodd-Frank largely left it to the CFTC to set out the details regarding FBOT registration. 

In doing so, however, Congress directed that the CFTC “shall consider whether any such [FBOT] is subject to comparable, comprehensive supervision and regulation by the appropriate governmental authorities in the [FBOT’s] home country.”[14]  I would note that it is no accident that this verbiage is similar to language included elsewhere in Dodd-Frank permitting the CFTC to exempt comparably and comprehensively regulated derivatives clearing organizations and swap execution facilities, further advancing the notion of international deference.

One area in which Dodd-Frank did impose specific requirements was with respect to linked contracts.  Dodd-Frank amended the CEA to prohibit an FBOT from providing U.S. Participants direct access with respect to a contract that settles against the price of a contract listed for trading on a DCM unless the CFTC determines that certain conditions are satisfied.[15]  The conditions set by Congress were drawn in part from those imposed in prior CFTC staff no-action letters, and are directly related to the integrity of the U.S. market that lists the contract to which the FBOT’s contract is linked and to the CFTC’s ability to oversee that market. 

Specifically, Congress required that if an FBOT wants to provide direct access for a linked contract, then the FBOT (or the foreign futures authority that regulates it) must have certain requirements that are comparable to those imposed on the DCM for the contract to which the FBOT’s contract is linked.  These include, for example, requirements relating to publication of daily trading information, position limits, large trader reporting, and providing information to the CFTC necessary to publish reports on aggregate trader positions.  The conditions also require the FBOT or its regulator to promptly notify the CFTC of certain changes relating to the linked contract in order to assure the CFTC’s ability to properly oversee the contract on the DCM to which the FBOT’s contract is linked.[16]

In short:  The hallmark of the FBOT registration provisions in Dodd-Frank is deference to foreign regulatory authorities that are providing comparable, comprehensive supervision and regulation of the FBOT.  And where the globalization of derivatives markets – in this case, the advent of linked contracts – compels the U.S. to impose conditions on an FBOT’s ability to provide direct access to U.S. Participants, those conditions are narrowly tailored to protect the integrity of the U.S. market to which the FBOT has linked its contract, and the CFTC’s ability to oversee that domestic market.[17]

The CFTC’s FBOT Registration Rules

This brings us to the CFTC’s FBOT registration rules, which we apply to the three registration applications before us today.  The rules do not stray terribly far from the agency’s historical no-action relief process.  Apart from new aspects such as including swaps[18] and addressing the linked contract provisions of Dodd-Frank, the rules continue to divide the registration requirements into the same categories that our staff evaluated in reviewing an FBOT’s request for no-action relief.[19] 

The CFTC made its intentions with respect to FBOT registration crystal clear in the preamble to the final rules.  These explicit statements of intent are worth quoting in full, as follows:

First, “when reviewing an application for FBOT registration, [the CFTC] will consider whether the FBOT and its clearing organization are subject to comprehensive supervision and regulation by the appropriate governmental authorities in their home country that is comparable to the comprehensive supervision and regulation to which DCMs and derivatives clearing organizations (DCO), respectively, are subject in the United States.”[20]  

Second, “[a]s in the case of the review performed under the no-action review process, the Commission’s determination of the comparability of the foreign regulatory regime to which the FBOT applying for registration is subject . . . will be a principles-based review . . . to determine if that regime supports and enforces regulatory objectives in the oversight of the FBOT and the clearing organization that are substantially equivalent to the regulatory objectives supported and enforced by the Commission in its oversight of DCMs and DCOs.”[21]

Third (in response to commenters’ concern about the CFTC adopting overly prescriptive registration rules for FBOTs), “the registration requirements . . . represent a principles-based approach to limited oversight and are not overly prescriptive.  FBOTs will be required to demonstrate . . . that they operate under supervision and regulation that is comparable to that provided by the Commission’s regulatory regime for DCMs, but will not be required to comply with the core principles applicable to DCMs under the CEA and the Commission’s regulations.”[22]

Finally, “[w]hile the regulations require the FBOT and its regulatory authority to provide critical information on an ongoing basis to the Commission, any on-going review of the FBOT and its clearing organization by the Commission will be limited to reviewing the required information and documentation that the FBOT must submit periodically to the CFTC and will not include direct surveillance of trading activity.”[23]

Here again, we see the CFTC’s dedication to:  1) deference to comparable, comprehensive regulation by our international regulatory colleagues; 2) a principles-based approach; and 3) requirements limited to those necessary to protect the integrity of U.S. markets and the CFTC’s ability to carry out its supervisory responsibilities with respect to those markets.[24]  Those defining characteristics of the CFTC’s approach to FBOTs under the registration rules are wholly consistent with the approach it has taken to FBOTs providing direct access to U.S. Participants throughout its history.

Conclusion

The deference that historically has characterized (and that continues to characterize) the CFTC’s approach to FBOTs providing direct access to U.S. Participants is a demonstration of international comity – an expression of mutual respect for the important interests of foreign sovereigns, and for our international regulatory colleagues overseeing well-regulated trading platforms and clearinghouses.  However, reciprocity also is an appropriate consideration in the exercise of international comity.[25]  As I previously have stated, I strongly prefer mutual recognition of comparable regulation to the application of retributive jurisdictional assertions, but will not rule out the latter should our own authority be disrespected.[26]  The Registration Orders that we are considering today expressly provide as much.

That said, it bears repeating that in Dodd-Frank, Congress authorized the CFTC to grant exemptions to other market infrastructure providers – specifically, clearing organizations and swap execution facilities – that are subject to comparable, comprehensive supervision and regulation abroad.[27]  It is my hope that as the CFTC, and our international regulatory colleagues, continue to implement the derivatives reforms to which the G-20 nations agreed at their Pittsburgh Summit in 2009, we apply the deferential, principles-based, and carefully calibrated approach that the CFTC historically has applied to FBOTs in the context of these other market infrastructure providers as well.[28]  This approach is sound, and it is time-tested.   

* * * * * * * *

I support the three FBOT Orders of Registration before us today.  I want to thank the staff of the Division of Market Oversight and the General Counsel’s Office for the time and effort they have put into them, and for addressing comments from my team.