SPEECHES & TESTIMONY

Statement of Chairman Heath P. Tarbert Before the November 5, 2019 Open Meeting

November 5, 2019

Thank you all for attending today’s open meeting of the U.S. Commodity Futures Trading Commission (CFTC).  We will begin by considering a proposed amendment to Commission regulation 160.30, which requires covered entities to adopt policies and procedures for administrative, technical, and physical safeguards to protect customer records and information.  This amendment will formalize the detailed requirements for those policies and procedures consistent with the Gramm-Leach Bliley Act.

The Commission will also consider three foreign board of trade applications submitted by the following European entities: (1) Euronext Amsterdam N.V. (“Euronext Amsterdam”); (2) Euronext Paris SA (“Euronext Paris”); and (3) the European Energy Exchange (“EEX”), (collectively, the “Applicants”).

Finally, I am proud to announce that today the Commission is celebrating the launch of its first-ever Veterans Affinity Group (“Veterans Group”), which will focus on the valuable role veterans play in fulfilling the CFTC’s mission.  It is an honor to welcome the Veterans Group with a public charter signing ceremony. 

Protection of Customer Records and Information

I support today’s proposed amendment to Commission regulation 160.30, which would establish specific requirements for policies and procedures protecting customer records and information.  Regulation 160.30 requires covered entities—including futures commission merchants, commodity trading advisors, commodity pool operators, introducing brokers, and swap dealers—to adopt policies and procedures to address administrative, technical, and physical safeguards for the protection of customer records and information. 

Today’s proposed amendment would require that these policies and procedures be reasonably designed to protect the security and confidentiality of customer records and information, address security hazards to that information, and guard against unauthorized use or access that can harm customers.  Formalizing these protections is important for those who entrust their sensitive information to CFTC-registered entities, as these customers must have comfort that measures are being taken to safeguard their data.  Requiring robust protections for customer information helps ensure that we are regulating our derivatives markets to promote the interests of all Americans.  Today’s proposed amendment advances that goal.

Foreign Board of Trade Registration Applications

My first strategic goal for the agency is to strengthen the resilience and integrity of our derivatives markets while fostering their vibrancy.  A core pillar of fulfilling this goal is to work with our international counterparts to reduce market fragmentation.  Accordingly, I support the applications of Euronext Amsterdam, Euronext Paris, and EEX to become registered foreign boards of trade pursuant to Section 4(b)(1) of the Commodity Exchange Act and Part 48 of the Commission’s regulations.  Achieving registration status will allow the Applicants to offer direct access to their electronic trading systems to members and other participants located in the United States, and to make eligible derivatives contracts available for trading by direct access from the United States. 

Part 48 establishes important requirements that foreign boards of trade must satisfy to become registered with the Commission.  In particular, Part 48 requires a determination that a foreign board of trade and its clearing organization are subject to comprehensive supervision and regulation by appropriate home country regulators that is comparable to the regulatory regime applicable to designated contract markets (DCMs) and derivatives clearing organizations (DCOs) under the Act and the Commission’s regulations. 

Regulatory comparability is determined by examining several requirements set out in Commission regulation 48.7.[1]  All three Applicants have worked diligently with our staff to demonstrate regulatory comparability, and all have credibly represented they have and enforce rules prohibiting fraud and abusive trading practices, and have implemented and enforce rules relating to market manipulation, price distortion, and other market disruptions, and that the derivative contracts they offer are not readily susceptible to manipulation.  All three Applicants are currently permitting direct access trading pursuant to existing staff no-action relief.

Euronext Amsterdam

Euronext Amsterdam, a public company organized under the laws of the Netherlands, operates a market licensed by the Dutch Ministry of Finance upon the recommendation of the Netherlands Authority for the Financial Markets (AFM), a signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (“IOSCO MMOU”).  Euronext Amsterdam is a wholly owned subsidiary of Euronext N.V., the holding company of the Euronext group, and is a “regulated market” for purposes of the European Community’s Investment Services Directive (the “European Directive”).  It is additionally subject to legislation adopted by the European Commission, the European Parliament, and the Council of the European Union. 

Euronext Amsterdam requires all members to meet specific fitness and financial soundness requirements.  It also employs a well-known trade matching system that complies with the IOSCO Principles for the Oversight of Screen-Based Trading Systems for Derivative Products (“IOSCO Principles”), and it clears trades through LCH, which is registered with the Commission as a DCO.

Pursuant to existing no-action relief, Euronext Amsterdam presently allows U.S. participants to trade certain of its listed futures and options contracts by direct access from the United States.[2]  Approving Euronext Amsterdam’s application for registration replaces and elevates to the Commission level this existing relief and allows direct access trading from the United States to continue without disruption.

Euronext Paris

Euronext Paris, also a wholly owned subsidiary of Euronext N.V., is a limited liability company organized under the laws of France.  It operates a market licensed by the French Minister of the Economy as a “regulated market” for purposes of the European Directive.  Euronext Paris is governed by France’s Monetary and Financial Code (COMOFI) and is supervised by the Autorité des Marchés Financiers (AMF) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR).  It is further subject to EC legislation as well as technical standards developed by the European Securities and Markets Authority (ESMA). 

Euronext Paris uses the same trade matching system as Euronext Amsterdam, Euronext’s Universal Trading Platform (UTP), which complies with the IOSCO principles.  Euronext Paris maintains appropriate tools to detect, investigate, and address regulatory violations, and it clears its trades through LCH.

Like Euronext Amsterdam, Euronext Paris is presently providing direct access trading pursuant to staff no-action relief that permits it to allow U.S. members and other participants to trade certain contracts from the United States.[3]  If its foreign board of trade registration application is approved, Euronext Paris will continue to be permitted to offer contracts for trading from the United States.[4]

EEX

EEX is based in Leipzig, Germany, and operates a regulated trading platform for a wide array of energy and agricultural contracts.  EEX is authorized to do business under the German Exchange Act and is subject to oversight by the Saxon State Ministry for Economic Affairs, Labour and Transport.  EEX clears through European Commodity Clearing AG (ECC), a licensed central counterparty (CCP) under the German Banking Act.  ECC observes the Principles for Financial Market Infrastructures (PFMI) adopted by the Technical Committee of IOSCO and the Committee on Payments and Market Infrastructures (CPMI).

EEX is subject to internal fitness and financial soundness requirements.  In addition, EEX’s automated trading system is provided through Eurex Deutschland’s trading platform, which incorporates the IOSCO Principles.  Like the other Applicants, EEX is providing for direct access trading for certain of its listed contracts pursuant to existing staff no-action relief.[5]

International Comity and Deference

I support issuing foreign board of trade registration orders for all three Applicants.  I believe doing so will promote vibrant derivatives markets and expand the liquidity available for trading and hedging.  The foreign board of trade regulatory regime hinges on deference to home regulators—in this case, the European Commission as well as member-state regulators. 

A sentiment that each Commissioner expressed during the last public meeting is that comity is a “two-way street.”  In recognition of the need for reciprocity, I believe approval of the applications is a sign of our good faith and continuing commitment to negotiate with the European Commission and ESMA about significant issues, particularly the implementation of the European Market Infrastructure Regulation (EMIR 2.2).

In supporting the issuance of registration orders, I note that language has been added to each order clarifying the CFTC’s ability to revoke foreign board of trade registration should we have concerns about material changes in the applicable regulatory regime, including developments relating to international comity.  It is my hope that such a revocation will never be necessary, as a relationship of comity between U.S. and EU home-jurisdiction regulators is essential to the smooth functioning of the transatlantic derivatives market, of which the registration of foreign boards of trade is an important component.

As my fellow Commissioners are aware, implementation of EMIR 2.2 could result in one or more U.S. CCPs being designated as systemically important to the EU financial system.  Such a designation could subject U.S. CCPs to direct supervision by ESMA, which risks market fragmentation and could inject systemic risk into the U.S. financial system.  This must be avoided, and the Commission will continue to review its engagement with EU entities as necessary. 

I continue to believe that no U.S. CCP poses a systemic risk to the EU financial system.  To the extent European authorities believe any U.S. CCP does in fact pose a systemic risk to the EU financial system, I would like to understand the reasons for this belief.  Such an understanding may allow the Commission to address the underlying causes of such concerns.  For example, if EU authorities believe the practice of posting European sovereign debt and Euro cash collateral to a U.S. CCP raises systemic risk concerns, the Commission could consider whether or not to allow such practices to continue. 

Signs of a lack of comity or deference may prompt additional reviews of exemptions and relief, similar to the Commission’s recent consideration of relief from the margin rule for uncleared swaps involving the European Stability Mechanism.  There is an opportunity to come to an agreement on the appropriate, deferential, and reciprocal means of supervisory cooperation that would allow each supervisor to monitor for any systemic risk that may be posed to the supervisor’s jurisdiction.

I hope that the recent positive signs from our European counterparts will continue, so that the Commission can maintain or provide further appropriate accommodations to European entities—mindful that cross-border trading, clearing, and intermediation all work to reduce fragmentation in our global derivatives markets.

The CFTC Veterans Affinity Group

Our veterans are an invaluable part of the fabric of our great nation.  Since the American Revolution, tens of millions of Americans have served our country in uniform.  As we approach Veterans Day, traditionally observed on November 11th, we are reminded that we are all forever indebted to them for their service and sacrifice.  Today, there are approximately 20 million veterans living in the United States.  We at the CFTC are proud to call more than 50 of them our colleagues.  They serve at every level of this organization, including on our executive leadership team.  I am honored to announce today that the CFTC will launch its first ever Veterans Affinity Group.

The primary purpose of the CFTC’s affinity groups is to assist the Commission in attracting, retaining, and promoting a diverse workforce of the best and brightest.  These groups are a valuable mechanism to build a culture committed to realizing our shared vision of being the global standard for sound derivatives regulation by offering employees leadership and professional development opportunities.[6]  Specifically, the Veterans Affinity Group will reinforce the agency’s core value of Teamwork[7] while highlighting the contributions veterans bring to our workforce.

The inception of the agency’s Veterans Affinity Group is a salute to all who have served.  I want to extend my deepest thanks and gratitude to my fellow Commissioners and their staffs, the Office of Minority and Women Inclusion, and the Office of the Executive Director for assisting me in turning this idea into reality.

 

[1] Pursuant to regulation 48.7, our staff reviews the following items in assessing regulatory comparability by foreign boards of trade: (1) membership and governance structure; (2) the automated trading system through which U.S. participants will trade; (3) the terms and conditions of the contracts made available for direct-access trading; (4) settlement and clearing; (5) the regulatory regimes governing the foreign board of trade and the clearing organization; (6) the rules and rule enforcement of the foreign board of trade and its clearing organization; and (7) information-sharing requirements applicable to the home country regulator, the foreign board of trade, and the clearing organization.
 

[2] See CFTC Letter No. 05-16 (August 26, 2005). 

 

[3] CFTC Letter No. 99-33 (Aug. 10, 1999), as amended, CFTC Letter No. 06-24 (Sept. 29, 2006).  The no-action relief presently covers the following contracts traded on Euronext Paris: CAC 40 Futures; CAC 40 Mini Futures; FTSEurofirst 80 Index Futures; FTSEurofirst 100 Index Futures; and FTSE EPRA/NAREIT Europe Index

 

[4] In addition to the contracts for which it presently has no-action relief to permit trading by U.S. participants, Euronext Paris’s foreign board of trade registration application seeks to allow direct access trading for U.S. participants in the following contracts: CAC40 Dividend Index Futures; Corn Futures; European Rapeseed Futures; Milling Wheat Futures; Options on Corn Futures; Options on European Rapeseed Futures; Options on Wheat Futures; Wood Pellet Futures; Rapeseed Meal Futures; Rapeseed Oil Futures; Options on Rapeseed Meal Futures; Options on Rapeseed Oil Futures; and Nitrogen Fertilizer Futures.

[5] See CFTC Letter No. 04-33 (Oct. 25, 2004).

 

[6] See the CFTC’s Vision Statement at https://www.cftc.gov/About/Mission/index.htm.

 

[7] See the CFTC’s Core Values at https://www.cftc.gov/About/Mission/index.htm.