Statement of Commissioner Dawn D. Stump Regarding CFTC Open Meeting on April 14, 2020

Teamwork – An Essential Core Value

April 14, 2020

The Commodity Futures Trading Commission (“CFTC” or “Commission”) CFTC may have only recently established core values in an official manner, but they have long-existed within the agency.  Over the past month, the CFTC has done a remarkable job of demonstrating those core values of commitment, forward-thinking, teamwork, and clarity.

Today, I would like to focus my remarks on teamwork.  I have always considered teamwork to be integral to the CFTC’s success, and I often express my views internally on the need to preserve the unique benefits we have cultivated as a result of such engagement, both with the public and private sectors.  We not only coordinate within the CFTC, within the federal government, and within the international community of regulators, but also with the market infrastructure providers and participants who are on the front lines of supporting well-functioning markets.  The past several weeks demonstrate both how essential that teamwork is, and how well we have deployed it.  While the CFTC’s team mentality has been reinforced during recent events, it was built during far less stressful times.  Today, we are considering several matters years in the making, and only possible through the CFTC’s tradition of engagement with and respect for market participants and fellow regulators – within the United States and abroad.

Teamwork, the CFTC and External Market Experts - Updating the CFTC’s Bankruptcy Regime

We are considering the first comprehensive revision to the CFTC’s bankruptcy regime in 37 years.  As recent market events have demonstrated, futures commission merchants (“FCMs”) and derivatives clearing organizations (“DCOs”) are integral to well-functioning derivatives markets.  Throughout the recent market volatility to date, the market infrastructure that supports clearing has functioned as intended while facilitating massive amounts of risk transfer and extraordinary risk management efforts.  The revisions to our bankruptcy rules proposed today are the culmination of an extensive undertaking that has been in the works for years.  The timing of this proposal should in no way be considered an expression of doubt regarding the integrity, stability, or resiliency of FCMs or DCOs in today’s market environment.

I have long believed that one aspect that makes our industry and our agency unique is the level of engagement and spirit of cooperation between derivatives market participants and the CFTC.  This proposal is an exemplary product of that engagement and cooperation.  I thank Bob Wasserman, his team in the Division of Clearing and Risk, and the Part 190 Subcommittee of the Business Law Section of the American Bar Association for their expertise and insights, and for the countless hours they have dedicated to this endeavor.

This proposal is an example of the value in reviewing our regulations to make sure that they are still fit for purpose.  This proposal recognizes technological advancements over the past 37 years, incorporates lessons learned from FCM bankruptcies during that time, and recognizes the necessity of providing more clarity regarding how a DCO would be treated in bankruptcy.

I support the principles-based framework of the Commodity Exchange Act (“CEA”) and the CFTC’s regulations.  But there are some instances – like in a bankruptcy – where more prescription is warranted.  At the same time, each bankruptcy is unique, and some degree of flexibility is required.  I am interested to hear whether we have struck the proper balance of principles vs. prescription here – especially with respect to the new framework established were there to be a DCO bankruptcy.

I look forward to our continued engagement and cooperation on this topic as market participants review and comment upon our proposal.

Teamwork, the CFTC and Fellow Domestic Regulators - Revising CFTC Form CPO-PQR

The type of teamwork required to do our job takes on many different forms, none more critical than working across our own agency’s operational divisions and with other domestic regulatory partners to effectively achieve our distinct responsibilities.  To do so most efficiently, we must consider how various streams of information received here at the CFTC may be leveraged across our divisions.  At the same time, we must acknowledge that many market participants within our regulatory purview also operate in areas overseen by the Securities and Exchange Commission (“SEC”).  We need a clear delineation of requirements derived from our unique responsibilities.  For example, there has been some confusion surrounding the various reports, and their intended utility, that investment advisers supply to each regulator.  Today we are attempting to revert to our core functions.

While the subject of today’s proposal is CFTC Form CPO-PQR, I think it would be helpful to level set the conversation with a review of the different overlapping forms these investment advisors are required to file with various regulatory authorities.  I am hopeful this will demonstrate why a correction is warranted to best achieve the distinct missions of regulators who are tasked to work together, rather than apply duplicative requirements on competing forms.

First, I want to distinguish between Form PF and Form CPO-PQR.  To be clear, Form PF is a form filed with the SEC, not the CFTC.  The authority for Form PF is found in the Dodd-Frank Act, which provided that the SEC could require private funds to file reports to, among other things, assist the Financial Stability Oversight Council (“FSOC”) in assessing systemic risk.  Dodd-Frank also stipulated that the CFTC should join the SEC, in consultation with the FSOC, to promulgate the rules surrounding the content of these reports for dually-registered investment advisers.  I assume this was designed to ensure that the FSOC receives a comprehensive picture of any systemic risk that either agency feels could be presented by dually-registered investment advisers.  However, under the statute, the report is to be provided to the FSOC by the SEC, not the CFTC.  The CFTC does not require Form PF to be filed with us.  We are confident that should we require any such information to achieve our mission, we can easily obtain it from the SEC.

Commodity pool operators (“CPOs”) that file Form PF with the SEC also must file a Pool Quarterly Report (“Form CPO-PQR”) with the National Futures Association (“NFA”) for quarters ending March 31, June 30, and September 30, and with the CFTC for the quarter ending December 31.  This report increases the transparency of activities and investment trends of these CPO registrants within the markets we regulate.

Today, we are refining CFTC Form CPO-PQR to better distinguish its function from that of Form PF.  The new form proposed today significantly reduces complexity and refocuses the information requested on Form CPO-PQR to the CFTC’s specific regulatory tasks.  As a consequence, under the proposal, the CFTC would no longer accept a Form PF filing in lieu of the revised Form CPO-PQR because Form CPO-PQR would now be tailored to the CFTC’s regulatory needs.  All CPOs would be required to file the revised Form CPO-PQR quarterly, but would also be allowed to file NFA Form PQR in lieu of filing the CFTC’s revised Form CPO-PQR.  Since 2011, when the SEC and the CFTC adopted new rules for private fund advisers that are also registered with the CFTC as CPOs or commodity trading advisors (“CTAs”), we have further developed each agency’s data utility needs.  Today’s proposal reflects those lessons learned, and I am interested to receive feedback from the public on the streamlined approach presented therein.

I wish to take this opportunity to commend my colleague, Commissioner Quintenz, on his continued leadership in advancing our core value of teamwork with the SEC.  It is because we have such a relationship with the SEC that we are able to more effectively regulate through information sharing, such as with respect to the data collected on Form PF, without the inefficiency of redundant data collection by both agencies.

Teamwork, the CFTC and Global Regulatory Partners - International Regulatory Coordination and Respectful Deference

We are also considering today two matters that reflect the CFTC’s commitment to working with and deferring, where appropriate, to our fellow regulators in other jurisdictions.  As the current pandemic has demonstrated, our global derivatives markets face global risks, and we must continue to respect, nurture, and utilize our relationships with regulators in foreign jurisdictions.  For these reasons, I support the final rule excluding the European Stability Mechanism (“ESM”) from the definition of “financial end user,” such that uncleared swaps between a covered swap entity and the ESM are not subject to the CFTC’s margin rule.  This rule recognizes and respects that Europe has already determined to exempt the ESM under its own European Market Infrastructure Regulation’s margin rules for derivatives not cleared by a central counterparty.  I also support the proposal exempting from the clearing requirement certain central banks, sovereign entities, and international financial institutions.

Teamwork, the CFTC and Regulated Market Infrastructure Providers - Sharing Responsibility for Customer Financial Information Privacy

I support the amendment to Rule 160.30 that is before us today.  Rule 160.30 requires financial institutions subject to the Commission’s jurisdiction – including FCMs, swap dealers, CPOs, CTAs, introducing brokers, and retail foreign exchange dealers – to have policies and procedures that are reasonably designed to protect the security and confidentiality of customer records and information in their possession.

Just as we are strengthening the data privacy protections of Rule 160.30, the Data Protection Initiative that I announced last year reflects our commitment to robust data protection measures for sensitive data in our own systems.[1]  When it comes to data security, the Commission, like those we regulate, must have both a culture, and policies and procedures, that foster heightened vigilance against the ever-evolving threats that confront us all.[2]  Teamwork between the regulator and the regulated is not only a shared core value, but an essential defense when it comes to protecting data.

Conclusion

In concluding, I want to thank the several teams from the Division of Swap Dealer and Intermediary Oversight and the Division of Clearing and Risk that have carefully prepared the rulemaking documents presented today, patiently answered our questions, and tirelessly worked to accommodate our comments and input.

To reiterate, “teamwork” is not a catchy buzzword we occasionally weave into our speeches here at the CFTC.  We are proud of our long-established commitment to working with stakeholders to achieve effectively regulated markets.  Sometimes we play the position of head coach, sometimes co-captain, and sometimes referee, but in the end our markets and the public benefit from well-coordinated playbooks designed to achieve common goals.   Recent public health concerns and market volatility have tested our system and reminded us that everyone on the team has a critical role to play.
 

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