When the Commission considered the proposed rule to amend the compliance requirements for commodity pool operators (CPOs) on Form CPO-PQR,[1]  I observed that the esteemed 19th century mathematician Charles Babbage had asked “if you put into the machine the wrong figures, will the right answers come out?”[2]  Baggage foresaw what would evolve in the 20^th century as the “garbage-in, garbage-out” predicament—that is, the concept that flawed, or nonsense, input data produces nonsense output or “garbage.” 

Since becoming Chairman, I have prioritized improving the CFTC’s approach to collecting data.  As a federal agency, we must be selective about the data we collect, and then make sure we are actually making good use of the data for its intended purpose.[3]  For example, we recently adopted three final rules to revise CFTC regulations for swap data reporting, dissemination, and public reporting requirements for market participants.[4]  One purpose of those amendments was to simplify the swap data reporting process to ensure that market participants are not burdened with unclear or duplicative reporting obligations that do little to reduce market risk or facilitate price discovery.[5]

Today we are engaged in a similar exercise.  The amendments to the compliance requirements for CPOs on Form CPO-PQR that we are considering reflect the CFTC’s reassessment of the scope of the form and how it aligns with our current regulatory priorities.  By refining our approach to data collection, the final rule—in conjunction with our current market surveillance efforts—will enhance the CFTC’s ability to gain more timely insight into the activities of CPOs and their operated pools.  At the same time, the final rule will reduce reporting burdens for market participants.

Background on Form CPO-PQR

Form CPO-PQR requests information regarding the operations of a CPO, and each pool that it operates, in varying degrees of frequency and complexity, depending upon the assets under management of both the CPO and the operated pool(s).  When it adopted Form CPO-PQR in 2012, the Commission determined that form data would be used for several broad purposes, including:

• increasing the CFTC’s understanding of our registrant population;
• assessing the market risk associated with pooled investment vehicles under our jurisdiction; and
• monitoring for systemic risk.[6]

For the majority of pool-specific questions on Form CPO-PQR, the Commission believed the incoming data would assist the CFTC in monitoring commodity pools to identify trends over time.  For example, the CFTC would get information regarding a pool’s exposure to asset classes, the composition and liquidity of a pool’s portfolio, and a pool’s susceptibility to failure in times of stress.[7]

Shortcomings of Form CPO-PQR

Seven years of experience with Form CPO-PQR, however, have not borne out that vision.  To begin with, in an effort to take into account the different ways CPOs maintain information, the Commission has allowed CPOs flexibility in how they calculate and present certain of the data elements.  As a result, it has been challenging, to say the least, for the CFTC to identify trends across CPOs or pools using Form CPO-PQR data.  In addition, taking into account the volume and complexity of the data it was requesting, the Commission decided not to require the data to be provided in real-time, but instead mandated only post hoc quarterly or annual filings.

As the CFTC staff has reviewed the data over the years, it has become apparent that the disparate, infrequent, and delayed nature of CPO reporting has made it difficult to assess the impact of CPOs and their operated pools on markets.  This is largely because conditions and relative CPO risk profiles may have changed, potentially significantly, by the time Form CPO-PQR is filed with the CFTC. 

Sound Regulation Means Collecting Only Information We Intend to Use

What we need is not over-regulation or even de-regulation, but rather sound regulation.  In the midst of the coronavirus pandemic, when we are facing the greatest economic challenge since the 2008 financial crisis, and possibly since the Great Depression, the fact that we are asking market participants to put significant time and effort into providing us data that is difficult to integrate with the CFTC’s other more timely and standardized data streams is not sound regulation.  Frankly, it is wasteful and an example of ineffective government.

My colleague Commissioner Dan Berkovitz made the following observation in connection with a different rulemaking: “In addition to obtaining accurate data, the Commission must also develop the tools and resources to analyze that data.”[8]  He is spot on.  But I believe the converse is also true.  We should not collect data we cannot use effectively.  In the case of Form CPO-PQR, this means not requiring market participants to provide information that the CFTC has neither the resources nor the ability to analyze with our other data streams.  Our credibility as a regulator is strengthened when we honestly admit that our regulations ask for data that we both have not used effectively and have no intention of using going forward.  That is what we are doing today.

Alternative, and Sometimes Better, Sources of Data Are Available to the Commission

Form CPO-PQR is not our only source of data regarding commodity pools.  The CFTC has devoted substantial resources to developing other data streams and regulatory initiatives designed to enhance our ability to surveil financial markets for risk posed by all manner of market participants, including CPOs and their operated pools. 

These alternative data streams, which include extensive information related to trading, reporting, and clearing of swaps, are in some cases more useful or robust than information from Form CPO-PQR.  Importantly, most of the transaction and position information the CFTC uses for our surveillance activities is available on a more timely and frequent basis than the data received on the current iteration of Form CPO-PQR.  Furthermore, CFTC programs to conduct surveillance of exchanges, clearinghouses, and futures commission merchants already include CPOs and do not rely on the information contained in Schedules B and C of Form CPO-PQR.

Taken together, the CFTC’s other existing data efforts have enhanced our ability to surveil financial markets, including with respect to the activities of CPOs and the pools they operate.  In general, the CFTC’s alternate data streams provide a more prompt, standardized, and reliable view into relevant market activity than that provided under Form CPO-PQR.  As revised, data from Form CPO-PQR will more easily be integrated with these existing and more developed data streams.  This will enable the CFTC to oversee and assess the impact of CPOs and their operated pools in a way that is both more effective for us and less burdensome for those we regulate.

In keeping with these principles—particularly the principle that we should not collect data we cannot use effectively—I note that as part of this rulemaking the Commission is instructing the staff to evaluate the ongoing utility of the Pool Schedule of Investments information in revised Form CPO-PQR.  This will include comparing it to the 2010 Schedule of Investments.  The review will be completed within 18-24 months following the date upon which persons are required to comply with the final rule and may result in further recommended actions.  During the review period, the staff also may identify and extend targeted relief for data fields that the CFTC receives from other sources.

Legal Entity Identifiers Are Something We Need

The final rule does more than simply eliminate certain data collections.  It also requires the collection of an additional piece of key information: legal entity identifiers (LEIs) for CPOs and their operated pools.  LEIs are critical to understanding the activities and interconnectedness within financial markets.  Although LEIs have been around since 2012 and authorities in over 40 jurisdictions have mandated the use of LEI codes to identify legal entities involved in a financial transaction,[9] this is a new requirement for Form CPO-PQR.  The lack of LEI information for CPOs and their operated pools has made it challenging to align the data collected on Form CPO-PQR with the data received from exchanges, clearinghouses, swap data repositories, and futures commission merchants.  As a result, we cannot always get a full picture of what is happening in the markets we regulate.  Adding an LEI requirement for CPOs and their operated pools will help give us a complete perspective.

In addition, the final rule better aligns Form CPO-PQR with Form PQR of the NFA, which all CPOs must file quarterly and which the NFA may revise to include questions regarding LEIs.  Under these circumstances, we could permit a CPO to file NFA Form PQR in lieu of our Form CPO-PQR as revised.  In doing so, we would offer CPOs greater filing efficiencies without compromising our ability to obtain relevant data.

Form CPO-PQR, As Revised, Has Other Regulatory Benefits

The Dodd-Frank Act established the Office of Financial Research (OFR) nearly a decade ago to look across our financial system for risks and potential vulnerabilities.[10]  It was contemplated that, for the OFR to do its work, it would have access to data from other U.S. financial regulators.  Yet to date, the CFTC has shared none of the Form CPO-PQR data with the OFR, largely because of the shortcomings outlined above.

Once Form CPO-PQR is revised, it has the potential to be useful not only to the CFTC.  To this end, we have negotiated a memorandum of understanding (MOU) with the OFR, under which we will for the first time provide to the OFR the information we collect regarding CPOs.  Under the MOU, the OFR will receive the Form CPO-PQR Information consistent with the provisions of Section 8(e) of the CEA, which establishes important protections for CFTC data sharing.[11]

Conclusion

For these reasons, I am pleased to support the Commission’s final rule to amend the compliance requirements for CPOs on Form CPO-PQR.  As revised, Form CPO-PQR will focus on the collection of data elements that can be used with other CFTC data streams and regulatory initiatives to facilitate oversight of CPOs and their operated pools.  This will primarily reduce current data collection requirements, but also mandate disclosure of LEIs by CPOs and their operated pools.  Focusing on enhancing data collection by the agency is no doubt tedious.  Nonetheless, I am convinced it leads to smarter regulation that helps promote the integrity, resilience, and vibrancy of U.S. derivatives markets.