In an address at the FIA-SIFMA AMG Asset Management Derivatives Forum, CFTC Commissioner Dawn D. Stump offered her perspective on (i) regulatory harmonization, (ii) the CFTC's approach to cross-border swap regulation; (iii) the protection of data by regulators and regulated entities; and (iv) the CFTC's new position limits proposal.
Ms. Stump observed that the CFTC's expanded regulatory authority under the Dodd-Frank Act has resulted in many asset managers becoming subject to CFTC regulation for the first time, in addition to being subject to SEC regulation. She acknowledged that this imposed burdens on both the regulated firms and on the CFTC itself. Ms. Stump said that the CFTC should focus its attention on those areas that were most important to its policy interests. (In this regard, Ms. Stump cited the agency's recently adopted amendments to CFTC Rule Part 4 (see previous coverage).) She also argued to reduce regulatory burdens for dual CFTC-SEC registrants, and increase regulatory certainty, including by "harmonizing" SEC and CFTC requirements.
Ms. Stump noted that the CFTC recently provided further guidance on the application of uncleared margin thresholds (see previous coverage). In July 2019, the CFTC staff issued an advisory clarifying that documentation requirements concerning uncleared swaps would be inapplicable until the $50 million initial margin threshold was exceeded with a particular swap dealer.
Ms. Stump questioned the trajectory of the agency's cross-border approach to swaps regulation. She said that the approach:
- fails to provide exemption from swap execution facility ("SEF") registration for non-U.S. trading platforms based on comparable, comprehensive supervision and regulation, thus preventing U.S. market participants from trading on non-U.S. exchanges that did not want to become registered in the United States;
- includes Cross-Border Guidance that that is a "stark departure" from the traditional CFTC approach of mutual recognition of foreign regulation; and
- requires non-U.S. central counterparties ("CCPs") to register with the CFTC in order to clear swaps for U.S. customers without first assessing whether the CCP is subject to comparable, comprehensive supervision and regulation in its home country.
Ms. Stump proposed returning to "global regulatory coordination and deference regimes with comparable regulation." She advocated:
- issuing SEF equivalence determinations to provide exemption for certain foreign-authorized and regulated trading facilities;
- codifying a modified version of the Cross-Border Guidance (see previous coverage) that would (i) harmonize the CFTC's definition of a "U.S. person" with the SEC's and (ii) establish a new category of entities – "significant risk subsidiaries" – to include firms that are not U.S. persons or guaranteed by U.S. persons, but whose swap dealing activities may impact the U.S. financial system; and
- considering revisions to the CFTC's approach to allowing U.S. customers' access to non-U.S. CCPs.
Data Protection Initiative
Ms. Stump explained that the CFTC will conduct a comprehensive review of the agency's approach to data protection. She advocated for a "holistic data strategy" that would:
- designate a new data privacy officer;
- update the data inventory catalog;
- implement the NIST Privacy Framework;
- examine whether to streamline data reporting requirements;
- review the organizational structure of multiple data functions; and
- remediate data security findings taken from recent Office of the Inspector General reports.
In anticipation of new data protection proposals, Ms. Stump advised regulators to consider: (i) refining the number of required data elements to be reported to include only those with an identified use-case by the CFTC; (ii) methods to decrease the number and type of messages submitted by reporting counterparties, received by swap data repositories, and reviewed by the CFTC; and (iii) extending the time delay for regulatory reporting under CFTC Rule Part 45.
Ms. Stump highlighted the essential components of the CFTC's new position limits proposal (see previous coverage), which would in part apply higher federal position limits to various core referenced futures contracts. While noting that several areas of the proposal needed to be reworked, Ms. Stump reaffirmed her support for it, and encouraged market participants to provide input on how the CFTC can improve its regulatory framework on position limits.
To provide greater regulatory clarity for market participants regarding position limits, Ms. Stump recommended that the CFTC update: (i) deliverable supply estimates for federal spot month limits; and (ii) the list identifying enumerated bona fide hedging practices.
Commentary Steven Lofchie
This is a thoughtful piece that sketched out the likely direction for the CFTC in the coming year. A very worthwhile read for those wanting a view of current thinking at the agency.
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