On December 13, the Commodities Futures Trading Commission (CFTC) held an open meeting to consider two new rule proposals and the application of Bitnomial Clearinghouse LLC for registration as a Derivatives Clearing Organization (DCO). The Commission discussed and voted to issue two new proposed rules: (1) Operational Resilience Framework for Futures Commission Merchants, Swap Dealers, and Major Swap Participants; and (2) Protection of Clearing Member Funds Held by Derivatives Clearing Organizations. Both proposals were approved as well as Bitnomial’s application for registration as a DCO. Below are statements from the Commissioners on the proposed rules and DCO application.
Also on the initial agenda were two other proposals, (1) Notice of Proposed Rulemaking regarding Swap Date Recordkeeping and Reporting Requirements; and (2) Notice of Proposed Rulemaking regarding Capital and Financial Reporting Requirements for Swap Dealers and Major Swap Participants. However, Chairman Behnam said the Commission will be making an announcement regarding disposition of these other matters in the coming days.
Proposed Rule – Protection of Clearing Member Funds Held by Derivatives Clearing Organizations (DCO): The Commission voted 3-2 to approve the proposed rule which intends to provide protections for clearing members’ funds and other property that are held by a DCO. To implement these protections, the Commission is proposing a definition of “proprietary funds” in Regulation 39.2 to include all money, security, or property received by a DCO from or on behalf of clearing members in connection with futures, options on futures, and swaps contracts cleared by the DCO. The proposed rule has a 60-day comment period which will begin when it is formally published in the Federal Register.
Chairman Rostin Behnam
- I fully support the Commission issuing the notice of proposed rulemaking on the Protection of Clearing Member Funds Held by DCOs. The growth and evolution of the non-intermediated clearing model necessitates the closure of the gap in our regulations that the lack of a regime for the safeguarding and protection of clearing member funds presents. The proposal of safeguards and protections for clearing member funds that are comparable to those applicable to customers is sound policy.
Commissioner Kristin Johnson
- Customer protection has been at the forefront of my agenda during my tenure as a Commissioner, and this proposed rule will continue to give teeth to my mission to champion the customer in our markets. I look forward to carefully considering the comments we receive to further sharpen our approach to promoting fairness and customer confidence.
Commissioner Christy Goldsmith Romero
- I have asked for more time for the CFTC to work on this rule, which would be our first rule on a disintermediated structure. I am strongly in favor of strengthening customer protections for retail participants, including banning commingling of funds. However, under this disintermediated market structure, retail lose their status as customers, which has serious consequences. They are essentially being put into the same role as an FCM that is a clearing member. We received the proposed rule late afternoon on the Wednesday before Thanksgiving, exactly three weeks ago. There was zero advance engagement with Commissioners on its contents, in contrast to the cyber rule.
Commissioner Summer Mersinger
- CFTC staff did not provide enough time for the Commissioners to consider all the implications. The proposal was shared with the Commissioners shortly before the Thanksgiving holiday, I do not know why the agency needed to act on the proposal so quickly.
Vote:
- Commissioner Mersinger and Commissioner Goldsmith Romero voted against the proposal while Chairman Behnam and Commissioner Johnson voted for the proposal. Commissioner Pham voted to concur with the proposed rule.
Proposed Rule – Operational Resilience Framework (ORF) for Futures Commission Merchants, Swap Dealers, and Major Swap Participants: The Commission approved the proposed rule 5-0 which would require covered entities to establish, document, implement, and maintain an ORF reasonably designed to identify, monitor, manage, and assess risks relating to three key risk areas: (1) information and technology security, (2) third-party relationships, and (3) emergencies and other significant disruptions. The ORF would also include requirements related to governance, training, testing, and recordkeeping. The CFTC set a 75-day comment period, which will start after the proposal has been formally published in the Federal Register.
Chairman Rostin Behnam
- The proposal is a holistic, principles-based approach that is calibrated with certain minimum requirements. Specifically, the proposed rule would require covered entities to establish, document, implement, and maintain an ORF reasonably designed to identify, monitor, manage, and assess risks relating to three key risk areas: (1) information and technology security, (2) third-party relationships, and (3) emergencies and other significant disruptions. The ORF would also include requirements related to governance, training, testing, and recordkeeping.
Commissioner Kristin Johnson
- I fully support this proposal. That said, the potential eventual finalization of this rule will highlight a gap between the operational resilience requirements placed on the covered entities, and the requirements on other Commission registrants, particularly DCOs. Safeguards rules currently in place for DCOs are nearing eight years old, and they do not consider the increasingly important risks posed to our registered entities by mission-critical third-party service providers.
Commissioner Christy Goldsmith Romero
- Cyber resilience has been a top priority of mine. I hope that this rule can help advance our markets from cyber response to cyber resilience.
Vote:
- The proposal was unanimously approved to be issued by the CFTC.
Bitnomial Clearinghouse LLC Application for Registration as a DCO: The Commission voted 4-1 to approve Bitnomial as a registered DCO.
Chairman Rostin Behnam
- I support Bitnomial’s registration as a DCO. Bitnomial has demonstrated compliance with each of the Core Principles applicable to DCOs.
Commissioner Kristin Johnson
- Without appropriate guardrails, vertical integration can cause financial instability, prejudice customers, stifle competition, and undermine the proper functioning of our derivatives market. Bitnomial, an exchange, and an FCM are all affiliated entities. The Commission must determine whether Bitnomial has complied with existing statutory and regulatory requirements to register as a DCO.
Commissioner Christy Goldsmith Romero
- This is a precedential decision and would be the first Commission vote to approve a vertically integrated model. I do not understand why the Commission would rush to register this small start-up company, thereby setting precedent, without completing the analysis that we are in the middle of right now.
Vote:
- Chairman Behnam and Commissioner Johnson voted “yes” to the application approval, while Commissioner Goldsmith Romero voted “no,” and Commissioner Mersinger and Commissioner Pham concurred.