On August 28, 2018, the US Senate confirmed Dan M. Berkowitz and Dawn D. Stump to be commissioners of the US Commodity Futures Trading Commission (CFTC or Commission), returning the Commission to its full five-person complement.1 The CFTC consists of five commissioners appointed by the president to serve staggered five-year terms. Mr. Berkowitz and Ms. Stump will join Chairman J. Christopher Giancarlo, Mr. Brian D. Quintenz and Mr. Rostin Behnam as CFTC commissioners. It is expected that Mr. Berkowitz and Ms. Stump will be sworn in in the coming days.
What are the backgrounds of the two new commissioners?
Mr. Dan M. Berkowitz, who takes a Democratic seat on the CFTC and replaces Commissioner Sharon Y. Bowen, was a partner at WilmerHale, co-chairing the firm’s futures and derivatives practice. Prior to his tenure at WilmerHale, Mr. Berkowitz served as the CFTC’s general counsel during the Obama Administration, which included, among other things, writing rules and regulations to implement the Dodd-Frank Act. President Donald Trump nominated Mr. Berkowitz on April 16, 2018. The US Senate Committee on Agriculture, Nutrition and Forestry (Senate Agricultural Committee) held confirmation hearings on July 24, 2018, and approved the nomination on July 31, 2018. Mr. Berkowitz’s term expires April 13, 2023.
Ms. Dawn D. Stump, who takes a Republican seat on the CFTC and replaces Commissioner Timothy G. Massad, was president of Stump Strategic, a consulting firm she founded in 2016. Prior to this, Ms. Stump was the executive director and senior vice president of US Policy for the Futures Industry Association and also served as a vice president at the New York Stock Exchange. Ms. Stump was also a former legislative staffer in both the US Senate and the US House of Representatives, including spending a number of years on the Senate Agricultural Committee. President Trump nominated Ms. Stump to be a commissioner on June 12, 2017. The Senate Agricultural Committee held confirmation hearings on July 27, 2017, and reported favorably on the nomination on August 2, 2017. Ms. Stump’s term expires April 13, 2022.
Have the new commissioners given any indication of how they will address the issues facing the CFTC?
Mr. Berkowitz, in his statement to the Senate Agricultural Committee, stated that he would “work diligently to ensure the CFTC’s regulatory program continues to work for and protect the farmers, ranchers, producers, consumers, and other end users that rely upon these markets.”2 Mr. Berkowitz noted his belief that the Dodd-Frank Act and the implementation of that Act by the CFTC and the industry have substantially reduced systemic risks, strengthened market integrity, enhanced transparency and improved public confidence in markets. Mr. Berkowitz noted that the CFTC’s regulatory program should not be fixed as of any particular point in time; rather it should adjust to evaluate and respond to new information and market conditions. One such example that Mr. Berkovitz included in his statement is the emerging market for cryptocurrencies.3 Mr. Berkowitz also stated that a “one size fits all” approach may not be appropriate since agricultural commodities markets and financial commodities markets present different regulatory issues. Mr. Berkowitz stated that he favors consultation and coordination with other federal regulators in developing and implementing regulation and believes the CFTC should continue to be active in promoting international harmonization.4
Ms. Stump indicated in her written statement to the Senate Agricultural Committee that her experience has been informed by the various energy and financial market initiatives she worked on as Senate staff. Ms. Stump noted that she helped negotiate an effort by the Senate to ensure that the CFTC has proper oversight authority over principal-to-principal transactions executed on electronic trading facilities, known as exempt commercial markets. While at the Senate Agricultural Committee, Ms. Stump was also involved in the effort to respond to the financial crisis and was specifically tasked with examining how to regulate standardized credit and interest rate swaps as well as the more tailored parts of the over-the-counter swaps market.5 Ms. Stump stated her belief that the derivatives markets are dynamic and constantly evolving, requiring regulators to be nimble enough to respond accordingly. She noted that there is a need to update the regulatory structure for customized swaps, and that the CFTC must be vigilant about reviewing and refining regulation so that it is calibrated accordingly. Ms. Stump also noted that the recently expanded portfolio of derivatives products and market participants under the CFTC’s regulatory oversight requires the agency to expand its expertise, without losing sight of its legacy mission of ensuring that the futures markets are performing a price discovery function void of manipulation.6
What issues and/or decisions are facing the Commission now that it is finally at full strength?
There is a plethora of issues waiting to be addressed by the Commission. The main issues are:
- Finalization or possible re-proposal of the position limits rules;7
- Finalization of the swap dealer de minimis rules;8
- Finalization or possible re-proposal of the capital rules;9
- Revision of swap data reporting rules;10
- Implementation of Swap Execution Facility (SEF) rule reform, including:
- Eliminating the current Made-Available-to-Trade (MAT) process;11
- Requiring that all swaps subject to mandatory clearing are subject to the trade execution requirement;12
- Allowing MAT swaps to be traded through all methods (beyond order book and Request-for-Quote (RFQ-to-3));13
- Establishing testing, registration and standards of conduct for swaps professionals;14
- Ensuring that swaps formation is not happening at Introducing Brokers (IBs) but rather on SEFs;15
- Revising the 15-second rule and the requirement that block trades must be executed off-platform;16 and
- Codifying no action letters regarding confirmation requirements for uncleared swaps, error trade policies, and audit trail requirements for post-execution allocation information.17
- Relief for small financial end-users from clearing and margin requirements;18 and
- Support of Fintech innovations such as the use of Distributed Ledger Technology.19
Also, there are a number of Project KISS revisions that may be brought before the full Commission, including:
- Clearing: potential revisions to customer initial margin requirements and the requirement that Derivatives Clearing Organizations (DCOs) that require full collateralization meet certain risk management requirements;
- Reporting: potential revisions to aggregation notice filings and Large Trader Reporting;
- Swap Dealers: potential revisions to disclosure obligations and the treatment of “intended to be cleared” (ITBC) swaps for swap dealers;
- Futures Commission Merchants (FCMs): potential revisions to rules regarding receipt and holding of customer funds, filing requirements and risk management requirements; and
- Commodity Pool Operators (CPOs) / Commodity Trading Advisers (CTAs): potential revisions to registration requirements for family offices, JOBS Act solicitation activities and business development companies.20
Thus, the full Commission has a full slate of issues to consider across a range of asset classes and market actors. Derivatives market participants will be watching to see which issues the Commission tackles first in order to ensure that all relevant viewpoints are heard.