In response to the May 2017 solicitation by the Commodity Futures Trading Commission for public input on how to apply existing rules, regulations and practices in a less onerous and costly way – Project "KISS" – many industry participants submitted recommendations by the submission deadline on September 30. KISS stands for “keep it simple stupid.” (Click here for background in the article, "Jay Clayton Sworn In as New SEC Chairperson; CFTC Asks to Be KISSed and Told How to Apply Rules More Efficiently" in the May 7, 2017 edition of Bridging the Week.)
Among the wide scope of submitted proposals, the Futures Industry Association recommended that new rules and policies be adopted through rulemaking and not enforcement and that the CFTC coordinate better with self-regulatory organizations to avoid duplicative enforcement and not charge registrants with failure to supervise solely because an underlying violation may have occurred. FIA also said the CFTC should ensure that clearinghouses’ contribution to their own default waterfalls (i.e., “skin in the game”) adequately incentivizes them and their shareholders to engage in prudent risk management, and that clearing members are never responsible for clearinghouses’ non-default losses.
A number of commentators, such as CME Group and Commodity Markets Council, requested that the Commission withdraw proposed Regulation Automated Trading, or if the CFTC determines to proceed with it, make any proposed rule principles-based. CME Group, along with CMC and BP Energy Company, also recommended substantial changes to the CFTC’s proposed position limits rule, including broadening the definition of bona fide hedging and the list of enumerated hedging categories. FIA and CME Group additionally called for a re-consideration of permitted investments for customer collateral.
ICE suggested that the CFTC be the primary regulator of all derivatives markets. ICE specifically proposed that the Securities and Exchange Commission harmonize all its derivatives rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act with CFTC rules, particularly those related to credit default swaps.
Citadel LLC proposed that the CFTC and the SEC develop consolidated reporting to ease the burden on dually registered fund managers, while PIMCO urged the Commission to consider the meaning of its prohibition against futures commission merchants guaranteeing customers against losses (click here to access CFTC Rule 1.56). According to PIMCO, the Joint Audit Committee – a representative organization of US futures exchanges and regulatory organizations – relies on this rule to insist that futures commission merchants margin together separate accounts with the same beneficial owner even when under the control of separate managers – adversely impacting those beneficial owners “who use multiple asset managers to manage separate pools of assets with distinct investment strategies.” (Click here to access JAC Regulatory Alert 14-03.)
A subcommittee of the American Bar Association's Business Law Section recommended that the CFTC overhaul its rules related to the liquidation of a futures commission merchant or a derivatives clearing organization in a bankruptcy proceeding to provide a trustee clearer guidance. A number of commentators supported the ABA's recommendations, including FIA and CME Group.
The International Swaps and Derivatives Association asked the CFTC to permanently exempt inter-affiliate swaps from the trade execution requirement and eliminate footnote 88 in the CFTC's cross border guidance to the extent it suggests that a facility would be required to register as a swap execution facility to the extent it meets the definition of a SEF, even though all it executes or trades are swaps not subject to the trade execution mandate (click here to access). According to ISDA, this footnote has prompted non-US trading venues to ban US persons for fear they might be subject to SEF registration requirements. ISDA also asked the CFTC to expand the clearing mandate's end-user exemption to broaden the group of potential beneficiaries, based a risk-based threshold as opposed to an asset-sized based threshold as currently is the case.
Better Markets, however, urged the Commission to be cautious in potentially weakening any existing regulation in response to Project Kiss. According to Better Markets, “Project Kiss raises a serious concern that its inevitable consequence will be to weaken the regulatory structure that the Commission carefully crafted and previously adopted to ensure that our commodities and derivatives markets are as stable, transparent and fair as possible.”
My View: Many of the recommendations of commentators to the CFTC’s Project KISS initiative filed two weeks ago foreshadowed recommendations made last week by the Department of the Treasury in its second report, “A Financial System That Creates Economic Opportunities: Capital Markets.” Treasury issued this report in response to President Donald Trump’s Core Principles for the federal regulation of the US financial system published earlier this year. (Click here for background in the article “Treasury Calls for Better Coordination and Not Merger to Improve SEC and CFTC Efficiencies; Recommends Review of SROs to Minimize Conflicts and Increase Transparency” in the current edition of Bridging the Week.) There are many good ideas among all the proposals, and hopefully some will be more than dreams soon!