On April 29, 2019, the Commodity Futures Trading Commission (CFTC) approved a proposed rule to amend certain regulations that apply to derivatives clearing organizations (DCOs) under Part 39 of the CFTC’s regulations, which implements the statutory core principles for DCOs. Part 39 generally covers registration and regulation of DCOs that centrally clear futures, options and swaps regulated by the Commission. The idea of central clearing of futures positions has been a fundamental risk mitigation measure for derivatives market participants in the United States. DCOs’ role in the clearing infrastructure is critical as managing an effective clearinghouse registration and regulation is key to facilitating efficient derivatives markets and preventing another financial crisis similar to the 2008 financial crisis. From conception, CFTC staff has worked with DCOs to address uncertainties arising out of interpretation and implementation of the requirements set forth in Party 39, ultimately leading to the proposed amendment.
The proposed amendment is in line with CFTC’s broader enterprise of Project Kiss, an agency-wide initiative to adopt appropriate changes and simplify agency rules, regulations and practices to make them less burdensome, less costly and more transparent to all participants. Among other things, the proposed amendment would streamline the registration and reporting process, address certain risk management and reporting obligations and add new requirements regarding default procedures and event-specific reporting in response to recent events. To do so, the Commission is proposing to revise or delete certain provisions, further define or provide more explicit direction in Part 39 to improve the clarity of the original text and codify staff relief and guidance. The overall goal is to provide greater certainty and uniform rules, which is beneficial for fairness, consistency and improving risk management across the clearing space.
For example, Regulation 39.16 would be amended to improve requirements surrounding member default management. The amendments would explicitly require DCOs to have a default committee that must include clearing members and require a DCO to include members in tests of the default management plan. This is likely a clear response to the recent member default at NASDAQ Clearing, highlighting the importance of default management mechanisms, safeguards and information sharing when a default occurs.
Commissioner Dan M. Berkovitz supports the amendment to Part 39. According to Berkovitz, the Commission adopted regulations in 2011 and 2013 to further implement DCO core principals and Title VIII of the Dodd-Frank Act. Berkovitz believes enough time and experience in implementing these regulations and subsequent developments have passed for the CFTC staff to now provide guidance and address concerns. Berkovitz states that the new governance regulations are beneficial and while many provisions set out only general principles, rather than providing specific guidance or prescriptive standards, he looks forward to public comments on whether more explicit guidance requirements would be appropriate for certain provisions. The comment period is now open and will end 60 days after the proposal is published in the Federal Register.
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