CFTC Requests Comment on SD/FCM Risk Management Rules
The CFTC requested comment on potential amendments to the risk management program ("RMP") and reporting requirements for swap dealers and futures commission merchants under CFTC Rule 23.600 ("Risk Management Program for swap dealers and major swap participants") and CFTC Rule 1.11 ("Risk Management Program for futures commission merchants").
The CFTC said that reconsideration of the rules is based on a number of factors, including (1) confusion and inconsistency in the requirements for SDs and FCMs; (2) "significant variance" observed in how firms define and report on risk areas; (3) the need for potential additional areas of risk to be considered; and (4) the format and timing of data being filed.
In the Request for Comment, the CFTC asked for feedback on:
- RMP Governance. The CFTC asked for input on whether the risk management program rules should (i) be amended to revise the definitions of "governing body" and "senior management," (ii) explicitly address reporting lines in a risk management unit ("RMU"), (iii) implement standards for the qualification of risk management personnel and (iv) provide further clarification regarding an RMU's independence from an SD's business trading unit.
- RMP Consideration. CFTC Rules regarding RMPs identify several risks which SDs and FCMs must consider. The CFTC asked for feedback on (i) additional risk considerations that should be taken into account and (ii) definitions that should be added for each identified risk type.
- Periodic Risk Exposure Reports. The CFTC asked for feedback on whether (i) the frequency at which SDs and FCMs are required to submit risk exposure reports should be amended, (ii) the content requirements of such reports should be amended and/or harmonized with those of NFA, (iii) requirements should be updated regarding notification to senior management of detected material risk and (iv) any violations of RMP policies or gaps in risk management controls should be included in such reports.
Comments are due 60 days after publication in the Federal Register.
CFTC Comment
CFTC Commissioner Christy Goldsmith Romero emphasized that sound risk management is "critical" to financial stability and that the CFTC must keep pace with emerging risks by re-evaluating current risk management rules. Ms. Goldsmith Romero pointed to "evolving technologies," including digital assets, artificial intelligence and cloud services, stating that the technologies introduce new risks. She referenced the high exposure to digital assets of the recently failed banks.
Commentary
This review of the risk management program requirements for SDs and FCMs is (potentially) a good step for the CFTC to take, both in terms of regulatory efficiency and oversight and in terms of facilitating compliance. It is notable that one of the reasons the CFTC gave for supporting this advanced notice of proposed rulemaking is the feedback the agency received from a number of swap dealers that quarterly risk reports are created solely for compliance purposes and not relied upon for internal risk management.
It would be good if, as suggested in certain of the posed questions, the CFTC moves away from a one-size-fits-all approach and recognizes that CFTC registrants are already subject to a number of other risk management program requirements - most notably, those adopted by U.S. and non-U.S. banking regulators.