September 29, 2023

Trade Groups Comment on Affiliations between Markets and Intermediaries

In response to a CFTC request for comment, NFA, FIA and ISDA addressed potential conflicts of interest and other issues related to affiliations between clearing and trading platforms (i.e., DCOs, DCMs and SEFs) and market intermediaries (e.g., FCMs).

As previously covered, the CFTC staff requested comment on how such affiliations might affect the carrying out of supervisory responsibilities, including "anti-competitive effects, treatment of nonpublic information, and the adequacy of the applicable financial resources." A wide variety of market participants and other advocates provided feedback on the request, including:

  • NFA. NFA stated that DCMs and SROs have appropriately addressed conflicts associated with having FCM investors and affiliated FCMs, and said that these types of relationships have been appropriately considered by the CFTC in the past. NFA recommended that the CFTC (i) consider amending CFTC Rule 1.52 ("Self-regulatory organization adoption and surveillance of minimum financial requirements") to prohibit a DCM from acting as the designated SRO ("DSRO") for an affiliated FCM to prevent associated conflicts of interest and (ii) address conflicts and competitive issues arising from a DSRO oversight relationship with a non-affiliated FCM.
  • FIA. FIA emphasized the importance of the CFTC’s current "tiered and interdependent scheme of rules distribution" within the derivatives markets which allows registrant entities to hold intermediaries accountable to laws "on a fair and impartial basis." FIA expressed concern with potentially "collapsing [the] existing multi-tiered ecosystem – with its inherent checks and balances – without proper analysis." FIA urged the CFTC against permitting an SRO to be the designated SRO for an FCM affiliate - in order to preserve impartiality.
  • ISDA. ISDA asserted that existing CFTC regulations "do not sufficiently address the potential for conflicts of interest" regarding situations in which a DCO has SRO supervisory authority over an affiliated intermediary. ISDA added that the mitigants included in the CFTC’s request for comment may not resolve conflicts of interest resulting from a DCO’s relationship with an affiliated intermediary. While maintaining that the current regulatory framework of checks and balances "should not be undervalued," ISDA requested that the CFTC provide new principles-based rules to address these conflicts.

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