CFTC Requests Comment on Issues Arising from Regulated Entities' Affiliation
The CFTC Divisions of Market Oversight, Clearing and Risk and Market Participants requested comment on potential issues related to affiliations between clearing and trading platforms (i.e., DCOs, DCMs and SEFs) and market intermediaries (e.g., FCMs).
The Divisions requested comment on how such affiliations might affect the carrying out of supervisory responsibilities and on other concerns, "including anti-competitive effects, treatment of nonpublic information, and the adequacy of the applicable financial resources." Further, the Divisions requested input as to (i) how a DCO affiliation with an FCM would impact margin requirements, risk management and liquidity, and financial resources and (ii) how "self-regulatory" authority given to clearing and trading platforms would be applied to their own affiliates.
The CFTC said that comments will be accepted for 60 days from June 28, 2023 (i.e., the date on which the request was published).
Commissioner Statements
- CFTC Commissioner Christy Goldsmith Romero. Ms. Romero said that she is "open to considering changes to traditional market structure," but only if it does not result in increased risk for customers and financial stability. Ms. Romero urged further study to consider unregulated affiliates, "including ... market makers, settlement facilities, custodians, and spot exchanges."
- CFTC Commissioner Summer K. Mersinger. Ms. Mersinger called the request for comment an "important initial step" to address issues regarding common ownership and control of regulated entities.
- CFTC Commissioner Caroline D. Pham. Ms. Pham said that understanding the dynamics in the "complex" relationship between DCOs, DCM, SEFs and intermediaries is "crucial" and that existing regulations are designed to address such issues.
Commentary
While the Divisions did not specifically mention LedgerX's "disintermediated" clearing proposal (which was withdrawn after FTX's demise) or CME's pending application to establish an FCM, it seems clear they were significant actions that led to this request for comment and raise fundamental questions as to market structure and conflicts of interest.