There has been a flurry of activity at the Commodity Futures Trading Commission (“CFTC”) in recent weeks.  As we reported previously, the CFTC approved three final rules, including the much-anticipated position limits rule, at its October 15 open meeting, and announced significant organizational changes to its operating divisions on November 3.  This post highlights additional significant actions by the CFTC in October and November and previews what is next for the CFTC under a Biden Administration.

CFTC Rulemaking

• At a joint open meeting between the CFTC and the Securities and Exchange Commission (“SEC”) on October 22, the agencies approved a joint final rule that will lower from 20 percent to 15 percent the margin requirement for unhedged security futures positions held in a futures account, thereby aligning this requirement with the margin requirement for security futures positions held in a securities portfolio margin account. The final rule was accompanied by a request for comment on potential ways to implement portfolio margining for uncleared swaps and non-cleared security-based swaps.
• At an open meeting on November 2, the CFTC approved amendments to its part 50 regulations regarding swaps exempt from the clearing requirements. Specifically, the amendments adopt a new exemption for swaps entered into by central banks, sovereign entities, and other domestic and international financial institutions.
• Also on November 2, the CFTC announced that it unanimously approved an amended order exempting eight Recognized Market Operators in Singapore from swap execution facility (“SEF”) registration requirements. The CFTC determined that these market participants are eligible for this exemption because it found that they are subject to a comparable, comprehensive regulation and supervision regime in their home country.
• On November 18, the CFTC unanimously approved a final rule establishing a framework for it to grant exemptions from derivatives clearing organization (“DCOs”) registration requirements for certain clearing organizations organized outside the United States. To qualify for this exemption, the clearing organization must be subject to comparable, comprehensive supervision and regulations by its home country regulator.  The final rule notes that, to date, four such clearing organizations have received this exemption.
• Also on November 18, the CFTC unanimously approved a final rule on SEFs, which codifies no-action letters relating to package transactions and error trades. The final rule allows market participants to choose the most suitable execution method for package transactions (i.e., transactions in which multiple component transactions are executed together), provided that the trade occurs through a SEF.  The final rule also codifies a principles-based approach that allows a SEF to establish suitable error trade policies, while requiring a SEF to require its participants to inform it of error trades and correcting trades, such that the SEF can guard against future error claims.

Division Actions

• On October 21, the Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued Staff Letter No. 20-34 to advise futures commission merchants on appropriate risk management practices when accepting or holding virtual currencies as customer funds.
• On November 13, the Division of Market Oversight (“DMO”) extended temporary no-action relief to SEFs and other market participants through Staff Letter No. 20-35. The relief applies to circumstances in which the SEF has rules and/or procedures that use the SEF’s non-order book trading system or platforms to facilitate block trades for swaps that are intended-to-be-cleared (and thus may not be compliant with CFTC Regulation 43.2), provided that certain conditions are met.  The no-action relief expires on the implementation date of the CFTC’s part 43 real-time public reporting rules.
• Also on November 13, the DMO issued Staff Letter No. 20-36 to extend temporary no-action relief to SEFs from the requirement to capture post-execution allocation information in their audit trail data, which will allow DMO to continue assessing these audit trail requirements. The no-action relief expires on the earlier of (i) the end of November 15, 2021; or (ii) the CFTC acting through rulemaking or order to provide a permanent solution.
• On November 19, the DMO issued Staff Letter No. 20-37 to extend no-action relief to CFTC-registered swap dealers and major swap participants established in Australia, Canada, the European Union, Japan, Switzerland, and the United Kingdom with respect to certain swap data reporting rules in the CFTC’s regulations. The no-action relief expires on the earlier of (i) December 1, 2020; or (ii) 30 days after the CFTC issues a comparability determination on swap data rules for the applicable jurisdiction.

Other CFTC Actions

• On October 23, CFTC Chairman Heath Tarbert and SEC Chairman Jay Clayton signed a joint letter announcing a one-year pilot program to formalize the “bad actor disqualification” process. Under SEC Regulations A and D, the entry of a final order that is based on a violation of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct against a respondent by the CFTC disqualifies the respondent from relying on various exemptions from the registration requirement for securities offerings. However, such disqualification may be waived by the CFTC.  In the joint letter, the agencies agreed to share information during the enforcement process and to coordinate with each other on whether disqualification should arise as a consequence of the CFTC order.
• On October 27, Chairman Tarbert issued a directive to CFTC staff on the use of staff letters and guidance. The directive emphasizes that CFTC staff should use staff letters only in circumstances that are not suitable for general rulemakings.  For example, the directive states that no-action relief should not establish CFTC policy and that interpretive letters, while they may be relied upon by the public (unlike no-action relief), may add meaning to an underlying requirement but likewise should not set new policy.

What’s Next for the CFTC?

Chairman Tarbert’s tenure at the CFTC has been marked by an active rulemaking effort; indeed, the November 18 SEF rule is the 32nd to be approved by the CFTC under his leadership.  Some of these rules were only passed on party lines – such as the position limits final rule, capital requirements for swap dealers, and cross border activity for swap dealers – but many others were approved unanimously.

The CFTC is likely headed for a significant shakeup come January 2021 with departing commissioners and a leadership change on the horizon.  First, Republican Commissioner Brian D. Quintenz, whose term expired in April 2020, has announced his intention not to seek a second term; he likely will leave the agency before year’s end.  Second, comity traditionally dictates that the CFTC Chairman will be of the party that controls the White House.  Thus, Chairman Tarbert, who was appointed to lead the agency by President Donald Trump, will either step into a Commissioner (i.e., non-Chairman) role or leave the Commission altogether – in which case it is likely that one of the Democratic Commissioners, Dan M. Berkovitz or Rostin Behnam, will be named Acting Chairman.  Both of these Democratic Commissioners have dissented from several of the rules passed under Chairman Tarbert, including those noted above.  As such, it is reasonable to presume that the initial focus of a Democratic-led agenda at the CFTC will be to review and perhaps unwind some of these more controversial recent rules.

Regardless of who becomes the next Chairman, we expect that the agency will continue to be very active on the regulatory front, both by finalizing new rules and by directing the manner in which recently-finalized rules will be implemented.  But until January 20 arrives and the agency actually turns over in party leadership, the Republicans still control the agenda, and Chairman Tarbert still has a few rules to consider and finalize, including the controversial revised electronic trading rule.  We will continue to follow these developments on the Covington Financial Services blog.