CFTC Seeks Public Comment on the Risk Management Program Requirements for Swap Dealers and Futures Commission Merchants

The Commodity Futures Trading Commission, CFTC, has announced an upcoming so-called advanced notice of proposed rulemaking (ANPRM) as regards risk management requirements of swap dealers (SDs) and future commission merchants (FCMs) many of which are major Wall Street banks or prudentially-regulated institutions. The ANPRM calls for public input and feedback on various aspects of the current risk management rules and regulations for SDs and FCMs stipulated in CFTC Regulations 17 CFR Part 23, § 23.600 and 17 CFR Part 1, § 1.11, including governance, risk reporting, potential new risk areas, current inefficiencies, and technological advancements. The ANPRM is high level in nature in that it does not propose specific rule amendments or modifications. Instead, it seeks to inquire whether or not targeted changes are needed so that the CFTC rules encompass all relevant significant risk sources, particularly those that have emerged in the past few years, and that the rules are clear, straightforward, non-confusing, and fit for the future.
#### The key issues addressed in the ANPRM are the following:
(1) governance requirements of SDs and FCMs: The current rules set forth specific structural requirements on SDs‘ and FCMs‘ such as the need to establish a risk management unit (RMU) that is independent from any business unit and that directly reports to senior management. In this context, the CFTC also sets out related requirements such as the qualification of relevant staff. The CFTC is now eager to find out how the current rules are working for SDs and FCMs? That is: are there any clarifications needed in terms of terminology or further specifications (e.g. reporting lines within an RMU)?
(2) risks addressed in the risk management requirements of the rules: Both above noted rules specify different types of risks that shall be considered by SDs and FCMs, some including segregation, operational, and capital risks AND some only including „any other risk of relevance for an entity“. As the term „any other risk of relevance“ leaves ample room for interpretations, the CFTC seeks to find out whether or not it should specify any such additional risk such as market risk, credit risk, liquidity risk, foreign currency risk, legal risk, settlement risk. Additionally, in view of technical developments and emerging cyber-security threats, the CFTC seeks to find out whether or not such should be explicitly noted in the rules along with specific risk management requirements.
(3) risk exposure reports of SDs and FCMs: Currently, the CFTC is observing significant variations in the risk exposure reports (RERs) among SDs and FCMs, making it challenging for the CFTC to gain a clear understanding of risk exposures across different entities and over time. There’s neither a defined format in which entities must report, nor is there a specific time schedule for filing. Thus, the Commission would like to somewhat standardize the reports so as to make them more useful and comparable. Additionally, the CFTC is considering whether to include additional risk areas in the regulations based on implementation experiences and market events such as risks posed by affiliates or third-parties or risks posed by performing additional (trading) activities.
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As these are only the key issues addressed in the document, please refer to the original legal text for more detailed, comprehensive information.