Risk Management Program Regulations for Swap Dealers, Major Swap Participants, and Futures Commission Merchants

As previously announced on June 6, 2023 (please see EventID 21420 in this context for more information), the U.S. Commodity Futures Trading Commission, CFTC, has published in the Federal Register (FR) its 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:
Governance Requirements of SDs and FCMs:
The CFTC is examining the current rules that impose specific structural requirements on SDs and FCMs. These requirements include the establishment of a separate and independent Risk Management Unit (RMU) that directly reports to senior management and the qualifications of the relevant staff. The CFTC is interested in understanding how well these rules are functioning and whether there is a need for further clarifications or specifications, such as reporting lines within the RMU.
Risks Addressed in the Risk Management Requirements of the Rules:
The existing rules require SDs and FCMs to consider various types of risks, including segregation, operational, and capital risks. However, the rules also use the term „any other risk of relevance for an entity,“ which may be subject to different interpretations. The CFTC is exploring whether it should provide more specific guidance by explicitly listing additional risks, such as market risk, credit risk, liquidity risk, foreign currency risk, legal risk, settlement risk, and considering emerging cyber-security threats.
Risk Exposure Reports of SDs and FCMs:
Currently, the CFTC is observing significant variations in the Risk Exposure Reports (RERs) submitted by SDs and FCMs. This variability makes it difficult for the CFTC to gain a clear understanding of risk exposures across different entities and over time. The ANPRM is seeking input on the possibility of standardizing the reporting format and establishing a specific time schedule for filing. Additionally, the CFTC is considering whether to include additional risk areas in the regulations based on market events and implementation experiences, such as risks posed by affiliates or third-parties and risks arising from performing additional trading activities.
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The ANPRM provides an opportunity for industry participants, experts, and the public to provide feedback and input on these issues before the CFTC proceeds with formal rulemaking. Please note, however, that the summary above only presents the KEY issues; there are many more aspects discussed in the ANPRM, details on which may be found in the original legal document as linked above.