By Elena Eyber, J.D.
The CFTC has published the Fall 2022 regulatory agenda of rulemaking matters that it expects to propose or finalize over the next year. Commissioner Mersinger does not object to the rulemaking matters set out in the CFTC’s agenda but disagrees with the agenda’s: (1) withdrawal of two rule proposals based on recommendations from a CFTC Global Markets Advisory Committee (GMAC) report prepared by its Subcommittee on Margin Requirements for Non-Cleared Swaps; and (2) omission of proposals to amend several rules that Mersinger believes are “unworkable, ambiguous, and/or inefficient, and which have been the subject of never-ending staff no-action relief or other workarounds because the CFTC has failed to address these issues by rulemaking.”
Uncleared margin rules. The GMAC report made several recommendations to the Commission to tailor the CFTC’s uncleared margin rules to account for the practical and operational challenges arising when they are applied to financial end-users that have only recently come into scope of those rules, such as pension plans, endowments, insurance providers, and mortgage service providers. The Commission implemented four of the GMAC report’s recommendations. The Commission also included a proposed rulemaking to implement two more of these recommendations in its regulatory agenda that was published in the Spring 2022. This rulemaking would have proposed: 1) revising the definition of a margin affiliate to prevent triggering the requirement to exchange initial margin with certain eligible seeded investment funds for a limited, three-year period; and 2) eliminating a provision disqualifying securities in certain money market funds from being used as eligible initial margin collateral.
According to Mersinger, the Commission has withdrawn this proposed rulemaking from the agenda without an explanation. “Thoughtful consideration is now necessary as to whether the margin rules should appropriately be tailored to account for the unique, practical challenges posed by the exchange of margin when one of the counterparties is a financial end-user instead” said Mersinger. Further, Mersinger believes the proposals “would harmonize our margin requirements with the way these issues are handled by our international colleagues in other major market jurisdictions, which would enhance compliance and coordinated regulatory oversight.”
According to Mersinger, not putting them out as proposals for public comment wastes taxpayer dollars because the staff has already devoted significant resources to preparing a draft notice of proposed rulemaking regarding these two recommendations, ignores the value added to the CFTC’s policymaking by the Advisory Committees, disregards the hard work of GMAC members, and runs directly counter to the Commission’s core value of transparency to market participants about the CFTC’s rules and processes.
Failure to address unworkable rules. Mersinger noted that she has publicly commented on multiple instances in which the Commission has failed to address unworkable, ambiguous, or inefficient rules.
Mersinger pointed out that one of the examples of an unworkable rule is Rule 37.6(b). Rule 37.6(b) requires that a swap execution facility (SEF) provide each counterparty with a confirmation of the transaction. When it adopted this rule, the Commission explained that, for uncleared swaps, SEFs could satisfy the written confirmation requirement by incorporating by reference terms in agreements previously negotiated by the counterparties, provided that such agreements were submitted to the SEF ahead of execution. However, the Commission recognized that the proviso that a SEF must obtain such documentation from the parties to an uncleared swap ahead of execution was not workable and created impractical burdens for SEFs.
According to Mersinger, despite the Commission’s awareness of this defect, it has not amended Rule 37.6(b) to fix the problem. This has forced the staff to issue four no-action letters providing relief from this SEF confirmation requirement. Further, when the Commission has granted SEF registrations, it has had to include in its registration orders an extended discussion about the single issue of swap confirmations in order to ensure a level playing field by requiring new SEFs to comply with the same conditions that currently registered SEFs must comply with in order to rely on the staff no-action relief.
Lastly, Mersinger stated that excessive reliance on staff no-action relief diverts resources away from core agency responsibilities and into the processing of multiple requests for no-action relief simply to maintain the status quo. Additionally, Mersinger stressed that unworkable or unclear rules can neither be complied with by market participants nor justly enforced by the Commission, and only by adopting realistic rules that clearly define the CFTC’s expectations can the CFTC hold those who violate those rules accountable. Mersinger is disappointed that the CFTC’s agenda does not include notice-and-comment rulemakings to create long-term solutions to the known problems.